Observations & Insight

Bits & Pieces
By JLN Staff

MarketsWiki just passed the 65 million page view mark. A big thanks to all of our users.

We have added John Kerin, the CEO of the Chicago Stock Exchange, to our list of speakers for the Chicago Summer Intern Education Series. We hope to add another tall speaker who will be spot on.

In case you missed it, we added James Gellert of Rapid Ratings and technology entrepreneur John Edge to our list of speakers for the New York events.

Here is the line up for New York. At 1 PM, we will have Nick Themelis of MarketAxess, Peter Borish from Quad Advisors, James Woods from IMC, Stacy Cunningham from NYSE and Boris Ilyevsky from ISE.

At the 3:30 PM session, we have electronic trader Haim Bodek, Chris White (formerly of Goldman), Chris Ferreri (formerly of ICAP), James Gellert of Rapid Ratings and John Edge

When we planned this series in New York, we expected to see lots of interns from the big banks attend, given that most of them were located in New York. We have yet to see that materialize, for whatever reason. Some blamed the Google Doc sign up form, which could not be accessed by some bank employees behind their networks. Maybe there are other reasons.

In Chicago and London we had interns from banks. I challenge the New York banks to send some interns. We promise to be nice to them and inspire them about the opportunities ahead.

Lead Stories

Trading Halted on NYSE
Saumya Vaishampayan – WSJ
Stocks dropped, then regained some ground, after the New York Stock Exchange said it had temporarily suspended trading in all stocks.

***DA: Then dropped again. And as of publication time, the suspension remains.

All-time Record Volume for VIX Options During the 2 A.M. to 8:15 A.M. CT Session
Matt Moran – CBOE Options Hub
A news story on Bloomberg recapping the July 8 trading in China noted that –
“The Shanghai Composite Index slid 5.9 percent to 3,507.19 at the close. With at least 1,331 companies halted on mainland exchanges and another 747 falling by the 10 percent daily limit, sellers were locked out of 72 percent of the Chinese market. … “
Many investors who are concerned about worldwide market volatility related to developments in China and Greece are exploring the use of futures and options on the CBOE Volatility Index around the clock to help manage portfolio volatility. Key recent points include –
All-time record volume of 8,848 contracts (estimated) during 2 to 8:15 a.m. CT Extended Trading Hours session was established for VIX options on July 8;
VIX July futures rose to an intraday high of 15 just before 3 a.m. CT on July 8;
VIX futures had strong volume of more than 31,600 contracts during Extended Trading Hours session from 3:30 p.m. Tuesday through 8:30 a.m. CT Wednesday.

***DA: News flash – volatility is good news if one is in the volatility business.

China Ousts Russia as Riskiest BRICS Market for Options Traders
Srinivasan Sivabalan and Natasha Doff – Bloomberg
China’s market meltdown is making even Russia look good.
Shanghai stocks overtook Moscow-listed equities as the riskiest for investors in the so-called BRICS universe on Wednesday for the first time since the build-up to Russia’s military intervention in Crimea in February 2014. Expectations for price swings in China jumped 17 percent today, extending the 2015 increase to 62 percent, compared with a 40 percent drop in Russian volatility this year, according to options data.

***DA: Congratulations. Although I can hardly believe Russia will emerge unscathed if China is on the ropes.

Goldman Sees Negative Loop in Commodities From Excess Money
Ben Sharples – Bloomberg
It’s going to take a prolonged slump in commodities to break a cycle of too much money and excess production, according to Goldman Sachs Group Inc.
The market is caught in a “negative feedback loop,” where lower raw-material prices are strengthening the dollar and lowering production costs for countries with weaker currencies, Goldman analysts wrote in a report. That boosts the prospects of higher U.S. interest rates and a reduction in emerging-economy debt, according to the bank. Demand for commodities will subsequently decline, capping prices and further reinforcing the greenback, it said.

***DA: Depends upon one’s perspective. Low prices create a positive feedback loop if one is a buyer of raw materials.

3 Volatility Charts to Watch for Signs of Contagion
Adam Warner – Schaeffer’s Research
I do think there’s a growing sense that this Greek story is about to wrap up — at least to the extent we obsess over it. I’ve said it before … and sure enough it rears its Grexit-y head back up again. But this time I feel confident.
Why? Because China Fear has gotten more and more airplay. We need something that means Doom and Gloom for stocks, and this one fits the bill. The Shanghai Composite has lost one-third of its value (or something like that) in a few weeks. That has to spill over here, right?

A guide to the US options market (Infographic)
Jon Watkins – The Trade News
A dozen exchanges are vying for market share in a range of equity and index products, attracting buy-side participation from US and also increasingly from Europe. We take a look at the numbers behind the market, giving you everything you need to know about US options.

***DA: Well, not everything, but a lot of things, anyway.

Indicator of the Week: Will the S&P Finally Wake Up in the Second Half?
Rocky White – Schaeffer’s Research
We’re halfway through the year as of last week. It has been a very flat market through the first six months. By one measure — which you’ll see below — it’s the flattest on record. I’ll look at similar years and see how stocks have performed over the next quarter, and for the whole second half of the year.

***DA: The answer is “yes, maybe” but don’t bet against “no.” (I should do this for a living).

Bets against Chinese yuan pick up due to equity turmoil
Sujata Rao – Reuters
China’s stock market turmoil is increasingly feeding through to its currency, driving up the cost of hedging against swings in the offshore yuan exchange rate while derivatives markets signal a bias for more weakness ahead.
With mainland share markets down 32 percent over the past four weeks, the offshore-traded yuan fell to four-month lows on Wednesday against the dollar on concern over a pick-up in capital outflows from China.
Traders also reported hectic trading in the options market as a pick-up in volatility and the stock market rout encouraged a rise in demand for yuan puts.

Traders Data: What Happens During Flash Crashes?
Irene Aldridge and Steve Krawciw – Traders Magazine Online News
Flash Crashes are a frequent occurrence. In the Dow Jones Industrial index alone, aggregate intraday prices dropped by at least 2 percent on 431 separate trading days since 1985. In individual financial instruments, Flash Crashes can be even more prevalent. The common shares of IBM, for instance, registered an intraday drop of at least 2 percent 966 times since 1985, nearly double the number of market-wide crashes.
Why do price crashes in individual securities sometimes lead to market-wide crashes with a specific example of the Flash Crash of October 15, 2014? On the flipside, why do some price drops fail to result in a flash crash? Let’s take a look.

Ringgit Volatility Gauge Advances as Bonds Fall Amid 1MDB Probe
Y-Sing Liau – Bloomberg
A gauge of volatility in Malaysia’s ringgit rose to a two-month high and government bonds dropped amid a probe involving finances linked to a state investment company.
A task force that includes the police and the central bank is investigating a money trail that allegedly showed funds connected with 1Malaysia Development Bhd. ended up in Prime Minister Najib Razak’s bank accounts, a claim he has denied. The controversy has helped make the ringgit Asia’s worst-performing currency this year as a drop in Brent crude erodes earnings for the oil exporter. Prospects the U.S. will increase interest rates is also weighing on the currency.


BATS Reports Continued Strong Market Share In June; European Equities Market Share Reaches 25.1%; U.S. Options Market Share At 9.6%
Press Release
BATS Global Markets (BATS) today reported June data and highlights including the company’s best market share in European equities since November 2012 and the third-best month on record in U.S. options.

BATS Reports U.S. Options Market Share of 9.6%. Third-Best Month on Record; EDGX Options Scheduled to Launch November 2nd, Pending SEC Approval
Press Release
BATS Global Markets today reported volume, market share, and monthly highlights for its U.S. options business, including its third-best month on record in June with 9.6% market share, up from 3.9 % one year ago. The monthly market share record is 9.9%, set in April 2015.

Orient Securities Selects Orc for Options Market Making in China
Press Release
Orc, the global market leader in electronic trading technology for listed derivatives, today announced that Orient Securities Co. Ltd. (Orient Securities), one of the largest securities firms in China, has selected Orc’s Trading Bricks platform for their options market making operations on Shanghai Stock Exchange (SSE). With the signed agreement, Orc and Orient Securities will be able to take advantage of the opportunity in China’s financial market development.

Regulation & Enforcement

Algorithmic Trades May Fall Under FCA’s Conduct Rules
John Glover – Bloomberg
Bankers responsible for the algorithms that power high-speed trading may come under increased scrutiny as the U.K.’s Financial Conduct Authority considers expanding its conduct rules to wholesale market activities.

Lehman Settles Derivatives Dispute Over Putnam Swaps
Joseph Checkler – WSJ
Lehman Brothers Holdings Inc. settled a multimillion-dollar derivatives dispute involving mutual-fund giant Putnam Investments, ending litigation over a series of swap agreements.


The evolution of Asia-Pacific tech for derivatives
Christopher Fix – Futures & Options World
In Asia, a fundamental and structural economic rebalancing has gradually been occurring over the last couple of decades. The “epicenter” of global economic growth and activity has shifted from the Western developed nations to the Eastern economies. Accelerated growth experienced by emerging markets has resulted in an international re-allocation of resources from the developed to the emerging market economies. Financial markets are helping, and should continue to expand, to facilitate this increase in demand, and allow for capital formation and risk management.

Research, regulators eye cybersecurity
Alice Attwood – Futures & Options World
The issue of cybersecurity, while seemingly the latest buzz word on compliance officers’ lips, is no new phenomenon.
A swathe of recent research on the subject has hit the FOW desk so it seems the trend is real and current, and with China’s parliament this week publishing a draft cybersecurity law, the issue continues to creep up the regulatory agenda.
While it is agreed that firms should be taking steps to improve their internal cybersecurity, this does not come cheap. However, according to recent research by Accenture, funds set aside for risk management is increasing.


New Academic Research Finds Options-Based Investment Strategies Outperform Long Stock Strategy
Press Release
The Options Industry Council (OIC) announced today the release of a new academic research study, “The Performance of Options-Based Investment Strategies: Evidence for Individual Stocks During 2003-2013,” conducted by Professors Michael L. Hemler, University of Notre Dame’s Mendoza College of Business, and Thomas W. Miller, Jr., Mississippi State University. The study, which was supported by OIC, found that some options-based portfolio strategies seemingly outperform long stock and improve the risk-return tradeoff of long equity portfolios over time. The authors presented the results of the study today at the 2015 Financial Advisors Forum held in conjunction with the 33rd Annual Options Industry Conference taking place this week in Miami Beach, Florida.

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