Archives: August , 2013
Strike Price, Tech Talk

Technology, Transparency and Choice Drive Buy Side’s Investment in U.S. Options

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The U.S. market for exchange-traded options took off during the past decade. The buy side is increasingly looking at options as instruments to hedge risk exposure and generate alpha, according to TABB Group’s recent report on the state of the U.S. options markets. In fact, TABB estimates that volumes will increase by more than 5 percent by year-end, even as market volatility wanes. So what is continuing to fuel growth in the options markets?

Market transparency and growing adoption of electronic trading technologies are key contributing factors. The changes in regulation and increasing use of electronic trading helped raise volume an average of 21 percent a year from 2000 to 2010 on seven U.S. options exchanges. Today, the options markets are supported by 12 exchanges and electronic venues where traders can access legitimate, reliable prices and order information so they can confidently and quickly execute a trade.

While the increase in trading venues has increased competition and lowered transaction costs for investors, fragmentation has also forced continued investment in technology on both the sell side and buy side. One area of investment on the buy side is platforms that help aggregate liquidity across multiple counterparties and exchanges. To access liquidity and capitalize on momentary market opportunities, institutional investors are adopting electronic platforms that offer integrated pricing monitors, trade analytics, risk monitors, and other tools. For the second year in a row, TABB’s study found Bloomberg Execution Management System (EMSX) is the most popular electronic trading platform for U.S. options. Now, I may be biased, but what I believe this reveals is that options market participants value unparalleled technology and transparency – but they also value choice.   For the full article courtesy of TabbForum, please click here

 

ETF News

The Follies of ETF “Flows”: Understanding the Trading Data

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indexuniverseCourtesy of Dave Nadig

In yesterday’s flows article, I talked about one of the biggest problems with ETF flows data; that is, a lot of times, that data is buggy.

The second problem is thornier. Even if you believe the data, it’s important to understand how it can be misleading.

The Second Problem: Misinterpretation

Even assuming that the flows data was perfect, I frequently see flows stories with headlines like “Investors put $100 million into GLD yesterday,” which give me pause. The reality of why money flows into and out of an ETF is slightly more complex than that.

If you’re an investor—whether you’re a hedge fund or my mother—you get ETFs the same way. You buy them on the open market. Only APs actually “put money” into an ETF. And they only do it when it makes financial sense for them to do so. So while ETFs can go in and out of favor—and experience enormous swings in volume—they’ll only actually grow or shrink in size when the ETF becomes over- or underpriced.

Let’s look at a simple example. Below illustrates the data on the Market Vectors Indonesia ETF, IDX. It’s an annoying fund for a market maker, because to make new shares, they have to go buy a bunch of Indonesian stocks, and that market’s not open during U.S. trading hours. Consequently, they’ll let the fund trade to a bit of a premium or discount before they’ll step in. Continue reading →

ETF News

Fed issues leveraged ETF warning

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imagesCourtesy of Chris Flood

Trading activity by leveraged exchange traded funds during periods of high volatility could trigger a crash in the US stock market, according to a warning by the Federal Reserve.

Leveraged ETFs (LETFs) use derivatives to provide a multiple of the daily returns of an index. When the stock market rises, leveraged ETFs need to buy more of the underlying index to make sure they deliver the required return.

 “Rebalancing by LETFs in response to a large market move could amplify the move and force them to further rebalance, which may trigger a ‘cascade’ reaction,” said Tugkan Tuzun, an economist at the Federal Reserve.

US regulators have repeatedly said that leveraged and inverse ETFs are not suitable for long-term investors.

However, the analysis by the Federal Reserve elevates these criticisms further, suggesting that the risks of LETFs have not been fully appreciated.

LETFs have been widely criticised for adding to end of day price volatility as their trading activities concentrate in the last hour of the trading session.

In a research paper published in July, the US central bank, said that trading by LETFs in the last hour of the day could cause “disproportionate price changes” and that if the stock market were to close sharply lower, this could affect investor confidence and lead to large overnight withdrawals.

The Federal Reserve also drew an explicit comparison between LETFs and the portfolio insurance strategies that contributed to the US stock market crash in October 1987.  For the full article from FT.com, please click here

ETF News

iShares Launches “Contango-Free” Futures-Based ETF: $CMDT

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indexuniverseCourtesy of Olly Ludwig/IndexUniverse

iShares, the world’s largest purveyor of ETFs, on Friday is launching a futures-based commodities ETF designed to minimize contango and maximize backwardation—a follow-on to “GSG,” a first-generation fund it launched about five years ago that doesn’t target contango. The new fund’s benchmark currently includes 20 commodities.

The iShares Dow Jones-UBS Roll Select Commodity Index Trust ETF (NYSEArca: CMDT) will be based on the contango-killing Dow Jones-UBS Roll Select Commodity Index Total Return. iShares’ latest filing with the Securities and Exchange Commission detailing the fund said the fund has a sponsor’s fee of 0.75 percent, or $75 for each $10,000 invested.

CMDT, which first went into registration in December 2011, is the latest in a growing field of contango-targeting broad-based commodities funds that includes the $6.29 billion PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) and the $495 million United States Commodity Index Fund (NYSEArca: USCI). USCI has an annual management fee of 1.03 percent, while DBC’s is 0.93 percent, or $93 for each $10,000 invested.

Strike Price, Tech Talk

Buyside Manager Adopts OMEX Systems’ Execution Platform; $850mil AUM Portfolio Strategy Firm Opts For Hands-Free, Multi-Custodian Order Routing

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New York, NY, Aug 7– OMEX Systems LLC, the provider of broker-neutral DMA and OEMS technology for firms active in the equities, options and futures markets, announced that a customized version of the vendor’s OEMS platform has been implemented by Durango, CO-based Swan Wealth Advisors, the $850mil AUM risk management firm specializing in proprietary, market neutral hedging and income strategies for use by the professional investment advisor community.  The OMEX trade execution platform will serve as Swan’s primary hub for implementing and administering the firm’s options-centric strategies across multiple custodians and thousands of sub accounts.

In framing the solution that OMEX provided to its most recent buy-side onboard, Robert Swan, Director of Trading and Technology for 16-year old Swan Wealth Advisors stated, “Like other managers with similar profiles, we’ve had to bear a myriad of logistical burdens when implementing strategies in tandem across a universe of accounts domiciled at multiple custodians, with each custodian imposing different order delivery instructions for its captive clients. OMEX proved uniquely intuitive in understanding our business and delivered a solution that has streamlined our workflow in a manner that had yet been available at any price from any other vendor in the industry.” Continue reading →