Apart from the usual issues with our fragile currency and defaulting Mediterranean nations, there was surprising news from Euronext – the troubled exchange which is experiencing great difficulty in basic operations. The Dutch retail investor association VEB launched a compensation procedure for the great mess up of July 29th.
The expiration procedure of the Weekly AEX options, the AX5 was settled 2,5 points too high. All retail investors will be fully compensated for losses due to this “technical error”. That’s great news. Investors with long calls (or short puts) got away with some unexpected profit in the first place, and those with long puts (or short calls) are getting compensated for unexpected losses.
Total amount of compensation is estimated at 500k. Quite a modest amount to be honest. The damage for investors results from an outright delta gamble (in-the-money options) and from those worthless out-of-the-money calls which suddenly settled seriously in-the-money. Unclear whether or not professional market makers will be compensated and are included in the estimate.
What about August 9?
Of course, Euronext denies any wrongdoing and refers to the compensation as a “goodwill payment”. Another open question is one of the other “technical errors” – August 9th was messed up in similar way. The error was 1 point, and I guess open interest the daily options is a lot smaller.
The quotation marks on the “technical errors” are on purpose – the inability to calculate index levels is an organizational problem. Euronext is a corporation with thousands of employees, but one with a simple spreadsheet to calculate an index level couldn’t be found.
The procedure of the Exchange Delivery Settlement Price (EDSP) calculation is changed, too. Basically the exchange isn’t sure whether or not they are delivering the correct settlement price – they decided to introduce Provisional EDSP. Market makers will check the calculation every day, and have the right to call for a recalculation. More details and rules here (pdf).