Observations and Insight

The World Is Flat: ISE’s Boris Ilyevsky Talks PIM And New Flat Auction Pricing
Sarah Rudolph – John Lothian News

In October, seven options market making firms sent a letter to the SEC outlining their concerns about “the growing trend of exchanges imposing oversized transaction fees on market makers” competing in auction crosses. The firms said they were disadvantaged by the current structure in which internalization is encouraged by the use of a “breakup fee” that keeps market makers from competing with “initiators” of the auction.

The International Securities Exchange (ISE) responded to the debate over price improvement mechanism (“PIM”) auctions by announcing a flat pricing structure for PIM auctions on ISE Gemini, where both PIM initiators and responders will pay $0.05 per contract. Priority customers on the originating side of a PIM order will continue to be free. JLN spoke with Boris Ilyevsky, managing director at the ISE, who explained how the new structure addresses the market makers’ concerns and what’s behind the debate over price improvement and fees.

To read more go here: http://jlne.ws/1umiMyH

Lead Stories

The Options Industry Council Announces Robert Whaley to Receive 2015 Sullivan Award
Press Release – OIC
The Options Industry Council (OIC) today announced Robert Whaley as the recipient of the 2015 Joseph W. Sullivan Options Industry Achievement Award in recognition of his exceptional contributions to the U.S. options industry. The award will be presented at the 33rd Annual Options Industry Conference on May 7 in Miami Beach, Florida.
Highly regarded as a derivatives and financial markets expert, Robert Whaley is the Valere Blair Potter Professor of Management and Director of the Financial Markets Research Center at Vanderbilt University. Throughout his career, Professor Whaley has been an industry consultant for major investment houses, security exchanges, and governmental agencies, as well as prominent accounting and law firms. Whaley has also published seven books and numerous research papers in top academic and practitioner journals.
***DA: I remember when I first used the Barone-Adesi/Whaley model for option valuation. It was a revolutionary simplification back when computers took a while to calculate theoreticals.

Will ECB Determine the Market’s Next Move?
Adam Warner – Schaeffer’s Investment Research
Well, we never quite got “officially” overbought on this particular VIX-go-round. CBOE Volatility Index (VIX) peak-closed at 22.39 (so far) on Jan. 15, about 14% above its 10-day simple moving average (SMA). And then on Friday, VIX grudgingly declined late in the day in the face of a sizable market rally and a long weekend ahead.
***DA: The ECB would like to determine the next move, but they are still debating that. We will let you know tomorrow.

Block Trade – Yesterday’s Buyer of VIX Jan 20 Calls
Russell Rhoads – CBOE Options Hub
Yesterday as the trading day got started I heard a shout to my right (which is the direction of the VIX pit) as a big trade came into the VIX arena. It turns out all the hubbub was about a buyer of 80,000 VIX Jan 20 Calls who paid 0.75 for 8,370 and 0.80 for 71,630 of those options. Being the day before January VIX settlement this trade was a bit of a surprise, but also got a lot of attention.

Volatility Remains A Concern – Weekly Market Outlook
Price Headley – CBOE Options Hub
After five straight days of losses for the market, even Friday’s big gain wasn’t enough to leave the market higher for the week.  That makes the third consecutive week of lost ground for stocks, though there are some hints that the bulls are sensing there’s something of a floor materializing near last week’s lows (which were pretty well aligned with the previous week’s lows).
Don’t misunderstand that observation – the bulls still have a ton of work to do if they want to convincingly put the market back on a bullish track.  In fact, the indices are still on the bearish side of the key short-term moving averages.  Friday’s bounce, however, took shape at the best and most likely rebound levels the market could have used in that capacity.

Buckle up! Fear is back, signaling major turmoil
Abigail Stevenson – CNBC
Jim Cramer has been in the stock market long enough to recognize a red flag when he sees one. This year the market has been filled with a landscape of uncertainty and volatility, and he’s seeing red flags all over the place.
***DA: Look out below. Or maybe above.

Overheard: Volatility in the Markets
Head for the bunker.
Stocks have felt like they are under bombardment of late, thanks to the plunge in oil prices, global growth concerns and surprising moves by bond markets and central banks. But perspective is warranted.
***DA: A lot of “sky is falling” talk considering we have just experienced a 5-year monster rally.

CHINA MONEY-Stock option launch will be slow but may boost blue chips
Lu Jianxin and Jake Spring – Reuters
China’s first stock options will launch next month with limited access to investors due to their risky nature, but their gradual rollout may benefit the real market.
Investors wanting to use options to hedge or speculate will likely build up their holdings in index heavyweight stocks, which regulators have long wanted to develop.

India Put Option Hedges Reach 1-Year High With Stocks at Record
Santanu Chakraborty – Bloomberg
Options traders are buying the most protection against losses in 14 months as Indian stocks rallied to a record for a second straight day.
The ratio of outstanding CNX Nifty index puts to calls rose to 1.40 at 3:50 p.m. in Mumbai, the highest since Oct. 31, 2013, according to data compiled by Bloomberg. The 50-stock Nifty gained 0.4 percent to 8,729.50 at the close for a fifth day of gains. The India VIX Index rose 2.6 percent to 17.71, the highest level in two weeks.


Banks Must Bear the Risk of Derivatives Losses, CME Paper Says
Matthew Leising – Bloomberg
CME Group Inc. (CME), the world’s largest derivatives market, wants its bank members to bear responsibility for ensuring there is enough cash on hand in the case of a default.
The debate over how clearinghouses are managed and the level of resources available has gone back and forth between the Chicago-based exchange owner and its largest bank members such as JPMorgan Chase & Co. (JPM) CME said in a white paper published today it has set aside the equivalent of 5.25 percent of the money its bank members have put into a collective default fund. In September, JPMorgan said CME’s contribution, referred to as skin in the game, should equal 10 percent.
***DA: Global regulators agreed 5 years ago that there was not enough capital backstopping the system. We are still arguing about whose capital should be used.

Singapore Exchange Q2 profit up 15.5 pct, highest in one year
Anshuman Daga – Reuters
Singapore Exchange Ltd (SGX) , which has rolled out a slew of measures to boost trading volume, said its quarterly net profit rose 15.5 percent to the highest in more than one year, helped by record derivatives business.

Regulation and Enforcement

Obama Pledges to Veto Measures Weakening Dodd-Frank
Clea Benson – Bloomberg
President Barack Obama pledged to veto any legislation that weakens new curbs on Wall Street as banks and the Republican-led Congress increasingly seek to roll back the Dodd-Frank financial-regulation law.


Russell Investments and Integral launch comprehensive execution service
Press Release – Russell Investments
Global asset manager Russell Investments and Integral Development Corp., a leading FX technology company, announced today the launch of Russell FX Network (RFX Network), a new end-to-end trading solution for the buy-side community for netting, execution and allocation of foreign exchange transactions. RFX Network is designed to help institutional investors including asset managers obtain currency exchange rates that seek to minimize tracking error with respect to the rates published by WM/Reuters.

Options Education

How Does VXX’s Daily Roll Work? – iPath S&P 500 VIX Short-Term Futures ETN
Vance Harwood – Seeking Alpha
All volatility Exchange Traded Products (ETPs) use indexes that track a mix of two or more months of the CBOE’s VIX Futures. Calculating this mix is not trivial and has resulted in a lot of bleary eyes – including my own. My intent with this post is to help you understand, and if you desire, accurately compute the key indexes used in the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) and other short-term volatility funds using Excel or similar tools.

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