CBOE Looks to Broaden Appeal of VIX Products Reply

Courtesy of Peter Chapman, Traders Magazine

CBOE Holdings, buoyed by the phenomenal success of options and futures contracts based on its Volatility Index, is ratcheting up its efforts to broaden their appeal.

“The volatility business is only eight years old, but we see terrific growth,” Ed Tilly, CBOE’s president and chief operating officer, told a gathering of reporters in New York recently. “We see hedge funds, prop trading firms, (commodity trading advisors), insurance companies and other institutional users migrating to the product. It’s very important for us.”

As part of its marketing, CBOE is emphasizing to money managers and traders the growth of liquidity in the instruments and the attractiveness of adding a volatility component to their portfolios.

The exchange operator also plans to provide European institutions with direct access to CBOE matching engines, 24 hours a day, 5 days a week.

The Volatility Index, or VIX, is a measure of the market’s expectation of stock market swings over the next 30 days, as determined by the performance of options on the Standard & Poor’s 500 Index. Trading in both contracts has soared in the past three years, with growth in the futures product especially dramatic.

Last year, average daily volume in VIX futures—traded at the CBOE Futures Exchange—reached 95,000 contracts, up from 5,000 in 2009. Average daily volume in VIX options—traded at the Chicago Board Options Exchange— reached 443,000 contracts, up from 132,000 in 2009. All this while overall options volume fell in 2012 and volatility itself was relatively muted.

Options Market Poised For Pick-Up; Institutional Managers Re-Focus Risk Strategies for 2013 Reply

The Outlook for 2013

Uncertainty around the elections, low volatility and anemic volumes in the equity markets drove the first year-over-year decline in options trading volume since 2002. But bright spots such as weekly and mini options portend a stronger 2013.

Despite the options market doldrums in 2012, TABB Group believes the volume retreat is a temporary phenomenon, especially when compared to trading activity in the “abnormal” market environment of 2011. The use of US-listed options by institutional investors remains in its infancy, and their adoption will only expand in the future. Latent demand from institutional investors that are just beginning to explore the role of equity options as a part of their portfolio strategies will drive volume in 2013 and beyond.

Weekly options will continue to expand their footprint in 2013 , and the pending March launch of mini options is also expected to drive volumes into 2013, especially from smaller retail accounts that have been largely absent from the options market in recent years. After initially launching for a handful of high-priced stocks, exchanges can be expected to quickly expand the list of names in the program. Trading interest from retail accounts will attract the interest of institutional accounts, especially accounts using relative value and quantitative strategies.

To read the full article from TABB Group, please click here

AdvisorShares Peritus High Yield ETF ($HYLD) Lists Options On CBOE; First High Yield Actively-Managed ETF with Listed Options Reply

AdvisorShares, a leading sponsor of 17 actively managed exchange-traded funds (ETFs), announced today that the AdvisorShares Peritus High Yield ETF (NYSE Arca: HYLD), the first high yield actively-managed ETF has met listing requirements of the Chicago Board Options Exchange® (CBOE®) and that HYLD options are now listed for trading on the CBOE.

ICE-NYSE Deal: Derivatives Exchange CEO Gets Icey Response From Some Sell-Side Stock Jocks Reply

Within the first several days since the  December 20 proposed merger announcement between NYSE Euronext and IntercontinentalExchange  (ICE), there has been no shortage of public responses, comments and of course, a lawsuit opposing the deal (filed last Friday by the New Jersey Carpenters Pension Fund).

For those following this deal, today’s WSJ column by Jason Bunge profiles the mindset of ICE CEO Jeffrey Sprecher, and it speaks volumes. It also raises concerns on the part of Wall Street’s biggest firms, who, along with exchanges, reap tens of millions of dollars in fees that more than a few consider to be wrought with conflict, and are necessarily loathe to put the genie back in the bottle.
Here are some poignant extracts from today’s WSJ piece:

The chief executive and chairman of IntercontinentalExchange Inc., which last week unveiled plans to buy NYSE Euronext NYX +0.32% for $8.2 billion, isn’t steeped in the business of equities trading. But he has plenty to say about it, including some views that challenge the prevailing wisdom and business models of many securities-trading firms.

The 57-year-old, who started IntercontinentalExchange 12 years ago after a career in the electric-power industry, opposes paying incentives to lure big traders onto stock exchanges, a widespread practice that exchange officials say is necessary to keep their markets in motion. Mr. Sprecher also objects to the dispersion of stock trading across scores of exchanges and private markets, a trend embraced by banks and trading firms that earn profits by trading shares away from exchanges.

Mr. Sprecher also has criticized the common practice by the NYSE and other U.S. stock exchanges of paying incentives to traders that are active buyers and sellers of securities. The exchanges say they pay such rebates to help ensure that there are traders to take the other side of orders placed by mutual funds or individual investors.

Paying these incentives has fostered a system that encourages some traders to heavily buy and sell without much concern for holding a given stock—making such traders more likely to abandon markets when conditions turn volatile, Mr. Sprecher said in Chicago last year.

Some industry executives are skeptical that Mr. Sprecher could change the practice, known as “maker-taker” pricing, even with the clout of the Big Board at his disposal. Doing away with it could require changes to many firms’ trading strategies, and an exchange could lose business as some customers shift to rival markets that still pay incentives.

Some of Mr. Sprecher’s views are consistent with those of the Big Board. Like NYSE executives, Mr. Sprecher has criticized the diffusion of stock-trading activity across scores of exchanges, brokerages and private “dark pool” markets, warning that the trend has damaged investor confidence in stock investing and played into catastrophes such as the “flash crash” of May 2010.

Traders say that the stock market is more convoluted and interconnected than the futures trading world Mr. Sprecher is used to, thanks largely to rule changes designed to boost competition among stock exchanges and brokers.

“The NYSE is a much different world, and it’s much more difficult to get any market-structure change done,” said Neil Catania, chief executive of MND Partners Inc., a brokerage firm on the floor of the NYSE. “But we need new thinking.”

The full article is available to WSJ online subscribers by clicking here

ETF New Rules: SEC Says Derivatives for Actively-Managed ETFs… Reply

Courtesy of Daniela Pylypczak     Back in March of 2010, the SEC began a review of the use of derivatives by ETFs, specifically actively-managed and leveraged funds. Norm Champ, Director of the SEC’s Division of Investment Management, stated that “The use and complexity of derivatives have grown significantly over the past two decades and have given rise to many interpretive and policy issues under the 1940 Act.”

But after over two years of analysis and review, the SEC finally made its decision last week: fund companies are now able to seek regulatory permission to include derivatives in actively-managed ETFs. There are, however, explicit stipulations that fund managers must adhere to [see also Actively-Managed ETFdb Portfolio ]:

1. The ETF’s board must periodically review and approve the ETF’s use of derivatives and how the ETF’s investment advisor assesses and manages risk with respect to the ETF’s use of derivatives.
2. The ETF’s disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission and staff guidance.

The SEC stressed that it will continuously review this issue, but in regards to decisions concerning the use of derivatives by leveraged exchange-traded funds, they are still hesitant to grant permission. Champ expressed his concern over these powerful products, stating that “Because of concerns regarding leveraged ETFs, however, we continue not to support exemptive relief for such ETFs.”

What Does This Mean For ETF Investors?

Derivative use has been a touchy subject for many investors, as these powerful instruments have led to some of the worst financial disasters of all time. On the other hand, they have also provided lucrative opportunities for those with the knowledge and in-depth understanding of how exactly these products work. But will using derivatives in actively-managed ETFs do more good or harm for investors? Unfortunately, the most reasonable answer is that only time will tell. Below we outline the top five actively-managed funds that investors may want to keep a close eye on [filter by active/passive and other fields with the free ETF Screener]:

Ticker	ETF	Expense Ratio	AUM
BOND	Total Return Exchange-Traded Fund	0.55%	$3.9 billion
MINT	Enhanced Short Maturity Strategy Fund	0.35%	$2.1 billion
ELD	Emerging Markets Local Debt Fund	0.55%	$1.5 billion
ALD	Asia Local Debt Fund	0.55%	$462 million
CEW	Dreyfus Emerging Currency Fund	0.55%	$276 million
*As of 12/13/2012

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb P

Trading Market Pros Do a 360; Looking Back and Forward 5 Yrs Reply

                  Extracts courtesy of a special year-end story from Terry Flanagan at MarketsMedia

The Standard & Poor’s 500 Index stood at 1,380 in mid-November, down about 5% from 1,450 five years earlier. To a visitor from Mars, the similarity of the numbers could suggest that it was a quiet period for financial-market participants.

But in reality, it has been the opposite, as the past five years has been perhaps the most tumultuous half-decade period in the history of global markets.

The fragile, end-of-rally market of late 2007 gave way to a full-blown financial crisis by September 2008, the nadir of which which lasted into 2009. Massive interventions on the part of governments worldwide staved off a doomsday scenario, setting the stage for some stabilization and a market rebound in 2009-2010. But the recovery has yet to sustain itself, and 2011 and 2012 have proved largely disappointing.

“The past five years will likely be viewed as a landmark period of timeless case studies within the history of financial markets,” said Karim Taleb, principal of investment manager Robust Methods.

“For institutional trading this was one of the most challenging market environments that I have witnessed in my career,” said Steve Hedger, head of equity trading at Fifth Third Asset Management. “Lack of liquidity, extreme volatility, and a disappearance of several venerable brokerage firms made seasoned traders earn their keep.”

The challenges for institutional traders such as Hedger revolve around liquidity sourcing-that is, finding sellers for buy orders and buyers for sell orders. Aside from the demise of Lehman Brothers and Bear Stearns, other liquidity sappers include tightening regulation of Wall Street, which has prompted surviving big banks such as Goldman Sachs and Morgan Stanley to pull in their trading horns, and a more general malaise and mistrust among buy-side investors, both retail and institutional.

Michael Wallach, CEO WallachBeth Capital

Aside from regulation, the most noteworthy topics from a broker-dealer perspective are the evolution and impact of trading technology and the exponential growth of institutions using both exchange-traded-products and option-centric hedging tools, according to Michael Wallach, chief executive of agency-only broker-dealer WallachBeth Capital.

Even with the proliferation of electronic trading, it has its limitations, and voice and floor will continue to offer liquidity, at least for some trades. “What hasn’t changed is the fact that trading screens remain notoriously one-dimensional despite the three-dimensional nature of financial markets,” Wallach said.

Additionally, market disruptions, geopolitically driven volatility spikes, and diminished investor confidence have sharpened focus on broker-dealers’ fiduciary obligations, Wallach said.

“What has struck me over the past five years is the level of innovation that we have seen in the market,” said John Kelly, chief operating officer at Liquidnet. “This has provided the means for investors to seek out growth, yield, diversity, or safety to a degree that was never before achievable.”

One market veteran’s perspective trumped the CNBC survey by a factor of five. “We enter the next five years with a significantly higher degree of uncertainty than any time I can recall in more than 30 years,” said Kelly of Liquidnet.

For the entire article (its a great read!) please visit MarketsMedia online platform

 

Market Contrarian Matt Gohd Joins WallachBeth Capital; Option Strategist to Hedge Funds Adds Further Dimension for Boutique Brokerage Reply

 

December 3, New York, NY—WallachBeth Capital LLC (“WB”), the institutional agency broker specializing in options and Exchange-Traded-Fund (ETFs), announced the hiring of Matt Gohd, the trading market strategist whose contrarian market calls have been widely-followed for two decades by leading hedge fund managers and industry observers. Mr. Gohd, a 30-year industry veteran joins WallachBeth as Senior Managing Director/Option Strategy.

According to WallachBeth CEO, Michael Wallach, “Our firm’s platform is based on providing objective market insight and conflict-free execution for sophisticated clients. Matt’s well-regarded contrarian approach to gauging market trends and constructing option strategies that capitalize on changes in market dynamics further enhances our idea generation role. His perspective is both a natural complement to our core business and a compelling adjunct to the equity research product that we launched in Q3 of this year.”

Mr. Gohd, who is often quoted by news media and has appeared frequently on CNBC and FOX Business, began his career more than 30 years ago at Bear Stearns & Co. He later founded the investment banking firm Bluestone Capital, which managed more than $1 billion in initial public offerings prior to its acquisition in 2001. Immediately prior to joining WallachBeth, Mr. Gohd was senior managing director and principal for the Tactical Strategies Group at New York-based Revere Securities.

 

Mini Options Ready to Grow? Reply

Courtesy of Andy Nybo, TABB Forum

The recent approval by the Securities and Exchange Commission (SEC) to allow the listing of “mini” options provides the options industry with a wealth of potential opportunities. The potential success of mini options, however, will be a double-edged sword. The costs to build out the necessary technological infrastructure to support trading of minis needs to be offset against the benefits (and revenues) they bring to options market participants, an evaluation many have yet to make.

Mini options may be simple in concept, but their very simplicity masks many of the challenges that will inevitably arise, especially if the contracts see broad trading success. On the surface, mini option products look just like their larger brethren — the “only” difference is that the deliverable size for a mini option is 10 shares of the underlying as opposed to 100 shares for standard contracts. All other facets for minis remain the same, with expirations, strikes and classes all replicating the standard contract terms. To date, exchanges have proposed listing mini options to five “high priced” stocks with a large retail following, namely Amazon, Apple, Google, the Spider S&P 500 ETF, and the Spider Gold Trust.

A number of factions have been actively campaigning behind the scenes to shape the ultimate structure of the mini options product. Not surprisingly, exchanges have taken a lead role in seeking the SEC’s blessing, with the ISE and NYSE ARCA receiving approvals in September to list the mini options on their respective exchanges beginning March 18, 2013. NASDAQ’s PHLX exchange filed for approval of its own mini products on Nov. 1 this year, and it is probably safe to assume that the other eight (or nine, depending on when you read this) exchanges are working on their own rule filings.

There is no doubt that the exchange efforts are broadly supported by retail brokers, as their retail investor clients are arguably the biggest potential end user of any mini options products. The high price of the selected underlyings prohibits the use of options by most retail accounts, which cannot afford the standard contract price. In many cases, a retail account will hold an odd lot of the stock and is shut out of using the standard contract for hedging or as a way to earn premium income.

Are We There Yet?

The major challenge is one of readiness. Although current proposals are targeting a March 18, 2013, launch date, hitting this date will depend on industry readiness to support the new mini product set.  The ISE and NYSE Arca may be ready for trading on the proposed start date, but brokers, market makers and industry vendors may not have all their ducks in a row in time for the launch.

For the full article from TABB Forum, please click here (registration required for 1st time readers)

In Your Face: Option Trading Contrarian Called $FB Move re: post-lockup activity Reply

     Courtesy of John Carney/CNBC

MarketsMuse Editor Note: article below was published Tuesday Nov 13 at 6pm, in advance of $FB lock-up  expiration.

Eight hundred million shares of Facebookare set to “flood” the market Wednesday, as the company’s biggest post-IPO lockup expires.

This has many investors fearful that stock sales from employees could push the stock, which has lost nearly half its value since the IPO, even lower. Some are calling it the “Facebook fiscal cliff.” (Read more: Facebook Drops as Employees Sell Shares)

But not everyone sees this as a reason to sell. In fact, some contrarians think it will be an excellent time to buy Facebook.

Matt Gohd, a senior managing director and options strategist at WallachBeth Capital, thinks Facebook [FB  21.5592    1.6992  (+8.56%)   ] stock could very likely go up in the aftermath of the lockup expiration.

“I think it could go up tomorrow, it will be up next week, and it will be up at the end of the month,” Gohd said.

Gohd’s thesis is pure contrarianism. With so many traders positioning themselves for a downward move in Facebook stock, the stock price may have already incorporated the coming sales. If you believe markets are at all efficient, certainly they should have priced in the shares coming out of lockup.

“The end of the lockup is the worst-kept surprise in U.S. history,” Gohd says.

When the first lockup of Facebook shares was lifted on August 16, shares fell 6.3 percent. But if you bought shares at the closing price on August 16 and held them for a month, you saw an 8.3 percent gain.

I should point out that Gohd pointed out in early August that the lockup expiration could be bullish for the stock

Facebook shares were flat the first trading day following the lockup expiration on October 15. If you bought at the closing price that day, you’ve seen a 2.18 percent gain to date. (And you were up by a nudge more than 19 percent on October 24.)

ETP Volatility Report from Velocity Shares Reply

VelocityShares is pleased to present the October 2012 Volatility Report, providing insights into the volatility landscape.

Highlights from this report include:

• Year-to-Date Performance for the VIX Index is -21%.
• Year-to-Date Performance for the S&P VIX Futures Indices:
  • Short-Term: -74% (SPVXSP)
  • Mid-Term: -47% (SPVXMP)
  • Tail Risk: -20% (SPVXTRSP)
• VIX spot increased steadily in October, opening at 15.73 before closing the month at 18.40.
• VIX Call Option Volume once again reached its second highest levels ever (and the most in over a year) on October 17th, 2012, nearing $850MM traded.
• The Short-Term S&P 500 VIX Futures Tail Risk Index (SPVXTRSP) ended the month with a long-vol bias of 23.87% long, its greatest long exposure since June 2012.
• Due to Hurricane Sandy, the stock exchange was closed for two days and reopened on October 31st. While a catastrophic event might be the cause of a spike in volatility, the following was observed:.
  • Short-Term VIX Futures gained 3.62%, which is within one standard deviation of the daily returns observed in October 2012
  • VIX Futures Dollar Volume on the 31st was greater than its 20-day moving average ($2.7B vs. $1.9B)
  • ETP Dollar Volume on the 31st was the same as its 20-day moving average ($1.4B each)
  • VIX Options Trading Volume on the 31st trailed its 20-day moving average (378K vs. 479K)

  For the full report, visit TABBForum.com