JLN Options: U.S. options exchanges craft rules to fend off turmoil; Stocks in Summer Slumber as VIX Tumbles Most Since 2012; Volatility Could Soar After the September ECB Meeting (VIX, VXX)

Aug 29, 2014

Lead Stories

Exclusive: U.S. options exchanges craft rules to fend off turmoil
John McCrank – Reuters
A year after Goldman Sachs (GS.N) bungled a software upgrade and lost tens of millions of dollars from unintended trades, the 12 U.S. stock options exchanges have crafted new rules for dealing with erroneous transactions, according to draft documents seen by Reuters.
Under the proposed rules, unintended trades placed by professional traders will usually have their prices adjusted to levels as close to their fair market value as possible, while wrong trades by retail customers will be mainly be undone, five sources with knowledge of the matter told Reuters.

Stocks in Summer Slumber as VIX Tumbles Most Since 2012
Callie Bost – Bloomberg
The U.S. stock market has fallen back to sleep.
Price swings as measured by the Chicago Board Options Exchange Volatility Index (VIX) have fallen 29 percent in August, poised for the biggest monthly drop since June 2012. The VIX is less than three points from a record low. Trading volume over the past four days has been the slowest since at least 2008, excluding the end of December, with a daily average of 4.4 billion shares changing hands, data compiled by Bloomberg show.

Volatility Could Soar After the September ECB Meeting (VIX, VXX)
David Becker – InvestorPlace
Complacency has set in during the dog days of August, but there is a catalyst in the very near future that could help stir up volatility.
The European Central Bank is schedule to meet Sept. 4 to discuss monetary policy. The calm, cool way the U.S equity market is trading, it feels like an announcement of a full-scale bond purchase program is baked in the cake.
So if you want to take advantage of low volatility, the market is giving you another chance.

S&P 500 ends week at record high
Dave Shellock – Financial Times
US stocks inched to fresh record highs and the euro hit its lowest level against the dollar in nearly a year as speculation about further policy easing in the eurozone helped offset persistent concerns about the situation in Ukraine.
In New York, the S&P 500 rose 0.3 per cent to a record closing high above 2,003, giving it a five-day gain of 0.8 per cent. The US equity benchmark broke above 2,000 for the first time on Monday, only to spend the rest of the week hovering in a narrow range on either side of that level.

Should Investors Prepare for Stock Market Falls?
Emma Wall – Morningstar
In December 2006, Schroders head of Asian equities King Fuei Lee gave an investor presentation with a slide entitled “Still More Signs of Market Irrationality Worrying Us”. Shortly afterwards there was a global recession and stock markets across the world began to tumble. In that slide he identified seven key indicators of market irrationality – five of which he says are now visible in the global markets.

Volatility Has A Lot To Do With Risk
Kevin Wrotenbery – Seeking Alpha
Defining risk is hard, and not that useful. Most investors already have some intuition about what constitutes risk, and it’s not an easy area in which to change people’s minds. If we adopt Warren Buffett’s model where every asset has an intrinsic value determined by the expected future cash flows the asset will generate, there are essentially two sources of risk. One is that if circumstances change the expected future cash flows (and thus the asset’s intrinsic value) might change along with them. The other is that calculating intrinsic value is not a science and we might make a mistake.

Preferreds Present ‘Outsized Risks’ If Rates Rise – Wells Fargo – Income Investing
Michael Aneiro – Barron’s
Preferred securities might offer comparatively attractive yields in a low-yield world, but they’re highly vulnerable to any rise in interest rates, and Wells Fargo Advisors advises investors to scale back their preferred holdings to prevent losses if rates do rise. Brian Rehling, Wells’ chief fixed-income strategist, says preferreds’ traditionally high 7%-8% coupons have been refinanced across the market with lower coupons that present “outsized risks” if rates rise, and he offers a pretty sweeping cautionary note for investors:

Videocast: VIX pits quiet down

Korea reveals derivatives safety measures
Song Jung-a – Financial Times
Korea Exchange said on Friday it would introduce safety measures to protect investors and counterparties from the fallout of erroneous derivatives transactions.
The exchange, one of the world’s largest derivatives exchanges for trading index options, will introduce a real-time price limit system and increase the number of underlying equities for stock futures.

UniCredit hires senior FX options trader
Peter Billington, former global head of foreign exchange flow options at Commerzbank, has joined UniCredit as a senior FX options trader and manager of the exotics trading book.


London Stock Exchange cash call supports underwriting cartel
Neil Collins – Financial Times
You are Chris Gibson-Smith, chairman of the London Stock Exchange. Is your top priority to: a) ensure a fair fight between buyers and sellers of stock; or b) look after the interests of shareholders in the companies listed?
The LSE is in the middle of a well-flagged, and generally well-received rights issue to pay for a sensible acquisition – a fine opportunity to show how efficiently capital can be raised on the exchange at a reasonable cost to the shareholders.

Regulation and Enforcement

Regulators Walk Fine Line On Market Structure
Bill Harts – MarketsMedia
Regulators appear to be striking the correct balance between fostering innovation and ensuring fairness and market stability.
“Based on what we’ve seen so far, we absolutely are backing Chairman White and we think that a well-regulated market is an efficient market and it’s good for all investors,” Bill Harts, CEO of Modern Markets Initiative, an advocate group for automated trading, told Markets Media. “We’re actually very positive that she’s decided to take a look at this and we hope to be part of that debate as to how to best regulate the markets.”


S&P E-mini: VIX supports coming fall
Martin McGuire – Futures Magazine
The September E-mini 500 (CME:ESU14) future formed a ‘doji’ yesterday even as the SPX index found a second consecutive session close just above 2000. This pattern warns of uncertainty and heightens concern that the bullish contingency, although having achieved a break of the 2000 milestone, may not have the interest or determination to drive prices still higher.

Modeling a risk-based criterion for a portfolio with options
Geng Deng, Tim Dulaney, Craig McCann – Risk.net
The presence of options in a portfolio fundamentally alters the portfolio’s risk and return profiles when compared with an all-equity portfolio. In this paper, we advocate modeling a risk-based criterion for optioned portfolio selection and rebalancing problems. The criterion is inspired by the Chicago Mercantile Exchange’s riskbased margining system, which sets the collateralization requirements on margin accounts.



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