Observations & Insight

Bits & Pieces
By John J. Lothian

We have added our final speaker to the lineup in Chicago for our MarketsWiki Education World of Opportunity Summer Intern Education Series. Ed Haravon of Spot Trading will join our esteemed list of speakers.

We are getting ready for the final preparations for our trip to New York and our events at the NYSE for the series. We are very appreciative of all the help from the staff of the NYSE to make this possible.

We have seen a nice inflow of sign ups for New York in the last day or so, but there is still plenty of room. See details for signing up for New York or Chicago at www.marketswikieducation.com

There is a great buzz about the Summer Intern Education series and we are grateful for all our friends, sponsors and colleagues who have forwarded information about it, shared it on social media and recommended it to their colleagues and friends. You are a terrific group of people and we are very thankful for your help. Keep it up, there is still room left in New York and Chicago.

Many people joke that I am the bionic man now that I have two new knees, a fused back and a new shoulder. Add a third crown to my set of teeth. I bit into some trail mix and found some of the trails, which chipped a tooth. It is always fun at the dentist.

Lead Stories

Traders Dump Energy Hedges Amid Another Low Hurdle for Earnings
Joseph Ciolli – Bloomberg
Investors see history repeating for energy companies this season, speculating that profit forecasts are again so low that there’s little need to hedge against a miss.

Pimco — Turn Stock Volatility Into Profits
Rick Chan – Barron’s
Is volatility an asset class? It’s a question we often debate, internally and with clients. There’s no simple answer. Either way, though, it’s an academic point that matters less than our belief that volatility is an “opportunity class” — one with a variety of tactical and macro implications. Moreover, as financial luminaries from European Central Bank President Mario Draghi to Federal Reserve Vice Chairman Stanley Fischer have warned, volatility is likely to rise as the Federal Reserve approaches its first rate hike in almost a decade. Likewise, the opportunities created by volatility are likely to rise in the coming years.

Europe Bank Bulls Are Waiting in the Wings as Greece Fears Wane
Roxana Zega and Inyoung Hwang – Bloomberg
When it comes to volatility in European banks, investors are better off just waiting it out.
At least that’s what the options market is signaling, with the longer-term cost of protecting against losses in lenders hovering at the cheapest level since 2012 relative to one-month contracts.

July and the VIX weigh heavily on the S&P
Simon Maierhofer – MarketWatch
It looks like a perfect storm: The Greek odyssey, the Chinese stock-market meltdown (Shanghai Composite down 30%-plus since June 5), and suspended trading at the New York Stock Exchange.
And all this is happening during a time of the year that’s typically rough for stocks, even without external catalysts.
Historically, the month of July is one of the weakest spots of the year. The chart below provides a visual. It plots the S&P 500 year to date against two types of S&P 500 seasonality.

Volatile Mixture: Young Biotechs’ Stock Market Rollercoaster
Bruce Booth – Forbes
The stock market has been a wild ride of late – big moves up and down, NYSE getting halted, Grexit, China – lots of reasons for added skittishness. The VIX index, which measures the volatility of the S&P 500, has gone up more than 50% in the last twelve trading days, into the range seen only a handful of times since mid-2012.
But the VIX measures the bigger end of the stock market. Biotech is a high beta equity sector, meaning it has a tendency to swing more than other stocks in response to market changes. Within the biotech sector, younger small cap stories are notoriously more volatile, but historically there’s been little aggregate data given how few biotech companies made it public. But that’s changed in the past two years, so it may be more useful to examine the ups and downs of these newly minted IPO stocks.

Is Wall Street Dismissing the Latest VIX Pop?
Adam Warner – Schaeffer’s Research
So we have plenty of signs of panic, not the least of which is the recent spike in large-range days and “key” reversals. But hey, there’s one spot that doesn’t look terribly worried — and that spot is, oddly enough, CBOE Volatility Index (VIX) futures.

Traders fear Greece and are watching Yellen
Patti Domm – CNBC
Some traders are already bracing for a violent Monday, but first they will get through Friday, listening to Fed Chair Janet Yellen for any guidance on whether international risks are serious enough to keep the central bank from raising rates this year.


Crypto Facilities and Elliptic Set Up Bitcoin Clearing System
John D’Antona Jr. – Traders Magazine
Two firms have joined together to bring standardization to bitcoin trading, clearing and settlement.
Bitcoin analytics and security firm Elliptic and bitcoin derivatives exchange Crypto Facilities announced their union and development of a settlement and clearing mechanism that separates bitcoin custody from all other exchange functions.

How Europe Would Cope With a 3-Hour Stock Exchange Outage: Badly
John Detrixhe – Bloomberg
What would happen if a major European stock market halted trading for three-and-a-half hours?
The New York Stock Exchange’s outage earlier this week did little to disrupt the trading of U.S. shares. In Europe, however, when a primary market experiences a shutdown, trading in those stocks collapses.

BATS Reports U.S. Equity Mkt Share Dips to 20.1% in June to 6.41B Shares
John D’Antona Jr. – Traders Magazine
BATS Global Markets today reported June U.S. equity volume was 20.1percent in June versus the 21.2 percent the bourse reported in May. Options volume was relatively flat for the month.

Regulation & Enforcement

CFTC eyes Hong Kong clearing exemption
Cian Burke – Futures & Options World
Hong Kong to be first jurisdiction to have equivalent clearing house regime
The US Commodity Futures Trading Commission (CFTC) late on Thursday, called for public comment on an application by OTC Clearing Hong Kong for permanent exemption from registration as a derivatives clearing organisation (DCO).

China police to fight crimes related to trading of stocks, futures
The Ministry of Public Security said Thursday it is planning a nationwide campaign to crack down on illegal operations in the field of securities and futures to protect the order of capital markets and investors’ interests.


Market Complexity Broke the NYSE Before Saving It
Matt Levine – Bloomberg View
So today the New York Stock Exchange published its explanation of why it shut down for much of yesterday. Here it is. Basically NYSE did a software update, and when it opened up the machine to put the updated software in, some bats got into the machine and flew around breaking stuff, and so NYSE had to open the machine back up and catch all the bats, and that took a while. I may not fully understand how computers work.

Why Wednesday’s NYSE Outage Was Perfectly Normal and Didn’t Really Matter
David Weisberger – Traders Magazine
All quiet on the Western front.
The lesson we should have learned is simple:
Instead of wringing our hands over technology and trying to legislate perfection, we should embrace the fact that our competitive system provides redundancy. The fact that all other exchanges and ATSs were able to trade normally meant that the market operated efficiently for all stocks, for the entire day. Claims in the media about “unnerved” traders notwithstanding, we should use this event to put an end to the calls for legislated exchange monopolies and anti-competitive rules. If listing exchanges were given a legislative monopoly – per Macey and Swenson’s ridiculous WSJ article- investors in NYSE listed issues wouldn’t have been able to trade for most of the day.


QUIZ: Options Trading Strategy or Cosmo Sex Position?
George Mannes – Money.com
An option is a contract giving the purchaser the right, though not the obligation, to buy or sell a security at a specified price for a particular period of time. Options trading—conducted formally for stocks on U.S. exchanges since 1973—has given rise to a number of distinctively named investing strategies.
These strategies, confusingly enough, sound a lot like strategies used in a completely different context: The names of sex positions that the women’s magazine Cosmopolitan suggests for its readers, in forums such as its Cosmopolitan.com website and its how-to guide The Cosmo Kama Sutra: 99 Mind-Blowing Sex Positions.

****SD: Consider this… SFW(ish).

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