Observations & Insight

Bits & Pieces & Planes, Trains and Automobiles
By John J. Lothian

The John Lothian News team is in Philadelphia this morning, as thunderstorms in New York cancelled our flight and this was the best option to get near New York. We are headed up to the Big Apple this morning by rental car.

It was the heck of a day, expecting to leave Chicago near noon and finally leaving near 10 PM and arriving in Philly at 1 AM.

Our New York Summer Intern Education Series now has over 100 people signed up to attend, something we could have only dreamed about a week ago. This is about the same base number we had in Chicago that first year, and now we pack them in each year. Thanks again to all who helped get the word out and encourage people to attend. And thanks again to Global Premier sponsor CME Group

Now, off to the road. Ninety-nine bottles of beer on the wall, ninety-nine bottles of beer. Take one down… Come on, guys, sing!

Lead Stories

Twitter Attracts Spoofers
Matt Levine – BloombergView
Yesterday I was a bit blasé about the October 2014 Treasury flash crash/rally, in which algorithms spent 12 minutes or so taking money from each other and, occasionally, themselves. One reasonable concern, though, is that when robots trade nonsensically with each other they undermine human confidence in markets. How confident does this make you feel?
That’s the stock price chart of Twitter, which spiked for about 10 minutes this morning after a fake news report hit the Web page www.bloomberg.market, which I do not especially recommend that you visit. The report — remember, fake! — said that Twitter had received a $31 billion buyout offer and was “working closely with bankers.” It more or less looked like Bloomberg — it’s easy to cut and paste HTML — but it is, again, fake: www.bloomberg.market is not a Bloomberg site, and was “registered on July 10 to a post-office box in Panama belonging to WhoisGuard Inc.” There were several tip-offs, including a misspelling of Dick Costolo’s name, an “it’s” that should be an “its,” and a headline, “Twitter Attracts Suitors,” that is way too short to be an actual Bloomberg headline. The Securities and Exchange Commission is investigating.

****SD: And to think I’ve never even remotely thought of Twitter and misinformation in the same breath before.

ICAP’s Michael Spencer predicts further market volatility
Philip Stafford – Financial Times
ICAP’s chief executive Michael Spencer is forecasting more days of extreme turbulence in global markets as the US prepares to raise interest rates and banks withdraw from their traditional role in the market.

****SD: Kind of like looking into a crystal ball and predicting crystal in your future.

US Listed Options Volumes Leap in June, with CBOE Leading the Charge
TABB Forum
The Options LiquidityMatrix is a monthly analysis of options market activity published by TABB Group with analysis and statistics from Hanweck Associates. The report includes options trading volumes and statistics on execution metrics for each US listed options exchange and the industry, using data sourced from the OCC and Premium Hosted Database (PhD),a joint offering from Hanweck Associates and the International Securities Exchange (ISE).

****SD: Let’s just hope this charge isn’t of the Light Brigade variety and instead augurs a bright future.

Wounds Seen Slow to Heal for Europe Stocks as Italy Leads Swings
Sofia Horta E Costa – Bloomberg
While relief over Greece prompted the biggest European stock rally since 2011, the legacy for investors is volatility.
After slumping to a five-month low, the Euro Stoxx 50 Index rebounded 9.5 percent in five days, falling as much as 0.5 percent on Tuesday before ending up. Its average daily move now stands at 1.7 percent in July, the most in almost four years. Portuguese and Italian shares led the swings, with average gains or drops of about 2 percent each day.

Wild intraday swings in US volatility index becoming the norm
Callie Bost – The Sydney Morning Herald
Big moves in US stocks have been so rare lately that when they do happen, the rush to hedge is violent.
Anxiousness among investors has led to unusually large jumps in the Chicago Board Options Exchange Volatility Index, which measures hedging costs on the Standard & Poor’s 500 Index. When calm has been restored, the volatility gauge has dropped just as quickly.

Did the VIX-plosion Turn the Market Complacent?
Adam Warner – Schaeffer’s Research
Another day, another decline in volatility. “VIX & Fear Totally Collapse,” says SlopeofHope.com. And if you look at his chart, it does give the impression of volatility literally jumping off a cliff. Of course, if you construct any chart to be twice as high as it is wide, and start counting at a number higher than zero, you run the risk of producing misleading imagery.

V-Shaped Move Makes a Comeback
James “Rev Shark” DePorre – TheStreet
Our old buddy, the V-shaped move, made a return appearance today. He hasn’t been around much this year, but he tends to show up when the bulls are caught holding too much cash and are anxious to put it to work. After the wild swings on the Greece drama, many market players were not well positioned for upside, and that is the sort of thing that supports V-shaped action.

Opteck (Central Spot Trading Ltd.) Introduces High/Low Position for GBP/CHF at the Last Day of Every Week and Month Beginning July 12th, 2015
Press Release
Opteck has decided to expand the duration for some of its assets. It is now possible to trade the GBP/CHF asset every end of week, as well as in the end of every month.

Indian Option Costs Gauge Caps Longest Losing Streak in 4 Months
Santanu Chakraborty – Bloomberg
India’s benchmark gauge of equity option costs fell for a fifth day, signaling weakened demand for protection against stock-market swings, as the CNX Nifty index climbed to a three-month high.


New York Stock Exchange System Failure Draws Attention to Staff Cuts
Nathaniel Popper – NY Times
When the New York Stock Exchange’s systems went down during the trading day last week, few longtime employees who had helped lead the exchange during past technical problems were on hand.

Nasdaq Announces New Data Feed Multicast IP Addresses for DR Data Center in Chicago
Press Release – Nasdaq
As outlined in Equity Trader Alert #2015 – 54, Nasdaq will be moving its Disaster Recovery (DR) site for U.S. equities and options markets from Ashburn, Virginia to Chicago, Illinois, that will begin in August. The new DR will be located on the 8th floor of the Equinix CH4 facility at 350 E. Cermak. In addition to offering expanded geographic diversity, this new DR location enables firms to easily connect to a multitude of multi-asset engines currently housed in or near this Chicago facility helping to potentially reduce overall networking costs.

EEX Group Announce Significant Growth Rates For The First Half Of 2015
Press Release – Mondovisione
In the first half of 2015, the European Energy Exchange (EEX) successfully continued its growth trajectory. Overall, the volume on the EEX Group power markets increased from 819 TWh to 1,401 TWh, resulting in a 71 % increase.

Regulation & Enforcement

UK Financial Conduct Authority Fines Firms And Individuals Over GBP1bn For Market Integrity Breaches
Press Release – Mondovisione
Kinetic Partners, a division of Duff & Phelps, has published research in its annual Global Enforcement Review showing that in 2014, market integrity was a key priority for FCA enforcement. In 2014, the FCA fined firms and individuals a total of 1.23 billion pounds for market integrity related breaches, which included abusive market behaviour such as: manipulation, insider dealing, FX failings and benchmark (i.e. Libor) manipulation. Kinetic Partners analysed publicly available data from financial services regulators across the UK, U.S. and Hong Kong to assess regulatory trends and their effects on the financial services industry.

International investors are on the hook for billions after Hanergy Thin Film is barred from trading
Heather Timmons – Quartz
Global funds including BlackRock, Vanguard and TIAA-CREFF are sitting on billions of dollars of potentially worthless stock, after Hong Kong Stock Exchange regulators said July 15 that Hanergy Thin Film Power should not start trading again without regulatory approval—a highly unusual move that could mean the stock will not trade again.
Hanergy, the solar power firm that mysteriously skyrocketed in value over several months and then lost $19 billion in minutes on May 20, has become exhibit one for critics worried about the excess volatility and lax regulation of Hong Kong’s stock market. The company suspended its own stock from trading that day, citing an upcoming announcement that has never come.


NYSE says earlier technical issue resolved
Chuck Mikolajczak – Reuters
Several options exchanges including MIAX, NYSE Amex and NYSE Arca, declared “self-help” against the Chicago Board Options Exchange on Tuesday, routing orders away due to what was later called a technical issue.

Vertex FX Offers Binary Options Trading
Press Release – Mondovisione
Hybrid solutions, the developers behind the successful Vertex FX trading platform have enhanced the product capabilities for brokerages by offering binary options in the single interface. The cross asset platform enables brokers to offer a one stop solution with FX, CFD and binary options trading.

Binary Options Trading Indicator Stochastic v1.0 Released By ITM Financial To VIP Forex and Binary Trading Members
Press Release
Forex and binary options software startup ITM Financial has released their latest software update, Stochastic v1.0 to their VIP level trading members. The binary option indicator took over two months to develop and took two teams of algorithmic trading data scientist to get it right. “We feel this is the best binary options trading indicator on the market, bar none” added CEO of ITM Financial, Curt Dalton. “The time and energy our teams put in on this piece of software leave it unparalleled in terms of technology and accuracy in the financial markets. If you are trading the forex market or the binary options market, this software is a necessity in your trading arsenal” finished Dalton.

Xignite And Nasdaq Provide Market Data To Fuel Fintech Innovation
Press Release – Mondovisione
Xignite Inc., the leading provider of market data from the Cloud, announced today that it integrated Nasdaq Basic market data, providing real-time Best Bid and Offer (QBBO) and Last Sale information for all U.S. Exchange listed stocks, on its market data cloud platform. With this agreement, Xignite fintech customers now have convenient API access to high-quality real-time quote data for all U.S. exchange-listed equities at a significantly lower cost. Nasdaq and Xignite will be co-hosting a FinTech Meetup on August 27 in New York to announce more details about the partnership.


Considerations When Choosing Between Unhedged, Currency-Hedged ETFs
Tom Lydon – ETF Trends
Investors who want overseas exposure can adapt to changes in the forex with unhedged or currency-hedged exchange traded fund options, but for long-term investors may be better served through sticking to one trade.
“There are valid reasons to invest in either currency-hedged or unhedged foreign-stock funds,” writes Karen Wallace for Morningstar. “The danger comes in trying to predict periods of relative strength for the U.S. dollar, and buying and selling hedged and unhedged funds in response.”

When can a Credit Call Spread cost you more than the difference between the strikes? Watch out for dividends!
Steve Claussen – OptionsHouse
I have seen pretty experienced option traders get caught in a losing trade thinking that a credit call spread can never be worth more than the difference between the short and long strike prices. Credit Call vertical trades are typically taught as limited reward limited risk trades, where the difference between strike prices is the maximum that the spread can be worth at expiration, so it goes to follow that would be the maximum risk of entering the trade. Further, if an astute trader can SELL the 4-sided credit box spread (pairing a short credit call spread with a credit put spread) for MORE than the difference between strike prices, which would be a golden trade – FREE MONEY!!! Well let me tell you something right up front. There is NO FREE MONEY trading options! If you see what looks like free money take another look at your assumptions and math. If it still looks too good to be true, run away. Something is wrong. Think about it. In today’s electronic age of trading do you really think you are on to something that the entire universe of options trader are just giving away? Chances are very high that you are missing something.


Comparing S&P 500 and MSCI EAFE Performance
Russell Rhoads – CBOE Options Hub
CBOE launched option trading on the MSCI EAFE (MXEA) index a couple of months ago. MXEA represents the performance of developed equity markets outside of the United States. There are over 900 stocks contributing to the index that cover over 20 different developed countries.
As a former spread trader I always like to take a look at the performance of similar markets. Today I’m going to cover the relationship between MXEA and the S&P 500 (SPX). We have data going back to January 2000 so the first chart is a quick look at the monthly price changes for both MXEA and SPX.

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