Observations & Insight

CBOE Celebrates Exit of Long-tenured Employees at Chicago Gala
By John J. Lothian

The CBOE held a gala event at the Aon Grand Ballroom at Navy Pier in Chicago last night to celebrate the long and successful careers of several key employees whose tenure dated back to the nascent years of the exchange.

Among those honored were Ed Provost, Philip Slocum, Thomas Knorring, Gerald O’Connell, Thomas Brady, Debra Peters and former chairman and CEO Bill Brodsky. Over 200 years of experience in the world’s first and leading options exchange will retire or move on with the CBOE closed the deal with BATS.

The event was attended by key industry veterans with roots in the CBOE story and in Bill Brodsky’s personal story, including colleagues of Brodsky’s from the AMEX where he started his exchange career.

Fellow industry legends Leo Melamed and Jack Sandner, who hired Brodsky at the CME and brought him to Chicago, were in attendance. There were too many key players in the story to list, but Brodsky did his best in comments to the audience.

Brodsky was honored after dinner with video congratulations from Illinois Governor Bruce Rauner, Chicago Mayor Rahm Emanuel, Senator Dick Durbin and former Vice President Joe Biden, Brodsky’s law school friend from Syracuse who lost an election to Brodsky for student body president of the Syracuse Law School.

The CBOE unveiled an oil painting of Brodsky that will hang in the CBOE boardroom, in honor of his service to the exchange.

The CBOE staff pulled off an incredible event worthy of those they honored. They are to be commended.

****SD: Steve Sears has a story for Barron’s about the event, too. Check out our videos about Brodsky’s and Ed Provost’s careers here and here.

Lead Stories

VIX Surge Is Unwelcome Lesson in Duplicity of Volatility Wagers
Oliver Renick – Bloomberg
It finally happened. After months of speculation over when the lull in U.S. equity volatility would snap, investors got their answer Wednesday. A bombshell report on President Donald Trump’s interactions with former FBI director James Comey sent the VIX up the most in almost a year. For anyone on the wrong end of the trade, it was a painful lesson.

****SD: An overdue lesson really.

The Volatility Buyer Known as ’50 Cent’ Just Had a Huge Payday
Luke Kawa – Bloomberg
He’s been patiently waiting for the VIX to explode, and now that it has, his calls will get rolled on. The mysterious volatility buyer or buyers dubbed “50 Cent” because of their propensity for buying large blocks of VIX call options priced at roughly a half-dollar each, had their best day of 2017 on Wednesday. The CBOE Volatility Index, commonly known as the VIX or fear index, surged by nearly five points on Wednesday to 15.59, its biggest jump since Sept. 9.

****SD: FT also has an update on “50,” which is supposedly the British investment firm Ruffer. I find “huge payday” misleading since they’ve already had so many millions of dollars of options expire worthless.

Don’t Fear The Fear Gauge
Steve Sears – Barron’s
By day’s end, the sum total of human knowledge will be lessened by an extraordinary number of reports that note the CBOE Volatility has surged as stock prices have declined. What will rarely be said is that VIX is designed to basically move in the opposite direction of the Standard & Poor’s 500 Index. So the key question is if the more than 30% rise in the fear gauge is meaningful, or not.

****SD: What else shouldn’t you fear? The reaper.

VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes
Matt Moran – VIX Views
[Yesterday] both the CBOE Volatility Index (VIX) and the CBOE VIX of VIX Index (VVIX) rose more than 45%. Some U.S. news developments that impacted the financial markets today concerned the former FBI director James Comey and former National Security Adviser Michael Flynn.

****SD: Recap of yesterday’s action in case you’ve been living in a cave (which honestly doesn’t sound like a bad idea…).

Be thankful for the return of volatility
James Saft – Reuters
Wednesday’s bout of equity market volatility may be a blessing in disguise for long-term investors. After a period of unprecedented calm in financial markets, equity market volatility as measured by the VIX index spiked 43 percent, reacting with distress over reports President Donald Trump may have tried to interfere with FBI investigations of his former national security adviser.

****SD: Also from Reuters – Trump turmoil could lead investors to reassess risk appetite

U.S. Shale In No Hurry To Hedge, Bet On Higher Oil Prices
Seeking Alpha
U.S. shale oil drillers have tactically used hedging to survive during the current oil crisis. Along with the technological advances, hedging has been one of the reasons for the survival of the shale oil industry. However, the shale oil producers seem to have reduced their hedging activity. They are now buying fewer put options, which has resulted in reduced demand for put options. Therefore, the relative cost of put options is down to its lowest level since August.

****SD: Anybody else hear “Bakken Formation” and immediately think of something out of Star Wars?

Exchanges and Clearing

CBOE Holdings’ C2 Options Exchange Sets Daily Volume Record
CBOE Futures Exchange Logs Third – Busiest Day on Record; Bats’ BZX, EDGX Options Exchanges Post Second – Busiest Days Ever
CBOE Holdings, Inc. (BATS: CBOE | NASDAQ: CBOE) said Wednesday trading volume at the all-electronic C2 Options Exchange, Incorporated (C2) set a one-day trading record with reported trading volume of 966,604 contracts, surpassing a previous single-day record of 825,299 contracts set on November 9, 2016.

Craig Donohue interview with The Options Insider Radio (AUDIO)
Options Insider
OCC and OIC have had a long-standing relationship with Mark Longo and The Options Insider Radio program. At the recent Options Industry Conference, OCC CEO Craig Donohue sat down with Mark Longo of The Options Insider for a nearly 40 minute conversation on a wide range of industry topics, resulting in the podcast below.

Regulators ask Deutsche Bank for Brexit trading rethink – source
John O’Donnell – Reuters
European supervisors want Deutsche Bank to prepare a fallback plan to lay out how it could shift the clearing of trades from London, one person with direct knowledge of the matter said, as the region seeks to guard itself against a possible hard Brexit.

****SD: Ruh roh!

BOX Options Exchange: New Chicago POP
At the end of July 2017, BOX Options Exchange (“BOX”) will offer a new point-of-presence site(“POP”) at the Equinix-CH1 data center in Chicago, IL.

****SD: Well, since the B stands for Boston, shouldn’t they go with “soda” in lieu of “pop”?

MOEX’s Q1 Financials See Profits Decline, Weighed Down by FX, Derivatives
Finance Magnates
Moscow Exchange (MOEX), Russia’s largest institutional trading venue, has reported its Q1 2017 report, which detailed its operating figures and financial results. The biggest change this quarter was a dive in its derivatives volumes, though its fees across multiple segments reported a wide change on a yearly basis.

****SD: In case you missed it earlier in the week, Reuters had an update on Russian options – Russian vol slumps as domestic selling dominates

Regulation & Enforcement

Exclusive: EU looks to build alternative to London for capital market – document
Huw Jones – Reuters
Brexit has forced the European Union to rethink its flagship capital markets union (CMU) project and urgently look for ways to create an alternative financial market to London, according to a draft EU document seen by Reuters on Wednesday.

Special Report: CFTC launches fintech hub
The Commodity Futures Trading Commission announced on May 17 that it will create “LabCFTC,” an initiative based in the CFTC’s New York office that will inform the CFTC’s understanding of new technologies and promote technological innovation in derivatives markets.


BNP Paribas injects $63m into trading communications platform
Hayley McDowell – The Trade
BNP Paribas has invested $63 million in a messaging and communications platform that has previously been backed by Goldman Sachs, Credit Suisse and Deutsche Bank. Symphony Communications Services will use the funds to move forward with expansion plans and drive growth in its current and new markets.

****SD: Cash is one type of injection that doesn’t scare me.

CME upgrades data and connectivity services with BSO
Hayley McDowell – The Trade
The Chicago Mercantile Exchange (CME) has expanded its global connectivity and data services through a partnership with BSO.


Pricing and hedging options with rollover parameters
Sol Kim – Risk.net
The simple trader rules dominate mathematically more sophisticated models.
The new rollover strategy, the next-to-next strategy, can decrease the pricing and hedging errors of all options pricing models compared to the nearest-to-next approach.
The “absolute smile” trader rule that assumes that the implied volatility follows a fixed function of the strike price has the advantage of simplicity and is the best model for pricing and hedging options.

Option Melting and Theta Decay Strategies: Swim Lessons
Scott Connor – The Ticker Tape
Options traders can potentially make money in the market when one of two things happens: when their long option goes up in value, or their short option goes down in value. If their option moves in the opposite direction, then they lose money. The same is true of spreads, which are made up of more than one leg, but one must look at the net value of the trade.

Critical Question for Stocks Is How Much Trump Bump Baked In
Lu Wang – Bloomberg
The U.S. stock market’s almost unblemished record of not caring about anything is getting its stiffest test yet, and whether the streak is preserved will say a lot about what’s been driving it.

Why long volatility is such a painful trade
Peter Garnry – TradingFloor
Volatility is the new hottest trading instrument with many participants across both professional and retail investors. The VXX ETF (long front-end volatility), in fact, is one of the most traded instruments among retail investors. But how does volatility work?

****SD: In case you want a refresher on term structure.

VIX Index Is Back To Pre-Crisis Lows. Does It Matter For S&P 500 Index?
If you watch major business news channels, you may have recently heard that the last time the VIX fell to its current low coincided with the beginning of the Great Financial Crisis of 2007-2008 began. It’s a sensational story line.

****SD: Cool chart of TV news mentions of the VIX jumping over the past month.

These are the 15 stocks Wall Street is most afraid of
Ryan Vlastelica – MarketWatch
Fear has been in short supply on Wall Street lately, but that doesn’t mean that investors are seen smooth sailing across the market. According to a Goldman Sachs analysis of the options market, there are 15 names “where fear is elevated,” based on their recent activity in the options market, which indicates “a high degree of downside risk in the next 12 months,” as measured by their skew and expected volatility over the next year.


Diversity in the C-Suite: Leaders Championing Change
Jessica Titlebaum Darmoni – The Glasshammer
On April 25, the Executive’s Club of Chicago hosted a discussion between Craig Donohue, Executive Chairman and CEO of Options Clearing Corporation, Aylwin Lewis, Chairman, President and CEO of Potbelly Sandwiches Works and Carter Murray, Worldwide CEO of FCB. Moderated by Nichole Barnes Marshall, Global Head of Diversity & Inclusion at AON, the conversation focused on how these leaders have addressed and implemented successful diversity and inclusion initiatives within their organizations.

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