JLN Options: Russian sanctions to test derivatives market; Options Expiration, Ukrainian Election May Spur Gold Out Of Trading Range; VIX ETFs Reveal a Complacent Market

May 23, 2014

Observations and Insight

A Tale of Two Issues: Zach Ziliak Breaks Down the HFT Debate

Today’s financial markets can be summed up in three words – global, fast, and complex. But as the market structure evolves, so must the regulatory structure that oversees it. John Lothian News has spoken with several industry experts to create this series on the evolution of financial market structure.

In part 6, quant -turned-attorney, Zach Ziliak points out that Michael Lewis’ Flash Boys, like any good novel, gets broken down into good vs. evil, and HFT has become an easy target. He says it is important to separate the debate in two – automated systems’ day to day activities, and issues related to the flash crash and other system failures.

Watch the video »

Lead Stories

Russian sanctions to test derivatives market
By Christopher Whittall, International Financing Review
Finance lawyers are scrambling to establish the potential impact of further US and EU sanctions in response to the Ukraine crisis, as concern mounts that derivatives trades involving Russian firms would be thrown into disarray.

Options Expiration, Ukrainian Election May Spur Gold Out Of Trading Range
Kitco News
Gold-market watchers are hoping that the results of the Ukrainian elections on Sunday and June options expiration on Tuesday may finally prod the market out of the tight trading range it has hewn to since late March.
June gold futures fell Friday, settling at $1,291.70 an ounce on the Comex division of the New York Mercantile Exchange, down 0.13% on the week. May silver fell Friday, settling at $19.418 an ounce, up 0.46% on the week.  Next week, both U.S. and U.K. markets are closed Monday for holidays.

VIX ETFs Reveal a Complacent Market
Tom Lydon, ETF Trends
As the CBOE Volatility Index, the so-called fear index, slides below a one-year low, VIX exchange traded product traders could begin to see volatility tick higher in a complacent market.

Gold fix put on the spot after Barclays fine
By Neil Hume, Xan Rice and Daniel Schäfer, The Financial Times
When Daniel Plunkett turned up for work in Canary Wharf on June 28 2012, his employer was again under fire. A day earlier, Barclays had paid £290m to UK and US regulators to settle allegations of manipulating the Libor interest rate benchmark.

The Morning Ledger: Investors Grow Bold, Except in Thailand
James Willhite, The Wall Street Journal
Good morning. The market’s “fear gauge” fell to a 14-month low, showing that few expect stocks to suddenly spike or plunge. Traders say there are several reasons, including record stock prices, steady U.S. growth and ongoing support from the Federal Reserve, the WSJ’s Chris Dieterich reports. Some, including New York Fed President William Dudley, warn that the low reading on the fear gauge, the Chicago Board Options Exchange Volatility Index, may point to a failure to account for market risks. But others counter that every downtick in the market has brought consistent demand for shares.

When moderation is no virtue
Economist blog
The most notable thing in the financial markets today is the absence of anything notable: volatility has collapsed to near-historic lows. Take a look at the accompanying chart from Bianco Research. It shows that Vix, a measure of how volatile stocks are expected to be based on options prices, has dropped to its lowest since 2007. Bond volatility is creeping closer to the historic lows reached a year ago, just before the taper tantrum. And foreign exchange volatility is also back to the lows of 2007.

Stock Market Volatility Plunges; Some Worry About Risk
By Dan Weil, MoneyNews
The main indicator of stock market volatility has plummeted in recent weeks, and some experts worry that investors are getting a little too comfortable.
The Chicago Board Options Exchange Volatility Index (VIX), which measures expected volatility for the S&P 500 index, touched a 14-month low of 11.68 Thursday before closing at 12.03.
So what has lessened investors’ fear?

Sales of All-or-Nothing Structured Notes Rise on Volatility Bets
By Luca Casiraghi, Bloomberg
Sales of structured notes that pay coupons only if stocks move within preset ranges surged to the highest in six years as investors speculate that swings in equity markets will remain subdued.
Global issuance of digital coupon notes linked to equities jumped to $1.55 billion this year from $559 million in the same period of 2013 even as sales of structured products declined, according to data compiled by Bloomberg. The securities, also known as all-or-nothing notes, generate returns when volatility is low.

VIX Volatility Index Falls to Lowest Level in Over a Year
Traders Cite Near-Record Stock Prices, Low Rates
By Chris Dieterich, The Wall Street Journal
The stock market’s fear gauge has fallen to its lowest level in more than a year, as investors drop their bets on large stock swings.
The Chicago Board Options Exchange Volatility Index, or VIX, hit a 14-month low on Thursday of 11.68 before closing at 12.03.

Low VIX Sparks Volatile Debate: What Does It All Mean?
Chris Dieterich, The Wall Street Journal
Many market watchers have been scratching their heads over low readings in the CBOECBOE +0.93% Volatility Index.
The VIX, often called the market’s “fear index,” continued to slide ahead of the holiday weekend, briefly touching 11.46 in recent trading, its lowest intraday level since March 2013.
Investors and market watchers are at odds over what factors are driving ultra-low volatility and what it might portend for the markets.


NASDAQ OMX Nordic Press Release
Stockholm — NASDAQ OMX announces that trading in weekly options on Swedish shares starts on NASDAQ OMX Stockholm on May 26. The introduction of weekly single stock options is an extension of the successful weekly index options offering that NASDAQ OMX launched in 2012, and that today represent around 5 percent of the total Swedish index options volumes.

TMX Group CEO Plans to Exercise Options and Sell Common Shares
TORONTO – TMX Group Limited (TSX-X) announced today that Tom Kloet, Chief Executive Officer, intends to exercise stock options and sell the underlying common shares subject to market conditions. As reported in TMX Group’s management information circular dated April 11, 2014, Mr. Kloet has a share ownership requirement of three times his base salary, which he will continue to exceed following any sales. Under the terms of his employment agreement, Mr. Kloet must disclose his intention to purchase or sell TMX Group common shares, including exercising of options, at least two business days prior to a transaction.

IMC Financial Markets to Become Designated Market Maker on the NYSE
Reaches Agreement to Purchase Goldman Sachs’ DMM Trading Rights
Press Release
The New York Stock Exchange (NYSE) and IMC Financial Markets (IMC), a global market making firm, today announced IMC Chicago LLC is expected to become a Designated Market Maker (DMM) by acquiring the Goldman Sachs DMM trading rights.

Press Release
BATS Global Markets, a leading operator of securities markets in the U.S. and Europe,  reports the BATS 1000® Index (Ticker: BATSK) closed at a record high of 21, 406.70 today, rising 222.16 points, or 1.0%, on the week.

Regulation and Enforcement

EU Financial-Transaction Tax Plans Turn to Derivatives
By Rebecca Christie and Jim Brunsden, Bloomberg
European efforts to build a financial-transaction tax are turning to which derivatives to tax and how to leave room for future expansion, planning documents show.
Greece, which holds the EU’s rotating presidency until July 1, has proposed several options for taking the plan forward, according to the documents prepared for a May 28 working group meeting. One task will be to decide which derivatives to tax, while another will be to choose how the current plan should set the stage for a broader scope later on.

CFTC eases Dodd-Frank burden on energy companies
Alexander Osipovich, RISK.net
In the wake of industry criticism, the US Commodity Futures Trading Commission is taking steps to relax position limits and accommodate the concerns of public utilities in its implementation of the Dodd-Frank Act.
The US Commodity Futures Trading Commission (CFTC) has announced a trio of steps aimed at easing the burden of Dodd-Frank Act regulations on energy companies and other end-users of commodity derivatives.


Options: Don’t be penny wise and dollar foolish when selecting strikes (video)
By Daniel P. Collins, Futures Magazine
Options are a great way to gain access to a market during times of high volatility.

How To Buy Gold Options
By Cory Mitchell, Forbes
Buy gold options to attain a position in gold for less capital than buying physical gold or gold futures. Gold options are available in the U.S. through the Chicago Mercantile Exchange (CME), so if you’ve wondered how to invest in gold, here’s a shorter-term and less capital intensive way to do it.


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