Observations & Insight

The Week Thus Far – In Case You Missed It
Spencer Doar – JLN

MIAX plans to launch its third exchange, MIAX Emerald, in Q1 2019.

Cboe announced it would begin disseminating a one year VIX calculation (VIX1Y) and that it is “exploring the development of a futures contract” on that index.

Speaking of the VIX, it took a stroll south of 15 yesterday. Then this morning – settlement time – it went on a 30 minute run from 15ish to 17, again bringing up talk of manipulation. See the lead Financial Times story below about that price action and ongoing concerns surrounding the index.

Now, VIX futures are in a fairly unremarkable contango (although those front two months get a bit kinky when you throw in the weeklies).

U.S. options markets as a whole just posted the strongest three month run in history (in volumes).

The IRS computers stink – see Bloomberg’s The IRS Really Needs Some New Computers. The recent narrative is IBM stock is tanking due to weak guidance, but I’ll posit it’s all tax backlash. As of this writing, IBM options volume is through the roof, according to OIC’s most active options list.

Barbara Bush, Matthew Mellon, Carl Kasell and Lee Ermey died this week.

Puerto Rico lost all power this morning.

Lead Stories

Vix index surge revives manipulation concerns
Joe Rennison – Financial Times (SUBSCRIPTION)
The Vix index, a measure of market volatility nicknamed Wall Street’s “fear gauge”, surged more than 10 per cent in the space of a few minutes on Wednesday morning, around the time of a monthly auction that sets the price of derivatives tied to the index.

****SD: Bloomberg has a quick take on the activity here.

Wall St reinvents equity collars as a risky money spinner
Robert Smith and Arash Massoudi – Financial Times (SUBSCRIPTION)
When Chinese billionaire Li Shufu needed help building a nearly 10 per cent stake in German carmaker Daimler, Bank of America Merrill Lynch and Morgan Stanley had 250m reasons to say yes.
That is because the banks made around $250m in upfront profits for providing Mr Li with a “funded equity collar”, a complex product combining equity derivatives with securities-based lending, according to bankers familiar with the transaction.

****SD: Who hasn’t had an experience with an uncomfortable collar?

It’s Back to Days of Melt-Up Elation for Stock Volatility Gauges
Adam Haigh and Cecile Vannucci – Bloomberg
The days when investors were enthusing over a “melt-up” in global equities disappeared quickly in the turmoil of early February. The corresponding record spike in the VIX disappeared almost as fast.
Volatility across the globe is already back to the levels seen before the blowout, even as stock gauges remain well below the records they posted just prior to the selloff.

Copper: Economic Risks Ahead and Options’ Downside Skew
CME Group
Copper prices are often said to reflect the health of the global economy, hence the moniker “Dr. Copper.” Between January 15, 2016, and December 28, 2017, copper prices rose by 72% as China’s pace of growth picked up and emerging-market nations such as Brazil and Russia began to recover from recession while the rest of the global economy boomed. This year, however, copper prices are about 5% off last year’s highs and copper options appear more concerned with downside risks than higher prices. Here’s a look at copper’s demand and supply, and possible trajectory.

Broker hid yen swaptions basis after trader backlash
Chris Davis and Lukas Becker – Risk.net (SUBSCRIPTION)
Following pressure from dealers, Japanese broker Totan took down screens showing a split in the pricing of yen swaptions last month, Risk.net can reveal. The protests may have been an attempt by traders to avoid losses that would result if they revalued their books using the new prices.

Exchanges and Clearing

Nasdaq Reviews Nordic Shutdown as Regulators Question Backups
Kati Pohjanpalo and Hanna Hoikkala – Bloomberg
Nasdaq Inc. is reviewing its systems to avoid a repeat of an hours-long shutdown in trading across the Nordic and Baltic markets, which prompted regulators to question its preparedness and forced Sweden to postpone a bond auction.

Cboe SEF Launches Two New NDF Currency Pairs
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today announced that its swap execution facility, Cboe SEF, has launched trading of U.S. Dollar (USD)/ Russian Ruble (RUB) and USD/Peruvian Sol (PEN) non-deliverable foreign exchange forward currency pairs.


Volatility Is Back — And So Is Hedge Fund Hiring
Amy Whyte – Institutional Investor
Marketing and investor relations hires rebounded from an all-time low as volatility returned to the markets — and hedge funds sought to make hay.

Two Sigma Hires Google Scientist Mike Schuster for AI Expansion
Kristy Westgard – Bloomberg
Two Sigma hired scientist Mike Schuster, who worked on the Google Brain team, to expand artificial intelligence at the $52 billion quantitative hedge fund.

Regulation & Enforcement

Fed’s new capital buffer refocuses on risk
Philip Alexander and Steve Marlin – Risk.net
The US Federal Reserve’s proposed revisions to its capital framework would make risk-based capital requirements more volatile, bank analysts say, intensifying prudential and shareholder focus on risky assets while improving the comparative appeal of low-risk activities.

Cryptocurrency Exchanges Get ‘Fact-Finding’ Letter from New York
New York Attorney General Eric Schneiderman asked 13 cryptocurrency exchanges for detailed information about their operations as part of a “fact-finding inquiry.”

****SD: Cboe’s crypto exchange partner Gemini was one of the 13 exchanges queried about operations.

Bank of England expects big Libor switch to start in earnest
Financial markets should start accelerating efforts to ditch Libor in favor of the Bank of England’s revamped interest rate benchmark being launched next week, a senior BoE official said.


Rival Systems now offering Value-at-Risk within its award-winning Rival Risk platform
Press Release
Rival Systems (Rival), an award-winning provider of trading and risk management software, today announced the availability of Value-at-Risk (VaR) within its Rival Risk platform.

QuantHouse Rolls Out Global Trade And Book Synchronisation Feature
QuantHouse, the leading independent global provider of end-to-end systematic trading solutions including innovative market data services, algo trading platform and infrastructure solutions, today announced the launch of its trade and book updates synchronisation feature in response to client requirements.

SSW Market Making Selects Cboe Europe as Technology Provider for Systematic Internaliser Services
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today announced that SSW, an innovative pan-European liquidity provider in a very broad universe of instruments, has started its Systematic Internaliser (SI) business by utilising Cboe Europe’s SI technology services to efficiently connect to and service their clients.


Walk On The Wild Side?
Seeking Alpha
With the VIX back down to a 14 handle, let’s look at the likelihood that we’ve truly transitioned into a higher volatility regime.

Pound Option Bets Signal Return to $1.40 More Likely Than Rally
Charlotte Ryan and Todd White – Bloomberg
Options traders are betting the pound is more likely to fall back to $1.40 in the next month than rally to $1.45, in a reversal of sentiment.

Here’s the good news being sent by the fear index
Nigam Arora – MarketWatch
Wall Street’s fear index is based on expectations of market volatility. Professionals use and trade this volatility in a variety of ways. But the average investor doesn’t. Nonetheless, he or she can benefit from the message sent by volatility.


Intercontinental Exchange Announces June 1 Launch of ICE Three Month SONIA Futures
Intercontinental Exchange

Why 2018 in Markets Feels So Awful
Barry Ritholtz – Bloomberg
Last year was unusual in many respects for financial markets. When expectations for how events normally unfold become challenged by data way outside its normal range, it is easy to imagine the world has gone mad. A science-fiction genre exists where the protagonists have jumped to (or awoken in) an alternative world. Think “The Man in the High Castle,” the “Star Trek” episode “Mirror, Mirror” and “It Can’t Happen Here.”
To this group, you can add a new title: “Outlier 2017.” I can imagine the sonorous baritone voiceover during the opening scene: “It was a year filled with aberrations.

What caused the market sell-off?
Arne Staal – FT Adviser
It might be a little soon to be feeling nostalgic for 2017 but after the last couple of months many of us could be forgiven for casting a longing glance back a year when equity markets posted unbroken monthly gains and volatility was conspicuous only by its very absence.

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