Options Market Making “Not A Viable Business” in 2015
The Options Insider
Thomas Peterffy is the Founder and CEO of Interactive Brokers. He is also the founder of Timber Hill – one of the longest-running market making firms in the options market. Thomas joined our Trading Tech Talk program to discuss many topics including the numerous problems facing options market makers in 2015. When asked if he would re-enter the market making business in 2015 his answer was surprising. “Absolutely not” he told Trading Tech Talk host and Options Insider CEO Mark Longo. “Maybe I would consider becoming an HFT. That’s a possibility…But as a conventional market maker it’s not a viable business for a newcomer.”
***JB: Just when we actually want the opinion of our resident (former) market maker he is nowhere to be found (well, Doug can be found in London which is not exactly “nowhere”).
***SR: Peterffy was one of the pioneers of algorithmic trading, and now its advances have helped to drive him out of the market maker business. Irony…or just the inevitability of industry progress?
Listed Volatility Trading Expanding to Amsterdam and Paris
Russell Rhoads – CBOE Options Hub
The volatility trading world will expand to two new markets this summer as Euronext plans to offer derivatives based two volatility indexes. Plans call for futures trading to commence based on the AEX Volatility Index (VAEX) and the CAC 40 Volatility Index (VCAC) in the next few weeks with options to follow sometime during the third quarter of this year.
***JB: I have a proposal in front of my boss to go investigate this further. Needs an “on the spot reporter” touch I think.
Here’s What Wall Street is Saying About Deutsche Bank’s Management Shakeup
Julie Verhage – Bloomberg
Deutsche Bank’s Co-CEOs Anshu Jain and Juergen Fitschen surprised many investors and announced their resignations over the weekend. The two executives had struggled to win investor support for their strategies after Deutsche Bank fell short of previous targets. John Cryan, a member of the supervisory board, will lead the bank alongside Fitschen for the next year after Jain leaves on June 30, and will be the sole CEO when Fitschen departs after the annual general meeting next May.
Uncertainty: The Blanket Excuse
Adam Warner – Schaeffer’s Investment Research
I know I harp on the overstatements of volatility in financial media, but I’m pretty sure it reached a crescendo on Thursday afternoon. So help me, I heard a guest on CNBC talk about increasing vol about every 10 seconds.
The Nasdaq chair even came on and noted the uptick in vol and predicted higher vol ahead — and then proceeded to contradict his argument by pointing out that 100-pt moves (in the Dow Jones Industrial Average, I assume) aren’t as meaningful now that price levels are this high. I take that all to mean that yes, we’re really volatile, if you take the absolute gains and losses in the indices of today and relate them to the absolute levels of the indices 20 years ago. Which, of course, makes perfect sense.
***JB: “We demand rigidly defined areas of doubt and uncertainty!” ~Douglas Adams, The Hitchhiker’s Guide to the Galaxy
Is Volatility About To Creep Up? Goldman Sachs, Morgan Stanley Debate
With the volatility in interest rates, currencies and oil of late, analysts at Goldman Sachs and Morgan Stanley debated whether it will bleed into equities in two separate notes.
Goldman said that “being short [equity-market] vol has paid off in 2015,” much like prior years. Krag Gregory, Goldman’s top analyst on the note, pointed to Credit Suisse AG – VelocityShares Daily Inverse VIX Short Term ETN and ProShares Trust II as evidence, each of which have gained more than 42 percent year-to-date.
Low Fear Levels Make For Cheap Option Protection
Bob Lang – Investing.com
Summer trading usually ushers in a time a low volatility and often very little interest. Markets tend to make sharp and jagged moves as liquidity is thin. At this time with markets at/near all time highs and nobody truly wants to get off the train, it makes for some difficulty but often some opportunities arise when others are looking the other way. Paraphrasing Robert Frost, ‘The road less traveled makes all the difference’.
New toys for flash boys in China’s fledgling derivatives market
Samuel Shen and Pete Sweeney – Reuters
The rapid liberalisation of Chinese derivatives markets has attracted a new breed of creative traders employing complex trading strategies that can generate quick profits – and an extra dollop of risk – in China’s runaway stock boom.
Brokerages and fund managers are investing in mathematics whizzes and hardware, and moving servers onto trading floors to gain precious microseconds dealing in new options and futures contracts, helping China’s CSI300 index become the world’s most traded equity futures contract in May.
Grasping Client Personalities When Volatility Hits
Daisy Maxey – WSJ
Whether the highly anticipated interest-rate hike arrives this year or next, it’s not too late for financial advisers to begin preparing clients for the likely aftermath: market volatility. Stock and bond markets could suffer a shock when the Fed finally de-ices short-term interest rates, and how investors will react depends partly on their risk tolerance and how well they’re prepared.
***JB: There was a recent [http://www.bloomberg.com/news/articles/2015-05-28/wall-street-s-young-guns-brace-for-first-big-test-as-fed-looms|Bloomberg article] that noted nearly a third of all traders are under 30 and have never seen a rate hike.
The Week in Russell 2000 Trading – 6/1 – 6/5
Russell Rhoads – CBOE Options Hub
Small cap stocks put up a great week last week with the Russell 2000 (RUT) rising 1.16% while the large cap oriented Russell 1000 (RUI) lost 0.59%. The chart below shows RUT pulling away from RUI for the second time this year – the first time beginning in early March before the lead being ceded to the Russell 1000 for a couple of weeks in May. As of Friday RUT is up 4.67% for the year while RUI has gained 2.21%.
The Week in Volatility Indexes and ETPs – 6/1 – 6/5
Russell Rhoads – CBOE Options Hub
The market digested the May Non-Farm Payroll number on Friday with both (weak) bullish and bearish cases being made for equities. I was asked about the number and my very non-quantitative response was to point to a tweet from Benzinga which depicted a guy just shrugging and looking bored. The week was pretty similar with the S&P 500 dropping 0.69% and all four of the volatility indexes in the term structure chart below moving higher, but by less than 4% across the board.
Fidessa launches new order analytics service for derivatives | Financial Industry & Algorithmic Trading News
Financial Industry & Algorithmic Trading News | Automated Trader
Fidessa group has announced the launch of a new order analytics service for its derivatives community that aims to bring greater precision to the control and measurement of derivatives algos.
Order execution is increasingly becoming an exception handling process as global derivatives markets become ever more dominated by algorithmic trading (Tabb Group estimates that algo execution of US buy-side futures volume alone will grow to 30% this year, up from 4% in 2011*). This is one of the key responses from FCMs as they increase their levels of automation to meet the cost pressures of operating today. But without the ability to monitor how orders are performing in real time, and to automatically identify deviations, it can be a false economy. On top of this, greater regulatory scrutiny means that both the buy-side and the sell-side need to really understand how the algos they are using are working, whatever the market conditions.
Options galore for investors
Most of the time, call and put options are used as instruments to take a short-term trading positions with a limited risk to trading capital. Essentially, it is traders who focus on options; while investors tend to stay away from such instruments mainly because they are speculative in nature and are bound by limited time.
But there are certain market conditions in which investors can use options to reduce the cost of holding stocks in their portfolio. Also, investors can use options to reduce the cost of buying a particular stock. Right now, the stock market is in a phase where options can serve both traders and investors.