Observations & Insight

Sweet 16 Honorable Mention – Regulation

Exchange leaders will be dealing with big changes at their respective companies in 2016, from launching new competing markets and dealing with new regulation to integrating new data acquisitions to expanding across different time zones.

The John Lothian News Sweet 16 Series featured our best ideas and thoughts about exchanges, regulation, economics and technology. But there are still more great ideas for 2016 that made our honorable mention. Here are comments from Art Hahn of Katten, Travis Schwab of Eventus Systems, Steve Probst of Global Risk, Brendan Bradley of Eurex, Justin Llewellyn-Jones of Fidessa on regulation.
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Lead Stories

That Giant Sucking Sound You Hear Is the ETF Options Market
Eric Balchunas and Tracy Alloway – Bloomberg
As investors rush to protect their portfolios in a tumultuous start to the year, odds are they will be using options on exchange-traded funds to do it.
While much of the recent focus on the ETF phenomenon has centered squarely on their inflows and trading growth, they are quietly becoming the epicenter of the equity option market.
ETFs now account for about 70 percent of all equity option volume, or $770 billion of the approximate $1.1 trillion traded per day, using a sample of the past 20 trading days. That’s double what the average volume was five years ago, at a time when more people than ever are buying and selling puts and calls on ETFs than they are on individual stocks.

****SD: Weird way to phrase the headline. Meant to be interpreted as ETF options are sucking volume away from other options products.

Oil options lurch closer to $20 Goldman doomsday forecast
Dmitry Zhdannikov – Reuters
When U.S. investment bank Goldman Sachs said last year that oil could fall as low as $20 per barrel, it assigned a fairly low probability to that scenario.
Fast-forward five months and in some parts of the world the forecast has already proved correct. Canadian physical crude has been selling this week at below $20 per barrel, less than it costs to extract and transport. Traders in the options market, meanwhile, are taking protection against prices falling below $25.

****SD: Also see this Reuters article, “Fear makes oil options increasingly expensive.”

Options traders prepare for future European stock market falls
Sudip Kar-Gupta – Reuters
This week’s rocky start for European stocks is driving equity traders to seek protection against any further sharp declines as concerns over China weigh on markets.
Despite being touted yet again as one of the most favoured investment plays of the year, euro equities have made their weakest start to the year in decades with losses so far of almost 6 percent, prompting a scramble in options markets to hedge against further losses of over 3 percent this month.
Traders and investors said the weak near-term outlook was spurring demand for “put” options, essentially bets on a market falling in future which give an investor the right to sell.

The VIX is Officially Overbought — So What’s Next?
Adam Warner – Schaeffer’s Research
I know this will shock you, but the CBOE Volatility Index (VIX) has moved to “officially” overbought. And that’s probably by any definition of overbought. I use greater than 20% above its 10-day simple moving average. It was about 34% above the trendline, as of Thursday’s close, and now also greater than the CBOE 3-Month Volatility Index (VXV).

VIX Jumps but Investors May Want to Buy Stocks
Steven M. Sears – Barron’s
The CBOE Volatility Index is up sharply as stocks swoon for another session. But the fear gauge’s message is not as dour as most think.
While the VIX (ticker: VIX ) is above 20, a level that is associated with bear markets for stocks, VIX futures pricing patterns indicate that investors expect the stock market will soon recover and advance.
“Either volatility has it right and you want to get long equities, or volatility is wrong and the market will get more violent,” a trading strategist told me.

Volatility ETFs Surge on China Woes
Tom Lydon – ETF Trends
The CBOE Volatility Index and VIX-related exchange traded products spiked Thursday after a quick plunge in Chinese markets triggered a sell-off in the U.S. and inflamed investor anxiety.

Yuan derivatives subdued amid China FX turbulence
Economic Times
Yuan forward derivatives have shown surprising calm amid sharp falls in the Chinese currency over the past month, signalling that the yuan’s sell-off may have run its course for now.

Hong Kong woes cause options price spike
Options on Hong Kong-listed Chinese shares traded at one of the most expensive levels of relative value in recent history on Thursday as traders bid the premium for Hang Seng China Enterprises Index (HSCEI) contracts well above the recent realised volatility of the index.

GMO Click Traders Incurs Mounting Binary Options Losses during December
Jeff Patterson – Finance Magnates
Japanese broking giant, GMO Click Securities, has reported its binary options metrics for the month ending December 2015, which revealed that a larger number of traders experienced financial losses with their trading than in November 2015, according to a GMO Click statement.


Options trades boosts CME’s December
Securities Lending Times
CME Group’s options volume in December averaged 2.7 million contracts per day, up 3 percent over the same month in 2014.
Electronic options increased by 4 percent over the same period.
Interest rate average volume dropped by 14 percent year-over-year, with 5.7 million contracts per day in December 2015.

LME moves to ease audit burden on members
Luke Jeffs – Futures & Options World
The London Metal Exchange has told clients it has changed how they will be audited, marking the second change to the exchange’s compliance arrangements in as many days.
The LME said in a client circular on Thursday that it has introduced a revised Member Audit Programme (MAP) that changes how the LME monitors its members’ conduct.

ICE Futures Canada Achieves Record Year in Canola Futures and Options
Press Release
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that in 2015 ICE Futures Canada achieved record volume in canola futures and options with 5.745 million contracts traded for the year.

Regulation & Enforcement

Currency spoofing probe could spell trouble for FX options
Enforcement action may hamper regulatory efforts and result in dark pool practices, an industry lawyer says
A widely reported move by the New York attorney general to investigate possible spoofing in FX options for emerging market (EM) currencies could put regulatory and enforcement efforts at odds, making it difficult for this segment of the market to develop and even pushing such trades into dark pool territory.


The Problem With Circuit Breakers
Bradley Hope and Dan Strumpf – WSJ
Some say exchange level tools may increase market volatility instead of controlling it
China’s latest effort to tame volatility is another sign that trying to control markets through crude tools at the exchange level may actually increase problems.
China implemented a marketwide circuit breaker on Monday ostensibly to help manage expected gyrations in share prices in the weeks and months ahead. But trading hit the maximum price-change threshold of 7% two days this week, causing trading to be halted on Monday and Thursday. Total trading time on Thursday morning lasted only about 30 minutes.
China’s securities regulator announced late Thursday that ?it would suspend the circuit breaker, saying it failed to calm the markets and instead worsened the selloff.

Inventor of Market Circuit Breakers Says China Got It Wrong
Nick Baker – Bloomberg
The man responsible for stock circuit breakers says Chinese officials must revise their safety net to avoid creating panic, joining critics who argue the nation’s trading halts are triggered too easily for such a volatile market.

Pulling the Plug on Comatose Servers
Karen A Frenkel – Bloomberg
Just as office tenants pay for square footage based on how many workers they expect to employ, the $200 billion data center industry charges customers based on how much space their servers occupy and how much power they plan to use. Data center customers, however, tend to overestimate, asking and paying for more servers than they need. They then wind up with so-called comatose servers that may sit idle for months. Some 30 percent of the world’s servers are going unused at any given moment, wasting about $30 billion a year, according to a June estimate by Stanford and Anthesis Consulting Group.

****SD: Not directly options related, but some insightful points about the data center and cloud industries that affect a variety of businesses. From the story: “The data center industry—companies that house client data on discrete servers, unlike the cloud—can accommodate less than a third of the world’s storage needs, and by 2020 it will be less than 15 percent, estimates equipment maker EMC.”


Not Your Father’s Low Volatility Strategy
Fei Mei Chan – S&P Dow Jones Indices
Low volatility strategies were a popular and growing category in 2015, and if the first several days of 2016 are any indication, it wouldn’t be surprising to see their popularity continue in the new year. That said, the topic of low volatility investing often comes with much discourse. A frequent argument is that a low volatility tilt is very similar, if not synonymous, to a bet on a small number of sectors or industries. In its 25-year history, the S&P 500 Low Volatility Index has often had high concentration in low volatile sectors – most frequently Utilities, Financials, and Consumer Staples. The index seeks out the least volatile stocks—with no sector constraints—so having large positions in sectors with relatively lower risk is not surprising.

The VIX Is a Trader’s Best Friend Right Now (VXX)
The volatility beast has awoken, delivering the worst start for equities to the year … like, ever.
That’s a doozy of a stat and has fear running rampant on Wall Street. And therein lies opportunity. The oft-watched volatility gauge, the CBOE Volatility Index (VIX), is in lift-off mode, suggesting sharp swings may be the norm for a spell. At 25, the VIX is pricing in average daily moves of roughly 1.5% for the S&P 500. Given the severity of the sell-off in stocks I’m actually somewhat surprised the VIX hasn’t risen more.


CBOE.COM Launches Enhanced Webcast System
CBOE via email
The Options Institute Webcast Center is pleased to announce the upcoming release of our newly enhanced webcast system at CBOE.COM. Featuring a fresh, streamlined design with more intuitive navigation and expanded resources, the enhanced system will provide myCBOE users with the most optimal viewing experience when learning about options, volatility products and appropriate strategies to trade these products.
In order to facilitate a change-over to the new system, we will be taking The Options Institute Webcast Center temporarily offline at the end of business on Friday, January 8, 2016. Come back to see what’s new in the coming weeks!

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