JLN Options: SEC Approves BATS-Direct Edge Merger; Why Tapering May Be Bad For Emerging Markets; Weekly Market Commentary 1.31.14

Jan 31, 2014

Observations and Insights

Exercising the right to evolve – CME FX options
Craig LeVeille, CME Group

(Editor’s note: This article originally appeared in the “Euromoney FX and Treasury Management Handbook 2014” and is reprinted with permission.)

There has been no shortage of major market influences and central bank actions affecting the FX markets in 2013. Abenomics was one key driving force for the rise in Japanese yen trading, and the continuance of quantitative easing (QE) in the US has made hedgers and speculators realise that currency risk can no longer be an afterthought. Emerging market currencies like the Brazilian real, Indian rupee and South African rand have depreciated in value when talk of QE ‘tapering’ arose, only to be stabilised when Fed remarks indicated that the end of the programme would be at least several months away.

But as many FX venues have seen dramatic decreases in trading volume, CME FX markets have witnessed significant growth in one key area – options. In fact, through early December 2013 our research shows CME FX options volume has grown 48% year over year, with FX open interest 49% higher than levels a year earlier. The growth in options is not too surprising given recent major risk events, like QE tapering discussions and Abenomics. Investors tend to use options as a safer tool to hedge exposures during periods when risks are very difficult to quantify.

However, a closer look at CME’s recent experience suggests that the growth in options may be as much the result of market evolution as it is about volatility. Given the early stage of automation in the global option market, there are strong reasons to be optimistic about future growth prospects.

Click here to read the entire article: http://jlne.ws/1edtOCG (PDF)

Lead Stories

SEC Approves BATS-Direct Edge Merger
Bradley Hope – WSJ.com
The Securities and Exchange Commission has approved the merger of BATS Global Markets Inc. and Direct Edge Holdings LLC, and the transaction is expected to close “within days,” the companies said in a statement today.
http://jlne.ws/1ellRJV

Why Tapering May Be Bad For Emerging Markets
Russell Rhoads – CBOE
My daily commute ritual can either involve driving or taking the train.  The one commonality is that I always listen to Bloomberg Radio on the way in.  I am just a huge Tom Keene fan.  Today there was an interview about tapering and the discussion centered around the impact of tapering on emerging markets.  More specifically, that tapering is ‘bad’ for emerging markets.
http://jlne.ws/1a8phAi

Weekly Market Commentary 1.31.14
Larry McMillan – CBOE
Are you having fun yet?  Volatility has returned, and the market is a daily dose of pain and pleasure, to either the bulls or the bears.  There are plenty of cross-currents now, and in reality, volatility hasn’t even increased all that much (statistically).
http://jlne.ws/1iAZcIc

CBOE’s Vix faces competition from ISE’s VolDex
Jonathan Watkins – Future and Options Intelligence
The International Securities Exchange (ISE) will begin listing options on the Nations VolDex index later this year in the hope that its new measure of volatility will attract investors.
The launch will pit ISE’s at-the-money offering up against CBOE’s out-of-the money options, with index provider NationsShares believing its VolDex will be an ‘alternative’ to the CBOE Volatility Index(Vix).
http://jlne.ws/1fFljNu

More complex ETFs on the way
David Pett – Financial Post
Exchange-traded fund investors can expect more fixed-income alternatives to hit Canadian markets in 2014, but it won’t be the only trend dictating new ETF issues this year.
Equity income, smart beta and currency hedging will also play a huge role in upcoming product launches, say industry participants.
http://jlne.ws/1jTZ7Vg

Did The VIX Have It Right?
David Moenning – Inside Futures
Calm appeared to be restored to the markets on Thursday as the fear of what could happen in the emerging markets waned and the word “crisis” was barely used. Traders adorned in rose-colored Ray-Ban’s suggested that the actions taken as well as those threatened by various governments and central bankers in the emerging market countries had produced a reprieve and that things ought to be hunky-dory from here.
http://jlne.ws/1eEf4r8

Videocast: Mixed trading in the VIX
optionMONSTER
http://jlne.ws/1eEdLsu

VXX and VXZ Volatility ETNs Now Five Years Old
Bill Luby – ETF Daily News
In the midst of all the emerging markets turmoil, I wanted to take a moment to acknowledge the fifth birthday of the two pioneering VIX ETPs : VXX and VXZ.
http://jlne.ws/1jU1eIv

HFTs Get a Lobbying Group of Their Own
Robert Stowsky – Traders Magazine
The high-frequency trading party may be coming to an end. Lawmakers and market regulators in both Europe and Asia have made recent moves to limit HFT trading; Italy’s transaction tax and the Singapore and Hong Kong stamp taxes on equity trades come to mind. The European Union is still discussing a minimum resting period that would kill HFT altogether while U.S. regulators are focusing on preventing system failures as opposed to curtailing trading behavior.
http://jlne.ws/1eEb4XQ

Exchanges

BATS Global Markets and Direct Edge Receive SEC Approval to Merge
Press Release (BATS)
January 31, 2014 – BATS Global Markets, Inc. (BATS) and Direct Edge Holdings LLC (Direct Edge) today announced the receipt of Securities and Exchange Commission (SEC) approval for their merger and expect to close the transaction within days.
The merger of BATS and Direct Edge, which was announced in August 2013, combines two customer-focused securities exchange operators under the BATS Global Markets brand to drive further innovation and better serve the trading and investing community.
http://jlne.ws/1cE0u6w (PDF)

Regulation and Enforcement

U.S., EU pledge better cooperation on derivatives reform
Douwe Miedema – Reuters
U.S. and European Union regulators on Friday pledged to work more closely together on reforming the $630 trillion (382.79 trillion pounds) derivatives market after publicly locking horns over the issue last year.
http://jlne.ws/1a8mM0K

FIA chief urges pragmatic approach to SEF trading
Richard Henderson – The Trade
Market participants and regulators should prepare for system errors and liquidity issues ahead of mandatory trading on swap execution facilities (SEFs), Walt Lukken, CEO of derivatives industry body the Futures Industry Association (FIA), has told theTRADEnews.com.
http://jlne.ws/1a8orU8

Strategy

Making D’oh on a ‘Homer Simpson Strategy’
George Acs – The Street
My least favorite situation is to have uncovered positions. Lately that is an increasing occurrence. Back during the 2008-2009 financial crisis, volatility was high and option premiums were substantially higher while the market was falling. it was actually very easy to stay ahead of the market, if you channeled Homer Simpson: Just say “D’oh.”
http://jlne.ws/1jTYpY7

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