Observations and Insight

Chris Hehmeyer, managing member, HTG Capital Partners – Why Cereal Might Be Cheaper On Mondays At 8 AM

“The technologies are changing so fast that you can always jump in to whatever’s next.”

Chris Hehmeyer, managing member at HTG Capital Partners, gives a brief history of the financial markets and discusses his journey from Tennessee to Chicago. Hehmeyer describes the setting of the fledgling Chicago Board of Trade and remembers when technology was really beginning to impact the financial industry. One memory was when Hehmeyer saw an Apple II computer create a spread chart for the first time. Prior, all data was written out and charts were drawn by hand, but Hehmeyer knew that the simple chart was the beginning of something revolutionary.
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Lead Stories

Traders Boost Europe Hedges on Wildest Swings Since ’12: Options
Sofia Horta e Costa – Bloomberg
What a ride.
In the past two weeks, European equities tumbled almost 10 percent for the third time in 2014, then rallied the most in two years over three days. Intraday swings in the Euro Stoxx 50 Index this quarter have been the wildest since 2012, and options traders have ramped up protection. Contracts on the Europe gauge reached a 20-month high relative to prices for those on the Standard & Poor’s 500 Index, data compiled by Bloomberg show.
***DA: Protect the lead.

Apple’s Stock Split May Have Hurt the Appeal of Mini Options
Saumya Vaishampayan – WSJ
One strategist thinks that Apple Inc.stock split this year has diminished the appeal for mini options, which were introduced less than two years ago.
An options contract confers right to buy or sell shares of a stock at certain price, called the strike price, by a specific time. That contract is linked to 100 shares of the underlying stock. Mini options, which started trading in March 2013, are linked to 10 shares of the underlying stock.
***DA: Those seeking a low-cost exposure to AAPL have more than one, er, option.

Facebook Volatility Draws Record Structured Notes Buyers
Ben Eisen – Bloomberg
Banks are selling a record amount of U.S. structured notes tied to the stocks of fast-growing, volatile technology companies such as Facebook Inc. (FB) and Twitter Inc. (TWTR)
Sales of securities linked to Facebook soared to $457.6 million this year, more than double the $204.2 million issued during the same period of 2013, according to data compiled by Bloomberg. The social media company, founded by billionaire Mark Zuckerberg, went public in 2012.
***DA: In the search for yield, no stone is left unturned.

Options Vega and Your Volatility has Volatility
Larry Shover – Fox Business
Compared to a stock or bond, options are contracts with a shelf-life and are exposed to a range of unique risks – greeks (i.e. delta, gamma, theta, vega, rho) – each of which measures the sensitivity to some variable including time and movement.
However, all derivative traders know that option prices actually boil down to the market’s expectancy of  future volatility of the underlying asset, since all the other determinants of an option’s price—the underlying price, time to maturity, interest rate, and strike price—are objective. Volatility is the subjective X factor, and seldom does an option’s actual, realized volatility replicate the implied volatility reflected in its valuation.
***DA: And yet, several realized volatility contracts have been listed but none have captured any real volume.

Options traders bet on Russian ETF rebound
Saqib Iqbal Ahmed – Reuters
Trading in the U.S. options of the largest Russian exchange-traded fund on Thursday suggested that some traders may have begun positioning for the fund’s shares to add to gains after hitting multiyear lows earlier in the week.
Shares of the Market Vectors Russia ETF were down 2.5 percent at $15.43 on Thursday even after Russian President Vladimir Putin, in a news conference in Moscow, assured Russians that the economy would rebound after the rouble’s dramatic slide this year.
***DA: Stable for now.

Oil Gains From 5-Year Low; Saudi Comments Add Volatility
Mark Shenk – BloombergBusinessweek
Crude prices rebounded from the lowest closing levels since May 2009 as comments from Saudi Arabia’s oil minister yesterday added to the most volatile market in three years.
West Texas Intermediate climbed as much as 4 percent in New York and Brent 2.9 percent in London. A measure of expected WTI futures movements and a gauge of options value was at the highest level since October 2011, data compiled by Bloomberg show.

Rally or not, market volatility looms
Patti Domm – CNBC
Friday may not see another monster stock market rally, but the quarterly expiration of futures and options could surely bring more volatility.
Fueled by the Fed, short covering and year-end buying, stocks rallied hard for a second day Thursday. The Dow tacked on another 421 points, giving it a two-day gain of 4.2 percent, the biggest two-day rally since November 2011. The S&P 500 surged 2.4 percent to 2,061, its best day since January 2013. The S&P saw a 4.5 percent two-day gain, its best since November 2011.
***DA: Amen to that.

‘Normal Volatility’ is an Oxymoron
Adam Warner – Schaeffer’s Investment Research
So, I’m half watching financial TV yesterday and, lo and behold, they start talking volatility. And guess what? The guest expected volatility to rise next year. This was shocking, of course, because no TV guest ever expects higher volatility on the horizon. And by none of them, I really mean all of them. But here’s where he got my anger buzz up: he referred to what we’ve seen recently (presumably this year and/or a more extended time frame) as abnormal. And next year’s volatility lift will merely return us to “normal.”
Oh, where to begin?
***DA: Meet the new normal. Same as the old normal, except when it isn’t.

S&P 500 Extends Rally to Third Day, Erasing December Loss
Oliver Renick and Sofia Horta e Costa – Bloomberg
U.S. stocks rose, with the Standard & Poor’s 500 Index erasing its loss for December, after the Federal Reserve spurred the biggest two-day jump in three years.
Red Hat Inc., CarMax Inc. and Cintas Corp. climbed the most in the S&P after reporting better-than-estimated earnings. Nabors Industries Ltd. and Denbury Resources Inc. advanced at least 3.6 percent to lead energy stocks higher for a fourth straight day.
***DA: Anyone just returning after a two-week cruise would think nothing happened in the market while he or she was away.


BATS Opposes NYSE Owner’s Stock-Market Reform Plan
Bradley Hope – WSJ
BATS Global Markets Inc., one of the three big stock exchange operators, is opposed to a draft proposal by the owner of the New York Stock Exchange to reform the U.S. stock market, its CEO said in an interview.
“Two sides are trying to come to a middle ground that leaves the investor in the cold,” said Joseph Ratterman, CEO of BATS.

Exchanges Let Stand ‘Potentially Erroneous’ Last-Second Trades in S&P 500 ETF
Chris Dieterich – Barronm’s
U.S. exchanges are investigating “potentially erroneous” last-second trades in the SPDR S&P 500 (SPY), the biggest exchange-traded fund, as stocks rallied into Thursday’s closing bell.

ICE CEO proposes 6 ways to reform markets, increase trading
Carla Caldwell – Atlanta Business Chronicle
Jeffrey Sprecher, the chief executive officer of Atlanta-based Intercontinental Exchange Inc. and owner of the New York Stock Exchange, wants to return more trading to the exchanges and he is proposing six ways to do it.
ICE circulated a draft letter among big brokers and investment funds outlining how markets could be reformed, The Wall Street Journal reports.
***DA: I think we are to the point where we should listen when he speaks.

Regulation and Enforcement

Fed Grants Volcker Reprieve in Banks’ Second Big Win This Month
Jesse Hamilton and Cheyenne Hopkins – Bloomberg
Banks added to their wins in Washington this month by getting a reprieve from the Volcker Rule that will let them hold onto billions of dollars in private-equity and hedge-fund investments for at least two more years.
The Federal Reserve granted the delay yesterday after banks said selling the stakes quickly might force them to accept discount prices. Goldman Sachs Group Inc. has $11.4 billion in private-equity funds, hedge funds and similar investments, while Morgan Stanley has $5 billion, securities filings show.

When Regulators Are Blind to Rules
Floyd Norris – NY Times
What happens when you turn over regulatory responsibilities to people who think there is really no need for regulation?
The United States, and much of the world, tried that for a large part of the last quarter-century. Along the way, a series of crises sent out warning signals that were not heeded.
After the economy recovered from the stock market crash of 1987, Alan Greenspan, the Federal Reserve chairman who had poured money into the market to stem the damage, was celebrated as a hero. He believed in what came to be derided as “market fundamentalism,” holding that markets were far smarter than governments and would produce optimal results if only there were no interference from politicians.

Royal Bank to Pay $35 Million to End CFTC Wash-Trade Suit
David Glovin – Bloomberg
Royal Bank of Canada will pay $35 million to settle a lawsuit brought by U.S. regulators over claims that it engaged in more than 1,000 illegal futures trades worth hundreds of millions of dollars to garner tax benefits tied to equities.
The bank neither admitted nor denied wrongdoing, according to a consent order signed by a judge today in the 2012 lawsuit by the Commodity Futures Trading Commission. U.S. District Judge Alvin Hellerstein in Manhattan permanently barred the bank from entering into or confirming so-called wash trades.
***JB:  Cost of doing business these days and one the shareholders and customers pay for.  For the people doing this it is Dom Perignon toasts and bonus time.

MetLife Derivatives, Illiquid Assets Cited by Panel in Vote
Jeanna Smialek and Jing Cao – Bloomberg
MetLife Inc. (MET)’s holdings of hard-to-sell securities and reliance on derivatives are among the reasons that the biggest U.S. insurer qualifies for Federal Reserve supervision, a government panel said.
“A large-scale forced liquidation of MetLife’s large portfolio of relatively illiquid assets, including corporate debt and asset-backed securities” could disrupt trading or funding markets, according to the decision released today by the U.S. Financial Stability Oversight Council.


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