Observations and Insight

Exchange CEO Series – ICE Cover: Jeff Sprecher taking on “fierce competition” and hackers
Exchanges have never faced more challenges and opportunities than they do today. John Lothian News sat down with six exchange CEOs at the 2014 FIA Boca Conference to talk about their views on four main topics: competition, regulation, growth and technology. Here’s what Jeff Sprecher, CEO of the IntercontinentalExchange Group (ICE), had to say about each. “It’s interesting to me that regulators today are trying to introduce more global competition when in reality, for those of us who are in the business, we realize that competition has never been more fierce and more global,” Sprecher said. “And frankly, we are all trying to look at the same opportunity set and trying to use our current positioning like never before.”

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Lead Stories

Volatility Traders Take Two Straight Lumps as VIX Slumps 20%
Brendan Conway – Barron’s
It’s what happens when nothing much happens.
The CBOE Volatility Index is down about 20% in two days. Traders’ worries over stock declines are, well, down. Judge for yourself whether the politics of Ukraine, China’s banking crisis, or some other issue are more worrisome or less so compared to last week. But those who vote with their feet have moved. So the value of put and call option contracts are down.

Bets rise on European stock market fall as options expiry looms
By Sudip Kar-Gupta, Reuters
Investors are scrambling to buy protection in the options market against a future fall in European share prices as geopolitical tensions threaten a 1-1/2 year long stock market rally.
Traders say tension between Western powers and Russia after Moscow’s effective annexation of Ukraine’s Crimea region is driving demand for ‘put’ options betting on a market pullback, along with concerns about a possible Chinese economic slowdown.

Design & Trading of VIX and Other Listed Volatility Derivatives Presentation at RMC
Russell Rhoads – CBOE
On Tuesday afternoon a presentation about the Design and Trading of VIX and Other Listed Volatility Derivatives was given by Bill Speth of CBOE and Dominic Salvino from Group 1.
Dominic Salvino noted that volume in VXX options for non-standard expiration dates is very similar to VXX standard expiration volume.

Options Show More Bullish Bets on Bond ETFs As Rate Fears Ease
Chris Dieterich – The Wall Street Journal
About those bond worries…
With Ukraine in turmoil and China showing signs of a potential slowdown, the options market is showing a renewed bullishness for U.S. Treasury bonds. That marks a sharp change from the consensus view last year, when most market watchers warned that rising interest rates would inflict losses on bonds.

Stocks volatile after Fed cuts another $10 billion
By JeeYeon Park, CNBC
Stocks gyrated Wednesday after the Federal Reserve decided to cut bond purchases by another $10 billion to $55 billion per month.
(Read more: Fed eases back the throttle, changes tune on rates )
The $10 billion reduction was largely in line with market expectations. The decisions passed on an 11-1 vote, with Narayana Kocherlokota voting against.

JPMorgan sells physical commodities unit to Mercuria for $3.5 billion
JPMorgan is selling its physical commodities business to Mercuria for $3.5 billion, the U.S. investment bank said on Wednesday, sweeping the fast-growing Swiss trading house into the top league of commodities traders.

Volatility Intensifies as the VIX becomes a trading tool
Institutional Investor
Volatility divides. Too much and it can be catastrophic. Too little and returns shrivel. Investors have felt the sharp decline in equity volatility during the past few years.

Videocast: Big VIX spread in May

Hedge Fund Shutdowns Hit Nearly Five-Year High
Rob Copeland – The Wall Street Journal
Here comes the flip side of the coin.
Amid a booming environment for hedge-fund launches comes some sobering news for industry newbies: Last quarter saw the most hedge-fund liquidations in nearly five years, research firm HFR said Tuesday.


Nasdaq OMX first to win EU approval to clear derivatives
Huw Jones – Reuters
Nasdaq OMX has kicked off Europe’s next phase in making financial derivatives safer by becoming the first clearing house to be authorised under new European Union rules.

CBOE Holdings top executives authorize stock sales
By Tom Polansek, Reuters
CBOE Holdings Inc’s (CBOE.O) top two executives have each established plans to sell up to 14 percent of their shares in the company, the exchange-operator said on Tuesday, a day after its stock price hit a record high.
***SR: This story follows up on the press release in yesterday’s newsletter.

New Study by Goldman Sachs: 196 Funds That Use Options Had Lower Volatility and Higher Returns
By Matt Moran, CBOE Options Hub
At the 30th Annual CBOE Risk Management Conference in Bonita Springs Florida, John Marshall of Goldman Sachs delivered a presentation on “Mutual Fund Use of Options: Public Holdings and Trends.”  John manages the Goldman’s Derivatives Research team in New York.

CME Group Inc. Announces Date of First-Quarter 2014 Earnings Release, Conference Call
Press Release
CME Group Inc. will announce earnings for the first quarter of 2014 before the markets open on Thursday, May 1, 2014. The company has scheduled an investor conference call that day at 7:30 a.m. Central time.


Trading Probe Breaks String of Gains for U.S. Exchange Operators
Gerrit De Vynck and Lu Wang – BloombergBusinessweek
Things had been improving for U.S. stock exchanges, with volume rising, the bull market entering its sixth year and investors coming back to the market.
The run of luck was broken yesterday by New York Attorney General Eric Schneiderman, who is probing whether U.S. markets are giving high-frequency traders unfair advantages by offering faster access and data than is normally available to the public. Nasdaq OMX Group Inc.’s stock fell the most in seven months.

CFTC Expected to Delay Planned Overseas Derivatives Trading Restrictions
Andrew Ackerman – The Wall Street Journal
The Commodity Futures Trading Commission is expected to delay planned overseas derivatives trading restrictions relating to a continuing effort to harmonize domestic and international rules.


Some Hedging Ahead of the Fed Meeting
By STEVEN M. SEARS, Barrons.com
It seems prudent to expect that the Standard & Poor’s 500 Index could advance in the wake of the Fed Reserve’s announcement this afternoon.
Still, options-trading patterns indicate significant hedging of U.S. stock portfolios just in case stock prices plummet following actions taken by Federal Reserve’s Open Market Committee.

A Better Way to Invest in Commodities — or Even the ‘Fear Index’?
By Brendan Conway, Barrons.com
Plenty of investors want to own commodities and inverse assets in theory. The trouble comes with executing it. The oft-published disclaimer says this index or that is “not directly investable.” The commodity futures market, which is where funds resort unless they store gold or silver in a vault, is a slippery beast.

Options Education

Panel Discusses Management of Low Volatility Products by Insurance Companies
By Matt Moran, CBOE Options Hub
On March 19 at the 30th Annual CBOE Risk Management Conference,  three experts discussed “Design and Management of Low Volatility Products by Insurance Companies”:
Alan Grissom, Global Head of Insurance,  S&P Dow Jones Indices
Chris Quallan, Vice President, Derivative Trading, 40/86 Advisors
Barry S. Seeman, Global Head of Derivatives Structuring, AEGON

Protecting Your Equity Portfolio For Less – Part XII
Seeking Alpha
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
This article begins with an overview of previous what has been covered in previous article in this series to provide links and references for new readers.
A summary section follows to explain the basics of how this hedging strategy is designed to work, including a link to a more detailed explanation.
Why I do not use VXX in my equity hedging strategy including an explanation of how and why VXX varies significantly from the VIX.

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