Stock Volatility Looms as Fed Bond Buying Ends: Options
Callie Bost – BloombergBusinessweek
The trajectory of the U.S. stock market is about to get bumpier, according to one measure in the options market.
Investors are bidding up contracts that protect against losses in the Standard & Poor’s 500 Index (SPX) in the next three months, driving the price to near the highest level in 19 months compared with contracts expiring in a month. The difference in implied volatility shows traders are hedging for risks that may be months away while expressing less concern over the present.
The great volatility debate
Futures & Options World
Despite a recent flurry of activity in certain asset classes, volatility has not returned to financial markets in any meaningful way and may not return so long as global central banks continue to provide markets with excess liquidity and remain fully committed to providing substantial assistance should any financial institution get into trouble. The resilience of the market to the normal sources of volatility is demonstrated by the contrast between the significance of recent geopolitical events with the insignificance of the market’s reaction to them. In 2014, we have witnessed the Russian annexation of Crimea, the shooting down of a civilian passenger plane over Ukraine, aggressive economic sanctions against Russia by both the US and EU, fresh instability in Iraq prompting new deployment of US troops and the most violent conflict in Gaza in a decade.
What Does It All Mean? S&P 500 Grinds Higher
JJ Kinahan – Forbes
The S&P 500 continued to chip away at uncharted territory last week after capturing the 2,010 level for the first time. In fact, the S&P 500 and the narrower Dow Jones Industrial Average both logged their fifth consecutive weekly gain. What’s most interesting perhaps is the pace of the advance. It’s been impressively slow, evident in a rail-thin, four-point average daily price swing in the S&P 500 over the past two weeks.
Leveraged ETFs, lovers of market waves, lose favor amid the calm
Ryan Vlastelica – Reuters
Leveraged exchange-traded funds, designed to magnify short-term returns, have fallen out of favor this year as investors who had embraced them are finding costs excessive in a calm market that is not rewarding bets on wild daily swings.
The funds may continue to lack appeal as markets show no indication that fear will enter into the trading equation anytime soon, with equities shrugging off all manner of negative headlines.
The New Face of VIX
Adam Warner – Schaeffer’s Investment Research
If you thought the CBOE Volatility Index (VIX) was great before, just wait. It’s getting even better. The Chicago Board Options Exchange (CBOE) has just announced a plan to enhance the calculation with … more data!
High-Frequency Trading Leads to Lawsuit Against Exchanges
Scott Patterson – WSJ
Three big law firms have joined forces to pursue legal action against major U.S. stock exchanges, claiming the exchanges handed unfair advantages to high-frequency traders to the detriment of regular investors.
The lawsuit, filed in the U.S. District Court of the Southern District of New York, could test a cornerstone of U.S. securities law: exchanges’ immunity from lawsuits seeking damages.
Researcher Argues for Preserving Floor Trading
Bradley Hope – WSJ
Daniel Beunza has spent the last 13 years scrutinizing the arcane language, rites of passage and rituals of an insular tribe imperiled by advances of the modern world.
His conclusion: Save the floor traders.
Notebook in hand, the London School of Economics professor shadowed New York Stock Exchange traders on and off the floor, tagging along for late-night trips to lower-Manhattan bars, fishing excursions and jaunts to a surfer-themed restaurant on Long Island owned by a former longtime NYSE trader.
CME, CBOE cut expenses as trading, income fall – In Other News
Lynne Marek – Crain’s Chicago Business
Chicago’s two big exchange operators have been waiting on a trading rebound that just won’t happen, so it’s belt-tightening time.
CME Group Inc., which runs the world’s biggest futures market, and CBOE Holdings Inc., owner of the Chicago Board Options Exchange, promised cost cuts after reporting disappointing second-quarter results. They’re pledging to reduce hiring, travel and advertising, among other things.
Regulation and Enforcement
SEC Names Ombudsman
Scott Patterson – WSJ
Investors who want to complain to the Securities and Exchange Commission about the Securities and Exchange Commission now have someone to bring their gripes to.The SEC on Friday named Tracey McNeil, a longtime SEC official, its first ever ombudsman, a role mandated by the 2010 Dodd-Frank financial overhaul. Ms. McNeil will “act as a liaison in resolving problems that retail investors may have with the Commission,” the SEC said in a statement.
U.S. SEC preparing new rules to boost oversight of funds – WSJ
The U.S. Securities and Exchange Commission (SEC) is preparing new rules to boost oversight of mutual funds and hedge funds as part of an effort to gain insight into whether the asset management industry poses risks to the financial system, the Wall Street Journal reported, citing people familiar with the discussions.
Tricks for Trading VIX
Steve Sosnick – Barron’s
Can you think of a benchmark index that doesn’t actually measure what most people think it measures? The CBOE Volatility Index, commonly known as VIX, is one.
Everyone seems familiar with the “fear gauge.” Whenever stressful stock-market conditions appear, the business media is quick to report the movements of the VIX. We pay close attention as VIX leaps higher when the market falls, and look for the all-clear signal of a declining VIX when a selloff appears to have run its course. Over the past few years, the index has become a benchmark, but it’s amazing how many market participants discuss, follow, and trade in a product they don’t truly understand.
‘Fungibility’ Leads to Multiple Options Exchanges
A shift away from floor-based to electronic trading and multiple listings are the primary drivers behind the explosive growth in options trading volumes over the past decade or so, and the concomitant proliferation of U.S. trading venues.
“One of the great things about listed options is they’re totally fungible, except for a few proprietary index products, so you can open an options contract on Philly and close it out on the CBOE, which is different than the futures markets,” said Joseph Corcoran, first vice president and head of government relations at Options Clearing Corp. “In addition to increased volumes, that has also led to a decrease in fees and significant competition among the exchanges.”