Lead Stories
OptionsXpress Benefits from Complex Orders

Peter Chapman, Traders Magazine Online News, January 27, 2012
The options industry recorded double digit growth last year, and at least one broker credited the use of sophisticated strategies for its good fortune.
OptionsXpress, bought by Charles Schwab & Co. in September, saw the number of options trades done by its 400,000 customers jump by 10 percent last year. Multi-leg strategies that establish directionally neutral positions increased in popularity, while those that are bullish or bearish saw less use.
“We have seen an increase in the use of more advanced strategies,” Nina Milovac, the director of OptionsXpress’ educational efforts, said at a recent industry conference. “The biggest increase was in the butterfly strategy.”
The retail broker handled 27 percent more butterfly trades in 2011 versus 2010, Milovac said. The spread trade is constructed with four options-either all calls or all puts. Two options are bought. Two are sold. A directionally neutral position is achieved. Overall, OptionsXpress’ highly active customers boosted their use of spread trades by 18 percent over the previous year. Spreads include butterflys, condors, diagonals, verticals, ratios, boxes, calendars, and others.
http://jlne.ws/ygHVgr *OptionsXpress is not the only entity affected by this increase in complex strategies. JLN Options has upcoming interviews with Steven Crutchfield, CEO of NYSE Amex Options, and John Goode, CIO of BOX, on the need for Complex Order Books to handle these trades.
Regulators Eye Exchange Technology
By JACOB BUNGE, WSJ.com
The technology used by U.S. stock exchanges faces tougher scrutiny from regulators following several high-profile breakdowns over the past year that snarled trading, according to people familiar with the matter. The Securities and Exchange Commission is drawing new standards for trading systems that would give the agency more powers to step in when problems occur. The vulnerability of U.S. stock trading to problems in increasingly interdependent electronic systems was highlighted by the May 2010 “flash crash,” which sharpened the SEC’s focus on technology.
The May 2010 ‘flash crash’—as seen from the floor of the Big Board—pushed regulators to propose new powers to address trading problems.
Exchanges run by Nasdaq OMX Group Inc. and Direct Edge Holdings suffered big technology glitches over the past year that forced them to make up millions of dollars in losses to customers. Minor problems, such as a server outage that affected trading data for some stocks on the New York Stock Exchange this week, are more common.
http://jlne.ws/w4Ud2I VIX – Options Volatility Sonar: Thursday Recap
Seeking Alpha
Thursday followed up the amazing day we had on Wednesday with S&P futures trading higher on the backs of a great report out of Caterpillar (CAT). Caterpillar beat the street by a mile and raised its revenue outlook for 2012 now expecting revenue of 68 to 72 billion and expects to earn around 9.25 per share. Other companies beating expectations were Bristol-Meyers (BMY), Time Warner (TWX), and 3M (MMM). Once again it appears the long volatility trade was wrong again as The CBOE Volatility Index (VIX) continued its march toward 17. Then the rally began to fade with the VIX perking up but VIX futures were actually down as depicted below.
http://jlne.ws/yt3qyp
 
U.S. Stock Options With Biggest Changes in Implied Volatility
By Bloomberg News – Jan 27, 2012
The following are the U.S. stock options that had the biggest percentage changes in implied volatility from the previous trading day as of 11:30 a.m. in New York. This {OSCH } search was limited to options that are more than 10 days from expiration, have trading volume of at least 200 contracts and have strike prices within 5 percent of the underlying security’s price.
http://jlne.ws/yZ0Jvh

Exchanges

NYSE Chief Sees Other Options Should Deutsche Boerse Deal Fail
Businessweek
January 27, 2012
By Nandini Sukumar and Erik Schatzker
Jan. 27 (Bloomberg) — NYSE Euronext, awaiting a final decision from the European Union on its merger with Deutsche Boerse AG, has other acquisition opportunities, Chief Executive Officers Duncan Niederauer said today.  There are “lots of assets that are available,” Niederauer said in an interview with Bloomberg Television in Davos, Switzerland. “Everyone will take a look at LME, LCH is an important asset,” he said, declining to comment on whether NYSE would make an offer.
http://jlne.ws/AhqD6W
 Northwestern Memorial names Bernick, Brodsky to board posts
Crain’s Chicago Business
By: Kristen Schorsch and Thomas A. Corfman January 26, 2012
(Crain’s) — Former Alberto Culver Co. executive Carol Bernick and Chicago Board Options Exchange CEO William Brodsky have been picked for top board posts at Northwestern Memorial HealthCare.
Ms. Bernick has been named chairman of the Chicago-based health system’s board. She was executive chairman of the Melrose Park-based cosmetics company until she sold it for $3.7 billion in May 2011 to Unilever PLC.
Meanwhile, Mr. Brodsky has been named chairman of the board of the flagship Streeterville hospital.
http://jlne.ws/wKFvRs Wall Street’s Sexiest Model
Emily Lambert, Forbes
Apologies to anyone who clicked on this story expecting to read about Christie Turlington or the latest Heidi Klum-Seal split news. But this is about Wall Street’s sexiest models – we’re talking about math.
The last few years have given us plenty of reasons to hate financial models. Models that promised to increase efficiency and manage risk became substitutes for common sense and justifications for greed. The real estate bubble was of course justified by them.
Yet people at hedge funds and trading firms, using models to mint money, remain passionate believers. Another supporter is George Szpiro, a mathematician turned writer who recently released a book called Pricing The Future, about the history of the Black-Scholes equation, the most famous model in finance and the one that launched this quantitative revolution (plus the Chicago Board Options Exchange). Szpiro, interviewed from his home in Jerusalem, explains why he still trusts models but why we should keep a close eye on the people who use them:
http://jlne.ws/zANGkT * Yeah, it’s about the Black-Scholes model. But the funniest thing in this article is that there is an actual link to the Heidi Klum-Seal split news.

Technology

Liquidity Centers Are Big Business
By Greg MacSweeney, Wall Street & Technology
Exchanges are the latest participants to jump into the data center colocation game as the appetite for hosted services shows no letdown.
Truth be told, data centers aren’t all that exciting. The server rooms largely are nondescript, dimly lit, extremely utilitarian and cold — both literally and aesthetically. But the technology inside the buildings is another story. The technology continues to evolve at blinding speeds, with stages of technological innovation often visible inside a single facility. Newer data centers are huge — typically 200,000 square feet or more — and they often roll out in phases, which makes it possible to witness improvement from Phase 1 development to Phase 3 development.
In Equinix’s facility in Secaucus, N.J., for instance, the cooling vents in the first phase were located close to the ceiling. In subsequent phases, the vents were lowered just above the server cabinets to blast cool air directly into the racks. While the change may not seem like a huge technological advancement, it increases cooling efficiency, something that is extremely important in an operation where cooling and power comprise the No. 1 cost.
http://jlne.ws/xOND0e

Strategy

Hedging against disaster even as markets grow calm
By Gertrude Chavez-Dreyfuss,Reuters
NEW YORK | Fri Jan 27, 2012
Don’t be deceived by the U.S. stock market’s rousing start this year or the new-found stability of the euro.
After months of seizing on every incremental development in Europe as a reason to buy or sell, markets have started 2012 on a firm footing. The S&P stock index is up 4.8 percent so far this year and the euro has rebounded from recent declines on hopes the euro zone will survive a likely default by Greece.
But fund managers betting on economic armageddon say the worst is far from over as they eye the negotiations to restructure Greece’s debt warily. While well-worn measures of volatility such as the CBOE Volatility Index show relative calm, indexes that track bets on extreme outcomes are rising. It’s why “tail risk” investing – pursued by funds that bet on steep, unexpected drops in asset values – is still attracting investors eager to protect against unlikely outcomes such as a market crash. The recent decline in volatility has made these hedges cheaper.
http://jlne.ws/zG4eBV

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