Observations & Insight

Bits & Pieces
By John J. Lothian

Four JLN team members are out in sunny Arizona for the Options Industry Conference, which gets underway officially today.

Jim Kharouf, Spencer Doar, Jeff Bergstrom and Patrick Lothian are covering the conference for JLN and will be conducting interviews, including with option exchange leaders.

Our coverage so far has included a two-part preview interview with OCC Executive Chairman and CEO Craig Donohue. They can be seen here and here

Across the pond, Patrick Thornton-Smith has left Duco and the City and has signed on as a non-executive director with Cult Wines Limited. I wish him well and advise him to stay away from the Jim Jones Wine.

Sometime later today MarketsWiki will go over the 100 million page view mark.

The story I wrote about Jim Oliff leaving the CME Group board has received over 600 views on LinkedIn, which is a huge number. I believe it is a reflection of the impact Jim had on the industry and how well liked he is.

Jim Kharouf and I will be in New York on May 22 and 23. We still have some meeting spots open, so let me know if you want to meet.

Last, registration for the MarketsWiki Education World of Opportunity series in New York and Chicago opens on June 1. You can see details about the series on www.marketswikieducation.com. We are still looking for more sponsors, so let me know if you are interested.


Bill Brodsky’s Pioneering Career: An Industry Innovator Looks Back


Bill Brodsky has been a fixture of the derivatives markets for the better part of 50 years — at the (then) American Stock Exchange, CME and CBOE. He recently stepped down from the CBOE after two decades as the CEO and then chairman of the exchange.

At each stop, Brodsky ushered in periods of change. He helped put AMEX on the options map in the ’70s; oversaw the launch of the electronic trading system Globex and of options on futures as CEO of the CME; and as CEO of the CBOE, took the exchange public and helped the birth of the VIX as a tradeable index (not to mention CBOE’s recent tie-up with Bats).

Brodsky was interested in markets from an early age, recalling how his father — himself involved in the securities business — would scan prices in the morning and evening editions of the newspaper. But his exposure to the ins and outs of trading truly started when he got a summer job on the floor of the NYSE. That summer job led to a series of other summer jobs that revolved around trading while he was in school. After getting a law degree, he joined his father’s investment banking firm. His association with options, in those days considered the backwaters of the derivatives industry, came about by chance.

In this JLN Video, Brodsky reflects on his storied career and the hurdles he overcame.

Watch the video »

Lead Stories

Two Sigma Agrees to Buy Interactive Brokers’ Options Market-Making Arm; Deal comes after Interactive Brokers announced in March its exit from the options market-making business
By Gunjan Banerji and Alexander Osipovich – The Wall Street Journal
Two Sigma Securities agreed to buy the U.S. options market-making business of Interactive Brokers Group Inc., called Timber Hill, the latest in a string of industry deals.
After adding Timber Hill’s business, Two Sigma Securities will trade more than 300 million shares and 1 million options contracts each day, according to a statement from Two Sigma Securities late Tuesday.

****SD: Bloomberg has a story on the deal here.

Markets Are Doing Nothing, and Investors Have Nowhere to Hide
by Dani Burger and Liz McCormick – Bloomberg
Demand and prices fall for global equity and currency hedges; Stock replacements, euro options among protection ideas
It doesn’t pay to worry about the unprecedented market calm.
As U.S. stocks trade at fresh highs and volatility across assets is so subdued it’s touching near-record lows, hedging seems like a luxury. It’s getting harder to justify coughing up money for cheap protection that ends up seeming overpriced in the face of rare, and quickly reversing, selloffs.

It’s not just the VIX – low volatility is everywhere
By Jamie McGeever and Vikram Subhedar – Reuters
The current slump in expectations of market volatility is not just a stock market phenomenon — it is the lowest it’s been for years across fixed income, currency and commodity markets around the world.
It shows little sign of reversing, which means market players are essentially not expecting much in the way of shocks or sharp movements any time soon. It’s an environment in which asset prices can continue rising and bond spreads narrow further.
The improving global economy, robust corporate profitability, ample central bank stimulus even as U.S. interest rates are rising, and some fading political risk from elections have all contributed to create a backdrop of relative calm.

Fragmentation Vexes Options Market Makers
There’s more going on in the options market than meets the eye.
If one measured the activity in the options market in terms of volume, then it would seem the equity derivative markets is quiet and poised for little to no volume growth this year. But this is simply not the case when one looks past volume and focuses on more structural changes, according to Jason Lichten, Director, Equity and Listed Derivatives Trading Strategies at Wolverine Execution Services. In a recent open call for Security Traders Association members, he said changes are occurring that bear scrutiny.

***SR: An important story, in case you missed it yesterday.

Hold On! The VIX Isn’t as Low as It Looks?!?!
As everyone hyperventilates about the ultra-low VIX, one strategist points out that the so-called fear gauge isn’t quite as low as it looks.
By Ben Levisohn – Barron’s
Yesterday, the VIX fell to its lowest level since 1993–except for one problem: It didn’t actually.
See, back in 2014, the CBOE changed the rules for the VIX index by including weekly options in the mix, says MKM Partners’ Jim Strugger, so today’s VIX is not quite the same as the one everyone was looking at just a few years ago. Strugger explains:

Exchanges and Clearing

Bats Acquisition Expenses Sink CBOE Earnings in Q1 2017
Aziz Abdel-Qader – Finance Magnates
The Chicago Board Options Exchange Holdings (NASDAQ: CBOE), the operator of the largest US options marketplace, has released its financial metrics for the first quarter ending March 31, 2017, which are now reported on a consolidated basis to include the business of its newly-acquired Bats Global Markets Inc.

CBOE VIX Near Multi-Decade Low as Stocks Hover Near Record
By Sam Bourgi – Economic Calendar
A measure of implied volatility known as the CBOE VIX is trading near multi-decade lows, as Wall Street’s favorite fear gauge continues to show prevailing quiet in the market.
The Chicago Board Options Exchange (CBOE) Volatility Index closed at 9.96 on Tuesday, on a scale of 1-100 where readings below 20 are generally associated with complacency in the market. The index closed at 9.77 on Monday, its lowest since 1993.

Regulation & Enforcement

Ex-SEC Accountant Settles Claims of Illicit Options Trading at Work; David Humphrey agrees to pay $108,600, pleads guilty to making false statements to conceal trading
By Dave Michaels – WSJ
A former staff accountant at the Securities and Exchange Commission agreed to pay $108,600 to settle claims that he made more than 100 illicit options trades while working for the regulator and then lied to investigators about his activity.


Desperate For Performance, Portfolio Managers Stop Hedging
The Frugal Prof
Thesis: With the VIX at historic lows, I analyze what is preventing institutions from hedging. Recency bias and the fear of continued underperformance make it too risky for managers to hedge portfolios. Ironically, the cost of hedging has never been lower, but portfolio managers can no longer afford it.

Half the Market
Modern IR
I’ve seen at least four Wall Street Journal stories in May alone about a quiescent VIX.
The CBOE’s volatility index derived from options pricing on the S&P 500 hit a low Monday last seen in Dec 1993, the WSJ said (subscription required). It moved lower still yesterday, 9.58 intraday.
Implicit in the storyline is a bull market, since one roared from 1993 to the bursting of the dot-com bubble. But the conclusion violates the Law of Small Numbers, the human propensity to assign undue value to insignificant data sets. As proof, the VIX was a hair’s breadth from record low in Jan 2007.

Low volatility means ‘historic opportunities’ to buy options, Goldman says
Ryan Vlastelica – MarketWatch
The multidecade lows in U.S. stock market volatility may mean a dull trading environment for short-term market participants, but it has also “created historic opportunities to buy options,” according to Goldman Sachs.
Daily moves have been slight lately, with one market expert dubbing recent activity the “most boring six days in 23 years.” The CBOE Volatility index VIX, -0.80% on Monday closed at its lowest level in more than 23 years, while one-month implied volatility for the S&P 500 recently hit 8% — its lowest level on record, going back to 1988.


Opinion: Conventional wisdom about the VIX ‘fear gauge’ is all wrong
It turns out that stocks don’t suffer if there’s low volatility
By Mark Hulbert, Columnist
CHAPEL HILL, N.C. (MarketWatch) — You’re needlessly worrying if you’re concerned that the VIX’s recent low readings are a cause for concern.
That’s crucial, since the recent drop in the VIX VIX, +0.30% — known as the fear gauge — to multi-decade lows has led to endless hand wringing about the allegedly bearish omen it constitutes for investors. All I can figure is that analysts and commentators have watched too many Westerns in which the cowboy frets when his campsite is “quiet — too quiet.”

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