Stock Market’s Soaring Volatility Mirrors 1987 Crash

Apr 9, 2018

Spencer Doar

Spencer Doar


Observations & Insight

The Spread – Week of 4/2 to 4/6

Lawsuits and volatility and a birthday – oh my! As volatility ebbs and flows in a year proving quite different from the previous one, JLN presents another episode of The Spread, our weekly options-related news recap.

Watch the video and see the stories referenced here »


Developments in Trade Talks News Roundup

What with tariff talk being such a driver of market-related conversation and an issue with numerous (and unknown) tentacles reaching all over the globe, we figured it apropos to include a brief roundup of some trade war/skirmish/tiff news to sift through if you want.

-Reuters -> China blames U.S for trade frictions, says negotiations currently impossible

-NY Times -> Europe Caught in the Middle as Trump Threatens China

-Bloomberg -> China Is Studying Yuan Devaluation as a Tool in Trade Spat

-Associated Press via CNBC -> Trump hails friendship with China’s Xi, suggests country will negotiate over trade spat

-NPR Planet Money Podcast -> Episode 833: Worst. Tariffs. Ever. This podcast is all about the Smoot-Hawley Tariff of 1930, which has lessons for today’s trade environment. Bonus: All of the “Ferris Bueller’s Day Off” references.

-WSJ -> Stocks Surge as Trade Concerns Ease

Lead Stories

Stock Market’s Soaring Volatility Mirrors 1987 Crash
Mark Kolakowski – Investopedia
After an extended period at near-historic lows, stock market volatility is on the rise, making some people with long memories a bit nervous. Now a managing director at UBS Financial Services, as well as an executive floor governor of the NYSE, Art Cashin has worked in the securities industry since 1959. As he told CNBC: “It’s a good deal more volatile than almost anything you’ve seen. It is unfortunately reminiscent of some of the volatility we saw in ’87.” Meanwhile, as Christopher Stanton, chief investment officer of California-based Sunrise Capital LLC told The Wall Street Journal: “The new safe haven is volatility. It’s the one thing that’s pretty much guaranteed.”

Inverse VIX losses were a reminder of interconnected market – expert
Global Investor Group (SUBSCRIPTION)
Some investor losses on February 5 that stemmed from Credit Suisse’s inversely correlated VIX exchange traded notes served as reminder of just how interconnected the market is, a legal expert has argued.
Speaking to FOW on Thursday morning, Sam Tyfield, partner at law firm Vedder Price, said: “The losses that some participants, who had invested in those XIV exchange traded notes (ETNs) at Credit Suisse, experienced on that day did serve as timely reminder that markets themselves are made up of hundreds of thousands of correlated and inversely correlated instruments – all of which are traded for different reasons and over different time horizons by different market participants.”

Citi warns of bigger market corrections ahead — but says ‘buy on the dips’
Silvia Amaro – CNBC
The forecasts are based on expectations of higher economic growth across the world and increased room for investments from several companies due to tax cuts in the U.S.
However, the bank warned that risks are rising due to increased market volatility and higher interest rates.

Equity Hedge Funds Must ‘Put Up or Shut Up’ With Market Volatility
Hema Parmar – Bloomberg
Firms can exploit less stock correlation, more dispersion; Marshall Wace’s fund is said to rise 4.1%; Glenview is down 7%
It’s make-or-break time for equity hedge funds after years of poor performance.
Stock-pickers have lamented that calm markets and not enough disparity in equity prices have hindered their ability to make money. They haven’t beaten the stock market annually in almost a decade. Industry titans like John Griffin and Alan Fournier have closed down.
But now that volatility is back and fiercer than it’s been in years, hedge funds can no longer blame calm markets for their woes.

****SD: You could also say this about banks. You asked for it, it’s here, now let’s see how you do without “lack of volatility” as a crutch.

Exchanges and Clearing

Cboe Declares April VIX Month
Cboe began publishing the Cboe Volatility Index (VIX Index) in April 1993. As part of our month-long celebration, we’re putting together special content highlighting the index.
On Monday, we shared the 1993 press release announcing the real-time dissemination of the VIX Index. The April 1993 release ends by noting the 20th anniversary of Cboe, meaning this month, we’ll celebrate the company’s 45th anniversary!

****SD: Old pics and new pics included!

BOX Options Introduces Auction-Only Designation
Traders News
Beginning April 30, BOX will introduce an Auction Only designation for Directed Orders.
The exchange said that a Directed Order with an Auction Only designation will be executed entirely via the Price Improvement Period (“PIP”). If it is not entered into the PIP by the market maker, the order will be cancelled.

ICE’s Chief Says Crypto Trading Is a `Trend We Can’t Ignore’
Viren Vaghela – Bloomberg
Intercontinental Exchange Inc., the owner of New York Stock Exchange, on Monday refused to rule out starting futures contracts on digital currencies, following in the footsteps of two of its rivals.

LME to keep Rusal aluminium on exchange despite US sanctions
Henry Sanderson – Financial Times (SUBSCRIPTION)
The London Metal Exchange said it won’t remove aluminum from Russian producer Rusal from its exchange following the imposition of US sanctions on the producer Friday.
The LME, the world’s largest metals exchange, said “it is for individual stakeholders on the LME to determine if particular brands are acceptable for their use given their legal or regulatory framework.”

****SD: This is a funky spot to be caught in for an exchange group.

Regulation & Enforcement

CFTC likely to scrap Obama dealer capital plan, propose new one, Quintenz says
Neil Rowland – MLex FS Core (SUBSCRIPTION)
The US Commodity Futures Trading Commission is likely to set aside the pending Obama-era plan setting capital requirements for derivative dealers and propose a new one, Commissioner Brian Quintenz told MLex.

****SD: I bet Neil camps out at a number of federal agencies.

FCA issues cryptocurrency derivatives warning
We are aware of a growing number of UK firms offering so-called cryptocurrencies and cryptocurrency-related assets. As indicated in our Feedback Statement on DLT, cryptocurrencies are not currently regulated by the FCA provided they are not part of other regulated products or services.


Meet Aladdin, the computer “more powerful than traditional politics”
Will Dunn – The New Statesman
The winter of early 1993 was a cold one in New York; the beginning of February saw the mercury drop below -13°C. Each morning of that winter Jody Kochansky would arrive at 6.30am at the Manhattan offices of BlackRock, and begin going through the printouts.

Smart Contracts Will Disrupt the Derivatives Market
Nicholas Kitonyi – The Market Mogul
The derivatives market is one of the largest in the global finance world. Virtually every asset type can be traded on the derivatives markets in the form of futures or options. We have commodity and currency futures, which represent the biggest pool in the futures market whereas various stock options and indices are traded in the options markets. However, trading in these markets attracts some of the highest fees charged by brokers and other intermediaries, thereby making it more difficult for investors to make money.

UBS suspends research access to some third parties, including Bloomberg
Vesna Poljak Joyce Moullakis – Bloomberg
The research arm of global investment bank UBS has asserted greater control over the sharing of its proprietary analysis with financial data service providers, suspending access to UBS analyst ratings, price targets and earnings forecasts for subscribers of affected services from Monday night.

****SD: The start of many more? Also see FT here

Regulators may extend timings of currency derivatives trading
India’s market regulators are in talks to extend timings of currency derivatives trading, two people aware of the discussions said, a move expected to help investors hedge their currency risks better.


When Doing Nothing Is the Best Thing To Do
Chris Schelling – Institutional Investor
The recent bout of volatility that began in February caught some market observers, and participants, by surprise. To many, it marked the return of risk.
Volatility, or standard deviation, is the most widely used proxy for risk in all of finance. It measures the dispersion of returns around the average for a given asset. An investment with lots of variability in returns from one period to the next has a high volatility; one with more stable and predictable returns has low volatility.


Cryptocurrency Firm Coinbase in Talks to Become SEC-Regulated Brokerage
Dave Michaels – WSJ
Coinbase, a leading cryptocurrency firm, has approached U.S. regulators about registering as a licensed brokerage firm and electronic-trading venue, a move that comes as regulators have waged an aggressive campaign to supervise the fledgling industry.

Russian Stocks Take Worst Hit Since Crimea on Sanctions, Syria
Ksenia Galouchko – Bloomberg
Ruble falls most globally; stocks drop most since 2014; Analysts warn other companies could be next for penalties

Rogue trading, fixing Vix and pruning Libor
Alexander Campbell –
Value-at-risk has come under steady criticism as a risk measure, for failing to register the true danger of tail risk events; expected shortfall (ES) has been praised as a replacement. But this week on both measures came under fire – specifically because they fail to model the true risk of rogue traders.

Cramer: Fear gauge is showing signs that the market may be bottoming
Elizabeth Gurdus – CNBC
On a turbulent day for the stock market as trade war worries mounted, CNBC’s Jim Cramer took to the charts to get a technical take on the market layout.
“When the averages are falling apart, the thing to focus on is the CBOE Volatility Index, the VIX for short, also known as the fear gauge, which was so heavily tied to the big breakdown in February,” the “Mad Money” host said on Friday.

****SD: For those of you who love your Cramer.

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