JLN Options: Traders Thank Fed for Once-in-Decade Surge in Profit; Key Market & VIX Levels To Watch Now; Small-Cap Weakness: Impending Doom, or Buying Opportunity?

Oct 2, 2014

Observation and Insights

Better Volatility: Scott Nations and ISE Look to Launch a Better Volatility Contract
JohnLothianNews.com

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.

Watch the video »

Lead Stories

Traders Thank Fed for Once-in-Decade Surge in Profit
Lucy Meakin – Bloomberg
Foreign-exchange traders are proving to be among the biggest beneficiaries from the tumble in markets ranging from stocks to bonds and commodities brought on by prospects for higher interest rates in the U.S.
Rising volatility is boosting the Parker Global Currency Manager Index, which jumped 3.29 percent last quarter in its biggest gain since soaring 4.93 percent in the last three months of 2004. The gauge, which tracks returns of 14 leading currency funds, had fallen in four of the previous five quarters and hasn’t had a winning year since 2010, when it rose 0.94 percent.
http://jlne.ws/10mS5RT
***DA: Still a long way to go before long-term averages are reached.

Key Market & VIX Levels To Watch Now
Moby Waller – CBOE Options Hub
It’s times like these, when the market is very volatile and/or selling off, that it’s helpful to look at some relatively stripped-down big picture charts.  We can see where we stand, what recent history shows us and what key levels of support may come into play.
First, the S&P 500 Index (SPX) (SPY) Daily Chart below, with only a Fibonacci Retracement and 100 day & 200 day simple Moving Averages (MA) on it (all charts captured around 30 minutes before the close on Thursday).
http://jlne.ws/1pJoZkz
***DA: But it is a waxing half-moon, so the next shift may still be two weeks away.

Small-Cap Weakness: Impending Doom, or Buying Opportunity?
Adam Warner – Schaeffer’s Investment Research
As I’m sure you’re well aware, 2014 has seen a bit of a cratering in small caps, particularly on a relative basis. Here’s the iShares Russell 2000 ETF (IWM) versus the SPDR S&P 500 ETF Trust (SPY) so far in 2014:
http://jlne.ws/1pJqf7b

How Volatility Wreaks Havoc on Compound Growth for Investors
Equities.com
The VIX Index, which measures volatility, has been at extremely low levels. At the same time, the S&P 500 has been climbed to record high levels. While high volatility can offer excellent buying opportunities, the inverse relation between VIX and the S&P 500 shows that low volatility is good for investors.
In 2008, when the financial crisis struck and the S&P 500 plunged, the VIX index jumped to an all-time high level. Indeed, volatility is bad news for investors as it has a negative impact on compound growth.
http://jlne.ws/1pJpg74

S&P 500 Correlations And VIX
Sam Ro – Business Insider
Sometimes, it just doesn’t matter how strong a company’s earnings prospects are. When volatility spikes in the financial markets, traders and investors will just dump everything.
This is one of the more intuitive manifestations of behavioral biases in the stock market.
RBC Capital Markets’ Jonathan Golub shared this telling chart in his new 84-page Investment Strategy Playbook.
http://jlne.ws/1pJpye7

Videocast: Why isn’t VIX higher?
optionMONSTER
http://jlne.ws/1pJoyGW

Options market bets on a Brazil comeback post-election | Energy & Oil
Saqib Iqbal Ahmed – Reuters
The prospect of leftist Dilma Rousseff winning another term as Brazil’s president has caused investors to flee Brazilian markets, but bets in the U.S. options market suggest the selling may have run its course.
http://jlne.ws/1pJnK4Z

Investors batten down hatches for volatile end to 2014
By Chris Vellacott, Reuters
Global investors are starting to cut back on stock market positions, wary of a wave of financial market turbulence in the final quarter of 2014 as the era of cheap money ends.
The tide turned abruptly this week with the close of the third quarter and major stock markets have lurched down at the start of October, a month associated with previous market shakeouts including the 1929 and 1987 crashes.
http://jlne.ws/1rOsgnW

Exchanges

ISE Gemini Exceeds One Million Contracts in Trading Day
Press Release – International Securities Exchange, LLC
ISE Gemini announced that it traded more than one million contracts for the first time (actual: 1,076,222 contracts) in a single day yesterday, and also established an equity options market share record for the exchange of 5.2%, excluding dividend trades.
http://jlne.ws/10mVu30

Eurex Group September ADV of 9.1 million contracts good for 30% jump MoM
Press Release (via LeapRate)
In September 2014, the international derivatives markets of Eurex Group recorded an average daily volume of 9.1 million contracts (September 2013: 9.1 million). Of those, 6.5 million were Eurex Exchange contracts (September 2013: 6.7 million), and 2.6 million contracts (September 2013: 2.4 million) were traded at the U.S.-based International Securities Exchange (ISE). In total, 142.8 million contracts were traded at Eurex Exchange and 54.5 million at ISE.
At Eurex Exchange, the equity index derivatives segment totaled 68.0 million contracts (September 2013: 61.8 million). The future on the EURO STOXX 50® Index recorded 31.1 million contracts. The options on this blue chip index totaled 19.4 million contracts. Futures on the DAX index recorded 2.9 million contracts while the DAX options reached another 3.5 million contracts. The Eurex KOSPI Product recorded 1.5 million contracts.
http://jlne.ws/1pJnnXU

CME Group Volume Averaged 15.3 Million Contracts per Day in September 2014, Up 17 Percent from September 2013, and Included Double-Digit Growth in Foreign Exchange, Interest Rate and Agricultural Commodities Volumes
Press Release – CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that September 2014 volume averaged 15.3 million contracts per day, up 17 percent from September 2013.  Total volume for September 2014 was more than 320 million contracts, of which 86 percent was traded electronically.  CME Group open interest hit a record level of 108.4 million contracts on September 11, and stands at approximately 104.1 million contracts at the end of the month, up 24 percent year-to-date.  
http://jlne.ws/cjpXe7

MIAX Options Announces Increased Trading Volume Results
Press Release – MIAX
MIAX Options Exchange (MIAX) announced today that for the month of September 2014 MIAX’s percentage of overall equity options volume and in MIAX-listed classes was 4.08% and 4.29%, respectively, both of which are new monthly records and represent two and one-half times September 2013 volumes.  For the third quarter of 2014, MIAX’s percentage of overall equity options volume and in MIAX-listed classes was 3.91% and 4.09%, respectively, and represent two and one-half times third quarter 2013 volumes.  In September 2014, MIAX achieved new record monthly and daily volumes, as MIAX executed 13,603,238 contracts for the month, or three times the volume of September 2013, and on September 19, 2014, MIAX executed over 872,000 contracts for the first time.
http://jlne.ws/1vBshgz (PDF)

BOX Price Improvement Activity for September
Press Release – BOX
In the month of September, price improved contracts on BOX Options Exchange (“BOX”) averaged 271,291 per day, which represented a 59% increase over the same period last year. Price improvement versus the prevailing NBBO for contracts submitted via BOX’s price improvement auction, PIP, averaged $396,412 per day, while total savings to investors this month was $8.3M. With this, BOX has saved investors over $545M since its inception in 2004. Overall average daily trading volume on BOX in the month of September was 383,224 contracts, which represented a 10% increase over the same period last year.
http://jlne.ws/1pJlKJS (PDF)

Options Exchange Marketshare – September 2014
Press Release (OCC via email)

September 2014 Total Options Marketshare:
AMEX-                 11.71%
BATS-                     5.69%
BOX-                       2.20%
CBOE-                   26.66%                                                           
C2-                          2.08%
GEM-                      3.90%
ISE-                        10.99%
MIAX-                     3.72%
NOBO-                    0.66%
NSDQ-                    7.95%
NYSE Arca-           9.61%
OMX PHLX-         14.82%

September 2013 Total Options Marketshare:
AMEX-                  12.24%
BATS-                      4.09%
BOX-                        2.20%
CBOE-                    27.61%
C2-                            1.68%
GEM-                       1.31%
ISE-                          13.91%
MIAX-                      1.35%
NOBO-                     0.81%
NSDQ-                      8.14%
NYSE Arca-             10.98%
OMX PHLX-           15.69%

September 2014 Equity Options Marketshare:
AMEX-                  12.72%
BATS-                      6.25%    
BOX-                        2.41%
CBOE-                    19.98%
C2-                            2.28%
GEM-                        4.27%
ISE-                         12.03%
MIAX-                       4.08%
NOBO-                     0.72%
NSDQ-                      8.71%
NYSE Arca-           10.34%
OMX PHLX-          16.22%

September 2013 Equity Options Marketshare:
AMEX-                  13.43%
BATS-                      4.52%
BOX-                       2.43%
CBOE-                   20.25%
C2-                            1.85%
GEM-                       1.45%
ISE-                        15.34%
MIAX-                     1.49%
NOBO-                    0.89%
NSDQ-                    8.98%
NYSE Arca-          12.05%
OMX PHLX-         17.32%

Regulation and Enforcement

Chicago feds crack down on high-speed trading or spoofing – Finance News
Lynn Marek – Crain’s Chicago Business
Federal regulators in Chicago raised the stakes today for high-speed traders, with the first criminal indictment for “spoofing.”
The U.S. Attorney’s Office in Chicago indicted New Jersey-based Panther Energy Trading LLC owner Michael Coscia on 12 counts of fraudulent and manipulative trading, alleging that he profited illegally from an ultra-fast scheme to place, but then rapidly cancel, futures contract trades. The grand jury charges were filed today in U.S. District Court for Northern Illinois.
http://jlne.ws/1pJoJSD
***DA: First test of the handy dandy new anti-manipulation rules. For more, visit the Market Manipulation page in MarketsReformWiki.

Technology

That Japanese Fat Finger Can ‘Absolutely’ Happen in U.S.
Michael P. Regan – Bloomberg
A funny thing happened after Michael Lewis’s book “Flash Boys” put the structure of the U.S. stock market under a microscope in March: The whole system ran pretty smoothly, at least compared with its recent past.
Sure, the electronic cat-and-mouse trading game that Lewis called a “rigged” system and others called “market making” may not have changed much. On the bright side, however, there have been no major technological meltdowns like the one that almost bankrupted Knight Capital Group Inc. or fouled Facebook Inc.’s initial public offering in 2012, or caused an almost 1,000-point plunge in the Dow Jones Industrial Average in 2010.
http://jlne.ws/10mSdRu
***DA: As long as there are humans, there will be the potential for human error.

Trade-Tracking Computer System Will Likely Cost Less Than Expected
Scott Patterson – WSJ
A giant computer system to track the trading of stocks and options in the U.S. could face costs of more than $500 million in the first five years of its operation.
While a hefty price tag, that is well below initial estimates of $4 billion to build and operate the system, known as the Consolidated Audit Trail, or CAT. A big reason for the drop: new efficiencies in storing data due to cloud storage technology and other innovations, experts say.
http://jlne.ws/1E5QQGe
***DA: Here in Chicago we dream of public projects that come in under budget.

Options moves into CME data centre
Finextra
Options, the leading private financial cloud provider for the global capital markets industry, today announced that it has completed the firm’s expansion into CME’s co-location facility in Aurora, IL.
http://jlne.ws/1pJmOxs

Strategy

Key market and VIX levels to watch now
Moby Waller – Market Intelligence Center
It’s times like these, when the market is very volatile and/or selling off, that it’s helpful to look at some relatively stripped-down big picture charts.  We can see where we stand, what recent history shows us and what key levels of support may come into play.
First, the S&P 500 Index Daily Chart below, with only a Fibonacci Retracement and 100 day & 200 day simple Moving Averages on it (all charts captured around 30 minutes before the close on Wednesday).
http://jlne.ws/1pJpKtP

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