JLN Options: Volatility – In the Eye of the Beholder; Risk On – Bond Market Volatility Gauge Drops; Volatility Will Drown Investors – Artemis

Apr 15, 2016

Observations & Insight

What is Blockchain?
Jeff Bergstrom – JLN

What Blockchain Is and Is Not

One of the most frequent topics we are reading and hearing about these days is blockchain technology. The articles run the gamut on how it will affect the financial industry, but very few articles explore what it really is and is not, and how it works. To many, blockchain is a magic box where things are recorded or registered, and that is supposed to help…maybe…somehow, something in the transaction process.

The first step is distinguishing between Bitcoin and blockchain. Bitcoin is a cryptocurrency that uses blockchain technology to work. It is not uncommon to conflate the two, but that would be a mistake. Bitcoin is often accused of being a means for drug dealers to do business. But, true or not, that does not make the blockchain technology it uses “bad.” That would be akin to saying cars are bad because moonshiners used them to smuggle alcohol during prohibition. So, while blockchain technology underlies cryptocurrencies, blockchain is not itself a cryptocurrency.

Read more HERE

Lead Stories

Volatility: In the Eye of the Beholder
Jason Zweig – WSJ
The latest newsletter from Matarin Capital Management, a Stamford, Conn.-based firm that runs about $700 million in assets, offers a simple visual reminder that investors often perceive the stock market to be more volatile than it is. Viewed daily over the 12 months that ended March 31, the S&P 500’s moves look superficially like the EKG of someone having a heart attack. Viewed quarterly, they resemble a shruggie emoticon without the smirk. And seen over the full sweep of the last 12 months, the market’s moves look like a whole lot of nothing happening in slow motion.

Risk On: Bond Market Volatility Gauge Drops
Min Zeng – WSJ
A gauge of the bond market volatility is signaling that investors don’t expect yields to spike any time soon, which may be a boon for investors dabbling into riskier assets. The Bank of America Merrill Lynch MOVE index, which measures implied Treasury bond price swings based on options, settled at 67.52 Thursday. It has tumbled from this year’s peak of 97.97 on Feb 11 – which was the starting point of a sharp rebound in stocks, oil, junk bonds and emerging-markets.

****SD: And here I started to feel very much risk off when I realized today marked the anniversary of the Titanic sinking.

Volatility Will Drown Investors: Artemis
A ‘Meeting of the Waters’ is a fitting analogy for today’s market environment according to Artemis Capital Management’s March 2016 volatility market analysis letter, which was sent to clients of the Artemis Vega Fund this week and has been reviewed by ValueWalk.
The ‘Meeting of the Waters’ refers to an area in north-west Brazil, near the town of Manaus where two largest tributaries of the Amazon River, the Solimoes and the Rio Negro, converge in dramatic fashion — what is known as the ‘Encontro das Aguas’ or ‘Meeting of the Waters’.

****SD: “You must be shapeless, formless, like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Become like water my friend.” – Bruce Lee

Euro Volatility May Catch Up to Pound’s Brexit Premium: Analysis
Implied volatility in the euro hasn’t kept pace with a surge in a similar measure for the pound, even as some investors look to hedge risks linked to a potential U.K. exit from the European Union using euro-dollar options. There is scope for the gap to narrow as euro-area political risks resurface, Bloomberg strategist Vassilis Karamanis writes.

****SD: From Bloomberg: Traders Bet Against the Pound as EU Vote Campaign Begins: Chart

Brexit would cause major legal issues for derivatives market -ISDA
A British exit from the European Union (EU), or Brexit, would raise legal challenges for the world’s $550 trillion derivatives market and create potential barriers for regulators dealing with a failed cross-border bank, a top industry body said on Friday.

Market Transaction Costs Have Spiked Recently, Indicating Larger Price Swings Could Be In Store
The latest data from Credit Suisse indicate volatility could continue to be a key theme in financial markets. According to Credit Suisse analyst Ana Avramovic, transaction costs and investor fears have been on the rise recently. Not only is the Credit Suisse Fear Barometer Index elevated, market “fragility” is also currently higher than normal. Credit Suisse uses its Transaction Cost Index as a measure of fragility. The Transaction Cost Index incorporates shortfall costs from trade data that is adjusted for trade characteristics such as aggression/size and market conditions like volatility.


Bats IPO pops 20% in first-day debut
Financial Times
Bats Global Markets shares began trading at $22.88 in what so far looks like a smooth debut. Shares priced late on Thursday at $19, the top of the price range, and the company was able to sell more shares than expected.

****SD: The press release about its pricing is here

MIAX Options Exchange Announces Promotion of Shelly Brown to Executive Vice President
Press Release
MIAX Options Exchange, a wholly-owned subsidiary of Miami International Holdings, Inc. (MIH), today announced the promotion of Shelly Brown to Executive Vice President, Strategic Planning and Operations, effective immediately. He will continue to remain responsible for business strategy and functionality requirements as well as establishing and maintaining client relationships for MIAX Options and MIAX PEARL, MIH’s second options exchange, following its expected launch in late 2016, subject to SEC approval. Shelly will also continue in his role as a Senior Vice President of MIH.

Nasdaq opposes proposed change to stock trading rules
Nicole Bullock – Financial Times
Nasdaq on Thursday formally opposed a proposed change to stock trading rules that could allow upstart trading venue IEX to become a fully fledged exchange. For investors seeking the best prices at any given time, the current understanding of market rules says quotes must be immediately available. IEX’s strategy is hinged on a 350-microsecond delay that it argues prevents high-speed traders from racing ahead of investors to profit from their trades before they make them.

Deutsche Boerse sees LSE deal boosting Europe’s economy
The planned $30 billion merger between Deutsche Boerse and LSE Group will support the EU’s Capital Markets Union (CMU) and bolster growth in the bloc’s flagging economy, the head of the German exchange operator’s biggest division told Reuters.

BRIEF-CME to delay listing of Live Cattle contracts from Oct 2017
CME says effective May 2, 2016, and pending all relevant CFTC regulatory review periods, it will temporarily delay listing of additional contract months (commencing with Oct. 2017 contract month and beyond) for Live Cattle futures and options contracts

TOM Liquidity Report March 2016
Press Release
Please click here to access the Markit report analyzing liquidity for Dutch equity derivatives. The majority of retail investors in The Netherlands have mainly access to TOM and/or Euronext for Dutch equity derivatives orders. Therefore, the liquidity report for the month of March onwards will focus on these two exchanges.

****SD: If comedian Bert Kreischer had an options trading venue, it would be The Order Machine.

EEX Options STP live On Trayport
Press Release
Last Friday, EEX saw the first registration of an power options trade for clearing via Straight Through Processing (STP), using the “Trayport Clearing Link – Complete Clear”. This connection enables brokers to register OTC transactions quickly and efficiently via the Trayport trading system for exchange clearing.

Exchange and CCP leaders assemble in Kuala Lumpur
Julie Aelbrecht – Futures & Options World
Exchange and clearinghouse leaders will gather in Kuala Lumpur next week for the World Federation of Exchanges’ (WFE) 33rd annual Clearing and Derivatives Conference, to discuss the evolving regulatory landscape and the risks and opportunities the global market is set to face. “This conference is timely as the derivatives market in the Asia region and Malaysia have experienced significant growth. We are cognisant of the need to continually bring together key industry drivers and stakeholders for conversations on the various business opportunities, challenges and regulatory trends, prospects and issues affecting the global derivatives market,” said Datuk Seri Tajuddin Atan chief executive officer of the Bursa Malaysia.

Regulation & Enforcement

FAs Worry SEC’s New Derivative Restrictions Are Overkill
Financial Advisor IQ
With last month’s deadline to comment on the SEC’s proposed limits on funds’ use of derivatives now passed, asset managers aren’t the only ones preparing in advance for a final ruling. Wealth managers are also bracing for guidelines that would require funds to restrict their use of derivatives to an exposure-based limit of 150% of net assets. Alternatively, some funds might be allowed to follow a risk-based limit of 300% of total assets, reports FA-IQ’s sister publication, Ignites.

U.S. senator seeks to strip ‘loophole’ from commodities bill
A U.S. senator who advocates for stronger financial regulation on Thursday sought to strip the key part of a bill authorizing the work of the country’s commodities and swaps regulator, the Commodity Futures Trading Commission.

Statement Of CFTC Chairman Timothy Massad On The Senate Agriculture Committee’s Passage Of Legislation To Reauthorize The CFTC
Press Release
I would like to thank the Senate Agriculture Committee members and staff for their work on reauthorization. While I have concerns with parts of this legislation, I hope those can be addressed as the process moves forward.

****SD: Reuters story here

FIA Announces Departure Of COO Mary Ann Burns
Press Release
FIA today announced that Mary Ann Burns, executive vice president and chief operating officer, will be leaving FIA at the beginning of July to head marketing and distribution for the craft brewery owned by her family.

After Binary Options, will CySEC and others Move Towards Forex and CFDs
Finance Magnates
Being reported on Thursday was a circular about fair trading practices related to binary options that was sent by CySEC to entities under their jurisdiction. The circular came days after ESMA had released an inaugural Q&A paper on how speculative products facing retail customers such as CFDs, forex and binary options fit within MiFID rules.

SEC Using More ‘Tactical’ Approach to Exams: Risk Chief
The Securities and Exchange Commission uses a “much more tactical approach” to examining investment advisors than a decade ago, and the agency’s exam division considers how long it’s been since an advisor has been examined when picking firms, Peter Driscoll, head of the new Office of Risk and Strategy, said Thursday.


Everyone Worries Too Much About ‘Black Swans’
Noah Smith – Bloomberg
In his 2007 book “The Black Swan: The Impact of the Highly Improbable,” finance writer Nassim Nicholas Taleb attempted to educate the public about the danger of rare, unusual events. This is obviously important in the world of finance — asset market crashes come infrequently, but have an enormous impact on investors’ wealth, and potentially on the economy. Taleb implies that human beings underestimate the risk of these so-called black swans — in fact, he started one hedge fund (which closed in 2005), and advised another, based on this thesis. But how often do people low ball the odds of catastrophe? And is it possible that we might do the opposite, overestimating the risk of things like stock-market crashes, pandemics and wars?

****SD: It’s true that the real nasty moments can leave a deeper impression than, say, a run-of-the-mill week where things went just fine.


The ‘No Man’s Land’ of Stocks Options Data
Finance Magnates
Stocks options could be one hell of a financial vehicle. The risk is enormous – and let’s assume that the notion of ‘high risk’ stands where investor can lose all his investment without any special coincidence – and dealing with options is certainly a place where all the money involved is on the line. On the other hand, the opportunities are huge. Options are one of these tools where one can make, in relatively short time, a 10x reward.

****SD: Part 2 of the story is below.

Finding the Right Data to Analyze Stock Options
Finance Magnates
While the challenges discussed in the first article were related to your risk/reward possibilities and included well-known data, the real information gap an option trader faces relates to the volatility, or the ‘implied volatility’. The definitions for these parameters are sometimes obscure, and more – not all volatilities are created equal. Sometimes (like before specific events) the expected volatility is built upon different assumptions than usual, and requires different arithmetic.


Exchange And CCP Leaders To Assemble In Kuala Lumpur, Malaysia For WFE-IOMA Annual Clearing & Derivatives Conference
Press Release
Exchange and clearinghouse leaders will assemble in Kuala Lumpur next week for the World Federation of Exchanges’ (WFE) 33rd annual Clearing and Derivatives Conference. The IOMA conference, which will take place 17-19 April, will be a forum for the discussion of post-trade issues affecting the global landscape.


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Past Options Newsletters

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