Observations and Insight

BATS takes a swing at Flash Boys and options growth
Jim Kharouf – John Lothian News

BATS Global Markets has been in the spotlight lately, which has many at the exchange wondering why it had to be the one that was closest to Brad Katsuyama’s trading terminal in New York.

In the wake of the thunderstorm caused by Michael Lewis’ book “Flash Boys,” and accusations that named BATS as the exchange that was part of the “rigged stock market” claim, Jeromee Johnson, BATS’ vice president, head of BATS Options market, says such charges are flat out wrong. Lewis tells the story of Katsuyama, now president and CEO of IEX exchange, how his cash equity orders would route first to BATS and then to other stock markets while he was at Royal Bank of Canada. Such orders would often tip off high frequency traders of a larger order, at which point they would beat Katsuyama’s orders to other stock exchanges and then sell them back to him at higher prices.

That caused Katsuyama and others to call foul, blaming stock exchanges and HFT firms, a charge that Johnson says is simply false.

Read More >>> http://jlne.ws/1iBbDZR

Lead Stories

NYSE Computer Error Prompts Cancellation of Almost 20,000 Trades
Callie Bost, Sam Mamudi and Eric Lam – Bloomberg
A computer malfunction at IntercontinentalExchange Group Inc. (ICE)’s two U.S. options exchanges yesterday caused almost 20,000 erroneous trades that were later canceled.
On the NYSE Amex Options market, 12,830 orders involving 462,468 contracts were busted, while the tally at NYSE Arca was 6,932 trades and 34,484 contracts, according to notices sent by the exchanges. Affected securities included Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Facebook Inc. (FB), MasterCard Inc. (MA) and the SPDR S&P 500 ETF Trust. (SPY) The erroneous trades happened from 9:30 a.m. to 9:43 a.m. New York time yesterday.

Saxo Announces Addition of Stock Options Trading to its Multi-Asset Platform
Press Release (PRNewswire)
Saxo Bank, the online multi-asset trading and investment specialist, has announced the launch of stock options trading on its platform for retail and institutional investors. This will enable clients of Saxo Bank both to consolidate their existing portfolios by allowing them to trade multiple asset classes from a single account, and to take advantage of Saxo Bank’s cross-product margining.
There will be no minimum ticket fee or carrying cost. Clients will be able to use either stocks or bonds as collateral, as well as exercise options online. As is the case across its whole offering, Saxo Bank will provide multi-language service and support.
***JB: See OIC’s press release below under Options Education that relates to this.

CME mulls price fluctuation limits for gold, silver futures
Frank Tang – Reuters
U.S. futures exchange CME Group Inc is considering the introduction of daily limits on price moves in gold and silver futures in a bid to rein in wild volatility that has spooked investors in recent years, a CME official said on Tuesday…
…The possible move reflects growing concern at the largest U.S. exchange of futures and options about big bouts of buying or selling that have caused huge fluctuations in prices without any apparent fundamental reason.

Nickel options boom shows scale of bulls’ ambitions
Andy Home – Reuters
Nickel is the only game in town right now among the base metals traded on the London Metal Exchange (LME).
LME three-month metal has edged back from the 15-month high of $18,715 per tonne reached on Monday but it is still up by over 30 percent since the start of the year. The next best performer among the LME pack is tin, trailing far behind with year-to-date gains of just 5 percent.

Fed will start hiking rates in July 2015, futures traders predict
The bond market has grown into its relatively dovish expectations about when the Federal Reserve will begin jacking up its key lending rate, and news out of the Fed this week is unlikely to disrupt the market’s uneasy peacefulness, market participants say.

Don’t Fear the Bubble
Steve Tobak – Fox Business
When asked if he thought we were seeing a tech bubble, Warren Buffett emphatically said, “I don’t see it. I would see it if it was a really big bubble,” he said. “I certainly saw it in the late 1990s. We don’t have that situation now. We do not have a big bubble market now.’

Demand for India Vix futures remains low despite market volatility
Justin Lee – Risk Magazine
Volatility in equity markets has risen due to May elections but demand for futures to hedge exposure is low.
Indian elections have driven up equity market volatility but demand for India Vix futures to hedge volatility remains depressed due to issues with the contract, say market analysts.

Videocast: VIX gains seen by July

New fund to give retail investors access to volatility index
Laura Millan – Financial Standard Online
Grant Samuel Funds Management and Triple3 will launch the Triple3 Volatility Advantage Fund, which will give retail investors exposure to options on the VIX Index.
The fund to launch next week and requires a minimum investment of $25,000.

Drug Merger Boom Sends Hedging Costs to Eight-Year High
By Trista Kelley and Inyoung Hwang, Bloomberg
Takeover-fueled gains that have made health-care companies America’s best-performing stocks over the past three years are pushing up the cost of hedges, too.

High-paying hedge fund swoops on Credit Suisse derivatives chief
Paul Clarke – efinancialcareers
Mathias Berenger, managing director and head of European vanilla options trading at Credit Suisse has left to join high-paying hedge fund Capula Investment Management.
Berenger, a derivatives trading veteran who has been in the sector since 1996, joined fixed income focused hedge fund Capula in April, regulatory filings show. For nearly three years, he has been head of vanilla options trading at the Swiss bank, having previously held the same position at Barclays investment bank.


Derivatives trading in Europe remains two-horse race
Deutsche Boerse’s Eurex (DB1Gn.DE) and U.S. rival IntercontinentalExchange (ICE.N) will withstand challenges from rival bourses and be the dominant forces in on-exchange derivatives trading in Europe, a Eurex official said on Tuesday.
Eurex Offers Futures Trading in Israeli Equities
Nandini Sukumar and Shoshanna Solomon – Bloomberg
Deutsche Boerse AG’s Eurex derivatives venue will list futures based on the Tel Aviv Stock Exchange’s TA-25 Index, giving its customers access to a Middle Eastern country for the first time.

CBOE Holdings Declares Second Quarter 2014 Dividend
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) announced today that its Board of Directors has declared a quarterly cash dividend of $0.18 per share of common stock payable on June 20, 2014 to the unrestricted common stockholders of record on May 30, 2014.

Regulation and Enforcement

SEC chair: We’ve found ‘bogus’ private equity and hedge fund fees
Dan Primack – CNN Money
SEC Chairwoman Mary Jo White today testified in front of the U.S. House Committee on Financial Services, to discuss the Agency’s recent activities and 2015 budget request. As part of that overview, White suggested that recent examinations of hedge fund and private equity fund managers have uncovered some very unsavory activities. Namely, charging improper fees to investors and portfolio companies.

U.S. SEC chair to Congress: ‘The markets are not rigged’
Sarah N. Lynch – Reuters
U.S. Securities and Exchange Commission Chair Mary Jo White flatly rejected claims that retail investors are being fleeced by high-frequency traders who can use their speed to jump ahead with buy and sell orders that fetch better prices.
***SR: Hard to imagine her answering differently.

Memo To Michael Lewis: The Excesses Of High-Speed Trading Are A Direct Result Of SEC Micromanagement
Bradley J. Bondi – Forbes
Michael Lewis is a wonderful storyteller and a powerful influence on lawmakers and regulators.  Some credit his best-selling book on the financial crisis, The Big Short, as contributing to the passage of the Dodd-Frank Act.  The putative narrative that emerges from his latest book, Flash Boys, is that the equity markets are “rigged” by sophisticated traders who quickly and unfairly jump ahead of other traders.
***JB: It is probably a good thing most of our office is out today else this certainly would have sparked arguments (friendly ones of course).

Trade reporting uncertainty raises “multiple problems”
Elliott Holley – Banking Technology
Nearly three months after the European Commission’s 12 February deadline for trade reporting, market participants are still not ready to report their derivative trades and serious problems remain with understanding the rules.
While delegated reporting may provide a ‘get out of jail free’ card for some financial institutions, others are deeply concerned about the impact of the new rules and the competence of the regulator, according to panelists at the Swift Business Forum in London.


Know the Macro Before you Attack the Micro
Bob Lang – CBOE Options Hub
There is just so much information to understand as we journey through our investment/trading adventure.  One of my chief macro concerns is the Fed and where policy stands.  Geopolitical issues must always be considered and nothing is more important right now than how Russia/Ukraine are effecting sentiment.  Nobody really knows how this is going to play out, so that unknown outcome raises doubt and suspicion in markets – especially at/near all time highs.

Apple and Amazon: A Low-Risk Options Plan
Mark D Wolfinger – Barron’s
Options are versatile tools that can generate profits when traders make a correct stock-market prediction. But just being right isn’t enough.
For example, bullish traders who buy call options (or bearish traders who buy puts) often lose money, even when their stock moves in the right direction. There are many ways it can happen: a) The stock does not make the expected price change before the option expires; b) The stock does move quickly, but the trader paid an inflated price for the options and the option price did not increase as expected; c) The trader buys options with the wrong strike price. Out-of-the-money options may be inexpensive, but far too often time passes and the stock does not move far enough to generate a profit.

The Best Allocation Strategy of 2014?
Examining the recent day-of-the-week biases
Adam Warner – Schaeffer’s Investment Research
Why don’t I like Mondays? Or Fridays?
Well, I’ll tell you. Market returns in 2014 have taken on an odd twist this year. The best strategy has clearly involved selling options volatility and ignoring the day-to-day noise and ultimately collecting the premiums. But the best allocation strategy has been to buy Monday’s close, sell Tuesday’s close, and go away.

Option Education

Options Industry Council, Saxo Bank Sign Content Sharing Agreement and Announce Options Education Roadshow
Press Release (OIC)
The Options Industry Council (OIC) and Saxo Bank, the online trading and investment specialist, have signed a content sharing agreement making OIC’s renowned equity options educational materials available to Saxo Bank’s global client base.



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