JLN Options: May 16, 2012: A Chat with BOX CEO Tony McCormick on After-Hours Options Trading

May 16, 2012

Commentary/Story/ Q&A

A Chat with Tony McCormick, CEO of BOX, on the Exchange’s Proposal for After-Hours Options Trading
The Financial Times published a story on May 14 revealing that the BOX Options Exchange is developing a plan to trade U.S. stock options after the closing bell (see below under Lead Stories). JLN Options wanted to follow up with BOX’s chief executive, Tony McCormick, with some questions about the plan, so options editor Sarah Rudolph spoke with him by phone after having heard him speak on the Exchange Leaders panel at the Options Industry Conference in New Orleans.

Q: Has anyone tried after-hours trading of options before?

A: I’m trying to remember – I think a long way back, possibly in the late 1990s, the CBOE tried to put up a pre-market session for options and maybe the way it was structured it didn’t have any traction. I think it was at about the time the equity markets decided to do pre- and post-market trading.

But the equity world has had an after-hours market for a long time. That’s a pre-existing condition, because if the underlying wasn’t trading you wouldn’t be able to trade the option, of course.

Q: I saw one person on Twitter who thought the idea was a “no-brainer.” But in the article in the Financial Times, Ed Provost was quoted as saying: “Since individual equity options are a derivatives equities [sic] and are dependent on stock prices, post-market trade on an options exchange currently is not very feasible.” Why do you think he might say that, and someone else would think it’s a “no-brainer”?

A: I don’t know why, because equities trade post-market and that would be sufficient for the derivative to trade. That is not to say that all equities trade post market, but the big ones do. You obviously wouldn’t list on things that don’t trade.

Clearly you have to limit the availability of names and make sure the OCC can handle exercise and assignment instructions. It’s all about facilitating the process and making sure the options clear properly. With stocks that are traded in extended-hour sessions, the orders are only good during the extended hours. So you have to have set some rules around trading these options, similar to the rules for extended-hour equities. The brokerages would determine some of those.

The after-hour options would not be in a displayed quote environment. You would put in a limit order at a certain price and see if it gets acted on. If a buy limit matches a seller limit, it’s a trade. So it’s like an electronic bulletin board.

If you get participation with enough limit orders, you will have trade matches. If the contract is a success, you’ll attract enough retail interest that the professional community will start to look at that market too. Whether they would actually quote markets remains to be determined. But you wouldn’t need them to quote to make a market.

Q: Do you think competitors will follow you in launching after hours options trading?

A: Oh, I think so. Like anything, there is no specific magic in what we’re proposing. Every exchange has different constituencies. We have a limited constituency, which is BOX and its shareholders, so we don’t represent so many different interests. But some of the bigger exchanges may prefer that an after hours market not exist, because, for one thing, you have to staff it, and for another, some just might not want people trading outside regular hours, because it effects their markets. Those participants might be able to influence a bigger exchange, although that would not affect BOX.

We were interested in what’s good for retail customers. I think they would like to have it if it is available. There are 30-50 names at the most that would make some sense and are fairly active.

When companies’ earnings releases come out, customers will trade a fair number of options, at least at-the-money. Whether the market becomes bigger than that, who knows? But if we tailor the product the right way, we think it will attract business and be good for people who want to adjust their positions after an earnings release.

The main difference is the product will not have dedicated liquidity – it will not be in a quoting environment, so you won’t have market orders.

Q: At the exchange briefing on the first day of the options conference in New Orleans, BOX mentioned changes in your fee structure. Could you elaborate on that?

We’re looking at tweaking our fee structure a bit, maybe with a mid-year implementation. We’d like to create some tiering of our exchange fees on the liquidity side. Up until now we’ve charged a flat 25 cents for responders. We’d like to allow a discount with a certain threshold of volume. We think that will increase responders’ appetites to be involved more. It is payment for order flow; we’re looking to increase that inducement, because payment for order flow has gone higher than our current inducement. We want to be competitive and pay the right inducement to retail traders.

Q: On the Exchange Leaders panel at the conference, Gary Katz at one point said (I believe) “The inverted fee structure on BOX drives the NBBO wider.” Do you disagree with that?

A: I think what we’re saying is we think price improvement is good, we think you should be able to initiate liquidity by introducing a PIP at the NBBO, and if someone wants to price improve it goes up improved; if not, it goes up at the NBBO. But the order gets stopped out at the NBBO by the initiator of the liquidity. [Gary Katz] is trying to make out that you can just put it up on BOX and the customer will miss out on the NBBO, but that’s not true.

Also, if the NBBO is so great, why has our PIP created $380 million of customer price improvement since its inception? More than a third of a billion has gone back to customers for price improvement. There is a reason the NBBO is so wide. There is a lot of informed order flow priced at the NBBO. If you knew your customer was a retail customer, you would quote a better market. But it’s one size fits all and the retail customer bears the price.

Q: You also mentioned on the panel, regarding BOX’s recent approval as an SRO, that “it takes two years to get a listing…” Can you clarify that?

A: Actually, there is a rule that says that if you are a member of the OCC, which we are now, you can submit any product that can clear via the OCC, without having to get separate approval. So long as a product clears and settles through OCC you can file for it. So later this summer we plan to file for a Maxi Spider large sized option. The SPY trades 100 shares of the underlying, and we will trade either 500 or 1,000 shares. We’ll offer it in nickel increments.

Lead Stories

TABB on US Options Trading: Low-Touch on the Rise
Over the past year, investment managers tell TABB, a number of important recent changes affecting their US options trading are not only short-term drivers – but long-term catalysts, says TABB Group.
Speaking to preliminary analysis drawn from TABB’s soon-to-be-published annual US options trading study (currently in editing), Matt Simon, TABB NY senior analyst and co-author of the new 2012 benchmark study with Andy Nybo, head of derivatives, says that when he backtracked through hours of transcripts from interviews with 54 traders at US hedge funds, asset managers and prop trading shops as to what h
ad changed the most in options trading during the past year, he believes that over the past year, many important changes in options trading are not only short-term drivers – but long-term catalysts.
(Editor’s note: the TABB Group 2012 Options Trading Study will examine the many factors influencing how and where buy side firms are trading options, including the growing adoption of electronic trading tools, the factors that influence the buy-side’s choice of broker-dealer relationships and the impact their behavior will have on sell-side options desks into 2013 and beyond.)

Chicago Board Options Exchange and China Financial Futures Exchange Sign Memorandum of Understanding
The Chicago Board Options Exchange (CBOE) and the China Financial Futures Exchange (CFFEX) announced today that they signed a Memorandum of Understanding (MOU), which establishes an open channel of communication and lays the foundation for future collaborative efforts between the exchanges. Executives from both exchanges signed the MOU today at a ceremony in Beijing, China.

UPDATE: China Financial Futures Exchange Expands Collaboration Efforts
–China Financial Futures Exchange expands collaboration efforts
–CFFEX signs memorandum of understanding with NYSE Euronext
–CFFEX signs memorandum of understanding with Chicago Board Options Exchange
(Updated to include agreement with Chicago Board Options Exchange.)
NEW YORK (Dow Jones)–The China Financial Futures Exchange will collaborate with NYSE Euronext (NYX) and the Chicago Board Options Exchange to develop futures and options markets in Europe, the U.S. and China as they look to extend the exchanges’ global reach.
Under the memorandum of understanding, the exchanges will explore opportunities for information sharing; exchange and train employees; and cooperate on joint research into developing strategies for the derivatives market.
CBOE, the largest U.S. options exchange and creator of listed options, said the agreement also creates the opportunity for potential joint marketing efforts and product development.

Sallie Mae Puts at Five-Year High Amid Loan Scrutiny: Options
2012-05-16 07:56:26.453 GMT
By Cecile Vannucci and Nikolaj Gammeltoft
May 16 (Bloomberg) — SLM Corp. bearish options prices have reached the highest level in almost five years relative to bullish ones, pushed up by traders concerned the U.S. government will take action to prevent a bubble in education loans.
Puts protecting against a 10 percent drop in the largest private student lender cost 1.33 times more than calls betting on a 10 percent gain, according to data on three-month options compiled by Bloomberg. The price relationship reached 1.35 on May 11, the highest level since October 2007. SLM shares have dropped 18 percent since reaching a seven-month high in March.

BGC Partners Appoints Michael A. Riffice as Managing Director and Head of Futures and Options, Americas
BGC Partners, Inc. (NASDAQ: BGCP) (“BGC Partners” or “BGC”), a leading global brokerage company servicing the wholesale financial and property markets, today announced the appointment of Michael A. Riffice as Managing Director and Head of Futures and Options, Americas. In this role, Mr. Riffice will be responsible for spearheading the growth of BGC’s futures and options business in the Americas.

ISE to List Options on Facebook on May 29
NEW YORK, May 15, 2012 – The International Securities Exchange (ISE) today announced that it will list options on Facebook (ticker: FB) beginning on Tuesday, May 29. Citadel Securities LLC will serve as the Primary Market Maker for Facebook at ISE. The options listing date is contingent on a successful completion of Facebook’s initial public offering on Friday, May 18.
http://jlne.ws/KLQLfj (PDF)

CBOE Information:
The CBOE has not put out a press release on Facebook options, but has released the following information:
If Facebook launches its IPO on Friday, May 18, the earliest Facebook options could begin trading would be Tuesday, May 29. The exchange has some qualifiers in its rules that dictate when the exchange can list a new option, including
— A minimum of 7,000,000 shares of the underlying security which are owned by persons other than those required to report their stock holdings under Section 16(a) of the Securities Exchange Act of 1934.
— A minimum of 2,000 stockholders
— Trading volume has been at least 2,400,000 shares in the preceding 12 months
— Market price per share has been at least $3.00 for the previous 5 consecutive business days preceding the date on which the Exchange submits a certificate to the Options Clearing Corporation for listing and trading.

UPDATE: Exchanges Lay Plans For Facebook’s Market Debut
-Nasdaq OMX conducting additional IPO tests this week
-NYSE Euronext dedicating server on Arca to Facebook shares
-Options on Facebook seen listing May 29
U.S. stock exchanges continued a round of system tests and preparations ahead of Friday’s greatly anticipated initial public offering of Facebook Inc. shares.
Nasdaq OMX Group Inc. (NDAQ), Facebook’s primary listing venue, held its second IPO systems test within a week and announced two more planned tests for customers, slated for Wednesday and Thursday, in the run-up to the offering. Separately NYSE Euronext (NYX) said its Arca electronic exchange unit planned to dedicate a trade-matching engine–the software that matches stock bids and offers–to provide the platform more flexibility in dealing with any quoting issues that should arise in the stock.

Facebook options seen listed on May 29
By Doris Frankel, Reuters
Traders will have their first crack at using options to hedge their bets or speculate on Facebook shares in two weeks, when U.S. options exchanges expect to list contracts on the hot new stock. http://jlne.ws/KqXQUd

CBOE warns that SEC probe could result in fine
May 15 (Reuters) – A U.S. Securities and Exchange Commission probe into the way the operator of the Chicago Board Options Exchange polices itself could result in censure or a fine, CBOE Holdings Inc said in a regulatory filing.
“While we do not know the outcome of the SEC’s investigation, should it determine to act, the SEC could, among other things, censure CBOE, impose monetary or other penalties and require CBOE to change its compliance programs and procedures,” the Chicago-based exchange operator said in a little-noticed line included in a May 8 filing.

International Securities Exchange and AlphaClone Announce Partnership to License and Promote Innovative Hedge Fund Position Replication Index
NEW YORK and SAN FRANCISCO, May 15, 2012 – The International Securities Exchange (ISE), a leading US options exchange, and AlphaClone LLC, the leader in hedge fund position replication, today announced their partnership to promote AlphaClone’s innovative hedge fund position replication index, the AlphaClone Hedge Fund Long/Short Index. Their partnership will serve as a platform to license and promote AlphaClone’s proprietary hedge fund position replication approach to third parties seeking to provide access to alternative investment products.

R.J. O’Brien Calls on Exchange
s, Regulator to Heed Industry Feedback on Extended Hours for Grain and Oilseed Contracts

Firm Recommends Trading Halt on 15 Days a Year When USDA Crop Reports Are Issued
CHICAGO, May 15, 2012 – R.J. O’Brien & Associates (RJO), the nation’s oldest and largest independent futures brokerage and clearing firm, today called on U.S. futures exchanges and the Commodity Futures Trading Commission (CFTC) to listen to feedback from farmers, food companies and commercial hedgers, and amend plans for the extended trading hours of grain and oilseed futures and options contracts. The firm is recommending a halt in trading on the 15 days a year when the U.S. Department of Agriculture (USDA) issues comprehensive reports on crop production, acreage and quarterly stocks.

Internet IPO Puts Rise at Record Rate Before Facebook: Options
By Nikolaj Gammeltoft and Cecile Vannucci
May 15 (Bloomberg) — As Facebook Inc. prepares its initial public offering, traders are boosting the cost of bearish options at a record rate for LinkedIn Corp. and four other Internet companies that sold shares in the past year. Puts trading 10 percent below shares of LinkedIn, Groupon Inc., Zynga Inc., Pandora Media Inc. and Yelp Inc. cost an average of 5.12 points more than calls 10 percent above on May 14, data on 30-day options compiled by Bloomberg show. That’s almost four times more than at the record low reached in April.

BOX considers after-hours options trading
By Telis Demos in New York and Hal Weitzman in Chicago, FT.com
Traders could get the chance to buy and sell US stock options after the closing bell, under a plan being developed by a US exchange. Tony McCormick, chief executive of the BOX Options Exchange, told the Financial Times that development of an after-hours platform is still in ”very early stages”.
“It exists for stocks, why not a subset of the options world? Electronic trading firms already accept some orders after-hours,” said Mr McCormick. Unlike in equities, where exchanges offer after-hours trading, the options markets are closed out of normal hours. The only options trades that take place after the bell are large bilateral transactions negotiated privately by large institutional traders.

NYSE Technologies to Launch Options Analytics
NYSE Technologies would like to inform clients of the forthcoming Options Analytics product.
Options Analytics is a real-time market data feed that includes implied volatilities and Greeks for listed options, monitoring the entire U.S. OPRA Composite NBBO feed and U.S. Level 1 Composite feeds for underlying stocks and indices. This low-latency, ready-to-use data feed will provide critical analytical content for options market participants.

Index, ETF option volumes near midday
Total option volume is very strong with 7.3 million options already changing hands today, and protection looks to be the name of the game in the indexes and ETFs, according to optionMONSTER’s data systems.

China tests out commodity options trading
Rebecca Hampson
China has started its first mock trials of commodity options trading after the Chinese regulator gave its approval this week.
The first exchange to run the simulated options trading on its commodity futures is the Dalian commodity exchange, which launched the internal trials this week after it gained approval from the Chinese regulator, China Securities Regulatory Commission.

JPMorgan’s Spectacular Whale Fail Was Preceded By Unusual Options Trading Activity
By Steve Smith, Minyanville.com (opinion)
Put options on JPMorgan were unusually active ahead of yesterday’s announcement of credit-trading losses.
MINYANVILLE ORIGINAL It appears that once again someone’s bunny had a good nose and they dug into the option patch to bring home a bunch of tasty carrots just in time for Mother’s Day. Yesterday afternoon following the close, JPMorgan (JPM) held a surprise conference call to announce significant losses in structured-credit trading.

Securities Technology Monitor: NYSE Does Away With Most of AMEX Brand
Tommy Fernandez, Securities Technology Monitor
NYSE Euronext (NYX) is renaming the small cap equities market NYSE Amex to NYSE MKT, effective May 14, 2012, subject to SEC filing.
NYSE MKT’s associated options market will continue to do business under the name NYSE Amex Options.
“NYSE MKT is a fully integrated trading venue within the NYSE Euronext community and the new name reinforces that fact,” said Scott Cutler, EVP and Co-Head of U.S. Listings and Cash Execution at NYSE Euronext, in a statement. “The venue is dedicated to growth-oriented companies in the U.S., and we continue to enhance the platform to best meet the needs of these clients.”
The exchange formerly known as AMEX is one of the primary markets for listing and trading small growth companies. It has gone through a number of name changes, including being known as the New York Curb Market. Nasdaq OMX Group first purchased the exchange in 1998 and then sold it to NYSE Euronext in 2008 for $260 million in stock.

Investors hedge against losses as Europe fears resurface
By Angela Moon and Doris Frankel, Reuters
The resurgence of the euro zone’s debt woes as a dominant force in the U.S. equity market has sparked a flurry of cautious bets in the options market as investors brace for more uncertainty. The S&P 500 may have lost only a little over 1 percent for the week, but markets have become noticeably more volatile following elections in Greece and France that changed expectations for how the euro zone will deal with long-standing debt problems.


CHICAGO, May 16, 2012 – William J. Brodsky, Chairman and CEO of CBOE Holdings, Inc. (NASDAQ:CBOE), today issued the following statement regarding Illinois pension reform:
“CBOE Holdings joins the Illinois State Chamber, the Civic Committee of the Commercial Club of Chicago, the Civic Federation and others in support of a call to action to reform Illinois’ pension laws and review Medicaid policy this legislative session.”
“Attracting and retaining growing businesses and quality jobs in Illinois requires us to address what is crippling the state’s finances. The current structure of our pension system is flawed, and it continues down an unsustainable path that will lead to dire results. Pension reform is needed now so employees and residents in the State of Illinois are fiscally secure.”

ISE extends helping hand to legging strategies
thetradenews.com May 14, 2012
The International Securities Exchange (ISE) has introduced a new order type, implied orders, which it claims will significantly enhance the execution of multi-legged strategy orders on its exchange. Multi-legged strategies are often used to help hedge risk, especially when trading higher priced stocks. Previously, multi-legged strategies operated on the ISE’s complex order book, but were not accessible to participants on the regular order book. Now the ISE has introduced implied orders, also known as legging orders, market participants can trade the individual legs from the complex order book on the bourse’s regular order book for the first time.

Boerse CEO Confirms Growth Goals Despite Subdued Start
— Company says 2012 growth, expense targets unchanged despite subdued first quarter
— First annual meeting since EU blocked NYSE Euronext tie-up
— Company considers EU’s derivatives market definition wrong.
FRANKFURT (Dow Jones)–Deutsche Boerse AG (DB1.XE) Wednesday said the German exchange operator’s 2012 growth and expense targets remain unchanged, despite a subdued first quarter, shareholders convene for the first time after the failed merger with U.S. peer NYSE Euronext (NYX).
“The current year has begun modestly due to the on-going lack of confidence among market participants,” Chief Executive Reto Francioni told the annual meeting. “This does not mean that we are losing sight of our growth targets.”
For 2012, Deutsche Boerse targets net revenue of EUR2.15 billion to EUR2.3 billion, equivalent to a rise of between 2.4% and 10% from the 2011 figure of EUR2.1 billion, which had been the highest level in the company’s history since 2008.

NASDAQ OMX Corporate Solutions Launches Integrated Platform for Media Monitoring and Sentiment Analysis Media Intelligence Integrates Critical Mention Broadcast
Monitoring Service to Provide Real-Time Blanket Coverage Across All Media

NEW YORK, May 15, 2012 (GLOBE NEWSWIRE) — NASDAQ OMX Corporate Solutions today announced the launch of Media Intelligence, an intuitive SaaS (software-as-a-service) platform providing real-time media monitoring and analysis across the entire media spectrum of print, online, broadcast and social media for public relations and investor relations professionals. Media Intelligence is part of NASDAQ OMX Corporate Solutions, a NASDAQ OMX technology software business dedicated to helping public and private companies minimize risk, maximize efficiency and increase transparency through leading PR, IR and governance products.

VIX Explodes To Three Month Highs (VXX, TVIX, VXX, VXZ, XIV)
Wall Street Sector Selector
VIX, the CBOE S&P 500 Options Volatility Index, also known as the “fear indicator,” blasted to multi-month highs today, climbing 9.95% to 21.87, now above its 50 day moving average and closing in on historical average levels. “20″ is widely considered the line in the sand between bull and bear markets, so sustained closing prices above today’s levels would point to the likelihood of higher VIX prices ahead.

Gold VIX Near 10-Month Low Amid Bets Against Stimulus: Options
2012-05-14 07:52:50.678 GMT
By Cecile Vannucci and Nikolaj Gammeltoft
May 14 (Bloomberg) — For all the concern the U.S. economic recovery is slowing, expectations for a rally in gold prices are 20 percent below the average level in the past year.
The Chicago Board Options Exchange Gold ETF Volatility Index, a gauge known as the Gold VIX that measures expected price swings for a security tracking the metal, is down 54 percent from its 2 1/2-year high on Sept. 28, data compiled by Bloomberg show. While the index climbed 13 percent to 18.46 last week, it remains 4.50 points from its one-year mean of 22.96. It averaged 30.79 in August and September as investors speculated the economy would contract.

Exchange Mergers on Hold for Now, NYSE CEO Niederauer Tells CNBC
Bloomberg By Whitney Kisling
Exchanges around the globe appear to be putting on hold plans to combine, NYSE Euronext Chief Executive Officer Duncan Niederauer, whose deal with Deutsche Boerse (DB1) AG failed this year, said in an interview with CNBC.
“I still think ultimately the destiny for this industry is to have fewer globally integrated exchanges,” he told CNBC today. “That all appears to be on hold for the time being.”
New York-based NYSE Euronext’s plan to merge with Deutsche Boerse of Frankfurt was blocked by European regulators in February on grounds that it would have created a “near monopoly” in European exchange-traded derivatives. The failure came after plans for mergers between Toronto and London, and Australia and Singapore also fell through.

Futures and options have stopped trading suddenly on NSE
Moneylife Personal Finance site and magazine
NSE said there was issue with order inflow, which is now resolved, but there are still some problems in order confirmation. Dealers do not confirm this.
The trading on National Stock Exchange seems to be facing critical technical issues. According to brokers, they are unable to do any trading in futures. Trading in all futures products such as Nifty, Bank Nifty, CNX IT, newly-launched FTSE etc are frozen since 1.36pm. Traders are unable to place execution orders in NSE F&O segment.

ISE Elects New Member to Board of Directors
NEW YORK, May 11, 2012 – The International Securities Exchange (ISE) today announced that Sylvain Mirochnikoff was elected by the Board of Directors for a one-year term to fill a vacancy. Mr. Mirochnikoff, who is Managing Director of the Institutional Equity Division for Morgan Stanley, will serve as an industry director representing ISE’s Primary Market Makers (PMMs). In addition, Michael Juneman, a Managing Director at Citadel Derivatives Group LLC, was re-elected as the other PMM representative on ISE’s Board. Timothy Brennan, the Head of Automated Market Making at Ronin Capital, was re-elected to ISE’s Board as a Competitive Market Maker (CMM) representative, and Joseph Sellito, Chief Executive Officer of Global Execution Brokers, an affiliate of Susquehanna International Group (SIG), was re-elected as representative of ISE’s Electronic Access Members (EAMs).

Hong Kong Exchanges Puts Rising Fastest in 14 Months: Options
By Jonathan Burgos and Kana Nishizawa, Bloomberg — Options dealers are charging the most in 14 months for bearish contracts on Hong Kong Exchanges & Clearing Ltd., concerned its bid for the London Metal Exchange may succeed and falling profits will drive down the shares. Puts protecting against a 10 percent decline in Asia’s largest exchange operator cost 1.01 times more than calls betting on a 10 percent gain, according to data on three-month options compiled by Bloomberg. The price relationship known as skew has jumped 5.7 percent since its one-year low on April 19.
The shares have lost 5.6 percent this year.

Closing Bell Rings For Exchange’s Name
Storied Stock Exchange Will Be Known as the NYSE MKT
The name of the American Stock Exchange, once among the most prominent stock markets in the world, is going the way of ticker tape. NYSE Euronext, NYX +0.55% which bought the trading venue in 2008, said Thursday it will change the name to NYSE MKT from NYSE Amex. For the first time in decades, daily stock tables in The Wall Street Journal and elsewhere will no longer list shares under an Amex moniker…The exchange’s business of listing companies has struggled with declining market share since peaking decades ago. It became better-known as an options-trading venue and is currently the No. 4 equity-options exchange by market share. That business was a key draw when NYSE Euronext acquired Amex for $260 million. NYSE Amex Options will continue to operate under that name.

Phillip CFD Launches AMEX Market
Phillip Securities Pte Ltd, one of Singapore’s largest brokers, is proud to extend its number of markets by providing Contracts For Difference (CFD) trading opportunities in the American Stock Exchange
(AMEX). With this additional market, Phillip CFD clients will now have access to the third largest options marketplace, which is also the leader in providing Exchange Traded Fund (ETF), closed-end funds, structured products and small and micro capitalization stocks.

US Recovery ‘Ahead of Schedule’: Larry Summers
The U.S. economic recovery was “ahead of schedule,” even as insufficient consumer demand continues to pose a risk, former Treasury Secretary Larry Summers said Thursday.
Summers noted that the CBOE Volatility Index, widely considered one of the best gauges of fear in the market, was below normal from a historical standpoint — “and that it has fallen by more than two-thirds since the president came into office — hardly consistent with the kinds of arguments that a number of the critics are making.”

Chicago Bd Options Exch, Inc v Int’l Secs Exch, LLC
“Where the specification makes clear that the invention does not include a particular feature, that feature is deemed to be outside the reach of the claims of the patent, even though the language of the claims, read without reference to the specification, might be considered broad enough to encompass the feature in question.”
On May 7, 2012, in Chicago Bd. Options Exch., Inc. v. Int’l Secs. Exch., LLC (Rader, Wallach, Fogel) affirmed-in-part, reversed-in-part, vacated-in-part and remanded the district court’s summary judgment that CBOE did not infringe U.S. Patent No. 6,618,707, which related to an automated exchange for the trading of options contracts that allocates trades among market professionals and that assures liquidity.

— CBOE vs. ISE re a patent for an automated trading system. See lead stories in the May 7th options blog: http://jlne.ws/LxYW0G

CME Group Announces the Launch of Short-Dated New Crop Options on Grain and Oilseed Futures
Press Release
CME Group, the world’s leading and most diverse derivatives marketplace, today announced the launch of Short-Dated New Crop Options on CBOT Corn and Soybeans futures to begin trading Monday, June 4. Short-Dated New Crop Options on CBOT Wheat futures will be listed for trading beginning Tuesday, September 4. These contracts are listed with, and subject to, the rules and regulations of CBOT.
“An increasing number of our producer customers use options to manage risk during the growing season,” said Tim Andriesen, Managing Director, Agricultural Commodities and Alternative Investments, CME Group.

Nasdaq Details Plan To Strike Back At ‘Dark’ Trading
–Nasdaq OMX crafting new trading functions aimed at retail, institutions
–Plans represent efforts to claw business back from “dark pool” venues
–High-frequency trading becoming less significant on Nasdaq markets
(Updates with comments from Nasdaq OMX executive, details on planned trading strategies, background on U.S. stock market.)
Nasdaq OMX Group Inc. (NDAQ) is planning a range of new stock-trading services designed to strike back at private trading platforms like “dark pools,” escalating the competition for stock orders of retail-level traders and institutional investors. The New York exchange group in the coming months will roll out new strategies for buying and selling large chunks of stock and introduce split-second electronic auctions geared to improve the prices that individual investors receive on their stock trades, senior executives said Thursday. The moves are geared toward recapturing share-trading business lost to banks and trading firms that run private stock markets that in many cases have become the first stop for orders of mutual funds and retail brokerage firms seeking to minimize the cost of doing business in the U.S. stock market.

VIX and More: Looks Like Apple VIX (VXAPL) Futures Are Coming Soon
In case anyone missed it, I wanted to highlight a report yesterday from Reuters which quoted Edward Tilly, President of CBOE Holdings, as saying that not only is the VIX product line ripe for expansion, but:
“We have benchmarks on a number of other products. I would point out one that is a favorite of mine that I wouldn’t be surprised if I saw us launch in the near future – futures on Apple VIX.”
The Apple VIX (VXAPL) was launched in January 2011 along with similar single stock volatility indices for the following:
Amazon (AMZN): volatility ticker: VXAZN
Google (GOOG): volatility ticker: VXGOG
Goldman Sachs (GS): volatility ticker: VXGS
IBM (IBM): volatility ticker: VXIBM
A successful launch of futures on VXAPL might open the door for futures on one or more of the other single stock volatility indices above. The chart below, courtesy of Livevol (StockCharts.com, you really should have VXAPL in your database) shows that VXAPL has tended to remain in the mid-30s, but has ranged between the high teens to the high 50s in the first 17 months of its life.


CFTC drops 85% exchange-trading limit
Final rule scraps controversial requirement that 85% of any contract must trade on exchanges
A controversial Commodity Futures Trading Commission (CFTC) rule, which would have forced US over-the-counter market participants to trade an overwhelming majority of futures and options on derivatives exchanges, has been dropped from final rules for designated contract markets (DCMs).

Dimon’s $2 Billion Bet Proves the Volcker Rule
By Phil Albinus, Advanced Trading
As Wall Street firms were making a case against Dodd-Frank and The Volcker Rule, JPMorgan loses big on a prop trading bet that blew up in their face.
Jamie Dimon just handed regulators and legislators one more reason to continue with the Volcker Rule. And it only cost him $2 billion. The CEO of JPMorgan Chase had to call in a bet from one of his top traders – known as the London Whale – for a spectacular bet on credit default swap indexes that went terribly wrong. Not only is the current loss $2 billion but there could be further fallout of $1 billion if, as one commentator says, “the market does not cooperate.”


NYSE Beefs Up Electronic Systems For Facebook Debut
NYSE Euronext (NYX) said its Arca electronic exchange unit will devote special resources to handle demand for Facebook Inc. shares in the social network’s public-market debut Friday. The company said Arca will dedicate a trade-matching engine–the software that matches stock bids and offers–to support the keenly-awaited flotation. The move comes as U.S. stock exchanges brace for a flood of investors seeking to trade in Facebook following its initial public offering, with some traders anticipating as many as 600 million shares in the company changing hands Friday.

Pipeline Trading Ceases Operations; Top Executive Biancamano Steps Down
John D’Antona Jr., Traders Magazine Online News
Troubled brokerage Pipeline Trading, which recently rebranded itself as Aritas Group, is selling its key technology assets and has stopped accepting orders, sources close to the company tell Traders Magazine. As a result, Aritas Group’s executive chairman, Jay Biancamano, will be joining software vendor Portware. This coincides with Portware’
s announcement yesterday that it has agreed to buy key Aritas technology assets.
Biancamano will serve in Portware’s business and product development group. He is expected to join the firm, along with 20 other Aritas staff, by the end of the second quarter.

Orc provides low-latency market connectivity to Indian exchanges
Orc, a leading provider of technology and services for the global financial industry, today announced new market gateways to the Bombay Stock Exchange (BSE) and National Stock Exchange of India Ltd. (NSE).
With India’s two major stock exchanges now supported via Orc’s trading technology, both domestic and international trading houses will be able to leverage Orc’s leading solutions to trade on both NSE and BSE from a single user interface. Orc is registered as a Foreign ISV with the NSE and is an Empanelled Vendor of the BSE.


Why You May Want to Wait Before Trading Facebook Stock
By Jeff McAllister, VP of Education, OptionsANIMAL
When an IPO creates as much excitement and fanfare as Facebook (NASDAQ ticker symbol: FB), it’s tempting to jump right in and buy the stock. But, if you are an option trader, you’re going to have to wait.
It seems that every news channel, blog, or investment program mentions the Facebook IPO at least once every 30 minutes. The IPO is now expecting to price between $34 and $38 per share and is going to be a volatile one. I suspect that the trading range for opening day will be significant.

Time to Prepare for Fear?
By STEVEN M. SEARS, Barrons.com
As Greek woes heat up again, options strategists are offering up some hedges for U.S. stocks.
The market’s fear gauge might be at a relatively subdued level. But many investors are starting to act as if the Chicago Board Options Exchange’s Volatility Index, otherwise known as the VIX, will soon be sharply higher. This subtle shift is evident in the increasingly defensive-related options positions that industry experts are suggesting to clients.
“At this point in the volatility cycle, we believe each new tremor is incrementally more likely to be the beginning of the next, inevitable shock,” Jim Strugger, MKM Partner’s derivatives strategist told clients Monday, sounding a warning echoed around Wall Street.

Currency Traders Head For Safety
By Jessica Mead, WSJ.com
LONDON—A reassuring Italian bond auction helped stem the euro’s slide Monday but currency traders remained wary of riskier bets such as the euro and the Australian dollar as the specter of a Greek euro-zone exit continued to haunt markets. The euro remained below $1.29 against the dollar and was also under pressure against the likes of the yen and the pound as fears about a Greek euro exit intensified. Poor euro-zone industrial output data for March and a soggy Spanish Treasury Bill auction also undermined the common currency. In derivatives markets, foreign exchange options, which give holders the right but not the obligation to buy or sell a currency pairing at a set level in the future, showed investors demanding more downside protection for the euro.

What’s behind call selling in Royal Gold
Royal Gold is bouncing today, but one investor remains a seller. optionMONSTER’s tracking programs detected the purchase of 2,273 July 77.50 calls for $0.50 and the sale of an equal number of October 70 calls by $3.30. Volume was below open interest in July but not October, which suggests that an existing position was rolled from one strike to the other.

Asia Currency Options Least Bearish in Year on Yuan Risk
By Yumi Teso and Lilian Karunungan, Bloomberg
Options traders are the least bearish on Asian currencies versus the dollar in a year as confidence builds that China will avoid a so-called hard landing, helping lure funds as Europe’s debt crisis deepens.

What You Need to Preserve Your Profits
By Dan Caplinger, The Motley Fool
With stock markets having set multiyear highs just over a week ago, some anxious investors want to pursue ways to help them lock in their gains from the past three years. For many, certain strategies using options would potentially let them protect their gains while still giving them some upside exposure.
Unfortunately, many stocks traditionally haven’t worked well with options strategies unless you have tens of thousands of dollars invested in them. A recently announced plan to create some innovative new options products could open the door to mainstream investors being able to use these strategies much more effectively.

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