Observation and Insights
Better Volatility: Scott Nations and ISE Look to Launch a Better Volatility Contract
There is a regular drum beat in the financial services arena about a “new asset class” or the “next asset class,” many of which really aren’t actually new. In recent years, volatility has checked most, if not all, of the boxes for a new asset class. The space has been dominated by the CBOE Volatility Index, better known as the VIX or “fear gauge.” But now a new volatility instrument has emerged, the VolDex, which teams Chicago-based options index firm NationsShares with the International Securities Exchange (ISE).
Scott Nations, president and CIO of NationsShares, says his VolDex index, on which the ISE is developing new options and possibly futures contracts, is the next generation volatility index that will address the needs of market users. ISE and his firm are working now to launch new options and futures contracts on the index.
Today’s Number: Options Records a Reflection of Global Events
Derek Sammann – OpenMarkets
Options trading is growing rapidly, and for good reason. We are seeing seismic shifts in volatility potential coming from a wide variety of sources. The Fed is likely to end its quantitative easing program soon, setting up a debate in the market about the timing of when zero short-term rates might be abandoned.
***DA: As he says, “Options come into their own as risk management tools when volatility regimes are in motion.”
Options Traders Most Bearish on Oil in 8 Months as Brent Slumps
Moming Zhou – BloombergBusinessweek
Option traders are the most bearish on crude oil in eight months after Brent slumped to a two-year low amid rising global supply.
Put options on front-month Brent futures to protect against price declines are trading at the biggest premium since February over call options to hedge price gains, according to exchange data compiled by Bloomberg. Brent, the benchmark for half of world’s oil trade, has slumped about 20 percent from the June peak, a common definition of a bear market.
***DA: Front month NYMEX crude futures settled below 90 for the first time since April 2013 I believe.
U.S. stock volatility blamed on Apple bears in options market
Neil Hughes – Apple Insider
Increasing volatility in the U.S. stock market is being attributed in part to Apple bears on the options market, who have helped to keep America’s largest publicly traded company at around the $100-per-share level.
***DA: Apple is big, powerful and awesome, but not that big. There are a few geopolitical tensions and interest rate uncertainty out there as well.
Apple Bears Awaken With Volatility Highest in Four Months
Joseph Ciolli and Callie Bost – BloombergBusinessweek
Apple Inc. (AAPL:US), whose share swings are contributing to one of the worst bouts of U.S. stock volatility this year, is becoming a focus of bears in the options market.
Demand for contracts that appreciate as Apple drops are selling at the highest prices (AAPL:US) in 14 months relative to bullish ones, data compiled by Bloomberg show. The stock has moved an average of 1.2 percent a day since the start of September, up from 0.9 percent in the first eight months of 2014, as concern mounted that features of its new phone are flawed.
Traders Wipe $1 Trillion From Default Swaps Before Overhaul
Abigail Moses – Bloomberg
Credit derivatives traders cut $1 trillion of outstanding positions last month as they prepare for the market’s biggest overhaul.
The total amount of money at risk with credit-default swaps dropped to $17.1 trillion on Sept. 26 from $18.3 trillion on Aug. 29, according to the Depository Trust & Clearing Corp., which runs a central registry for the market. The gross notional numbers don’t account for offsetting contracts.
***DA: Right. When you account for offsetting contracts, the number shrinks too low to make for a snappy headline.
Should We Panic About the Lack of Panic?
Adam Warner – Schaeffer’s Investment Research
I’ve spent the better part of my writing time pointing out that the Fear Complex has tended to outpace the Reality Complex. By that I mean that just about everything volatility-related has over-anticipated future market declines, pretty much since the last actual serious decline ended in March 2009.
Videocast: ‘Cautious selling’ in VIX
As stocks slide, the big money is getting in
Alex Rosenberg – CNBC
Even as stocks are sliding hard, the biggest options traders have been making bullish wagers on stock indexes—which could indicate that the big money senses a buying opportunity in the market.
The S&P 500 fell to a nearly two-month low on Thursday, and at one point looked primed to have the first four-day losing streak of the year. But on Wednesday and Thursday, some of the day’s biggest trades have been sales of put options on the S&P 500 and the Nasdaq 100, as well as sales of call options on the VIX.
VIX Spot Index to Include S&P 500 Weekly Options Beginning Oct. 6th (Part 1)
Matt Moran – CBOE Options Hub
Beginning Monday, October 6, 2014, CBOE will calculate the spot value of the CBOE Volatility Index (VIX) using S&P 500 Index (SPX) options with weekly and standard 3rd Friday expirations that more closely bracket the 30-day target timeframe. While this change is not expected to have a dramatic impact on the spot VIX Index (see point 5 below), the change is a more precise enhancement to the VIX as the premier 30-day measure of the expected volatility of the S&P 500 Index.
Intercontinental Exchange Reports ICE and NYSE Volume for September and Third Quarter 2014
Press Release – ICE
Intercontinental Exchange, Inc. (NYSE: ICE), the leading global network of exchanges and clearing houses, today reported exchange traded volumes.
For September and the third quarter of 2014, futures and options average daily volume (ADV) decreased 6% and 13%, respectively, compared to prior year periods.
– Commodity ADV declined 6% year to year in September, with energy ADV down 7%, partially offset by Other Oil and Other Ags ADV, which both increased 15% year to year.
– Financials ADV decreased 5% over the prior September due to continued low volatility in European interest rates. This was partially offset by medium and long-term interest rates and equity derivatives ADV, which increased 19% and 24%, respectively.
– NYSE’s U.S. cash equities ADV declined 1%, while U.S. equity options ADV increased 1%, over the prior September.
– U.S. cash equities market share was 23.7% and U.S. options market share was 23.1% for the month.
CME Group Announces Reduced Electronic Trading Hours for CME Livestock Products in Response to Customer Feedback
Press Release – CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it will reduce electronic trading hours of CME Livestock futures and options products following comprehensive outreach to producers, commercial customers, traders and other industry participants who manage their risk in its markets. Pending CFTC review, trading in CME Livestock markets will be amended on the CME Globex electronic trading platform beginning with trade date, Monday, October 27, 2014.
Regulation and Enforcement
Secret Goldman Sachs Tapes Put Pressure on New York Fed
Nathaniel Popper and Peter Eavis – NY Times
Wall Street’s top regulator is coming under new criticism for failing to adequately police the banks under its supervision, years after the financial crisis.
Lawmakers are scrutinizing allegations that the Federal Reserve Bank of New York went easy on one of the most prominent banks under its watch, Goldman Sachs, despite concerns voiced by those inside the Fed that a deal Goldman was pursuing was “legal, but shady.”
***JB: I’m surprised people seem surprised by this.
Prosecutors Catch a Spoofing Panther
Whenever I talk to people about high-frequency trading I ask them: “What should I think about spoofing?” My basic problem is that it seems so dumb.
***DA: Algos designed by ex-pit traders attempt to duplicate some of the things pit traders would occasionally do. One is trying to goose the market in this manner. Now it is a no-no.
Russell Investments makes strategic investment in NextCapital
Press Release – Russell Investments
Global asset manager Russell Investments is one of the lead investors in a $6 million strategic investment in NextCapital (formerly Business Logic), a Chicago-based digital adviser and the technology provider behind the delivery of the Russell Adaptive Investing methodology to individual participants in defined contribution (DC) plans.