JLN Options: Vix may be losing its ‘fear gauge’ tag; EM stocks drive down options prices; Derivatives Rules Softened in Victory for Banks

Apr 10, 2014

Lead Stories

Vix may be losing its ‘fear gauge’ tag
Jamie Chisholm – Financial Times
The CBOE on Thursday launched options on the VXST, the nine-day volatility index created to deliver an even shorter-term hedging horizon than its progenitor, the 30-day Vix.
The new options add to the dizzying array of volatility-focused products.

EM stocks drive down options prices
Gulf Times
Rallying stocks from India to Brazil are driving down options prices as investors unload contracts to protect against future declines in equities.
The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a gauge of options prices, is down 32% since February 3. Last week, it capped a record streak of decreases. Contracts on the exchange-traded fund tracking countries such as China, Russia and India are the cheapest in almost six months versus US stocks, data compiled by Bloomberg show.

Derivatives Rules Softened in Victory for Banks
Matthew Leising – Bloomberg
In a victory for banks, global financial regulators revised rules governing how much money must be set aside to cover losses by swaps traders, backing away from guidelines that firms warned would destabilize the $693 trillion derivatives market.
The Basel Committee on Banking Supervision’s final rule, released today, would require swaps dealers to hold less cash to protect against defaults than did a proposal published last year.

World Waits for U.S., EU to Solve Derivatives Spat: Faull
Rebecca Christie and Silla Brush – Bloomberg
The U.S. and the European Union must resolve a disagreement on cross-border derivatives trading to set an example for other nations seeking clarity on a trans-Atlantic standard, a top official from the European Commission’s financial-markets agency said today.
***JB: Everyone hold their breath!

The Newest Volatility Vehicle on the Block
Adam Warner – Schaeffer’s Investment Research
As of tomorrow, our long national nightmare will be over! We can trade options on the CBOE Short-Term Volatility Index (VXST)!
Okay, it’s not that long a nightmare. The data is calculated back to January 2011, but the Chicago Board Options Exchange (CBOE) just rolled out “live” VXST half a year ago.

Videocast: Short-term VIX trades

Tough Swap Standards Drive Up Trade Costs 92-Fold
Matthew Leising – Bloomberg
New rules aimed at making the world safer from blowups in the $693 trillion derivatives market are poised to drive up costs so much for retirement funds and other users that bankers say they do just the opposite.

The slumps that shaped modern finance
The Economist
Finance is not merely prone to crises, it is shaped by them. Five historical crises show how aspects of today’s financial system originated—and offer lessons for today’s regulators.
***JB: Admittedly not options related but interesting enough to be worth sharing.


CME Group trading outage exposes weakened trading floor
Tom Polansek – Reuters
Open-outcry traders sprang into action during an electronic trading halt in CME Group Inc agricultural markets on Tuesday, but a better solution to the outage would have been to close the pits down too, traders and investors said a day later.

Clearinghouses’ default “waterfall” offers no panacea against their potential failure
Bora Yagiz – Reuters
The push of derivative contracts into central counterparties (CCP) – also known as clearinghouses — has been underway for more than five years, yet it remains unclear how these entities would fare under stressed market conditions in the U.S.

Singapore exchange to let in big market-makers
Jeremy Grant – Financial Times
Singapore is taking steps to boost trading volume on its stock exchange, but in a way that aims to deter the type of high-frequency trading that has sparked controversy in the US.
SGX, the Asian city-state’s bourse, has suffered from weak trading volume in its equities market, and was overtaken last year by the Stock Exchange of Thailand, pushing it to second place in southeast Asia for the first time.

IEX Gains Momentum as Upstart Market Tops Some Incumbents
Joseph Ciolli – Bloomberg
Wall Street is showing more signs of plugging into IEX Group Inc., the dark pool that says it has the antidote to speed traders.
IEX, started by the heroes of Michael Lewis’s book “Flash Boys,” handled 23.9 million shares yesterday, up 27 percent from the daily average in March. While IEX accounts for less than 1 percent of total U.S. volume, the five-month-old platform has more trading than four of the 13 American exchanges, including IntercontinentalExchange Group Inc.’s NYSE MKT.

Regulation and Enforcement

Massad: Taking the reins on derivative reforms
Jill Priluck – Reuters
The Senate Agriculture Committee met Tuesday to approve the nomination of Tim Massad as chairman of the Commodity Futures Trading Commission, even as the agency fumbles over the definition of a “swap.”

Slow Cop, Fast Beat: SEC Takes Its Time on High-Frequency Trading Rules
Dave Michaels, Matthew Philips, and Silla Brush – BloombergBusinessweek
When Mary Jo White appeared before the Senate in March 2013 seeking confirmation as chair of the Securities and Exchange Commission, she told lawmakers that understanding high-frequency trading’s impact on the stock market would be a “very, very high priority.” She spoke about the “sense of urgency” the SEC needed to bring to the issue so that “appropriate regulatory responses can be made.” More than a year later, lawmakers, investors, and SEC commissioners are still waiting to see what that response will be.

BlackRock Urges Curbs on Predatory High-Frequency Trading
Alexis Leondis – Bloomberg
BlackRock Inc. (BLK), the world’s largest money manager, said regulators should work to rein in predatory high-frequency trading with targeted changes.
Exchanges and regulators need to establish a robust framework to police and identify abuses, while also being careful to distinguish them from practices that ultimately benefit investors such as electronic market-making, the New York-based firm said yesterday in a research paper authored by executives including Barbara Novick, vice chairman, and Richie Prager, head of trading and liquidity strategies.
***JB: I’m sure the SEC will get right on that.

Receiver sues AlphaMetrix brass for $19 million
Lynn Marek – Crain’s Chicago Business
A federal receiver appointed to dismantle the failed futures investment fund administrator AlphaMetrix Group LLC sued the company’s top officers, alleging they used Chicago-based AlphaMetrix as their “personal piggy bank.”
The complaint filed in U.S. District Court for Northern Illinois on April 7 against five AlphaMetrix officials, including CEO Aleks Kins, seeks more than $19 million, the bulk of which is money owed to the company’s trading adviser partners and creditors.

Options Education

Options: Meet Vega, Volatility’s Kissing Cousin
Steve Smith – Minyanville
With volatility rising and earnings season heating up, it’s the perfect time to look at vega — volatility’s kissing cousin. Options traders sometimes use these terms interchangeably, and while they are related, they’re two distinct concepts.
Volatility is one of the five inputs used in the basic Black-Scholes options pricing model. Higher volatility means higher option prices. That’s because higher volatility means greater expected price swings.



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