JLN Options: SEC Charges OptionsXpress In Naked Short Selling Scheme

Apr 16, 2012

Lead Stories

SEC Charges OptionsXpress In Naked Short Selling Scheme
WSJ.com
The Securities and Exchange Commission charged an online brokerage and clearing agency, as well as four of the firm’s officials and a customer, in an alleged naked short selling scheme. The SEC alleges that Chicago-based optionsXpress and its customer, Jonathan I. Feldman, repeatedly engaged in a series of sham “reset” transactions designed to give the illusion that the firm had bought certain securities. Naked short-selling is when an investor sells stock without having the borrowed shares to deliver to the buyer. Regulation SHO, a package of SEC rules aimed at cracking down on naked short selling, requires a trader to locate shares for borrowing before effecting short sales.
http://jlne.ws/IRBcCj

Bank Earnings Disappoint Bullish ETF Options Traders
Seeking Alpha
In anticipation of strong first-quarter bank earnings, options traders were taking on bullish positions in exchange traded funds that follow financial stocks. However, the financial sector ETF fell into the red Friday. On Thursday, financial sector stocks and ETFs were rising ahead of company earnings as options traders piled into calls – futures options associated with bets on potential share gains, reports Doris Frankel for Reuters. Call options are used to take bets on a rise in share prices and to hedge against short positions in the underlying security. The contracts allow an investor to purchase shares at a predescribed price up till the expiration of the contract.
http://jlne.ws/HIb1dM

What’s Next For Exchanges After Fizzled Merger Plans?
Advanced Trading
In an interview with Advanced Trading, Tabb Group analyst Adam Sussman spells out what’s next for the global exchange industry after their best-laid merger plans were halted by regulators across the world.
http://jlne.ws/HXfU68
After TVIX, Time To Fix ETF Creation Process, Rosenblatt Says
Barrons.com By Brendan Conway
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. To read Williams you’d think regulators should take a hard look at ending this time window between orders and actions. It might reduce the chance that well-informed traders get ahead of the pack. Recall we’re talking specifically about the VelocityShares Daily 2X VIX Short-Term ETN (TVIX), where new creation units were cut off by the investment bank in February.
http://jlne.ws/HOMcm8

Exchanges

Traders boycott CME Eurodollar options
Fri Apr 13, 2012
* Traders stay out of options on Eurodollar futures pit
* Boycott hurts volume in market
* Protest stems from large “block trades”
* CME says “block trades” are important tool
By Tom Polansek and Ann Saphir
CHICAGO, April 13 (Reuters) – Independent traders boycotted pit trading of CME Group’s options on Eurodollar futures on Friday in protest against large, privately negotiated trades that they say put them at a disadvantage.
The move shrank volume in the market until the floor traders ended their action in the afternoon.
http://jlne.ws/HMJjQS
CME Group to confer with angry traders
By David Roeder, Chicago Sun-Times
The financial pits in Chicago seldom are hotbeds of social activism, but several dozen traders walked away from their posts Friday to protest a policy of the Chicago Mercantile Exchange. The action by independent traders, known as locals, in the Eurodollar futures pit slowed business for part of the morning. It also prompted executives at CME Group Inc., owner of the Merc and the Chicago Board of Trade, to schedule a meeting Monday with some of the protesters. The walkout happened because of a large “block trade” in Eurodollar options the exchange approved Thursday. Block trades are privately negotiated deals governed by exchange rules and must to be reported to the market, but only after they are completed.
David Stein, a local who helped organize the walkout, said block trades smack of insider deals because the market doesn’t get to participate in them. “The exchange has to look at this, because right now [its] customers are not getting the best price,” Stein said.
http://jlne.ws/IHdpGb

National Stock Exchange Of India To Study Upcoming Listing Rules
WSJ.com
— NSE board has yet to see detailed regulations on listing of exchanges
— CEO says listing helps raise capital or get new technology
— CEO says NSE has superior technology
— CEO says merger with Bombay Stock Exchange is unlikely
By Vladimir Guevarra Of DOW JONES NEWSWIRES
LONDON (Dow Jones)–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,” Narain told Dow Jones Newswires.
Narain was speaking on the sidelines of the World Federation of Exchanges-International Options Market Association conference.
“Personally, I think listing has enormous merit if an exchange either needs to raise capital or get new technology which it would otherwise not be able to get–things of that sort. But if an exchange already has those, a listing is still attractive from the point of view of an exit, providing a more liquid entry and exit for other potential shareholders,” he said.
http://jlne.ws/HN9S9w

Regulation

SEC Brings Knife to HFT Gunfight
Former lawyers for the largest U.S. securities regulator say the agency is fighting a 21st century battle with 20th century capabilities.
By Justin Grant, Advanced Trading
There has been much talk in recent months about how U.S. regulators are stepping up their efforts to better regulate high-frequency trading. We’ve explored this story from a number of angles this year already, touching on everything from how a newer, bolder Securities and Exchange Commission is preparing to tackle the high-frequency marketplace, to what the global exchanges are doing to fend off abusive high-speed techniques.  http://jlne.ws/IgmFyH

FIA Special Alert: CFTC to Consider Final Entity Definition Rule on April 18
The Commodity Futures Trading Commission announced it will hold an open meeting on April 18 to consider two final rules:
* Final joint CFTC/Securities and Exchange Com
mission rule on further definition of “swap dealer,” “security-based swap participant,” major swap participant,” “major security-based swap participant,” and “eligible contract participant.”
* Final rule on commodity options.http://jlne.ws/HNfwGH

Strategy

How to Play Fears of a U.S. Stock Correction
By STEVEN M. SEARS, Barrons.com
Options activity suggests that many investors expect stocks to fall. Could it be a bullish sign?
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. And the widely-watched VIX, currently trading at a relatively sanguine 20, isn’t signaling the fear that it was last fall when it was in the high 40s.
http://jlne.ws/HIczEk
Merits of short puts vs. covered calls
Chris McKhann | optionmonster.com
PUT: SEE CHART GET CHAIN FIND STRATEGIES
The covered call is the most popular option trade by far, but there is an easier–and arguably better–way to get similar exposure. Selling calls against long stock holdings, known as a covered call or buy-write, is the most widely used option strategy. Many brokerage firms have tiered option-trading approval levels, with covered calls coming first.
http://jlne.ws/J3o1en

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