Cboe’s year of change; Committee for Options Markets?; VIX lawsuit developments

Jun 20, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

FIA IDX 2018 – Brexit’s Influence on Global Markets

MiFID II was more than 20,000 pages with 21 million paragraphs of regulation. Considering its scope, things have gone rather smoothly since it went into effect in January. But for Simon Puleston Jones, FIA’s head of Europe, there is no time to rest on the laurels of a successful implementation with Brexit looming.

Brexit cuts across all the other issues on FIA’s plate in Europe. One aspect of MiFID II left unresolved is equivalence assessments, which are impacted by Brexit. The Emir review this year, with its third party clearing components, is impacted by Brexit. (It makes sense the FIA opened an office in Brussels.)

With Brexit altering Europe the most, Puleston Jones said the industry believes the United States will be the end beneficiary.

Watch the video here »


Chicago is Crypto-fuel For the Coinbase Rocket
Jim Kharouf – JLN

My meeting with Paul Bauerschmidt has been reset three times and he’s running a few minutes late for our coffee in Chicago. It’s understandable. Since taking the role as head of Coinbase’s Chicago office last October, it’s been non-stop for Bauerschmidt and his office of nine and soon to be more.

He is on board with one of the fastest growing crypto exchanges in the world and thrilled with the ride after helping build Eris Exchange and CME’s swap business before that. In many ways, he’s one of the new asset class pioneers in a city largely built by financial pioneers.

For the rest of the commentary, click HERE

Lead Stories

In a Year Marked by Controversy, Cboe Seeks to Improve the VIX; Exchange is making changes to a monthly auction that determines final prices of futures tied to the index
Gunjan Banerji – WSJ (SUBSCRIPTION)
Cboe Global Markets Inc. is revamping a controversial feature of one of its most-lucrative products: the Cboe Volatility Index, or VIX – also known on Wall Street as the “fear gauge.” Cboe is making changes to a monthly auction that determines final prices of futures tied to the VIX. While the changes amount to tweaks to its architecture, they also mark a step by the exchange operator to improve a product that has come under intense srcutiny due to manipulation allegations.

****SD: Smooth VIX settlement today – see the Reuters story in Exchanges. I haven’t yet had the pleasure of meeting her, but Banerji is wearing multiple hats. I see her picking up a bit of Steve Sears’ mantle over at Barron’s from time to time.

Exchanges, industry group petitions SEC to create committee on options market
Rick Baert – Pensions and Investments
A group of market participants led by Cboe Global Markets has asked the SEC for permission to create a committee to analyze potential changes and improvements to the U.S. options market.

JPML Bundles CBOE Index Manipulation Suits In Chicago
Lauraann Wood – Law360
The Judicial Panel on Multidistrict Litigation on Thursday sent several suits alleging an unlawful manipulation of the Chicago Board Options Exchange’s volatility index to Chicago federal court, saying the move will ensure efficiency and consistency while litigating the case’s complex issues.

****SD: Thank you, JPML, for making my life easier.

Robinhood in Talks With Regulators to Offer Bank Products
Julie Verhage and Olivia Zaleski – Bloomberg (SUBSCRIPTION)
Robinhood Markets Inc. has more than 4 million U.S. consumers using its free stock-trading platform. Now, it’s in talks to offer them other banking services like savings accounts, according to people familiar with the matter.

****SD: The velocity at which their options business has taken off is breathtaking. Clearly their expansion mantra is pedal to the metal.

Options indicate investors under-pricing OPEC volatility
Reuters via Yahoo
In the heady mix of risk events investors have had to keep tabs on in June, it seems like OPEC has slipped under the radar – at least if option prices on crude and energy equities are anything to go by.
****SD: Also from Reuters – Oil traders ready for musical chairs as China tariffs loom

U.S.-China Trade Spat Isn’t Why Stocks Are Stumbling
Mark Hulbert – Barron’s
Do you really think the threat of a trade war is causing U.S. stocks to stumble? That’s what the headline writers would have you believe, but I’m not buying it.
It strikes me as though mounting trade tensions have become commentators’ latest whipping boy, conveniently available as the after-the-fact explanation for whatever the market is already doing.

Exchanges and Clearing

Cboe VIX logs orderly June settlement
Saqib Iqbal Ahmed – Reuters
The Cboe Volatility Index .VIX, Wall Street’s so-called “fear gauge,” logged an orderly monthly settlement on Wednesday, which is likely to help allay concerns that the index is manipulated on settlement days.
The VIX futures June settlement, calculated using a subset of S&P 500 .SPX options, was 12.27, according to Cboe data. The VIX opened during regular trading hours at 12.47.

Big Volume for VIX Futures during Global Trading Hours (GTH) on June 19
Matt Moran – Cboe
Estimated volume for futures on the Cboe Volatility Index (VIX) during Global Trading Hours (GTH) rose to more than 79,000 contracts on June 19, making the GTH session one of the busiest on record. VIX futures often are used for portfolio management purposes in times of financial market uncertainties, and the financial markets recently have digested news about tariffs and possible trade wars, and a recent headline at wsj.com noted “Markets Begin to Take Threat of Trade War Seriously.”

Eurex Exchange – Fixed Income Highlights
In May, geopolitical risks such as the uncertainty arising from the Italian elections continued to drive European FIC markets. Short covering in Bund Futures helped to drive futures volumes in German benchmark derivatives products. The spread between Bunds and BTPs was a focal point for fixed income traders and widened to levels not seen for five years, with a spread at 232 basispoints (bps). Options volumes saw a strong pick-up, partly driven by the Italian turmoil and partly by short covering as Bund Futures rallied hard and the market sought protection to the upside. Implied volatility on ten-year Bunds rose from 3.85 percent to 5.5 percent, the top end of the 4 to 6 percent corridor that we have seen for much of the past 24 months.

Level 01 Collaborates With Thomson Reuters to Introduce Blockchain-based Derivatives Exchange
Level 01 Technologies is poised to launch the Level01 Derivatives Exchange, a platform envisioned to be the ultimate fair and transparent environment for the trading of derivative contracts.

****SD: The Thomson Reuters line is soooo misleading. Near as I can tell, Level 01 is simply using TR data – “The platform utilizes Thomson Reuters data feeds as a trusted source for its AI deep learning algorithms to provide real-time pricing analytics on derivative contracts.” I’m also suspicious of the use of “ultra fair” in its pitch deck. That being said, p2p options trading via smart contract is intriguing…


Goldman Sachs brings back former prop trader as an MD
Beecher Tuttle – eFinancialCareers
Goldman Sachs isn’t just losing managing directors; it’s hiring them too. The firm just re-hired a longtime veteran of the company who formerly worked within the firm’s most lucrative and controversial business. Former macro prop trader Robert Surgent rejoined the company in June as a managing director in New York.

****SD: Bringing back a former prop guy right as Volcker is getting a revamp – coincidence?

Regulation & Enforcement

Managed futures mutuals face fresh SEC derivatives rule
Legal experts are warning that managed futures strategies are once again facing the prospect of SEC regulation of their use of derivatives in mutual funds in a move that has taken many by surprise.

ECB Poised for Power Over Euro-Derivatives Clearing Post-Brexit
Silla Brush and Alexander Weber – Bloomberg (SUBSCRIPTION)
The European Central Bank edged closer to gaining power over financial clearing, a lucrative business dominated by London and a flash point in the Brexit negotiations.
Lawmakers on a European Parliament committee on Tuesday endorsed a bill that amends the ECB’s governing statute, explicitly granting it authority over clearinghouses for euro-denominated contracts. This matters to the U.K. because the vast majority of interest-rate swaps in euros are cleared at a London unit of the London Stock Exchange Group Plc.

Buy side, broker, vendor fee models “not sustainable” – report
Louisa Chender – Global Investor Group (SUBSCRIPTION)
The existing business models for fees that brokers and their buy side clients pay for vendor’s services are not sustainable, according to a report.
In the latest Aite Group report, ‘OMS in focus: The Light and Dark Sides of FIX and Client Connectivity’, the research group estimates that brokers paid US$1.23 billion globally in 2017 for client connectivity.

****SD: Also from Global Investor Group on the unsustainable front – European regulatory model unsustainable – expert

Will states pick up where feds left off on derivatives regulation?
Kristin Broughton – American Banker
As state attorneys general take on a more muscular role in financial policy, enforcing consumer protection laws amid the deregulatory wave in Washington, they may soon add another item to their agenda: derivatives.
That is the hope of Michael Greenberger, a law professor at the University of Maryland, who recently published a paper on how big banks — such as JPMorgan Chase, Bank of America and Goldman Sachs — have taken advantage of loopholes in the regulation of derivatives under the Dodd-Frank Act.


Negative Latency
Matt Hurd – TABB Forum
Negative latency is impossible. There is no such thing. OK. So, why are you meandering about it then? The impossible made other people millions of dollars over the years when my team and I gave them negative latency. But you said it was impossible? The fun stuff always is.

****SD: A bit in the weeds, but when you’re dealing with micro-slices of time, how could it not be?


A Smarter Way to Rebalance with the BuyWrite Index (BXM)
Dave Donnelly – S&P Dow Jones Indices
As advisors begin mid-year rebalancing of client portfolios, they face a dilemma.

3 Sectors to Sell Short in a Trade War
Alan Farley – Investopedia
Three sectors stand out as potential short sale opportunities if a full-scale trade war breaks out in the coming weeks. Remarkably, these market groups have held close to their 2018 highs in the second quarter, with investors betting that political posturing will yield fruitful negotiations. That could change overnight if the Trump administration follows through on threats against China, Canada, Mexico and the European Union.

Halfway Through 2018, Risks Rise For Investors
Rob Isbitts – Forbes
If you are not familiar with the “boiling frog metaphor,” allow me to summarize it for you. If you put a frog in boiling water, it senses the temperature and jumps right out. If you put a frog in room temperature and slowly raise the heat, it won’t sense it until it is too late. Now, as disgusting as that scene is to me as a pet and animal lover, the point is very relevant for investors as we approach the middle of 2018. The heat around us is rising, and I don’t mean the temperature. The perspective with which you approach the next 6-18 months is likely to have an outsized impact on your ability to meet your long-term investment objectives, be they preservation, income or growth-oriented.


Deutsche Bank Settles New York Forex Probe for $205 Million
Deutsche Bank AG agreed to pay $205 million to settle a long-running investigation of its foreign exchange trading by New York’s banking superintendent, resolving one of several remaining regulatory issues that have dogged the bank in the U.S.

****SD: “The dealers operated in a chat room known as ‘Butter the Comedian.'” Wut?

Cboe president Chris Concannon thinks ICO legal issues will multiply
John Detrixhe – Quartz
One of the big questions since initial coin offerings took off—raising billions of dollars in the past year while spawning concerns about scams—is how watchdogs will clean up the ICO market. Last week William Hinman, a top US Securities and Exchange official, provided some guidance on how the agency views digital assets and ICOs, which resemble crowdfunding that’s been supercharged by crypto speculation.

****SD: Or as Business Insider phrased it – ‘It was true for tulips, junk bonds, and mortgage-backed securities, and now crypto’

JLN Options Newsletter

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Cboe’s year of change; Committee for Options Markets?; VIX lawsuit developments

Jun 20, 2018

Spencer Doar

Spencer Doar

Associate Editor

Lead Stories

Volatility May Be the World’s Only Undervalued Asset Class
Doug Kass – RealClearMarkets
I have argued that risk is underpriced because in large measure of the structural changes in the markets and participants positioning. Risk is an ever-present condition that cannot be eliminated, though it can be shifted through time and redistributed in form.

Sometimes You Beat the Bear. Lately, the Bear Beats You.
Stephen Gandel – Bloomberg
Investors have spent at least $2.6 billion this year on funds that are supposed to protect their portfolios in a market crash. Instead, those funds, rather than insuring their assets, have lost nearly $2.8 billion, according to data from Bloomberg Intelligence.

****SD: I feel like this article is framed incorrectly. If you’re going to use the insurance analogy, then stick with it. If the flood didn’t materialize, was the insurance a waste? It is very hard to determine motive when it comes to these instruments as ProShares’ Rich Ledee mentioned at a Cboe panel about VIX futures last week. Some action is purely speculative, some is intraday hedging and some is actually buy-and-hold moves by institutions that know what they’re getting into. Then there’s all the short interest. It is an oversimplification of a complex suite of products. Moreover, the article doesn’t mention why these funds, by virtue of using VIX futures, degrade over time, while harping on their “poor performance.” They’re acting the way they’re supposed to. What about “beating the bear” with inverse volatility? XIV has been a standout and the inverse side of the puzzle isn’t mentioned here either. See Matt Moran’s story two below for more on the panel I referenced.

The market is acting like risk no longer exists, Bank of America says
Fred Imbert – CNBC
As stocks have climbed to record levels this year, investors are neglecting one very important aspect of financial markets, according to analysts at Bank of America Merrill Lynch.

****SD: If risk rears its head in the forest and no one’s there to be fearful, is it still scary?

Chicago Panel Discusses Current Dynamics of the VIX Market
Matt Moran – Cboe
Over the past year a number of media stories have noted that the VIX Index appears to be somewhat “low” in light of worldwide geopolitical tensions. At a conference I heard Professor Richard Thaler opine that the “low” level of the VIX Index is one of the biggest financial mysteries of our time. Earlier in 2017 the minutes of a meeting of the Federal Reserve Board “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty …”

How an Analyst Thinks Bitcoin’s Volatility Is Predictable
Steven Russolillo – WSJ
J.C. Parets, founder of Eagle Bay Capital and author of the All Star Charts blog, reckons the Fibonacci sequence is the key to the cryptocurrency’s twists and turns.

Weekly Realized Volatility Rankings
Robert Krause – LinkedIn

****SD: According to Krause’s RealVol indices, livestock, cocoa and OJ are the assets with higher than average volatility.

Why Has Stock Market Volatility Been So Low in 2017?
Victor Xing – HuffPost
Put it simply, with policy-induced excess liquidity permeating financial markets, risk premium and volatility of various asset classes are consistently suppressed by “yield-seeking” investors.

Exchanges and Clearing

Nasdaq Reports Third Quarter 2017 Results; Delivers Strong Profitability And Income Growth
Nasdaq, Inc. (Nasdaq:NDAQ) today reported financial results for the third quarter of 2017. Third quarter 2017 net revenues were $607 million, up $22 million or 4% from $585 million in the prior year period. The third quarter increase in net revenues included a $15 million, or 3%, increase due to organic growth and a $7 million favorable impact due to changes in foreign exchange rates.

Big Bank Turns to Nasdaq for Help Running Its Currency Trading
Annie Massa – Bloomberg
Nasdaq Inc. won its first deal to help power a bank’s currency trading, its latest attempt to branch out from its original business of running a famous stock exchange.
Nasdaq didn’t identify the new customer beyond calling it a “Tier 1 bank,” according to a statement Wednesday. The bank will use Nasdaq’s matching technology, the software that pairs up buyers and sellers.

Intercontinental Exchange Announces Strategic Stake in Euroclear
Intercontinental Exchange
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, announced it has acquired a 4.7% stake in Euroclear for EUR 275 million. ICE anticipates having one representative join the Board of Euroclear. Euroclear is a leading provider of post-trade services, including settlement, central securities depositories and related services for cross-border transactions across asset classes.

****SD: ICE also announced it would acquire Virtu’s BondPoint. This comes on the heels of its completed acquisition of BAML’s Global Research Index Platform. Starting to make sense why ICE was named to the Fortune Future 50, eh? Of course, it’s not like ICE acquiring a business is anything new.

SGX reports 1Q FY2018 net profit of S$91 million
Singapore Exchange (SGX) today reported 1Q FY2018 net profit of S$90.7 million (S$83.1 million), on the back of revenues of S$204.5 million (S$190.8 million). Operating profit rose to S$106.0 million (S$97.2 million), while earnings per share increased to 8.5 cents (7.8 cents). The Board of Directors has declared an interim dividend of 5 cents (5 cents) per share, payable on 9 November 2017.

Top investors want Deutsche Börse chief to resign
Olaf Storbeck in Frankfurt – Financial Times
Three big investors in Deutsche Börse want chief executive Carsten Kengeter to resign after a court in Frankfurt blocked his efforts to settle a criminal insider-trading investigation.
The shareholders, who between them control more than 6 per cent of the exchange group’s share capital, told the Financial Times that the court’s rejection on Monday of a deal that would have seen him pay EUR500,000 and avoid charges had fatally undermined the CEO.

LSE’s clearing boss eyes New York amid Brexit row
Samuel Agini – Financial News
The new chief executive of LCH capped his first week on the job by warning that Brexit, and the EU’s ensuing efforts to seize business from the City, could force the London Stock Exchange Group’s majority-owned clearing house to shift all or part of its operations to the US.

CurveGlobal plans futures on Libor successor
Helen Bartholomew – Reuters
CurveGlobal, the London Stock Exchange Group’s fixed income derivatives platform, plans to launch futures contracts referencing the Sterling Overnight Index Average, a Bank of England-administered unsecured lending rate that has been selected as the preferred Libor replacement for sterling financial contracts.

****SD: But what about the options?

Overstock.com to launch massive ICO
E-commerce veteran Overstock.com is planning to sell up to 500 million digital tokens via an initial coin offering that will launch next month, CEO Patrick Byrne announced today at the Money 20/20 conference in Las Vegas.

Regulation & Enforcement

EU scraps its answer to U.S. Volcker Rule for banks
The EU has scrapped a draft law that could have forced the bloc’s biggest banks to split up in order to reduce the risk of them being “too big to fail”, in a rare move that will cheer major trading firms.

FIA’s Puleston Jones speaks at UK House of Lords hearing
FIA’s Head of Europe, Simon Puleston Jones today spoke alongside LCH Group CEO Daniel Maguire at a hearing of the UK Parliament’s House of Lords EU Financial Affairs Sub-Committee.


Horizon Software Joins The QuantHouse qh API Ecosystem For End-To-End Performance And Global Reach
QuantHouse, the independent global leader of end-to-end high performance market data and trading API based technologies, today announced that Horizon Software, the leading provider of electronic trading solutions and algorithmic technology, has joined the qh API Ecosystem to benefit from global reach and end-to-end performance.


Hedging Your Portfolio to Protect Your Profits
Steven Sears – Barron’s
Monkeys throwing darts at a list of stocks can often outperform professional stockpickers, but knowing what to do with low volatility is much more nuanced.
That fact is easy to forget because on almost any day of the week, at practically every hour, someone is chirping about the CBOE Volatility Index’s unusually low level as they draft some magnum opus about investor complacency.

What are my options for protection?
Gary Delany – TradingFloor.com
In this short refresher we revisit some of the options strategies investors may consider when seeking protection from adverse market moves.
Exchange-listed options can be used in a variety of ways. Investors often use options to construct a defined risk strategy; to put less capital at risk versus buying the underlying asset; harnessing leverage; and to use options as protection against adverse market moves.

Modern Portfolio Theory or Volatility Index (VIX)?
Dan Bosscher – Livewire Markets
Modern portfolio theory, a hypothesis from the 1950’s (Markowitz) has been the traditional strategy for protecting portfolios from drawdown. Investors are increasingly asking whether this is still the best way to build a resilient portfolio. The traditional view is that diversification should be enough to protect us from volatility. But does it really work?

Inverse Volatility Traders Are Cashing Out
Bernie Schaeffer – Schaeffer’s Investment Research
One of the notable constants in the stock market’s post-election march to new highs has been the prolonged hibernation of the CBOE Volatility Index (VIX), with scores of seasoned volatility pros having prematurely called for an end to the “low VIX regime” over this period. But as the VIX stubbornly refuses, for now, to revert to anything resembling its historical mean, 2017 has continued to be a banner year for inverse volatility trackers, including the ProShares Short VIX Short-Term Futures ETF (SVXY).

How to protect against a vulnerable stock market’s ‘fragility event’
Joe Ciolli – Business Insider
At this point, anyone following the stock market knows that price swings are non-existent.
The CBOE Volatility Index (VIX) is locked near record low levels. The benchmark S&P 500 hasn’t seen a 3% pullback in 242 days and counting, the longest such streak in history.
So what should investors do? Bank of America Merrill Lynch thinks it’s time to prepare for an inevitable shock — or as it describes it, an “overdue fragility event.”

Market Volatility Bulletin: VIX Joins The S&P In A Push Higher
Seeking Alpha
Spot VIX had the chance to fall on what was a decent day for stocks, and passed on the opporunity: what gives?

With So Few Doing So Much for Dow, Breadth Is a Bust
Helene Meisler – TheStreet
CNBC’s anchors and guests are not known for uttering a bearish word unless the market is actually collapsing, but they commented several times on Tuesday that the move in the Dow Jones Industrial Average was mostly “just two stocks.”


The Bond Market’s Moment of Truth Is Now
Brian Chappatta – Bloomberg
Ten-year yield closes above key mark for first time since May; Breakthrough has traders eyeing 2.5% and 2.6% levels

European Central Bank divided over wisdom of declaring end to QE
Claire Jones – Financial Times
The European Central Bank is gearing up for its most important meeting of the year, as senior officials gather to decide the fate of the EUR2.1tn asset purchase scheme that many credit with breathing life into the eurozone recovery.
At issue is whether the ECB will declare this week that the economy has recovered sufficiently for quantitative easing to end next year — a pronouncement that would reverberate in foreign exchange markets and could shape interest rate expectations.

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