Volcker Rule expectations tempered; Cboe’s VIX volume problems

May 30, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

Volatility Views 306: Setting Things Straight on VIX Manipulation (AUDIO)
The Options Insider
Today’s guest is Tom Lee, Managing Director at Investment Strategy and Research at Parametric.

****SD: Skip to the ~7 minute mark for the start of VIX settlement talk. Main points: 1) lots of participants in VIX futures don’t hold through settlement “messiness” (as Lee calls it), 2) this pertains to a very small window of time and should not be viewed as an indictment of the overall VIX complex or its underlying SPX options and 3) Mark Sebastian said the Cboe should think about opening settlement so others could come in to provide more liquidity.

Lead Stories

Banks temper expectations for first ‘Volcker Rule’ rewrite
Michelle Price, Pete Schroeder – Reuters
U.S. regulators are set to rewrite rules reining in banks’ risky trading behavior, making changes that will cut compliance costs but stopping far short of allowing firms to return to their gambling days seen before the 2007-2009 global financial crisis.

****SD: It all depends on how you look at it – via Bloomberg: The Volcker Rule Is About to Lose Some of Its Bite

Muted VIX Volume Will Make Cboe’s Slide Even Worse, Says JPMorgan
Luke Kawa – Bloomberg (SUBSCRIPTION)
The Italian political imbroglio was a boon for haven assets like U.S. Treasuries on Tuesday. But it didn’t spur a feeding frenzy in the instruments equity investors use to protect against stock swings.
The dearth of demand bodes ill for exchange operator Cboe Global Markets Inc., whose proprietary products include options and futures on the oft-vexed VIX index. The so-called “fear gauge” that tracks the 30-day implied volatility on the S&P 500 Index jumped 3.8 points on Tuesday, its fifth-largest jump of 2018. Yet volume in options linked to the VIX were meager.

****SD: In the wake of JPM cutting Cboe’s price target to $94, the stock has dropped to the 99 handle from a Tuesday high in the 103s. Shares of the exchange group are down ~20 percent this year.

Treasury Volatility Reawakens With Biggest Jump Since 2016
Luke Kawa – Bloomberg (SUBSCRIPTION)
Italian politics just did what a correction in U.S. equities and a breach of 3 percent on the U.S. 10-year yield could not: knocked the Treasury market out of its slumber.

The Bad Days Have Been Really Bad in 2018’s Stock Market
Lu Wang and Elena Popina – Bloomberg (SUBSCRIPTION)
Volatility jumps the most since February as S&P sinks on Italy; Average down day is 24% bigger than the average up day in 2018
None of the narratives floating around the market make any sense. Bond yields are too high, and too low. Politics don’t matter, then they do. There’s excessive inflation, or not enough.

Bitcoin is the market’s new fear gauge, investor says
Kellie Ell – CNBC
Price changes in bitcoin and other cryptocurrencies are a better indicator of volatility in the market — as good as the VIX, says Brian Stutland of Equity Armor Investments.
“There is huge correlation right now between VIX and bitcoin 30 days ago,” he says.
Cryptocurrencies allow investors to move their money off the balance sheets of banks and decrease credit risks.

****SD: For an update on “the new fear gauge,” see MarketWatch’s Bitcoin holds $7,000 as volatility trends lower

Vix volatility index hits highest level in a month
Cliff Venzon – Financial Times (SUBSCRIPTION)
Heightened volatility struck US equities on Tuesday as developments in Italy’s political sphere fuelled investor anxiety.
The Cboe’s Vix index, a widely tracked measure of volatility, rose 4.4 points to 17.64, a 33 per cent increase for the day. During Tuesday’s trading session it touched a peak of 18.78, its highest level since April 25, according to Thomson Reuters data.

Exchanges and Clearing

Chicago Stock Exchange sale price rose in bidding war
Crain’s Chicago Business
A little known fact behind the recent deal to sell the tiny Chicago Stock Exchange: There were at least four other bidders, including two local investment groups with familiar industry names.
It turns out that Intercontinental Exchange wasn’t the only outfit interested in buying the Chicago Stock Exchange earlier this year. There were four other bidders—and that competition helped drive up the price for the eventual buyer.
Atlanta-based Intercontinental, which also owns the New York Stock Exchange, agreed last month to buy the relatively tiny bourse’s parent, CHX Holdings, for $70 million, which was two and a half times more than a prior offer from a U.S.-Chinese group of investors that failed to win regulatory approval.

***SD: Some interesting motivations to infer from this story. Other bidders included MIAX, former NYSE execs who helped build Archipelago, and folks from the crypto firm Bcause as well as tZero – tZero was apparently the culprit in ratcheting up the bidding.

Options, other markets to follow US corporate bond index futures
Louisa Chender – Global Investor Group (SUBSCRIPTION)
Cboe, IHS Markit and BlackRock will launch the first US corporate bond index futures this summer

CME Group Daily Volume Surpasses 50 Million Contracts For The First Time; Interest Rate Futures And Options Reach All-Time Daily Volume Record Of 39.6 Million Contracts
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it reached an all-time daily volume record of 51.9 million contracts traded on May 29, 2018. The previous single-day volume record was 44.5 million contracts, set on Nov. 9, 2016.

ICE’s Interest Rate Futures And Options Complex Sets Daily Volume Record Of 7.8 Million Contracts; Euribor Futures Achieve New Volume Record
Intercontinental Exchange, Inc., a leading operator of global exchanges and clearing houses and provider of data and listings services, announced today that ICE’s Interest Rate complex achieved record daily volume of 7.8 million futures and options contracts on May 29, 2018 surpassing the previous record of 6.2 million contracts set on May 6, 2010. Year to date volume in ICE’s interest rate complex is up 13% and open interest is up 5% year over year.

Deutsche Boerse Presents Details Of Its “Roadmap 2020” Strategy
Focus on organic growth, targeted acquisitions, and investments in new technologies;
Structural net revenue targeted to grow by more than 5 per cent p.a. – annual net profit to increase by between 10 and 15 per cent on average;
Structural costs to be reduced by around EUR 100 million until 2020;
Technology investments of EUR 270 million with several hundred new jobs in areas holding potential for the future;

****SD: Right in line with that, other news from Deutsche Boerse today – Deutsche Boerse Group acquires US FX ECN platform

Gold options contract registers record turnover on MCX
Times of India
Multi Commodity Exchange of India (MCX), the country’s largest commodity derivatives exchange, witnessed record turnover and volume of Rs 2,021 crore and 6443 kilograms (kg) respectively on May 29 in its gold options contract.

Regulation & Enforcement

Exchanges Blast SEC for Plan to Rein In Rebates
Alexander Osipovich – WSJ (SUBSCRIPTION)
Two of the biggest U.S. stock-exchange operators have accused the Securities and Exchange Commission of exceeding its legal authority with a proposal to limit the rebates they pay traders to attract stock orders.

****SD: A truncated version of the story is available from MarketWatch. Meanwhile, pension funds came out in support of the pilot program this week. Check out the related SEC personnel move below, too.

Jeffrey Harris, Chief Economist And Director Of The SEC’s Division Of Economic And Risk Analysis, To Leave The Agency
The Securities and Exchange Commission today announced that Dr. Jeffrey H. Harris, the Chief Economist and Director of the Division of Economic and Risk Analysis (DERA) and a Professor of Finance at American University’s Kogod School of Business, will leave the agency at the end of May to return to academia full time.

****SD: He spent nine months at the agency during which he helped develop a transaction fee pilot for NMS stocks.

Analysis: Dozens of Brokers to Move Offshore Due to ESMA Leverage Rules
Victor Golovtchenko – Finance Magnates
As the European Securities Markets Authority (ESMA) is preparing to launch its new regulatory framework for retail brokers, compliance pressure is set to move many offshore. Despite payment processing and bank account registration hardships, brokerage companies that have been previously regulated in the EU are preparing to make an offshore move.

Credit Suisse Is Near Lehman Derivatives Settlement
Credit Suisse AG is closing in on an agreement to settle a $1.2 billion derivatives demand against bankrupt Lehman Brothers Holdings Inc., reducing the claim to $385 million, according to a person with knowledge of the matter.


See What We’ve Been Building For You – Under the Hood
Robinhood Blog
Just like on the Robinhood App, you can now track and invest in Bitcoin and other cryptocurrency on Web. You can also monitor and close your options positions, with additional options functionality coming soon.


Bond Traders’ Confidence in Fed Rate Path Crumbles
Alex Harris and Edward Bolingbroke – Bloomberg (SUBSCRIPTION)
The latest bout of market turmoil is denting investor confidence in how aggressively the Federal Reserve will tighten policy this year.
Activity in options on eurodollar futures shows traders are starting to unwind bets that the central bank will hike four times in 2018. The evaporation of that wager, which implied one more increase this year than indicated in officials’ quarterly projections, is also apparent in rallying fed funds futures.

Oil bulls scurry for protection against a wave of OPEC supply
Amanda Cooper – Reuters
OPEC’s plans to boost output have spooked oil market bulls, who are starting to seek protection at levels well below the current futures price in case the group delivers a rapid increase in production.

Wall Street Has a Hot Options Trade to Profit From Sideways S&P
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Buy-write index beating S&P 500 after trailing since 2016; Strategy works best in flat markets while guarding against vol
There’s an options trade that promises stellar returns if U.S. stocks continue to tread water. The catch: it’s only managed to deliver that a handful of times over the past decade.

***SD: I guess things really are changing if buy-write is “hot”?

Hedge Fund’s Tencent Trade Pays ‘Huge’ on a Selloff, or a Rally
Bei Hu – Bloomberg (SUBSCRIPTION)
BFAM’s Fuchs recommends buying put options hedged with shares; He says trade can make a 30% return on capital over six months


Turkish Lira Extends Its World Beating Advance to a Third Day
Tugce Ozsoy – Bloomberg (SUBSCRIPTION)
…It appreciated as much as 2.1 percent, putting the Turkish currency on course for its longest winning streak in a month. While options traders are still pessimistic on the lira, they’re paying less to bet on its decline than the ruble for the first time in about two weeks.

JP Morgan says second-quarter trading revenue about flat from year ago
Hugh Son – CNBC
J.P. Morgan Chase, the world’s biggest investment bank by revenue, said trading revenue in the second quarter is likely to be about unchanged from a year ago amid charges related to taxes and accounting rule changes.

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