Volatility Reality Check
JJ Kinahan – Forbes
Don’t look now, but it may be time for a market history lesson. Conditions have become notably more volatile than a month ago. Let’s just say that volatility is on the move, and while it’s still low compared to other market cycles, the vol charts, especially a measure of historical volatility over implied volatility in the S&P 500 index, are starting to wake up.
That means the thin, whipsaw trading of last week could continue. It’s true, too, that light volumes are possibly exacerbating volatility as many participants, especially those in Europe, vacation during August. What’s that mean for investors still glued to their screens? Thin volume can lead to exaggerated market moves.
Is the VIX ‘Too Low’ at 16?
Adam Warner – Schaeffer’s Investment Research
So, on Saturdays I usually go cut and paste CBOE Volatility Index (VIX) data from Yahoo! Finance into my Grand Master Spreadsheet. Anyway, I stumbled on a CNBC video there: “Is the VIX underpricing risk?” It was some of the Options Action gang talking VIX. I’m not real sure I know their answer after watching it, but it was interesting seeing some public wisdom on the subject.
Exclusive: Russell Rhoads On Volatility, VIX Options
Louis Bedigian – Benzinga
Traders are bound to make mistakes, but are fears of market fluctuations enhancing the problem?
Russell Rhoads, a senior instructor with the Options Institute at the Chicago Board Options Exchange, recently told Benzinga’s #PreMarket Prep that it seems like traders are “almost conditioned to either get short volatility or if they’ve got long exposure, take it off fairly quickly.”
Bullish Undertones After Recent Weakness – Weekly Market Outlook 8.11.14
Price Headley – CBOE Options Hub
While Friday may have been a bullish day that pulled the market away from the side of the cliff at the last minute, it’s still premature to say all is well; there’s still plenty of opportunity for the bears to growl again and push the broad market back into a downtrend.
The details of the make-or-break levels are below. Let’s first take a look at the relevant economic data, there are a handful of key data nuggets for this week.
High-frequency traders flee investment banks
Daniel Schäfer – Financial Times
High-frequency traders in London are increasingly defecting from investment banks to join specialised trading firms as they seek to escape tighter restrictions on pay and looming rules banning proprietary trading.
Electronic trading firms have stepped up hiring in the City, poaching staff from large investment banks in the process, according to Astbury Marsden, a recruitment firm.
Euro-Area Hedging Costs Climb on Russia, Economy Concern
Namitha Jagadeesh – Bloomberg
Options traders are turning increasingly skeptical on euro-area equities as they assess military tension between Russia and Ukraine and concern over deflation in the 18-nation trading bloc.
The cost of protecting against swings in euro-zone stocks jumped 52 percent from the Euro Stoxx 50 Index’s almost six-year high in June through Aug. 8. The gauge of regional equities tumbled 9.3 percent during that time, with Germany’s DAX Index entering a correction. Swiss (SMI) and U.K. equities each declined less than 5.5 percent from their peaks, making options on the two national benchmark gauges the cheapest in more than a year relative to their neighbors in the euro area.
Three Gray Swans – Week of August 11th – 15th
Russell Rhoads – CBOE Options Hub
This week the Gray Swans worth watching are about the consumer and then about prices.
These large-cap funds are crushing the S&P 500 this year
John Waggoner – USA Today
Yes, some funds are clobbering the Standard and Poor’s 500 stock index this year. We’ll get to those in a second. And it won’t take much longer than a second, because as a group, large-cap funds are stinking up the place, at least compared to the index.
The #1 Statistic in Self-Defeating ETF Investor Behavior – Focus on Funds
Brendan Conway – Barron’s
Since everybody on Twitter seems to love this stat, here you go: ETF investors in one study were more than twice as likely to log onto their brokerage accounts every single day.
What are you doing if you check your account every day? You’re like a dieter who hangs out at the Krispy Kreme. At minimum you’re going in there to fiddle, or to think about it. At worst, you’re a day trader.
BATS Global Markets Reports July Volume and Activity
Press Release (BATS)
BATS Global Markets (BATS) today reported July U.S. equities market share of 20.3% and European equities market share of 21.5%, with both figures an increase from June.
In July, BATS became the world’s largest stock exchange operator for the first time, executing $1.27 trillion in notional value of transactions compared with $1.21 trillion for the Intercontinental Exchange, which operates NYSE Group, and $1.10 trillion for Nasdaq OMX.
**Note the second sentence: BATS is now the world’s largest stock exchange operator (by notional value of transactions) – SR
CME Group Reaches All-Time High Open Interest of 103.4 Million
Press Release (CME Group)
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it reached an open interest record across asset classes standing at 103,387,860 open positions as of August 7, 2014. This exceeds the previous record of 103,056,895 contracts on August 25, 2011.
Total CME Group volume for trading date August 7, 2014 was 13.8 million contracts and August average daily volume to date is 14 million, up 33 percent compared to August 2013 to date.
Exchanges Defend European Data Fees
Exchanges have defended their market data fees in Europe to regulators despite complaints from fund managers that the charges are too high compared to the US.
In response to the consultation on the revised Markets in Financial Instruments Directive, which covers trading in the European Union, fund managers said market data fees in the region are too high in comparison to the US. Exchanges have defended their fees in their replies to the European Securities and Markets Authority. Esma published responses to the MiFID II proposals from firms that chose to make them public.
Debate Over High-Frequency Trading on IEX Muddied by Trade Counting
Bradley Hope – WSJ
IEX Group Inc., the start-up trading venue operator that promises to protect investors from predatory trading activity, has found itself at the center of a fierce debate about just how much of the trading in its dark pool is done by high-frequency trading.
With IEX expected to file its application to become a full-fledged stock exchange with the Securities and Exchange Commission sometime in the next week, the stakes in the back-and-forth are higher than usual. However, looking closer at the details, it does appear to be a somewhat misleading debate.
Regulation and Enforcement
RPT-Traders brace for research crackdown as easy money dries up
Lionel Laurent – Reuters
Regulatory pressure to undo the traditional way brokers sell research alongside share dealing is alarming traders in Europe, who fear a further drop in business and more cost-cutting in an already tough environment.
At stake is the lucrative but opaque system under which fund managers pay brokers an all-in commission on every trade, charged to the fund’s clients, which covers not only the execution of the deal but research and other services.
Protection from unexpected moves
Stocks tumbled on July 31, 2014 with the Dow and S&P 500 posting their first monthly drop since January ‘14 as investors worried about Europe’s economy, an Argentine default and a jump in U.S. labor costs prompted concerns about corporate margins.
The Dow Jones Industrial Average closed unofficially down 317 points and the S&P 500 dropped 39 points.
Many traders who didn’t guess that these corrections were coming in these markets continued to stay in the markets waiting for a correction and then got stopped out and made no profit, or even lost money.
Binary options may have been a good way for these traders to stay in the game.