Lead Stories

The ‘father of the VIX’ on its 7-year low: Don’t worry about it
Victor Reklaitis – MarketWatch
“I wouldn’t be worried about it,” said Robert E. Whaley, a professor at Vanderbilt University’s Owen Graduate School of Management known for developing the VIX for the Chicago Board Options Exchange in 1993.
He said the VIX’s low levels show people are comfortable that nothing serious will happen in the next 30 days.

Frenzy of Volatility Bets Underpin Lowest VIX Since 2007
Callie Bost – Bloomberg
Below the stock market’s placid surface, a battle is raging over how long the calm will last.
Hedge funds and other speculators have pushed long and short positions in futures tied to the Chicago Board Options Exchange Volatility Index to record highs, according to data compiled by Bloomberg. In listed contracts, demand for protection should the bull market falter has sent the price of bearish puts to a 15-year high relative to calls.

VIX ETFs and Their ‘Fatal Flaws’ Mean You Risk Getting ‘Eaten Alive’
Brendan Conway – Barron’s
Here’s what Michael Block of Rhino Trading says about volatility exchange-traded funds and notes in a morning client email. “VXX” is the ticker symbol for Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX):

Hedge Fund Industry Surpasses $3 Trillion for First Time – MoneyBeat
Steven Russolillo – WSJ
The hedge-fund industry exceeded the $3 trillion barrier in May for the first time ever, according to one research firm, as new allocations and performance gains pushed total assets to a new record.
Some $22 billion flowed into hedge funds last month, bringing the year-to-date inflows to $93 billion, according to data provider eVestment. That’s the largest five-month total to start a year since 2007. Performance gains also added $37.8 billion in assets last month, leaving the total tally just north of $3 trillion.

Volatility Down, Stock Market Up: What Would Signal A True Correction?
Lloyd Khaner – Minyanville’s Wall Street
Just as the Wall of Worry was about to drop into dangerously complacent territory, Old Man Iraq rears up to give us something to worry about and then some. After a brief and shallow dip, the S&P 500 (INDEXSP:.INX), Dow (INDEXDJX:.DJI), and Nasdaq (INDEXNASDAQ:.IXIC) came ripping back up. The S&P 500 went as far as hitting yet another Rita Coolidge “All-Time High,” while the DJIA is now only a shout away from the 17,000 mark.

A Low VIX Does Not Mean High Complacency | Options
Steve Smith – Minyanville’s Wall Street
Along with the recent decline in the CBOE Volatility Index (INDEXCBOE:VIX), the put/call ratio has been trending lower, suggesting increased bullish sentiment.
But if you pull the curtain back, the put/call ratio actually shows a fairly high level of concern for a sharp market decline.
Before diving into a look the put/call situation, I have a quick comment on the CBOE Volatility Index (VIX), the better known, and more widely covered option gauge.
Reports of the VIX’s death have been greatly exaggerated.

Hedge-Fund Manager Saiers Steps Down to Pursue Art Career
Nikolaj Gammeltoft and Callie Bost – Bloomberg
Nelson Saiers is stepping down from his role as chief investment officer of Saiers Capital LLC to pursue a career as an artist, leaving the top role at the firm to founder Jason Adler.
The 39-year-old money manager will continue as an adviser to the fund while Adler will assume responsibilities of CIO starting Sept. 30, according to a letter to investors that was obtained by Bloomberg News. Adler started the New York-based hedge fund in 2007 by transforming his former firm Geronimo LLC, an options market maker that he founded in 2001, into a fund that wagers on volatility.

LSE to Buy Frank Russell to Boost Indexes Index Business
Manuel Baigorri and Jonathan Morgan – BloombergBusinessweek
London Stock Exchange Group Plc (LSE) agreed to buy Frank Russell Co., a unit of Northwestern Mutual Life Insurance Co., for $2.7 billion to bolster its FTSE International Ltd. business.
LSE will pay for the acquisition with a rights issue of $1.6 billion and finance the rest with new and existing debt, according to a statement. The exchange said the takeover will boost earnings in the first full year. The shares jumped 6.1 percent, the most since July 2013, to 1,984 pence today.

Proposed Acquisition of Frank Russell Company and Fully Underwritten Rights Issue
Press Release (London Stock Exchange Group)
London Stock Exchange Group plc announces the proposed acquisition of the entire issued share capital of Frank Russell Company from Northwestern Mutual and other minority shareholders of Russell for total cash consideration of US$2,700 million (£1,590 million)1


DERIVATIVES: Exchange forecasts slashed on low volatility
Mike Kentz – IFRe
Analysts at Keefe, Bruyette & Woods have lowered earnings-per-share estimates for a handful of derivatives bourses as low volatility depresses volumes and damages revenues at major exchange operators.
Niamh Alexander and Kyle Voigt of KBW lowered EPS estimates for the Chicago Board Options Exchange, Investment Technology Group, and Nasdaq. InterContinental Exchange also saw estimates lowered, however the change resulted from its sale of the Euronext platform picked up through the purchase of NYSE rather than the low vol backdrop.

BATS Renews Lease at Kansas Global Headquarters
Press Release (BATS)
BATS Global Markets (BATS) today announced the signing of a 10-year lease renewal at its Kansas City-area global headquarters, as well as plans to open a Chicago office and expand its New York City presence due to the Direct Edge Holdings merger.
BATS, based at 8050 Marshall Drive in Lenexa, Kan. since September 2008, occupies about 35,000 square feet in the building with 104 associates. The Chicago office will be located at 200 South Wacker Drive.
http://jlne.ws/TBVWa9 (PDF)

Regulation and Enforcement

High-Frequency Firm Tradebot Swam in Barclays Pool, N.Y. Says
Sam Mamudi – Bloomberg
New York Attorney General Eric Schneiderman’s complaint against Barclays Plc (BARC) names just one outside high-frequency trader, Tradebot Systems Inc., as operating in its dark pool. In keeping with the document’s tone, the firm is referred to more than once as “toxic.”
Schneiderman’s complaint, filed with the Supreme Court of New York today, alleges that Barclays executives lied to clients about high-frequency traders in its LX platform, one of the biggest private U.S. equity venues. In particular, London-based Barclays hid that Tradebot was “one of the largest and most toxic participants.”

SEC Provides Details of 5-Cent Tick Test
Scott Patterson – The Wall Street Journal
The Securities and Exchange Commission unveiled plans for a one-year test of trading in some stocks in five-cent increments after more than a decade of trading in pennies.
The highly anticipated plan is designed to determine whether trading in certain stocks, especially less heavily traded shares, could be improved with a wider spread, or “tick,” between the prices investors offer to buy and sell for.

U.S. SEC votes to adopt part of its swaps cross-border rule
The U.S. Securities and Exchange Commission voted on Wednesday to adopt the first of a series of crucial rules that lay out when foreign banks that deal in derivatives must comply with U.S. regulations.


The Most Volatile Sector of All?
Adam Warner – Schaeffer’s Investment Research
Mirror, mirror on the wall, what’s the most volatile S&P 500 Index (SPX) sector of them all?
Would you believe utilities? Seriously.
This doesn’t get a lot of publicity any more, but there are nine “Select Spyders” you can trade in exchange-traded fund (ETF) form. Basically, all SPX stocks are allocated into one of nine buckets: Energy (XLE), Tech (XLK), Utilities (XLU), Healthcare (XLV), Consumer Discretionary (XLY), Consumer Staples (XLP), Materials (XLB), Industrials (XLI) and Financials (XLF).

Options Education

The Volatility Index Does Not Tell The Future
Robert Singarella Jr. – Seeking Alpha
The VIX has been attracting a good deal of attention in the past few weeks; ironically, for the opposite reason that it usually makes headlines. When the VIX is reaching new multi-year highs, it is a good bet that the market is crashing. During the 2008 financial crisis, the VIX reached an all time high of 80.86 intraday. Looking at an overlay of the VIX on the S&P 500 makes it obvious why the VIX earned the nickname “the fear index.”


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