Lead Stories

Sell Stocks, Buy Options
Steven M. Sears – Barron’s
In the recorded history of options, there has rarely been a better time than now to buy them.
The stock market’s grinding advance to record highs has pushed implied volatility to near record lows. The closely watched CBOE Volatility Index is around 11.50, far below its long-term average of about 19.
Other measures are even lower.

Calm or Complacency, in Three Charts – MoneyBeat
Steven Russolillo – The Wall Street Journal
It is really quiet on Wall Street. So quiet, in fact, that some officials at the Federal Reserve are wondering whether tranquil financial markets are actually something to worry about.
Bond prices have strengthened this year, stocks have rallied to record highs and measures of investor sentiment remain strikingly low. The VIX, which tracks market volatility, recently traded at 11.86. It has gone 74 consecutive weeks below its long-run average of around 20, the longest such stretch since 2006 and 2007.

Will 2014 be like 2007?
John Nyaradi – MarketWatch
The similarities between 2014 and 2007 are remarkable, to say the least.
The past week brought us a rising tide of commentary about the similarities between the current stock market and that of 2007. Although nobody is afraid of another financial crisis, many are reading the signals as a warning of a significant stock-market pullback.
Both 2007 and 2014 are examples of how the stock market can continue to rise to record highs on thin volume.

Currency Volatility Rises to 2-Week High Before ECB Meets
Rachel Evans – BloombergBusinessweek
A gauge of currency volatility among Group of Seven nations rose to the highest in two weeks before the European Central Bank meets tomorrow amid speculation on what it may do to spur the region’s sluggish economy.
The euro fell versus most major peers. The dollar stayed higher against the euro after a Federal Reserve report said the U.S. economy expanded at a modest to moderate pace last month. The greenback rose versus the yen after an index of U.S. service industries increased more than forecast in May. Canada’s currency fell as the central bank said the nation still faces risks from low inflation.

About That Volatility = Complacency Claim…
Jeff Malec – Seeking Alpha
Here’s how the usual reporting on low volatility goes…
There’s Low Volatility because the VIX is low, and the VIX being low reflects investors paying less forfuture downside protection, and paying less for downside protection means investors are less concerned (or aware) of the possibility of downside… so low volatility means these investors are becoming more “complacent”.

Volatility Dies, Hedge Funds Lose
Mark Gilbert – Bloomberg
Since I wrote about the death of market volatility, first on May 1 and then again on May 13, others have weighed in on the issue. There’s a growing consensus that not only is the disappearance of price swings hard to explain, it may prove downright dangerous at some point.
To summarize: volatility has fallen to record lows in stocks, bonds and currencies.

Videocast: Big buyer of VIX calls

You Think This Is a Boring Market? Be Careful What You Wish For
David Fabian – The Street
The word around the financial community right now is boring. The stock market has entered a phase of minuscule price movements and low volume metrics. There is a multi-year low in volatility and uncertain economic data.
In short, equities are boring us to death one slow day at a time.

What’s lurking under the low Vix? – The Tell
Anora Mahmudova – MarketWatch
Complacent markets? Certainly, at first glance. The CBOE Vix index, otherwise known as Wall Street’s fear gauge, is sitting near or below 12 and has been for about two weeks. The last time it was at these levels for a prolonged period was in 2007.
And, yes, we all remember what happened.


Exchange operator ICE to cut at least 15 order types from NYSE
John McCrank – Reuters
IntercontinentalExchange Inc plans to eliminate at least 15 order types from the New York Stock Exchange in order to help simplify the structure of the market, an executive of the exchange operator said on Tuesday.

Futures Exchanges Defend Trading Practices
Executives from the major U.S. derivatives exchanges said that the futures markets are not biased toward any category of trader, especially high-frequency traders.
At a meeting on Tuesday of the Technology Advisory Committee of the Commodity Futures Trading Commission, the executives said that automated and high-frequency trading are an inevitable consequence of advances in technology which have benefited investors by boosting liquidity and raising certainty of execution.

Japan’s Osaka Exchange Looking to Expand Into Commodity Markets
Agnieszka Troszkiewicz – Bloomberg
Japan Exchange Group Inc. (8697), the country’s main bourse operator, is considering expanding into commodities and currencies.
“We have the ambition to expand our product base from securities into the other types of products including commodities,” Hiromi Yamaji, chief executive officer of Osaka Exchange Inc., a unit of Japan Exchange, said in an interview in London yesterday. Precious metals, rubber, oil, liquefied natural gas products and foreign-exchange futures and options are possible, he said.

Regulation and Enforcement

As bank swaps trades come under rules, electronic trading may rise
Karen Brettell – Reuters
Three months after new trading requirements for the $300 trillion U.S. derivatives market were introduced, little of the market is operating as regulators intended, with mandates for most bank trades delayed and investors slow to embrace new trading systems.
That may start to change this month. Trades that package interest rate swaps and U.S. Treasuries, which comprise most interdealer interest rate activity, will fall under new trading rules from June 16.

Trading to influence gold price fix was ‘routine’
Xan Rice – Financial Times
When the UK’s financial regulator slapped a £26m fine on Barclays for lax controls related to the gold fix, it offered more ammunition to critics of the near-century-old benchmark. But it also gave precious metal traders in the City of London plenty to think about.
While the Financial Conduct Authority says the case appears to be a one off – the work of a single trader – some market professionals have a different view.

CFTC mulls retooling market surveillance for high-frequency trading — FCW
Adam Mazmanian – FCW
U.S. financial regulators are in the midst of upgrading their IT capabilities to monitor and police high speed computer trading. As documented in the recent Michael Lewis book “Flash Boys,” high-speed traders go to considerable expense to co-locate their network infrastructure inside exchanges to gain a latency advantage over less nimble rivals that can be measured in microseconds. They hire top mathematicians to write algorithms to predict the movement of markets and trade accordingly. Events like the 2010 “Flash Crash” have roused regulators to the need to develop investigative capabilities that match the speed and dynamism of the market.

U.S. Senate Confirms Three Commissioners to Derivatives Agency
Silla Brush – Bloomberg
The Senate voted today to confirm a new chairman and two commissioners to serve on the main U.S. derivatives regulator.
In a series of voice votes, the Senate confirmed Treasury Department official Timothy Massad to serve as chairman of the Commodity Futures Trading Commission and J. Christopher Giancarlo, an executive at New York-based inter-dealer broker GFI Group Inc. (GFIG), as a commissioner.
Earlier, the Senate voted 48-46 to confirm Sharon Y. Bowen, a New York-based lawyer at Latham & Watkins LLP, as a commissioner.


Don’t Complain About This Boring Market. Prepare.
The word of the financial day is “boring.” We’ve entered a phase of miniscule price movements, low-volume metrics, a multiyear low in volatility, and uncertain economic data.
In short, stocks are boring us to death one slow day at a time.
The problem is compounded by the fact that the SPDR S&P 500 ETF (SPY) is sitting close to all-time highs and defied nearly every “top” that experts have predicted. This has many traders sitting on their hands or frustrated with the lack of movement in existing positions. No one wants to add up here, but no one wants to short this resilient market, either. This problem will only be settled through time and price.



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