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Country closed, markets open

2 comments / May 31, 2009
Large parts of Europe are closed this Monday. It’s time to celebrate the “Monday of the Holy Spirit” also known as “the second day of Pentecost”. During this sunny day the shops are usually closed, and it may be difficult to buy a set of fresh barbecue meat.

However, the financial markets are open. Basically, it appears to be a fundamental right to be able to buy your straddles. With every normal person enjoying the beach or lining up for the dixi toilets at music festivals near the border – traders are facing another boring day at the office. Bummer.

The Germans of the Eurex are open as well. Hardly a relief.

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Golden girls at IMC

13 comments / May 27, 2009
Apart from a few rare exceptions, the desks of the derivative trading firms are occupied by an all-male workforce. In the good old trading days in the pit, at the turn of the last century, some female traders did exist, though – and they used to be excellent traders as well.
Caught another example of an excellent female trader working for IMC. Haven’t got a clue what she actually did, but the 39 year old former JPMorgan relationship manager surely negotiated an inspiring reward package when she joined the company. The new “commercial director advisor of the board” received the following package:

* monthly salary of EUR 11.757
* sign on bonus : EUR 400.000
* guaranteed end of year bonus: EUR 400.000

Sounds reasonable competitive. After excessive use of the company credit card, IMC sacked her within half a year. Painful, especially for IMC as the top-notch trader arranged a gold-plated EUR 600.000 severance package. That’s even more than she initially asked for in the legal procedures. The magazine for lawyers didn’t tell whether the severance package mend a farewell to the end-of-year bonus. Also remains unknown wether Wiet Pot paved the way for her entry, fired her or perhaps a combination of both (“a scratch trade“). Anyway, let’s hope the 21 fired traders in the beginning of 2009 received similar golden parachutes..

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Fooling retail investors with new tick size

4 comments / May 23, 2009
Euronext is finally ready to introduce the one-cent tick size in the Amsterdam stock options market. This Premium Based Tick Size plan has been postponed for a while, the crisis curbed their enthusiasm in November 2008. Seven months later the united market maker lobby has achieved some success as well. The threshold has been set on 20 cent instead of 30 cent.

Premium based tick size means the options with values below EUR 0.20 can be traded on screen with a tick size of one cent. The market could quote 0.06 – 0.07. Above the value of 20 cent the tick size remains five cent (say 0.25 – 0.30).

Quite straightforward stuff. However, with the strategy orders the 1 cent tick size is slowly creeping into the rest of the territory. As long as the value of the strategy (like a butterfly) is below the 20 cent threshold the 1 cent tick size applies. And what happens if an option with the value of 5 euro is combined with a 10 cent option in a strategy? The implied leg price shows up in the screen. Rival exchange Eurex has one cent tick sizes as long as everyone can remember. The bottleneck for Euronext used to be the heavy used capacity restrains imposed by the obligation to quote all series for pmm’s.

Retail investors fooled by Euronext
Everyone has got to make a living and there’s nothing wrong with running a profitable business. The whole idea behind the premium based tick size is of course the boost of traded volume and revenue for the exchange. NYSE-Liffe director Jonathan Seymour (who has no friends) is heralding his efforts to serve the interests of the retail customers. Very kind of mister Seymour to make the far out-of-the-money crap tradable and give a cent better execution. However, the exchange is fooling the customers. Introduce some Premium Based Transaction Fees instead of bragging about the interest in retail clients. With the current high level of transaction fees for retail traders they should stay out of the little options as long as it cost them five cent for a round trip. Even if your name is Nassim Nicholas Taleb, avoid trading the far otm options with retail brokerage fees.

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The final ECB cut

0 comments / May 7, 2009
Forget the creepy predictions about Tokyo-style deflation. The predicted inflation in the Euro zone in five years has been rising to the highest level this year. Not predicted by some Brussels government agency, but based on the difference between the yields on inflation protected bonds and conventional bonds. In five years the predicted inflation for the consecutive five years is 2,64%. ECB President Jean-Claude Trichet is monitoring this level closely. According to Commerzbank’s analyst David Schnautz today’s cut in the ECB rate has been the last we’ve seen. (credits to AFS for the suggestion)

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Bid-ask spread tightens in option market

24 comments / April 26, 2009

Before the outbreak of the crisis, the world of derivatives was as exciting as a the running episodes of Sesame Street. Some minor changes, but basically every day the same. Press releases could be copy-pasted from the previous month. Volume of traded options went up, and bid-ask spreads went down. This has all been ruined by the uninvited partycrasher called “the creditcrisis”.

However, there is a little surprise here. According to Alan van Griethuysen, director of Euronext’s derivative trading, the bid-ask spread of options have actually shrunk over the last year. With lower volume and higher volatility swings this sure sounds like an unexpected fairy tale. It may be true the spreads have become tighter on average, but he obviously didn’t mention the quote size. The size on the screens are probably lower than before, and the tradable size in the broker market has definitely left the building. So are the brokers, who are facing a difficult times.

Mr van Griethuysen cheered on the comeback of the small trading firms. Klinkenberg, 323 and Nino are mentioned in the papers, as well as the new primary market maker Tibra. Here’s another thing Van Griethuysen forgot to mention. The valuable liquidity providerships are slowly evolving into a commodity. All option classes started back in 2002 with only three primary market makers responsible for quoting all series. Right now new licenses are introduced every year and now six (or even seven) primary market makers exist in almost all stocks. Van Griethuysen has opened the door, and turns surprised when traders actually walk in.

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