Observations and Insight


Donald Wilson, CEO of DRW Trading Group – Reminiscences (and Prognostications) of a Futures Operator

“My focus was on combining the disciplines of trading and risk management with quantitative research and computer science.”

Donald Wilson, CEO of DRW Trading Group, gives his story of how he found his way into the financial industry, starting with his realization that he enjoyed mathematics and then discovering how to connect it with trading currency futures. Having no connections to the financial industry, Wilson was persistent in sending his resume out to firms until finally landing a job where he started by observing traders on the trading floor. Wilson also discusses DRW Trading Group, giving a brief history of the firm and its growth throughout the years, as well as giving insight on what he thinks the future holds for the financial industry. While regulatory change may seem to have created a burden on the industry, Wilson believes that there are still plenty of opportunities that can be created from new rule changes.

Watch the video »

Lead Stories

VIX Shoots to Eight-Month High in Selloff as Bears Reclaim Edge
Callie Bost, Oliver Renick and Joseph Ciolli – Bloomberg
Squalls turned into stock market storms this week as concerns about the global economy and Federal Reserve send day-to-day swings to the widest in eight months.
Bears were in control today, sending the Standard & Poor’s 500 Index (RTY) down 1.9 percent as of 3:03 p.m. in New York, following the biggest rally in the gauge this year. The Chicago Board Options Exchange Volatility Index surged as much as 28 percent to the highest level since February after European Central Bank President Mario Draghi said there are signs the recovery is losing momentum.
***DA: Meet the new normal. Same as the old normal.

Stimulus Bets Send S&P to Biggest About-Face Since 2011
Oliver Renick and Lu Wang – Bloomberg
The U.S. stock market can’t seem to make up its mind.
After plunging 1.5 percent on Oct. 7 and rallying almost 1.8 percent yesterday, the Standard & Poor’s 500 Index (SPX) dropped 2.1 percent at 4 p.m. in New York today, the biggest turnaround in almost three years. As investors weigh the prospect of slower economic growth overseas against the benefit of U.S. interest rates staying near zero, a measure of 10-day volatility has risen to the highest level since April, data compiled by Bloomberg show.
***DA: The market these days is kind of like what Mark Twain said about the weather in New England. You don’t like it? Wait five minutes.

Investor Icahn sees stock market correction coming -CNBC
Svea Herbst-Bayliss and Sam Forgione – Reuters
Billionaire investor Carl Icahn said on Thursday a stock market correction is “definitely coming” and he is worried about the economy, as U.S. stocks tumbled on fresh worries about global growth.
Icahn told CNBC in an interview that he still has a lot of money invested in the stock market and has taken measures to protect his portfolio.
***DA: My guess is Carl will be fine.

The awkward return of volatility
Andrew Wilkinson – Futures Magazine
Thursday’s trading has seen midweek gains wiped out by equity sellers.
According to OCC data, overall option volume for the first six days of October is running at an average pace of 18.1 million contracts and half of those days saw volume trade above 20 million lots. Of course, it is still early in the month, but option volume has picked up. As you can see from the chart below, in the past six years, there have only been two months when average volume ran above the 20 million high-water mark.

Did the Fed Just Do Another QE, or Did I Miss Something?
Andrew Giovinazzi – The Options Insider
Maybe it was the Europeans or maybe it was some jitters in China or Africa.  The FOMC suddenly lost it zeal for raising rates.  The economy here has been growing but not enough to satisfy our rate mandarins.  Maybe it is the TWTR/FB world of instant gratification but it takes time to get off the QE band wagon.

Are We Due for a New VIX Regime?
Adam Warner – Schaeffer’s Investment Research
Beware: Small Sample Size Anecdotal Observation Alert. I’ve noted recently that the CBOE Volatility Index (VIX) hasn’t had much of a surge as of yet, despite a rather ugly market. That’s somewhat bearish, in my humble opinion.
But, that’s not stopping anticipation of the VIX surge yet to come.
***DA: That didn’t take long. About a couple hours.

Gauging the Fear Gauge
David Reilly, The Wall Street Journal
Volatility is back. Well, not exactly.
Stock-market volatility, as measured by the Chicago Board Options Exchange CBOE’s VIX index, has leapt of late. Thursday’s sharp sell off of stocks saw the Vix jump around 18% at one point, taking the index to nearly 18. That is about 70% above the year’s lowest reading, seen in early July.
***DA: Good story, worth a read, but his prices are a couple of hours old. The VIX settled at 18.76.

ICAP Financial Futures Head Pettit Said to Go This Year
By Julia Verlaine and Ambereen Choudhury October 09, 2014
Gary Pettit, ICAP Plc (IAP)’s head of financial futures and options, will leave by year-end as the world’s biggest broker of transactions between banks cuts costs, a person with knowledge of the plan said.
His departure comes as London-based ICAP shrinks the global broking division, seeking to eliminate 60 million pounds ($97 million) of costs this financial year, said the person, who asked not to be identified because the matter is private.

Videocast: November VIX calls surge (video)

Next Week in Weeklys – 10/13 – 10/17
Russell Rhoads – CBOE Options Hub
There were no additions to the Weeklys list this week.  Below is a list of companies with Weeklys reporting earnings next week.  Note the list is pretty long as next week we are getting into third quarter earnings results.


Volumes Rise Across Main Exchanges in the Asia-Pacific Region as Volatility Picks Up
Three of the most important financial centres in the APAC region have reported positive monthly operating metrics. Volumes were up across the board in September with Japan’s equity bourse outperforming its rivals.
Adil Siddiqui in Forex Magnates
Exchanges in Japan, Singapore and Australia have boosted investor confidence in the region after reporting an uptake in trading activity. The three exchanges saw positive flows across various segments, including equities, futures and options.

CBOE Holdings Rating Reiterated by Keefe, Bruyette & Woods (CBOE)
Posted by Shayan Afkhami, Mideast Times
CBOE Holdings, Inc logoKeefe, Bruyette & Woods reissued their market perform rating on shares of CBOE Holdings (NASDAQ:CBOE) in a research report sent to investors on Thursday morning. The firm currently has a $57.00 price target on the stock, up from their previous price target of $54.00.

Regulation and Enforcement

CFTC’s Wetjen urges fix to commodity options problem
Alexander Osipovich
CFTC commissioner says seven-part test on definition of a swap under Dodd-Frank “was not specific enough or clear enough” for industry participants
A member of the US Commodity Futures Trading Commission (CFTC) has called for the agency to take action on an issue stemming from its Dodd-Frank Act regulations, which has bedevilled energy companies for the past two years.
Mark Wetjen, a centrist Democrat who has served on the CFTC since 2011, said it was time for the agency to resolve the ‘seventh prong’ problem, which makes it difficult for utilities, natural gas suppliers and other energy firms to determine how certain types of physical contracts should be treated under Dodd-Frank.

Wall St. watchdog to shut penny-stock market, boost OTC oversight
John McCrank – Reuters
Wall Street’s industry-funded watchdog plans to shutter its antiquated, quarter-century old trading system for penny stocks, while increasing its oversight of over-the-counter (OTC) securities traded elsewhere, according to a regulatory filing.

Turf War Pushed CFTC to Embarrassing Amaranth Deal, Senators Say
Silla Brush – Bloomberg
The main U.S. derivatives regulator undermined a government probe into a trader’s alleged rigging of an energy market and imposed an embarrassing $750,000 fine to settle the case, three Democratic senators said in a letter.
Brian Hunter, a former trader at Amaranth Advisors LLC, agreed Sept. 15 to pay the fine, which resolved Commodity Futures Trading Commission allegations and avoided a trial that was scheduled to begin this month.

Expected Change in Derivatives Aims to Curb Damage From Bank Failure
Peter Eavis – NY Times
Six years ago, the $700 trillion derivatives market helped turn Lehman Brothers’ collapse into a full-blown global financial crisis.
But this weekend, regulators and large banks expect to agree on a change to derivatives that is intended to contain the damage caused by the crash of a large bank, several people briefed on the negotiations said.


Strategy To YieldBoost Enersys To 9% Using Options
Shareholders of Enersys (NYSE: ENS) looking to boost their income beyond the stock’s 1.3% annualized dividend yield can sell the March 2015 covered call at the $60 strike and collect the premium based on the $1.90 bid, which annualizes to an additional 7.8% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 9% annualized rate in the scenario where the stock is not called away. Any upside above $60 would be lost if the stock rises there and is called away, but ENS shares would have to climb 8.8% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 12.3% return from this trading level, in addition to any dividends collected before the stock was called.

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