Observations and Insight

My Realization: BOX and VolX Team Up to List Options on RealVol SPY Index
Doug Ashburn – John Lothian News

When assessing actual exposure in the market, why does the listed world use measures of implied volatility?

That is the question VolX CEO Bob Krause asks to anyone who will listen. Why, he wonders, is the listed derivatives market dominated by the VIX, a measure of 30-day volatility expectations?

The standard in the OTC market, by contrast, is the variance swap – a contract where the payoff is in terms of actual movement in the underlying (“realized volatility” if you will). He says the OTC market is doing it right, in that participants are hedging actual market exposure with actual price movement, rather than expectations of future price movement.

Pending Securities and Exchange Commission approval in the next few months, BOX Options Exchange will begin exclusively listing VOLS, options on a realized volatility index based on the SPDR S&P 500 Exchange Traded Fund (SPY ETF). These cash-settled options will reflect the daily closing values of the SPY over a 21-day trading period per VolX’s RealVol Daily Formula.

Read the rest of the story on JohnLothianNews.com — http://jlne.ws/16Oz1ig

Lead Stories

Renewed Volatility Brings US Listed Options Volume to Second Highest Level Ever, Says TABB Group Report
Press Release via Business Wire
Renewed volatility in US listed options fed by fears of a global Ebola pandemic, collapsing oil prices and European economic weakness took trading volumes to their second highest level ever, reaching 4.3 billion contracts in 2014, 3.7% higher than 2013, according to a new quarterly research report from TABB Group.
During the fourth quarter, says TABB principal Andy Nybo, head of derivatives research, who wrote “US Options Market Review: Fourth Quarter 2014,” volume totaled 1.14 billion contracts, a 10% increase from the third quarter 2014 and a 10.1% increase over the same period in 2013. The role of short term options (STOs) with weekly expirations continues to grow in importance, with volume rising to a record 1.1 billion contracts in 2014, accounting for 27.6% of total volume.

Hedge Funds Shorting VIX Out of Style Amid Greece, Oil
Callie Bost – Bloomberg
Betting against market turbulence is losing its allure with hedge funds.
That’s the signal from futures tied to the Chicago Board Options Exchange Volatility Index, where the spread between long and short positions has jumped to the highest since at least 2004, Commodity Futures Trading Commission data show.
***Shorting vol looks to be a winner today. Furthermore, CNBC has been particularly void of interesting market-related content. Brett Favre was on yesterday. This morning we had a lengthy interview with the cover model from this year’s SI swimsuit edition, followed by YouTube star Michelle Phan’s business development plans.

Volatility Picks Up On Greece Tension
Minyanville’s Wall Street
Stocks had another volatile day as Greece-related tensions flared up again.
On Sunday, Greece’s Prime Minister Alexis Tsipras spoke out against Greece’s austerity program, making various demands including an increase in the minimum wage and the payment of World War II reparations from Germany. Tsipras also said he would seek a bridge loan to cover obligations until June rather than continue with its bailout program.
***DA: Because reparations worked so well after World War I, right?

‘Lots of Volatility, But Running in Place’
Chris Dieterich – Barron’s
Market watchers were nearly unanimous headed into 2015: expect more market volatility. Ask and you shall receive.
The S&P 500 has averaged 1.4% intraday swings since the start of December, according to MKM Partners. The CBOE Volatility Index hasn’t fallen below 14 since then and repeatedly pierced 20, its long-term average, in January. The VIX is an options-based measure for expected swings in the U.S. stock market.

The Market is Mired in a Confidence Crisis
Bob Lang – CBOE Options Hub
There really is no other way to explain the twists and turns of this market other than increasing doubts that higher prices can continue. We’re not talking about outrageous valuations and lack of investing control as we saw back in the late 90’s. No, I am referring to self-doubt and the confidence crisis that was created from the global financial collapse just six short years ago.
The confidence built by the Fed through several monetary programs reached peak levels recently. While we tend to like a market with some doubt (i.e. a “wall of worry”), if there is no reason to invest or trade, then players will simply exit. Today, it seems the Fed is speaking in tongues instead of being as transparent as possible – especially at a critical time like this.
***DA: Confidence is important, and the Fed knows it, and nothing says confidence quite like an interest rate hike. But jumping the gun could squash the recovery. But confidence is important, and the Fed knows it. Repeat ad nauseum.

Videocast: Trader sees floor in VIX
***DA: But is there a trap door hiding under the carpet?

Shanghai exchange live on first equity option
Luke Jeffs – Futures & Options World
The Shanghai Stock Exchange launched with a fanfare on Monday an exchange-traded fund option based on its blue-chip index, marking the first Chinese mainland option contract.
The launch of the SSE 50 ETF option was attended by top Chinese officials including Han Zheng, member of the CPC Central Committee Political Bureau and Chief of CPC Shanghai Municipal Committee, and Xiao Gang, chairman of the China Securities Regulatory Committee.
***DA: And a grandiose fireworks display.

Will China Find Its Footing in the Options Market?
Adam Warner – Schaeffer’s Investment Research
Now, it’s not for everyone just yet. According to reports, you need an account of at least 500,000 yuan to get started (about $80,000). That won’t matter all that much at first, as they are also limiting investors to position limits of 50 contracts. So what could possibly go wrong?
***DA: Confucius said, “A fool and his money will soon be shorting options.”


BOX to Launch Realized Volatility Options on VolX Patented Concept
Press Release – BOX
BOX Options Exchange (BOX) and The VolX Group (VolX), architects of RealVol™ Products, announced that they have entered into an exclusive licensing agreement whereby BOX will list RealVol SPY Options (VOLS) for trading. BOX filed on January 21, 2015 for approval to list VOLS with the U.S. Securities and Exchange Commission and will begin listing the options once approval is received. VOLS will be the first exchange-traded options based on the realized volatility of the broad U.S. equity market.
http://jlne.ws/1CdK3Gt (PDF)

CME pit closure sparks member buyout call
Financial Times
The demise of futures trading pits in Chicago and New York has triggered debate over exchange membership, a privilege some now view as a burden in an era of electronic markets.
A membership gave traders and brokers access to the once-bustling trading floors of CME Group, the biggest futures exchange operator. CME last week announced it was closing most open-outcry futures trading, abandoning a tradition dating to the 19th century.
***JL: This is the email message I received yesterday from RJO CEO and FIA Chairman Gerry Corcoran about my comments about the CME Group member meeting with executives of the CME Group about the closing of the futures pits. It is published with his permission:

John, I am so glad you pointed out that seat owners were the beneficiaries of tremendous profits during the demutualization process.  The time is here for the great CME Group transition to occur; I believe Terry as Chairman has been patient and done this with dignity and respect to all of those current and past members who so professionally populated the pits and created liquidity, price discovery and risk transfer for the world.  But history is littered with failed companies that held on to the past and did not move forward and embrace the future; as such I believe CME has made the right decision.

Now, the FCM community will have to make its own tough decisions in managing the pit closures and how the process impacts their employees.  Capitalism is a steamroller….you better stay ahead of it, or it will run you over!  No firm better understands and respects the importance of pit trading than RJO, but we also don’t get caught up in the past and look forward to how we will best serve our clients and protect our employees in the future.

Hope all is well!

CME Group Inc. Names Slate of Director Nominees
Press Release – CME Group
CME Group today announced its slate of candidates for its board of directors for election at the company’s annual meeting to be held Wednesday, May 20, 2015.
The board of directors recommends the Class A and Class B shareholders voting together elect the following nineteen individuals to the board:

Regulation and Enforcement

SEC Proposal Would Make Companies Say If Executives Can Short
Dave Michaels – Bloomberg
U.S. regulators took a small step toward making it harder for executives to bet against their own companies.
Under a proposed rule released Monday, the Securities and Exchange Commission would require companies to make public any policy that allows employees to use short sales, options, swaps or other transactions that would allow them to profit if stock in their company falls.

New York financial regulator sends subpoenas in forex probes – sources
Karen Freifeld – Reuters
New York’s financial regulator has sent subpoenas to Goldman Sachs (GS.N), Credit Suisse (CSGN.VX), BNP Paribas (BNPP.PA) and Societe General (SOGN.PA), expanding its probe into the possible rigging of foreign exchange rates through computer programs, people familiar with the matter said.
The state’s Department of Financial Services, overseen by superintendent Benjamin Lawsky, is looking at whether computer programs allow banks to front-run or otherwise take advantage of clients, the sources said.
***JB: Instead of subpoenas the government should just send them a bill.  Save some time and bother.

Europe’s open access rules pose threat to end-users, says ICE chief
The Trade
Europe’s incoming rules granting open access to clearing houses threaten increased capital requirements for end-users of derivatives, according to Jeffery Sprecher, chairman and CEO of Intercontinental Exchange (ICE).
Speaking on an earnings call last week, Sprecher addressed the open access rules set out in the revised Markets in Financial Instruments Directive (MiFID II), which effectively introduces competition in listed-derivatives clearing.


FlexTrade Wins Award for Best Options Trading Platform
Press Release via Business Wire | Rock Hill Herald Online
FlexTrade Systems, Inc., a global leader in multi-asset execution and order management systems, today announced its Derivix OEMS has won the “Best Options Trading Platform – Vendor” category at the fourth annual Wall Street Letter Institutional Trading Awards 2015 ceremony, which was held at Cipriani in New York on February 4.
The WSL Awards are designed for brokers, exchanges and trading platforms operating within the institutional trading industry who have proved themselves over the course of the preceding year.

LSE Millennium cuts deal with India’s NCDEX
Cian Burke – Futures & Options World
British exchange’s Millennium has cut various tech deals in recent months
The London Stock Exchange’s Millennium IT tech unit has won the mandate to supply  India’s National Commodity & Derivatives Exchange (NCDEX) with the core technology infrastructure for its derivatives market.


SPX Range & Oil Key Juncture – Weekly Market Outlook
Price Headley – CBOE Options Hub
Despite Friday’s modest stumble, last week was clearly a good one for the market, bringing it back from the brink of a significant correction and putting it back within reach of a significant breakout.  Yet, as has been the case too many times over the past couple of months, the bulls just couldn’t deliver the knockout blow to the bears when they needed to the most.  This isn’t to say it’s not going to happen.  It is to say, however, it’s definitely not a done deal and a move back lower could well happen.

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