Observations & Insight

High Frequency Chatter
Doug Ashburn – JLN

The talking heads on TV love anniversaries. They are the easiest way to fill space in the 24-hour news cycle. In the debate over high-frequency trading, however, the network brass at CNBC and Fox Business could not wait a full year before starting the “Flash Boys: One Year Later” party.

Yesterday, CNBC aired a segment with Michael Lewis, author of the book that brought HFT into the mainstream vernacular. In the segment, Lewis defended his liberal use of the term “rigged” when describing the stock market, and said the markets are still rigged. The network flashed back to April 1, 2014 (not quite one year ago) when Lewis, IEX CEO Brad Katsuyama and former BATS president Bill O’Brien squared off in a debate that, well, got ugly.

Watch the Michael Lewis on CNBC Power Lunch, March 23, 2015

Not coincidentally, Katsuyama appeared on the show a few minutes later, to discuss IEX’s one-year trajectory, market share and the company’s plans to transform from dark pool to stock exchange.

Watch Katsuyama on CNBC Power Lunch, March 23, 2015

Meanwhile, over on Fox Business, our favorite regulator-turned-industry-advocate, Bart Chilton, took the other side of the argument. In the segment with Maria Bartiromo, Chilton, spokesman for the Modern Markets Initiative, called Flash Boys “a big lie,” and said that markets are cheaper, faster and better for retail customers. He said the front-running argument is not backed up by facts, and he went on to call Lewis out as “an author just trying to sell books.”

“My favorite Michael Lewis book is “The Blind Side,” said Chilton, “and I think he had a big blind side on this issue.”

Watch Chilton on Fox Business, March 23, 2015

If you would like to learn more about HFT, have a look at our HFT series from last year. We interviewed a number of participants, including regulators, dark pool operators, and members of both the buyside and sell-side.

John Lothian News HFT Series 2014


Finally, here is one issue to which there is no argument – Futures for Kids (FFK) is a fantastic organization that does a tremendous service to the industry and allows us all to “give a little back.” Its newest campaign, “Food for a Day” is provides a unique opportunity to do just that – give a little back.

And I mean a little. Did you know that London City workers spend, on average, GBP 10.59 a day on coffee, lunch and miscellany? FFK suggests that, for this year’s FFK Day, May 15, bring a sack lunch, make your own coffee, and take the ten-and-a-half quid (about $16) and donate to the organization. You’ll be glad you did.

Lead Stories

Paying Most Since ’08 on Dollar Hedges Works as Currency Plunges
Callie Bost – Bloomberg
Anyone wondering why you’d pay the highest prices since 2008 to hedge against declines in the dollar found out last week when the currency slid the most in more than three years.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, slid 2.2 percent last week. The rout came as options on the PowerShares DB US Dollar Index Bullish Fund reached the most since December 2008 relative to those on the SPDR S&P 500 ETF Trust, one-month data compiled by Bloomberg show.

***DA: When a market rallies 30 percent in a year and gives back 2 percent one week, “rout” is hardly the word I would use to describe it.

As Silence Falls on Chicago Trading Pits, a Working-Class Portal Also Closes
William Alden – NY Times
The pits where generations of sweating traders in colorful jackets once bellowed out orders for wheat, corn and cattle contracts, using hand signals and sheer force of personality, are almost empty. The smattering of traders who hung around them on a recent day appeared listless, some glancing at tablet screens, others staring blankly into space.

***DA: Some of us were known to appear listless, staring blankly into space, even when the market was rocking.

The witching hour: How the algos took Apple down at Friday’s close
Philip Elmer-DeWitt – Fortune
“There was no apparent news item in the afternoon indicative of anything dramatic for the company,” wrote Barrons’ Tiernan Ray Friday referring to Apple’s precipitous close. “Options expiration could have something to do with it, perhaps.”
There’s no “perhaps” about it. The last 60 minutes of the third Friday in March is what traders call a quadruple witching hour, when four different kinds of trading instruments expire simultaneously: stock index futures, stock index options, stock options and single stock futures.

***DA: Pockets of illiquidity. It was worse in the days before algos. Trust me.

The Fed Gives A Boost
Price Headley – CBOE Options Hub
There’s little doubt as to last week’s economic focal point… the release of the minutes from the most recent FOMC meeting. It was an interesting (and a slightly mixed) message. The Fed dropped the word “patient” from the description of how long it would wait to raise interest rates, and then made a point of saying it was in no hurry to do so given the current state of the economy.
The real curveball, though – and the key reason the U.S. Dollar may have started a pullback – was the long-term interest rate forecast the Federal Reserve’s governors offered.

***DA: In the days of zero and negative interest rates, a quarter point shaving of the Fed Funds forecast is a huge deal.

The Kentucky (and Cinderellas) of Recent Volatility Plays
Adam Warner – Schaeffer’s Investment Research
Well, an apology for my bracket picks. I still say Villanova is going places this year!
But hey, we do options here most of the time. The volatility world is very CBOE Volatility Index (VIX)-centric, and I’m as guilty as anyone. There are many other volatility indices out there, including lots of tradable ones. Matt Moran of CBOE Options Hub highlights some of the most “volatile” in bracket form:

***DA: No fair! I made a VXST/Kentucky joke last week after round one. I said I would take VXST and the over. Best theoretical trade I made all year.


Eurex expands interest rate derivatives offering
Press Release – Eurex
The international derivatives market Eurex Exchange, a subsidiary of Deutsche Börse Group, is launching new options contracts on the Euro Bund futures with weekly expiration dates (weekly options) on 20 April 2015. Contracts with expiration dates on the five following Fridays will be offered in addition to the existing options on the Euro Bund Futures. This expanded range of options further diversifies Eurex Exchange’s offering of euro-denominated interest rate derivatives.
Eurex Exchange has worked closely with market participants and market makers in developing these weekly Bund options in order to ensure liquid trading from day one. Interested participants will be able to test the new weekly Bund options in a simulation environment from 26 March.

Hotspot to Expand European Presence With Launch of London Matching Engine
Press Release – BATS
Hotspot, a leading institutional foreign exchange (FX) market owned and operated by BATS Global Markets, today announced plans to expand its European presence with the launch of its first Europe-based FX matching engine later this year.
BATS President Chris Concannon said, “This project is important for our current – and future – customers as it gives BATS a larger footprint in the leading trading centre in the FX world. As home to more than 50% of currency trading globally*, and growing, the European market is a top priority for the Hotspot team.
jlne.ws/1Fzjkuz (PDF)

***DA: Bats leave footprints? I did not know that.

Regulation & Enforcement

Ex-Rabobank Employee Stewart Pleads Guilty in Libor Probe
Patricia Hurtado – Bloomberg
A former Rabobank Groep trader pleaded guilty to engaging in a five-year scheme to commit wire and bank fraud tied to the manipulation of Libor, the benchmark for trillions of dollars in transactions worldwide.
Lee Stewart 51, of London, who was a senior derivatives trader at the Dutch bank’s London desk from 1993 to 2009, pleaded guilty to a single count in Manhattan federal court Monday.

Citadel fined $70,000 for accidentally sending orders to CME
Citadel Securities, LLC has agreed to pay a $70,000 fine to CME Group Inc for sending a minute-long series of accidental stock-futures orders to the exchange operator, according to a disciplinary notice issued on Monday.

***DA: In college, I “accidentally” ordered 10 pizzas to be delivered to my jerk ex-roommate.


Speed Gives Way to Safety as SGX Upgrades Derivatives Market
Eduard Gismatullin – Bloomberg
Singapore Exchange Ltd. is shifting its focus from speed to safety as Southeast Asia’s biggest bourse embarks on the latest upgrade to its derivatives-trading technology.
SGX’s matching engine — the software that puts two sides of a trade together — already meets customers’ demands for speed, so the exchange has put better execution and risk management at the center of a new project, according to Michael Syn, the bourse’s head of derivatives. Increasing the speed of an Asian exchange makes little difference past a certain point because the signal first needs to cross the vast distances between the region and the rest of the world.

***DA: Any system is only as fast as its slowest component.

Speed Traders Team Up in Microwave-Tower Superhighway Plan
John Detrixhe and Sam Mamudi – Bloomberg
Two key competitors in the technological arms race that’s driving financial markets ever closer to light speed have called a truce.
KCG Holdings Inc., a brokerage with roots in high-frequency trading, and World Class Wireless LLC will unite their networks of microwave towers, connecting major market centers around the globe, according to a statement released last month. WCW, which is owned by ECW Wireless, has the same address and senior managers as high-frequency trader Jump Trading LLC. A representative for Jump said the firm declined to comment.

***DA: The KCG cafeteria can now heat up a leftover plate of pasta in 8 nanoseconds.


Alibaba: Pessimism Is at Extreme Levels for Stock
Steven M. Sears – Barron’s
Get long Alibaba.
Wall Street’s sales traders are increasingly telling clients to buy Alibaba Group Holdings (ticker: BABA ) at a time when the stock and associated implied volatility are trading near lows.
The recommendation is gaining vigor since the passing of last week’s lock-up phase that allowed some pre-IPO investors to sell shares.

A VIX for the Energy Sector
ETF Trends
As oil prices have fallen, many investors with exposure to energy companies have wisely kept an eye on VIX. But there is another volatility benchmark – one more suited to energy equity investments – which investors should also watch carefully: VXXLE.

SPX Weekly Bear Call Spread Analysis
Russell Rhoads – CBOE Options Hub
I’ve seen several trades using RUT options to initiate out of the money credit spreads as of late. However, I just came across a pretty interesting one using SPX options.


If you fear a correction, use VIX ETN as a hedge
Nigam Arora – MarketWatch
Are you concerned about a stock-market correction in the short-term? If the answer is yes, take a look at iPath S&P 500 VIX ST Futures ETN VXX, which represents the CBOE Volatility Index (VIX). VXX typically goes up when the stock market goes down. Let us start by looking at the annotated chart that shows the correlation between S&P 500 represented by ETF SPY and VXX.

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