Observations & Insight

EDGX Update
JLN Options

EDGX, the 13th US equity options exchange, quietly launched on November 2. The latest
exchange from BATS Global Markets, EDGX posted the following options volumes in its first and second weeks.

November 2 – 981 November 9 – 4,930
November 3 – 1,399 November 10 – 7,606
November 4 – 986 November 11 – 9,956
November 5 – 532 November 12 – 12,613
November 6 – 5,717 November 13 – 19,828

The exchange appears to be gathering a bit of traction, albeit very small, as EDGX’s volume on November 13 represents a 0.09 percent market share. By comparison, BATS, which has been making a steady climb up the market share charts, posted 2.02 million contracts traded on November 13 representing an 8.93 percent market share, according to data from the OCC.

Lead Stories

The markets (and citizens of the globe) prove to be resilient #JeSuisParis
As individuals come to terms with the horror and tragedy that occurred just a few days ago in France, the markets themselves have their own way of reacting to these events. The adage often repeated is that two things can move the markets: fear and greed. The knee-jerk reaction to the breaking news on Friday that Paris was under a series of coordinated terror attacks was indeed fear. In the after-hours markets, the price of the SPY ETF traded down a bit as some people were looking to just sell. Or perhaps it was greed as some people looked to potentially profit from what they thought was going to be a down move in the markets.

A Little Perspective: Will Next Month Be the First Interest Rate Increase Since 2006?
CBOE Options Hub
As of 11/12/2015 the market is pricing in about a 64% chance of a 25 basis point rate increase at the next FOMC meeting which concludes on 12/16/2015.
If Janet Yellen and the other voting members of the Federal Reserve choose to “liftoff” next month, it will be the first interest rate increase in the US since June 29, 2006.

Event-Driven Hedge Funds Are The `Worst Disappointment,’ Says K2
Bei Hu – Bloomberg
Event-driven strategies have been the most disappointing performers this year, said Robert Christian, head of investment research at Franklin Resources Inc.’s K2 Advisors, after many hedge funds failed to profit from mergers and acquisitions despite a record year for deals.

Weekly Market Outlook – Volume & Volatility
Price Headley – CBOE Options Hub
What started out as only a modest possibility last week didn’t take long to turn into the worst-case scenario. The S&P 500 (SPX) (SPY) gave up 3.6% of its value last week… the biggest weekly drop since the one that did the core of damage in mid-August.
Uncertainty regarding the health of the economy after a few-too-many disappointing retail earnings reports was largely to blame for the weekly setback, though uncertainty surrounding the near-term future of interest rates took a toll as well.
Of course, it may also be possible that stocks were overbought and simply ready for some profit-taking.

Ramsey the Bear, Who Called S&P 500 Decline, Sends Warning
Joseph Ciolli – Bloomberg
Doug Ramsey, whose bearish research foreshadowed the U.S. stock market’s first correction since 2011, says the rebound that has lifted equities since August doesn’t mean the mispricings that drove the rout have gone away.
If anything they’re worse, according to the chief investment officer of Leuthold Weeden Capital Management LLC, who says valuations are higher than when the selloff began because of deteriorating revenue and profits. The Standard & Poor’s 500 Index is trading for 1.8 times sales, about where it was in August, while industrial stocks last week were priced at 20 times earnings, the most in more than a decade.

VIX Shows Fear Once Again, With Signs Of A Surge To Come
Bob Lang – Investing.com
We would all love to continually call tops and bottoms in markets and be correct. After all, with that ‘magic’ we could never lose, right? Sell at the exact height of a bull run, get in at the bottom of a bear move. While that can be possible to do from time to time, nobody can call a top or bottom correctly on a regular basis. With so much emotion, psychology and irrationality there is just not a clean path to calling a top or bottom. Charts and technicals certainly are helpful identifying reference points, high/low volume areas and zones of interest.

The Week in Russell 2000 Trading – 11/9 – 11/13
Russell Rhoads – CBOE Options Hub
The tough week for stocks was harder on small caps than large caps as the Russell 2000 (RUT) was down 4.43% and the Russell 1000 (RUI) dropped 3.63%. RUT has a lot of work to do to catch up with RUI as the gap is at almost 3% between RUI (down 1.92%) and RUT (down 4.83% for the year).

Binary Options Feature Prominently in Investment Scams
Mark Henricks – The Street
Binary options, little-known investment tools used primarily by sophisticated investors, are involved in the most common type of scams reported to one regulatory telephone hotline. The Financial Industry Regulatory Authority (FINRA) recently issued a warning — two years after a similar Securities and Exchange Commission warning — advising investors to beware of binary options scams.

Japan Binary Options Volumes Extend Downward Streak
Irina Slav – Finance Magnates
The trading volumes of binary options in Japan fell further in October, extending a two-month downward trend, the country’s Financial Futures Association (FFAJ) reported. Total volumes stood at 44.589 trillion ($360 bln), down from 45.97 trillion JPY ($380 bln) for September. The annual decline was even more pronounced, with the October 2014 trading volumes figure standing at 57.297 trillion JPY ($470 bln).

Foreign investors’ moves in derivatives segment rule out bounceback soon [India]
Ram Sahgal – The Economic Times
The 533-point fall in Nifty over the past two weeks might raise hopes of a bounce back, but foreign investors’ activity in the derivatives segment seems to belie such expectations. Citing their behaviour, market honchos and derivatives experts are suggesting a more “neutral to negative” outlook over the near term.


The heroes of ‘Flash Boys’ are swinging back against critics
Matt Turner – Yahoo Finance
IEX Group, the upstart trading venue that is trying to challenge the world’s largest stock exchanges, said its critics were stuck in the past.
The firm, led by Brad Katsuyama, filed to become a stock exchange in September. Its application has raised objections from rivals including the New York Stock Exchange and BATS Global Markets.

Intercontinental Exchange to Acquire Trayport from BGC Partners and GFI for $650 Million in Stock
Press Release – ICE
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that it has entered into a definitive agreement to acquire Trayport for $650 million in ICE common stock. Trayport is a subsidiary of GFI Group, which was acquired by BGC Partners in March 2015. Trayport licenses its technology platform to serve brokers for electronic and hybrid trade execution primarily in the European over-the-counter (OTC) utility markets. The transaction will enable ICE to provide new services to the European OTC energy markets, including European power, natural gas and coal.


A Sweet Spot For Trading Overbought VIX?
Adam Warner – Schaeffer’s Investment Research
Our long national CBOE Volatility Index (VIX) nightmare is over: We’re overbought again! By overbought, I mean VIX closed 25.6% above its 10-day simple moving average (SMA). I use >20% over the SMA as a threshold. Just to refresh/update, here’s how my chart of overbought VIXes since 2009 looks:


Option Implied Volatility as a Market Insight Indicator
Marc Chandler – Economy Watch
Even if one does not trade currency options, sometimes insight can be gleaned that help the price discovery process. Very short-dated options that many observers focus on tracks spot too closely to be particularly useful for our purposes. For this exercise, we look at three-month volatility and risk-reversals.

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