Observations & Insight

Lucky Number: ISE’s Mercury Set To Be 13th Options Exchange
by Sarah Rudolph, JLN

The expanding field of equity options exchanges will grow to 13 around Q3 of this year, as the ISE launches its third options exchange, ISE Mercury.

The exchange, originally set for the second quarter of the year, will give the ISE three options platforms, one for every existing type of fee structure. The ISE is now only waiting for regulatory approval.

The competition is heated in the options space. ISE has recently focused on market segments outside of the payment-for-order flow, rebate style format. But as this structure has become a much larger segment of the market, ISE has adapted and plans to implement it into ISE Mercury.

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Lead Stories

Six Years of Buy the Dip Keep Stocks Calm as Other Markets Erupt
Callie Bost – Bloomberg
The new haven trade is equities.
So suggests the Chicago Board Options Exchange Volatility Index, the gauge of stock market anxiety that has plunged 39 percent since January even as turbulence engulfed currencies, commodities and bonds. Compared with foreign exchange, U.S. shares are the calmest since 2006, with the Standard & Poor’s 500 Index hovering about 26 points from a record.

***DA: “Stock prices have reached what looks like a permanently high plateau.” -Yale economist Irving Fischer, October 17, 1929.

A $61M Trade on One of the Worst Products Ever Created
Adam Warner – Schaeffer’s Investment Research
Maybe there was more to Friday’s iPath S&P 500 VIX Short-Term Futures ETN (VXX) blip than meets the eye. The CBOE Volatility Index (VIX) sonar video seems to have disappeared into the ether. But here’s the deal — about the same time as the VXX fireworks, a player bought 120,000 January 2017 9-strike puts in ProShares Trust Ultra VIX Short Term Futures ETF (UVXY) for $5.10.

***DA: Is “slippage arbitrage” an actual phrase? If not, I hereby lay claim to it.

Something’s troubling about the market: Trader
Amanda Diaz – CNBC
The S&P 500 is about 2 percent from record highs, and one trader is bracing himself for some potentially volatile months to come.
Todd Gordon of Tradinganalysis.com said that a looming Fed rate hike and the “sell in May and go away” adage could bring some sharp moves into the market.
But what troubles Gordon most is the fact that traders appear to be paying for more protection in the form of put options, this despite the fact that the S&P 500 is relatively close to record highs.

***DA: It has been a nice 6-year run. For an absolute return investor, it is worth paying extra vig to cover a down period. Read on:

The biggest mistake investors are making right now
Joshua Brown – Fortune
We tend to be willing to ignore historical facts when a more convenient promise comes along. In this case, that promise is the rise of the unconstrained bond fund.
Welcome to Year Seven of the post-financial crisis period.
Or perhaps we should say that we are now firmly in the pre-crisis period given that, statistically speaking, the next calamity is probably right around the corner.

Investors don’t feel market rigged: ConvergEx CEO
Michelle Fox – CNBC
One year after Michael Lewis’ book “Flash Boys” claimed the markets were rigged, a new survey shows many on Wall Street don’t necessarily agree with him.
According to a ConvergEx poll of 245 investment professionals, 57 percent believe the market is unfair for all participants. That is down from 70 percent who said the same thing last year, just after the book’s release.

***JB: I may be missing something because while 57% is less than 70% it is still more than half.


HKEx chief Li eyes Chinese derivatives
William Mitting – Futures & Options World
Extending the trading link between Shanghai and Hong Kong to include derivatives is central to Hong Kong Exchanges and Clearing’s plan to develop its home city as a pre-eminent financial centre, said Charles Li, the chief of the exchange group.

***DA: No argument here.

CME urges tougher US response to EU clearing dispute
Philip Stafford – Financial Times
The head of the US’s largest derivatives exchanges has suggested European clearing houses be restricted from US markets, if a long-running regulatory spat between the world’s two main regions for derivatives trading is not resolved soon.
Terry Duffy, executive chairman of CME Group, will tell an agriculture committee of the US House of Representatives on Wednesday that equivalent recognition of US clearing houses by European regulators is “the one overriding issue” facing the country’s derivatives markets.

***DA: Keeping the world’s financial markets safe is of paramount importance. Well, it is a close second to that of protecting our turf from those Yankee interlopers.

Stock Exchanges Are Beginning to Take Bitcoin Seriously
Olga Kharif – Bloomberg
The biggest U.S. stock exchange operators are taking steps to embrace bitcoin, spurring speculation the digital currency is coming up from underground.
Nasdaq OMX Group Inc. revealed Tuesday that New York-based Noble Markets, a platform for trading bitcoin, has agreed to license Nasdaq’s X-stream technology. Noble is adopting the same software used by securities exchanges around the world, and a related system runs the Nasdaq Stock Market, one of the biggest equity exchanges. The news follows the New York Stock Exchange’s January agreement to invest in Coinbase, another platform for trading the digital currency.

***DA: Are they taking bitcoin seriously, or are they acknowledging the power of block chain technology and digital payment systems?

Regulation & Enforcement

Will The SEC Force Your Broker Under FINRA Control?
Annette L. Nazareth and Jeffrey T. Dinwoodie – Traders Magazine
The overwhelming majority of SEC-registered broker-dealers must also be members of FINRA. Through a commonly overlooked exemption in SEC Rule 15b9-1, some broker-dealers that operate proprietary-only businesses are able to avoid FINRA regulation. The SEC plans to vote on a proposal to amend this rule on March 25.
While it is not clear whether the SEC will seek to eliminate the exemption or narrow its availability, the rulemaking could have important implications for firms currently relying on the exemption and, more broadly, for the ongoing market structure debate.
Let’s explore the history of this exemption and some of the possible implications of an SEC rulemaking.


Barclays, Sungard see future for clearing
Cian Burke – Futures & Options World
Tech firm Sungard signed this month Barclays as the first customer of a new clearing utility which seeks to bring various banks together to share the back office service, signalling a possible new model for the embattled clearing industry.
Sungard said the new futures and swaps clearing service will help derivatives brokers cut costs and achieve greater efficiency, as well as reducing operational risk and total cost of ownership by leveraging economies of scale in the middle and back office.


Cheap Call Options Are a Better Buy Than Stocks
Steven M. Sears – Barron’s
Investors nervous about paying up for expensive equities now have an arguably superior alternative: cheap call options.
With calls on the Standard & Poor’s 500 trading near the lowest levels in almost five years, it is possible to buy the large-capitalization benchmark index cost relatively inexpensively even as the equity market trades at historically high prices.

This could be the best way to bet on stocks now
Alex Rosenberg – CNBC
Bulls, rejoice!
The price of bullish call options on the S&P 500 has fallen to historical lows. That means that from a historical standpoint, it is remarkably inexpensive to make a bullish bet on stocks by buying on the options market.


Sentiment Tools: Taking the Temperature of the Market With the VIX, Part 1
Bob Lang – CBOE Options Hub
Random movements in the stock market are very tough to explain but if we can understand the role of sentiment, these moves make sense. Remember, stocks move along the spectrum of fear and greed, a chart being an excellent portrayal of these emotions. We can point to several sentiment-related indicators to get a pulse of market players, this is especially useful in the short run. In part 1 of a series, we’ll take a look at some of these and how they impact decisions and market movement.

Strategies To Trade Volatility Effectively With VIX (VIX,VXX,VXZ,VIVY,VIXM)
Chicago Board Options Exchange Market Volatility Index, better known as VIX, offers traders and investors a bird’s eye view of real-time greed and fear levels, while providing a snapshot of the market’s expectations for volatility in the next 30 trading days. CBOE introduced VIX in 1993, expanded its definition 10 years later, and added a futures contract in 2004. (For more, read: The Financial Markets: When Fear And Greed Take Over).

Why is the Chicago Board Options Exchange important?
The Chicago Board Options Exchange (CBOE) was the very first exchange to offer standardized exchange-traded options on stocks. It is still the world’s largest options exchange by far. The annual volume of trading on the CBOE is in excess of 1 billion contracts.

Why we are lousy investors
Jill Schlesinger – Chicago Tribune
Despite the best efforts of the financial services industry, not to mention the coterie of press outlets slavishly devoted to the professionals that populate the field, investing should not be very complicated. We can break down the process into six steps:

Using Binary Options for FX Trading
Thales of Miletus was a 5th century B.C.E. Greek philosopher to whom credit is given for writing the first ever options contract. Aristotle recounted that early one spring Thales reserved all the olive presses in Miletus at a discount. When harvest time came and the olives needed to be pressed, he leased the presses out at a much higher price. When you stop and think about it, he was quite clever. The reservation price had to be high enough to give the press owners an ‘up front’ profit as good as they expected to earn at harvest time.

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