Volatility – An intellectual virus, a bubble, or both?; Huge Brazilian FX trade

Apr 27, 2018

Spencer Doar

Spencer Doar


Observations & Insight

Lessons From the “Not Guilty” Verdict in This Week’s Criminal Spoofing Trial
Renato Mariotti, former federal prosecutor – JLN
Wednesday’s stunning “not guilty” verdict in United States v. Andre Flotron, only the second spoofing case ever taken to trial, is a reminder that it is extremely difficult for prosecutors to prove a defendant’s intent beyond a reasonable doubt in the absence of direct evidence. We should expect the DOJ and CFTC to reevaluate their charging practices in the wake of this significant defense victory.

****SD: A related (subscription) article from Global Investor Group – Spoofing easier to prove in UK/EU than US – lawyer. Though to Mariotti’s point, maybe prosecutors shot themselves in the foot by adding the “intent to drive up prices” piece rather than just going with “intent to cancel.”

Lead Stories

An intellectual virus, a bubble, or both?
Eric Lonergan – Philosophy of Money
The recent phase of market volatility precipitated by the February 2018 ‘flash crash’ has morphed into fears of a growth slowdown, phoney Trumpian trade wars, and real wars. But the initial crash itself may be more significant. There have been only three phases in last 25 years when the S&P500 has moved this rapidly in this short a period of time, a fact drawn to my attention by my perceptive colleague at M&G, Marc Beckenstrater (see chart). Rapid moves of this magnitude have historically coincided with genuine events. The Asian crisis, the tech bust, and the GFC.

Brazil Traders Just Made a Huge Bet in Currency Options Market
Ben Bartenstein and Davison Santana – Bloomberg
Traders may be wagering real to swing violently in coming days; Tuesday volume on contract was 25 times the daily average
Brazil options traders seem to be gearing up for a sudden surge in currency volatility.

Tail Risk: Who’s Afraid of King Kong?
Paul Kovarsky, CFA – CFA Institute Enterprising Investor
How quickly we forget.
After a bullish 2018 for the markets, all of a sudden, tail risk is back on everyone’s minds.
Which means it’s a good time to talk with mathematician and risk management expert Raphael Douady. Douady has authored a number of scholarly articles on tail risk and collaborated with Nassim Nicholas Taleb, of Black Swan fame, among others.

Chart o’ the Day: The Options Boom
The Reformed Broker
The Wall Street Journal notes that this past quarter has been the best first quarter for trading revenues at the banks and brokers since financial crisis.

Unlocking mysteries and family secrets
Sharyn Alden – DeForest Times-Tribune
Wisconsin writer David B. Bohl pieced together a complicated true story – his own – over several years of research to find out the answer to, “Who am I?”

****SD: Bohl was a market maker at CBOE in the ’90s. All I could find on him was a March 1992 letter of consent from the CBOE’s Business Conduct Committee regarding a $50,000 fine.

Old rules, algorithmic traders add costs to U.S. share buybacks
John McCrank – Reuters
U.S. companies are on track to buy back a record amount of their own stock this year, but a decades-old markets rule aimed at preventing manipulation makes these trades easy to game and has probably cost companies billions in recent years.

****SD: I suppose this could go in our “strategy” section…

In this market, peak happiness gives way to a series of trade-offs
Michael Santoli – CNBC
It’s been exactly three months since stocks peaked in a flourish of giddy momentum, and the market is now more volatile, less expensive and not quite as beloved, as the indexes struggle to maintain their long-term uptrend.

Exchanges and Clearing

HKEX confirms after-hours trading of equity index options
Jenna Lomax – Securities Lending Times
Hong Kong Exchanges and Clearing Limited (HKEX) will make its most actively traded equity index options available for trading in the after-hours trading (T+1 session) of its derivatives futures and options market from 14 May this year.

Cboe Broke Record for Bitcoin Futures Volume
Shobhit Seth – Investopedia
The popularity of trading bitcoin futures contracts (XBT) continues to scale new heights. On Wednesday, CBOE, the dominant U.S. derivatives exchange providing bitcoin futures contracts, saw its highest-ever trading volume for bitcoin futures since the launch of trading in December. (See also: How to Invest in Bitcoin Futures.)


Citi shakes up its commodities business
Neil Hume – Financial Times
Citigroup has made changes to its commodities business, one of the most active on Wall Street.
In an internal memo, the bank said it had spilt the roles previously held by the new head of the unit Jose Cogolludo

Regulation & Enforcement

Virtu boss slams ‘stupid’ French regulator for 2015 fine
Samuel Agini – Financial News
The chief executive of one of the world’s most prominent trading firms has lashed out at the “stupidity” of the French financial regulator over a fine his company received in 2015.

****SD: The 2015 fine was related to equity trading. However, if European regulators are indeed “stupid” and “don’t understand what market-making means” then everybody in the derivatives biz better be sweating, too.

Basel: Basel III will represent major improvement
Jenna Lomax – Securities Lending Times
The revised market risk framework drawn up by the Basel Committee on Banking Supervision (BCBS) for Basel III will represent a major improvement to the pre-crisis regulatory framework when it is finally completed and implemented, according to the authority.

****SD: Basel says Basel will be good? No kidding.

Barclays, Goldman Champion ISDA Standard for Blockchain Derivatives
Ian Allison – Coindesk
Blockchains and smart contracts were supposed to fix the inefficiencies and slash the costs of derivatives trading, but two years since such promises came in vogue, a foundational issue has yet to be ironed out.

Treasury’s Phillips pleads for caution on implementing Basel standards
John Heltman – American Banker
A top Treasury official cautioned regulators against rushing to complete certain final aspects of the Basel III capital and liquidity standards, suggesting the agencies should take more time to ensure that the new standards are in line with existing rules.

In Whose Interest Is SEC ‘Best Interest’ Broker Rule?
Benjamin Bain – Bloomberg
What standard should apply to brokers who advise their clients on what to buy? President Donald Trump’s administration, like that of Barack Obama’s before it, is grappling with how to discourage sales practices that steer customers into investments that boost broker compensation but are inappropriate for the client. The latest idea — a “best interest” standard — comes from the U.S. Securities and Exchange Commission. Already, it’s causing confusion.


Why Amazon and Google Haven’t Attacked Banks; Banks’ move to cloud computing makes them attractive clients to tech giants
Telis Demos – WSJ
Technology giants and big banks have been warily circling each other, especially in the payments arena. So far, they are more frenemies than rivals.


Derivatives market evolving fast: SECC
Khmer Times
Derivative trading in the kingdom continues to mature as traders become more acquainted with the market, said a high-ranking official at the Securities and Exchange Commission.

****SD: Anybody trading Cambodian markets?

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