JLN Options: Nasdaq OMX To Transition Forex Options To Mirror Spot-Market Prices

Apr 17, 2012

LEAD STORIES

Nasdaq OMX To Transition Forex Options To Mirror Spot-Market Prices
Dow Jones Newswires
NEW YORK – Nasdaq OMX Group Inc. (NDAQ) is revamping the way it lists options on foreign currencies, a move that brings spot-market pricing onto a regulated exchange. PHLX Forex Options, pegged to launch June 18, will transition the pricing convention of existing foreign-exchange options listed on Nadaq’s PHLX options exchange to “strike” prices that mirror currency exchange rates. Previously, strike prices were based on a multiple of spot-market currency prices. Now, they will be simplified to more closely match the exchange rates traders are familiar with.
http://jlne.ws/Ijw5JL

SEC OptionsXpress Case Alleges Sham Trades Hid Illicit Shorting
By Joshua Gallu, Nina Mehta and Nikolaj Gammeltoft, Businessweek
Three years of discussions between regulators and OptionsXpress Inc. culminated in a lawsuit yesterday, when the U.S. Securities and Exchange Commission alleged the brokerage helped facilitate illicit short sales. The company, four executives and a customer violated SEC regulations with sham options trades from October 2008 to March 2010 designed to give the illusion of compliance with short-sale rules, the SEC said. Customers in the OptionsXpress trades accounted for an average of 48 percent of daily volume in one of the targets, Sears Holdings Corp. (SHLD) (SHLD), in January 2010.
http://jlne.ws/IYvmMW

After TVIX, Time To Fix ETF Creation Process, Rosenblatt Says
By Brendan Conway, Barrons.com
Would last month’s boom-and-bust in a leveraged Credit Suisse (CS) product have been more orderly with stricter rules over how new ETF and ETN shares are created? Rosenblatt Securities’ Steve Williams sure thinks it could have helped. He argues that the real TVIX lesson applies to the entire ETF industry and isn’t specific to ETNs, which have gotten considerable heat the last several weeks.
In a new client note, Williams says that there are “hours or days” in between when creation-and-redemption orders are made and their disclosure on data services like Bloomberg and Reuters. He considers the creation-and-redemption process to be far too opaque, a quality that invariably helps sophisticated traders and harms those who aren’t in the know.
http://jlne.ws/HOMcm8

CME Local Trader Walkout Signals Strains as Pit Trade Dies

By Matthew Leising April 16 (Bloomberg) — A boycott at CME Group Inc.’s eurodollar option pit last week shows the strains of earning a living in a market in which the people who shout out orders to buy and sell futures no longer own the exchange. 
Block trades performed April 12 were called unfair by local traders, who add liquidity by buying and selling for their own accounts. Prices for the privately negotiated transactions were higher than offers in the pit, which wouldn’t be allowed in open-outcry trading, said Rocco Chierici, a broker at R.J. O’Brien & Associates on the floor of the Chicago Mercantile Exchange.
http://jlne.ws/IUUaIb

EXCHANGES

National Stock Exchange of India to Study Upcoming Listing Rules
By Vladimir Guevarra of Dow Jones Newswires, The Wall Street Journal
The National Stock Exchange of India Ltd. will study upcoming rules that would lay down conditions for the listing of the country’s stock exchanges, NSE Chief Executive Ravi Narain said Monday.
“We will look at the detailed regulations, and our board will look at it. Our board hasn’t examined this at all so far…The board will examine the case for a listing as and when the detailed regulations come out,” Mr. Narain said.
Mr. Narain was speaking on the sidelines of the World Federation of Exchanges-International Options Market Association conference.
http://jlne.ws/J7XVGQ

Barclays Announces Closing of Three iPath Exchange-Traded Notes Offerings
Press Release, The Wall Street Journal
Barclays Bank PLC (“Barclays”) announced that it has issued C$250,000,000 principal amount of three series of iPath Exchange-Traded Notes (“iPath ETNs”), each with a maturity date of April 16, 2042. The following are the new iPath ETNs and their exchange tickers:
1. iPath(R) S&P 500 VIX Short-Term Futures(TM) CAD Hedged ETN (VIX)
2. iPath(R) S&P 500 Dynamic VIX CAD Hedged ETN (DVX)
3. iPath(R) Pure Beta Crude Oil CAD Hedged ETN (PBO)
The iPath ETNs will be listed and posted for trading on the Toronto Stock Exchange commencing at the open of trading today.
http://jlne.ws/HNtSsR

Vix products are not for rational investors
By John Dizard in the Financial Times April 15
Panic was quite different to fear, he was discovering. Panic was moral and nervous collapse, a waste of precious energy, whereas fear was all sinew and instinct: an animal that stood up on its hind legs and filled you completely, that took control of your brain and your muscles. — The Fear Index, Robert Harris, 2011
The odds against gamblers in Las Vegas casinos are well known. Those against Vix investors, though similar, are not.
If the public behaved rationally, casinos would be out of business and there would be little if any trading in Vix (Chicago’s volatility index) futures and options. Yet supposedly sophisticated investors, who would laugh off the notion that you can beat the house playing slot machines, have turned the Vix products into one of the greatest marketing successes in the history of financial products.
http://jlne.ws/HPYEly
…and below, today’s response:

Think ‘earthquake insurance’ before buying Vix futures
by Mr Devesh Shah, Financial Times
Sir, I was glad to read John Dizard’s thoughtful article on the Vix volatility index (“Vix products are not for rational investors”, FTfm, April 16). As a co-inventor of the new Vix index, patent pending, and someone who started the Vix trading business at Goldman Sachs in 2004, I am both pleased and disappointed with the growth of the Vix products. My disappointment mirrors John Dizard’s observations and he has them well documented. My biggest disappointment is the Vix product suite being misunderstood by most of its buyers. Those who depend on Vix futures hedging day to day equity portfolio risks are missing the bigger picture and may be much better off buying puts on equities or equity indices.
http://jlne.ws/IU5kz5

OPTIONS ON FUTURES

CME stands ground after Eurodollar options protest
By Tom Polansek, Reuters
CME Group is standing its ground on large, privately negotiated trades in the active Eurodollar options market after meeting on Monday with traders who protested against its rules, traders said.
CME executives, including Phupinder Gill, the company’s next CEO, met with floor traders who boycotted the options on Eurodollar futures pit on Friday morning, depressing volume, said David Stein, a trader who attended the meeting.
“The exchange is not interested in changing anything,” Stein said.
http://jlne.ws/IzSVK7

More Traders Sound Off About The CME Walk Out, And They Have A Brutal Message For
The Protesters

by Julia La Roche, Business Insider
A bunch of CME Group independent floor traders, commonly referred to as “locals,” made a splash Friday after staging a walkout boycotting pit-trading options of Eurodollar futures — the most actively traded interest rate product at the exchange.  The protest followed a controversial trade the previous day known was a “block trade” — a privately negotiated order/trade that’s performed off site, but cleared by the exchange and then posted on the CME’s website minutes later.
http://jlne.ws/IUUgj0

Oil Options Volatility Little Changed as Futures Hold
By Barbara Powell, Bloomberg
Oil options volatility was little changed as the underlying futures settled 10 cents higher after fluctuating for much of the day.
Implied volatility for at-the-money options expiring in June, a measure of expected price swings in futures and a gauge of options prices, was 27.1 as of 3:30 p.m. on the New York Mercantile Exchange, up from 26.8 percent on April 13.
“We’re kind of range bound again and we’re not seeing much movement,” said Fred Rigolini, vice president of Paramount Options Inc. in New York.
http://jlne.ws/HKBhUN

TECHNOLOGY

OptionsCity adds powerful trading solutions from Knight 
Press Release
Chicago, April 17, 2012 – OptionsCity Software, a leading provider of electronic trading solutions, has added Knight’s automated trading services and algorithms for equities into both its Metro and Freeway platforms.
“We are pleased to have expanded the execution capabilities provided by Knight Direct into our trading platforms” said Chris Herndon, Sales Director of OptionsCity. “This integration allows OptionsCity to provide traders with access to additional markets and opportunities.”
http://jlne.ws/HRrp1x

STRATEGY

How to Play Fears of a U.S. Stock Correction
Options activity suggests that many investors expect stocks to fall. Could it be a bullish sign?
by Steven M. Sears, Barron’s
Investor fear about U.S. stock market correction has gotten quite high relative to the fear about stocks on many other major country exchanges.
This fact is known because of something called “skew,” which is invisible to most people, even though it is a critical piece of financial information.
To be sure, most investors look at the Chicago Board Options Exchange Volatility Index (VIX), rather than skew, to get a quick gauge of how fearful or complacent investors have become.
http://jlne.ws/HIczEk

Options Trading In A Sideways Market

by Jim Fink, Seeking Alpha
Stocks are down so far in April. After jumping to a four-year high on the first trading day of the month, the S&P 500 dropped a cumulative 4.3 percent – its worst multi-day decline since November 2011 – after suffering losses for five consecutive days culminating in Tuesday’s worst one-day loss of 2012. The trigger was three-fold: (1) the Federal Reserve’s March meeting minutes showed only “a couple” of the Fed’s 10 voting members in favor of further quantitative easing compared to “a few” in the January meeting minutes; (2) weak bond auctions in Spain and Italy (i.e., higher interest rates) raising fears of a resumed Euro debt crisis; and (3) a weak March U.S. employment report combined with a voting Atlanta bank president member of the Federal Open Market Committee stating that the report wasn’t weak enough to justify QE3.
http://jlne.ws/JbkrBK

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