Observations & Insight

Bigger Picture: BATS Execs Willing To Collaborate To Expand Options Business
Sarah Rudolph, JLN

BATS Global Markets has a hand in both equities and options, and its options market, though relatively new, is holding its own among the growing list of options exchanges. John Lothian News’ Sarah Rudolph caught up with Kapil Rathi, the exchange’s vice president of options business strategy, and Bryan Harkins, its executive vice president and head of U.S. markets, at the Options Industry Conference in Miami Beach earlier this month and spoke to them about BATS’ plans for a new exchange, how to grow the pie in the options space, BATS’ new proposal for small-cap equity trading, as well as their take on the OCC’s capital plan.

SR: BATS Options has been building its market share. What is the next phase in the exchange’s growth?

KR: Our near-term goal is to launch a new options exchange called EDGX Options, with a customer priority/pro rata allocation model. BATS is a leader today in the price-time market, a fairly small subset of the options industry. So there is a large customer base not currently being served by BATS: the “classic” market with a pro-rata priority based model and payment for order flow. This is the model used by CBOE, Amex, MIAX and PHLX.

BH: Our expansion in options is also part of our overall plan to execute and be No. 1 in all the asset classes we touch. We try to identify large markets we can enter with our technology and our economies of scale and improve the efficiency of that market.

Read the rest of the interview

Lead Stories

Shake Shack’s Undefinable Risk
By Steve Sears – Barron’s
Shake Shack does not currently trade in the options market. This prohibits investors from buying bearish puts that increase in value as stock prices decline. Shake Shack was recently down about $5 around 80. The stock went public in January at $21.
The Chicago Board Options Exchange says Shake Shack options should be listed in late July.

***DA: Investors were also prevented from trading calls as the stock was on its way to quadrupling in value.

Is the VIX Signaling Doom?
By Adam Warner – Schaeffer’s Research
Remember all the way back to … last week? You know, that time when spring was in the air and the CBOE Volatility Index (VIX) was in the 12s?

***DA: If doom is around the corner, with the VIX maintaining a 13 handle, there is still plenty of room to the upside.

US binary options “deep in the money” says Forest Park BX CEO Justin Hertzberg
By Justin Hertzberg – LeapRate
Last month, another LeapRate guest editorialist published an article entitled, “Did Cantor Fitzgerald just Legalize Gambling in the US?” While it was an eye-catching title (it caught mine), the sensational title missed what is truly sensational about the CFTC registered Cantor Exchange, in that it has revolutionized the way binary options are traded.

***DA: What separates it from Nadex, the only other registered entity listing binaries, is contract size.

Volatility Survives (For Now) The Same Old Chop
Today delivered a great example of how the stock market does NOT respond the moves in the U.S. dollar index. The U.S. dollar ended the day flat, yet the S&P 500 was still able to recover most of its losses from Tuesday. On that day, the surge in the dollar was supposedly responsible (or at least correlated with) the plunge in the stock market. It stands to reason that mainly dollar weakness could return the S&P 500 to the previous level.

***DA: Beware the single metric. That type of logic can get you into trouble.


Hotspot Introduces Market-leading Standards for Liquidity Providers
BATS Press Release
Hotspot, a leading institutional foreign exchange (FX) market owned and operated by BATS Global Markets (BATS), today announced new standards for Hotspot liquidity providers
that qualify as Market Makers, including reduced timeframes for acting on Non-Firm Liquidity and high targeted acceptance rates for such orders.

BSE’s high-speed BOLT Plus crosses 1 billion in volumes
The Economic Times
Leading bourse BSE today said its high-speed Plus platform has seen over 1 billion derivative contracts being traded since it began operations in November 2013.

HKEx To Introduce Three New Stock Option Classes on 22 June
Hong Kong Exchange and Clearing Limited (HKEx) will introduce three new stock option classes on Monday, 22 June 2015: New China Life Insurance, Hang Seng H-Share Index ETF and CITIC Securities.
New China Life Insurance and CITIC Securities are both H-share companies and eligible for Southbound trading under Shanghai-Hong Kong Stock Connect, HKEx’s mutual market access programme with the Shanghai Exchange. The Hang Seng H-Share Index ETF was the third most actively traded ETF at HKEx last month and accounted for about a fifth of the total ETF turnover.

Poised for Revolution, Currency Trading Gets Veteran Combatant
By Sam Mamudi and John Detrixhe – Bloomberg
Bats Global Markets Inc. is betting on a revolution in currency trading like the one in stocks 20 years ago. It began its crusade with a $365 million acquisition followed by a price war.
The currency market “over the next three to five years is going through a structural change that won’t come again,” Bats Chief Executive Officer Chris Concannon said in an interview in the company’s downtown Manhattan office. “It’s equities in the 1990s.”

**SR: More about what BATS is up to these days.

Regulation & Enforcement

Wall Street Is Using the Power of Dodd-Frank Against Itself
By Adam Davidson – NY Times
Regulating Wall Street is an Old Testament sort of affair: Like Leviticus, it is all about the persnickety details. But politicians try to talk about it in New Testament terms, with sinners and saints, salvation and damnation. Only they can’t agree on who the sinners are — the bankers or the bureaucrats — and wherein lies salvation. Such moralizing, however, does very little to shine light on the benefits and drawbacks of the byzantine 2010 banking regulations known as Dodd-­Frank.

***DA: Let he who is without sin cast the first stone. On second thought, never mind.


The Road To Tax Alpha
By George Michaels and Brian Roberti – FINalternatives
“Danger, Will Robinson! Danger!” To alert him of impending peril, this is what the Robot tells young Will in the 1960s TV show Lost in Space. Similar to Will’s protector, today automated alerts warn of potential mistakes or point out something overlooked. We embrace and rely on alerts of all types. Google calendar alerts remind us of meetings lest we miss them. Fitbit devices remind us when our activity level wanes. Daily alerts on positions and portfolios help investment managers to monitor the economic health of their investments.


China Stocks: New Rules Create a Great Opportunity
By Steven M. Sears – Barron’s
The Mainland-Hong Kong Mutual Recognition of Funds initiative begins July 1. The liquidity program is likely to prompt retail investors to buy mutual funds, in turn causing fund managers to buy large amounts of stocks. Investors can pre-position by purchasing broad-based exchange-traded funds and super-charging those positions with options.

Volatility and the benefits of downside protection strategies
By James Williams – Hedgeweek
Despite the devastation of the 2008 global financial crash, institutional investors are soaking up more of the upside in global equity markets, despite not necessarily having a clear strategy on how to protect their portfolios against downside volatility.


Debit Spreads and Credit Spreads – Similar.
By Dan Keegan – CBOE Options Hub
Selling credit spreads is a very popular starting point for many retail options traders. A call credit spread is a bearish trade and a put credit spread is a bullish trade. Both of them involve selling an option with a higher premium and buying an option with a lower premium. But many investors only look at credit spreads. We’ll show two credit spread examples but compare them to debit spreads.

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