Lead Stories

Wall Street posts biggest rally of the year
Tanya Agrawal – Reuters
Wall Street posted its sharpest rally of the year on Tuesday, as investors snapped up beaten-down stocks a day after the market’s worst performance in four years on fears about China’s economy.
Financial markets also got a boost from China’s second interest rate cut in two months.
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Wildest Stocks Since 2011 Left Liquidity Void in U.S. Options
Callie Bost – Bloomberg
The headaches that plagued U.S. stock investors Monday were more like migraines in the options market.
With regulation and risk limits crimping the market-making role of big U.S. banks, traders are relying more on automated and high-frequency firms to keep trading lubricated. Liquidity was at a premium when the wildest markets in four years threw off bid-ask spreads and inflated options costs.
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Wall Street slump highlights liquidity crunch in U.S. options market
Saqib Iqbal Ahmed – Reuters
The sharp slump in U.S. stocks on opening on Monday threw U.S. options markets out of gear as a dearth of liquidity made it extremely difficult for traders to make trades.
The Dow Jones Industrial Average lost more than a 1,000 points in the first few minutes of trading, after a more-than 8.0 percent drop in Chinese shares and a selloff in crude oil and other commodities.
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Credit derivatives clearing catches on
Mike Kentz – Reuters
Credit investors are buying into clearing for single-name credit default swaps as a cure for the ailing market – even though it is sometimes more expensive than existing bilateral execution methods.
The Intercontinental Exchange has signed up 21 new buyside firms to its single-name CDS clearing offering this year – more than doubling the total buyside participation to 39 firms – via a lobbying effort that includes discounts for buyside firms that back-load existing swaps into clearing between June and December.
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Awakening to a Future Without the Fed, S&P 500 Lurches Into Correction
Joseph Ciolli and Anna-Louise Jackson – Bloomberg
Could it have ended any other way?
U.S. stocks, stuck in neutral since quantitative easing was curtailed 10 months ago, went into freefall as the prospect of higher interest rates became too real to ignore. For all the talk of a slowing China and crashing oil, signs a correction was coming have been visible ever since the Federal Reserve began withdrawing stimulus.
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Shredded Stock Charts, Growth Uncertainty Point To More Volatility
JJ Kinahan – Forbes
China’s new day dawned with aggressive stock selling even as its central bank cut interest rates for the fifth time since November and shored up bank reserves. But much of the rest of the globe—including the United States—returned as early buyers after several knee-buckling sessions. The stock market bounce (oil and the dollar are nosing higher, too) is testament to expected continued volatility as international markets assess another boom-bust cycle for growth-engine China.
This is market action that calls for small, nimble trades for those who prefer a very short-term horizon; as we’ve preached, don’t go “all in” or “all out” of positions in these conditions. As for those dug in for the long haul, it’s time to refocus on otherwise largely solid fundamentals (and in some instances, prettier valuations) up and down select U.S. stocks.
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Vanguard CIO Buckley Sees Stock Drop as Return to Volatility
Margaret Collins – Bloomberg
Vanguard Group Inc., the world’s largest mutual-fund company, sees the deepening plunge in equity markets today as a return to volatility.
“You’ve had this steady march upward from 2009 until this year when we were going sideways, treading water,” said Tim Buckley, chief investment officer at Vanguard, which manages $3.3 trillion in assets. “Now you’re seeing a return of volatility to the markets.”
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Breaking Down the Second-Largest VIX Storm on Record
Adam Warner – Schaeffer’s Investment Research
History doesn’t repeat itself perfectly, but the current VIX explosion resembles what we saw in 2011
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Was This a Flash Crash? And Other Questions About Monday’s Swoon
Sam Mamudi – Bloomberg
U.S. investors were jittery on Monday morning after fears of an economic slowdown had rocked markets around the world.
Their concern was realized when the Standard & Poor’s 500 Index plunged 5.3 percent in the opening minutes of trading, the biggest intraday loss in four years. It was the start of a roller-coaster ride, as the market bounced up only to fall again. The pattern repeated through the day until the close, when the benchmark finished down 3.9 percent.
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Japan Stocks Plunge Again in Wildest Trading Day in Four Years
Yuji Nakamura and Yuko Takeo – Bloomberg
Japanese stocks plummeted, after seesawing from gains to losses in the wildest trading range in four years. Volume was more than twice the average.
The Topix index slid 3.3 percent to 1,432.65 at the close in Tokyo, reversing an intraday rally of 1.9 percent. It has plunged 15 percent since China sparked a global rout on Aug. 11 when it devalued the yuan. The Nikkei 225 Stock Average dropped 4 percent to 17,806.70, the lowest close since Feb. 10. Shares in Shanghai extended the biggest plunge since 1996.
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Black Monday No Surprise, Say Analysts
Andrew Barber – Institutional Investor
The international market gloom over emerging economies and commodities has reached the U.S., spooking the bulls. The Shanghai composite Index fell by nearly 8.5 percent one day after China’s State Council approved a shift of as much as $150 billion in fresh equity investments by China Investment Corp., China’s sovereign wealth fund. After weeks of battering by sharp currency declines, developing-markets equities sold off in sympathy.
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Oil options surge shows micro-market fears going macro
Jonathan Leff – Reuters
For most of this summer, the relentless decline in oil prices has raised only muted alarm in the options market. Even as crude lurched to six and a half year lows, the threat of a dramatic break far below $40 seemed remote.
That changed abruptly on Monday, when a key oil option gauge surged to its highest since March as a quickening sell-off in the Chinese stock market sharpened fears about economic growth. Traders raced to buy insurance against a deeper, faster fall that could drag prices down to levels last seen in 2004.
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Historic Profits for High-Frequency Trading Firm
Bradley Hope – WSJ
Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive.
“Our firm is made for this kind of market,” said the CEO, Douglas Cifu.
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Breathe But Don’t Panic
Kristina Hooper – Morningstar
When markets sell off, it’s never orderly and it can be very unsettling. But don’t let fear take over your portfolio. A spike in volatility can actually be a healthy thing for the market, it can provide buying opportunities and it’s usually temporary. Let’s try to keep things in perspective after a tumultuous week.
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Technology

OptionsCity to Provide Settlement Price Solution for Nasdaq Futures, Inc.
Press Release – OptionsCity
OptionsCity Software, a global provider of futures and options trading and analytics solutions, has been selected by Nasdaq to provide a settlement price solution for derivatives contracts traded on Nasdaq Futures, Inc. (NFX).
“This initiative is aligned with the OptionsCity vision to leverage its core competencies in pricing and analytics to be the power behind exchanges,” said Dan Rooney, OptionsCity’s VP of Global Sales. “With the flexible architecture of Metro NOW, we continue to expand our leadership in the options on futures market.”
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Strategy

Selling volatility in an era of low returns
Michael Mackenzie – Financial Times
Turmoil across markets has once again reminded investors how measures of bond and equity volatility can abruptly switch into the danger zone almost without warning.
With US equities being hit hard by the deepening gloom over the global economy and across emerging markets, a key index that tracks investor sentiment has suddenly surged to its highest level since 2009.
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China Meltdown Creates Enticing Options Trades
Steven M. Sears – Barron’s
Since late July, we have recommended that investors buy bearish puts in anticipation that China’s stock market would tumble.
China’s stock market has since suffered a massive decline, and the story does not seem ready to end anytime soon.
Investors are now advised to adjust their put positions to reflect new price levels and risks.
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How to Embrace the VIX Super Spike With VXX
Tyler Craig – InvestorPlace
The Wall Street roller coaster just entered death mode. So hide the kids, hoard the pepto bismol, and consider queuing up a trade or two on your VIX ETF of choice to welcome our new volatility overlords.
To get a sense of just how extreme the fear and anxiety became during Monday’s crash look no further than the CBOE Volatility Index (VIX).
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Education

Today’s volatility highlights the problem with stop orders!
Steve Claussen – OptionsHouse
The tremendous movement, i.e. volatility we have experienced today, in the markets highlights the multiple problems with the reasoning that using stop orders is good discipline to limit your downside in your stock positions. Using stop loss orders simply cannot provide the dynamic hedge that options provide.
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