Lead Stories

Nasdaq Wants A Magic Shoebox
Michael P Regan – Bloomberg
There are three main reasons behind Nasdaq’s $1.1 billion purchase of the International Securities Exchange, but only one of them is likely to cause widespread gossip and speculation among the market-structure debate club that’s been meeting nonstop since “Flash Boys” was published. It also points to a broader problem in the stock-trading world. First, the purchase will help Nasdaq firmly leapfrog over CBOE Holdings as the biggest owner of U.S. options exchanges by volume. Second, it will also allow Nasdaq to double its stake in the Options Clearing Corp. clearinghouse to 40 percent. The third reason, however, is where all the intrigue lies. The deal gives Nasdaq licenses to run more stock exchanges, right when IEX Group — the company profiled in “Flash Boys” as the antidote to suspected high-frequency trading predators — is waiting for the Securities and Exchange Commission to rule on its application as an exchange. According to an interview with Annie Massa, Nasdaq Chief Executive Officer Robert Greifeld made it clear that he’d consider asking the SEC for permission to also run an exchange with a “speed bump” to delay buy and sell orders by a tiny fraction of a second, one of IEX’s main selling points.

****SD: A real magic shoebox yields new Air Jordans before their actual release.

US Listed Options Volumes Jump Year over Year in February as Stock Market Swings Persist
Callie Bost – TABB Options Liquidity Matrix
Stock-market turbulence continued into February, sustaining year-over-year volume growth in the U.S. listed options market. February volume totaled 331.9 million contracts, 9.7% higher than the year-ago February, but 9% lower than January’s total. The S&P 500 slid 0.4% in February, plunging as much as 5.7% through Feb. 11 before recovering almost all of the losses by the end of the month. US stocks sold off amid increased concerns about the creditworthiness of banks overseas, then bounced back as economic reports showed improvement in the US economy. The CBOE VIX Index averaged 22.52 in the month, closing as high as 27.59 on Feb. 11 and as low as 19.34 on Feb. 25.

Tech Bias Has Nasdaq VIX at 6-Month High Over S&P Fear Gauge
Joseph Ciolli – Bloomberg
To see how fast sentiment soured on last year’s momentum winners, look at the options market, where the price of insuring technology stocks against losses is holding stubbornly high versus other industries. A Chicago Board Options Exchange gauge tracking costs of hedging in the Nasdaq 100 Index is the highest since August versus a similar measure for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The ratio of the two gauges sits 11 percent above its seven-year average and is hovering at a level has reached only two other times since the start of the bull market.

****SD: Do you know what else has happened three times in the last seven years? The San Francisco Giants winning the World Series. Coincidence? Yes, it’s a total coincidence.

We have just witnessed a ‘death cross’ in the market’s fear indicator
Yahoo Finance
Put down the champagne glasses and curb your enthusiasm for the seventh anniversary of the bull market. That’s because something quite ominous appears to be brewing in the options market. The CBOE Volatility Index (^VIX) might be back down to the upper-teens. But the so-called “Fear Index” just made its own version of a “death cross,” according to Russell Rhoads, head of education at the CBOE’s Options Institute. That doesn’t bode well for the market. In technical analysis, a “death cross” usually occurs when the 50-day moving average falls below the 200-day moving average. Technicians see this at as sign that things will get worse.

El-Erian: Uncontrolled Volatility Ahead as Central Banks Wither
The European Central Bank’s latest and most dramatic move to stimulate the European economy is another example of a monetary policy that tries to boost growth in one region by taking it from another, says Mohamed El-Erian, chief economic advisor at Allianz and former CEO of PIMCO.

For Hedge Funds, Start of 2016 Offers Little Relief From 2015
Matthew Goldstein and Alexandra Stevenson – NY Times
The hedge fund titan Larry Robbins did something out of character last year. He apologized to investors for losing their money and pledged to “right the ship as quickly as possible.” Then he solicited more money from them, raising $1 billion for a new fund and promised to waive the fees. But he keeps on losing money. Over the first two months of this year, his $9.2 billion Glenview Capital Management’s flagship portfolio lost 15 percent. The new fund — called GCM Equity Partners — is down 5.2 percent. Even worse, the Glenview Capital Opportunity fund, a $1.7 billion portfolio that uses leverage or borrowed money to enhance its bets, has lost 22.4 percent through the end of February.

****SD: Anybody been watching “Billions”? Bad start to 2016 for Axe Capital too.


Nasdaq-ISE: Exchange Consolidation Ahead?
Terry Flanagan – Markets Media
Could the options-exchange pendulum be about to swing from fragmentation toward consolidation? That is the some perception of some market observers in the wake of Nasdaq’s planned $1.1 billion purchase of International Securities Exchange, which would bring six of the 14 U.S. options exchanges under one corporate roof. “Consolidation in this market has long been inevitable, and this acquisition ultimately should be good for investors easing the burden of navigating the numerous liquidity pools that make up the U.S. options market,” said Kevin McPartland, principal in market structure and technology at Greenwich Associates. The deal isn’t meant to close until the second half of this year, and Nasdaq has yet to spell out what they’ll do with six options exchanges, so the announced deal has no immediate implications for liquidity and block trading. But it’s reasonable to assume that the combined entity will fold at least one exchange into another, McPartland told Markets Media.

****SD: The TABB story below goes hand-in-hand with this one.

Nasdaq-ISE Deal Shows New Growth Strategy in US Options Market
Callie Bost – TABB Forum
If Nasdaq’s acquisition of ISE is finalized, Nasdaq would become the largest options exchange operator in the U.S. While the deal is an exciting prospect for traders frustrated by the growing fragmentation of the options industry, it signals a turning point for exchange operators in their battle for a larger piece of market share, as the strategy of creating organic growth through new venues seems to have run its course.

Jefferies backs ICE in LSE bid
Futures & Options World
The Atlanta exchange has until March 29 to make an offer for the London group The Intercontinental Exchange is poised to make a rival offer for the London Stock Exchange and is likely to be successful, according to a research note from Jefferies. Analysts at the investment bank said Friday that ICE’s rival bid for the London Stock Exchange is possible and will be successful, according to a client note seen by FOW. The Intercontinental Exchange confirmed at the beginning of the month that it was eyeing a rival bid for the London Stock Exchange Group. The firm has until March 29 to launch their offer. The surprise move from the Atlanta-based giant came after the LSE and Deutsche Boerse in February said that they were working on a “merger of equals,” after months of speculation. In the client note, “Questions to Ask About Ice and the Fight for LSE,” Jefferies analysts said they expect the Intercontinental Exchange (ICE) to make a formal offer for the London Stock Exchange.

ICE Would Keep London Stock Exchange If It Bought LSE Group
Bloomberg Business
Intercontinental Exchange Inc. has decided it would keep London Stock Exchange Group Plc’s namesake equity market if it successfully buys the parent company, according to people familiar with the matter, a reversal of strategy from the last time ICE purchased a European stock exchange.

****SD: Sprecher the contrarian.

Regulation & Enforcement

SEC urged to beef up trading safeguards
Nicole Bullock and Joe Rennison – Financial Times
Vanguard the asset manager and high-speed trader Virtu Financial are among a group of financial industry heavyweights urging the US Securities and Exchange Commission to help avoid a repeat of the chaotic trading that rocked markets last August. The group of 18 financial firms said in a letter on Thursday that there was broad agreement on ways to improve measures meant to safeguard investors in times of stress.

Inching Our Way to a Level Derivatives Playing Field
Russell Goyder – Futures & Options World
On February 10, European Commissioner (EC) Jonathan Hill and US Commodity and Futures Trading Commission (CFTC) Chairman Timothy Massad, announced a common approach regarding the requirements of central clearing counterparties (CCPs). This marks an important step towards the overall harmonization of the cleared derivatives markets. However, in my view, firms are not on easy street quite yet. Going forward, financial institutions will continue to face challenges around key issues like modeling, pricing and risk managing derivatives in a still complex and perpetually changing marketplace. But before I get into some of those specific challenges, let’s acknowledge the significance of this decision. The common approach is valuable because it: 1. Enables EU CCPs operating in US markets and US CCPs operating in EU markets to be on equal footing 2.Minimizes regulatory overhead with a single set of rules 3. Helps to harmonize markets by encouraging cross-border activity and boosting market liquidity

****SD: The technology needed for any firm to be competitive moving forward? The author says: “Put bluntly, a flexible curve-building tool should eat the LCH-CME basis and negative rates for breakfast, and ask for more.”

Mifid II requires multi-exchange links – report
Luke Jeffs – Futures & Options World
Law firm Norton Rose Fulbright has published research that questions the practice of trading firms using a single exchange when better prices may be available on alternative markets. The Dutch arm of the law firm published on Wednesday a report that suggests firms using a single trading venue may be in breach of European rules that will become active in 2018. Europe’s second version of the Markets in Financial Instruments Directive, which is set to take effect in January 2018, tightens up on the first Mifid reforms from 2007. The research argued that there has been a multiplication of trading venues since the first round of Mifid and the new rules will reflect that by tightening up on the definition of best execution.

Proposed regulatory change could hit U.S. options trading volume
U.S. options exchanges, already hard pressed to revive declining volumes, face a new threat from regulatory changes that could restrict the use of options in retirement accounts, which until now have been a growing part of the industry. The U.S. Department of Labor’s (DOL) Conflict of Interest rule aims to stop brokers and advisors from recommending products that put their profits ahead of clients’ best interests. The rule, proposed in April 2015, is expected to be published during the first half of this year.

****SD: In case you missed this story yesterday, I’m including it again. I’ll leave the description of part of the issue to Sean Henderson, a retired real estate broker who uses options in his self-directed IRA: “If the market stays in a range for an extended period of time, my retirement account will be dead money that inflation could erode. With options, I can place non-directional trades that make money through time decay. I sure don’t want to lose the flexibility that options provide.”

Japan’s FSA Warns Binary Options Provider SimPop Not Regulated
Finance Magnates
The Japanese Financial Services Agency (JFSA) has issued a warning that a website offering binary options under the name SimPop is not authorized to do so in Japan. The watchdog said in an update that the company name was World Union Lead Trust Limited and had a France-based address in Paris.


Expanding the TT Ecosystem
Drew Shields – Trading Technologies: TradeTalk
In the last two months, we have accomplished a significant milestone in the development of the TT platform. We’ve rolled out access to 16 new markets, bringing TT very close to market parity with X_TRADER. Adding new markets to a trading platform is not necessarily newsworthy. It’s what a software provider like us does multiple times a year, year after year. However, this mass rollout over the last two months has been unique in the way that 10 of those markets were integrated into TT.

The World’s Biggest Hedge Fund Hires Former Apple Exec As Co-CEO
In a move that will reverberate on Wall Street, Bridgewater Associates, the world’s biggest hedge fund, told its clients on Thursday that it had hired technologist Jon Rubinstein as its co-chief executive officer.


Stock Options Indicator Flashes Bullish… With A Caveat
See It Market
We are not the first or only ones to point out that the current post-February stock rally has been less than enthusiastically received by the trading community. While there are some exceptions, most intermediate-term sentiment gauges are either leaning towards fear levels or, at best, neutral. One example comes from the equity options market where daily call buying in recent days has reached a nearly unprecedented streak of subdued levels relative to put buying. This has typically been a bullish sign for the stock market – however, the current signal is anything but typical.

Covered Put Writing: Not What You Think
Seeking Alpha
Covered put writing is theoretically no different than covered call writing. If you’re comfortable with covered call writing, then you’re comfortable with covered put writing. A covered put writing strategy can be considered a defensive strategy relative to an outright investment in the underlying. There are two broad market covered put writing ETFs available, ticker symbols PUTX and PUTW.

Inside the New PUT-Write ETF: Can it Counter Volatility?
The U.S. bourses were on a tumultuous ride at the start of the year and were languishing in the red. Concerns over the Chinese market slowdown and the oil price rout had a brutal impact on the broader market. Though the markets are on the mend now, we share the skepticism of several other investors on the duration of this uptrend. A certain level of uncertainty is still present in the market.


Volatility, Short- and Long-term
Craig Lazzara – S&P Dow Jones Indices
This morning’s Financial Times highlighted a study of market volatility suggesting that return and volatility are inversely related — that “the correct response to an increase in volatility…is to exit the market.” This is certainly true in the short run, as the table below confirms.


OIC: 5 Options Greeks for Next-Level Traders
March 15, 2016, 3:30 pm CST
What you’re seeing with your options quotes is only half the story. When you understand the value of options Greeks – and the benefit they can bring investors and traders – you’ll be taking the next steps towards a better understanding of how options can work for you.

****SD: Also on March 15th, the Bank of Japan will be wrapping up their next monetary policy discussions. For more events next week, see below.

The Week Ahead: Traders Await Fed Decision, Yellen Remarks
Kirra Fedyszyn – Schaeffer’s Research
With earnings season winding down, most of the focus next week will be on a flood of data — including the latest stats on inflation, housing, retail sales, and consumer sentiment. However, the spotlight for the week will be firmly pointed on the Federal Open Market Committee (FOMC) meeting, as policymakers debate their next steps on interest rates and monetary policy. Meanwhile, Federal Reserve Chair Janet Yellen is slated to deliver her first post-meeting press conference since the December rate hike.

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