A Decade on From the GFC – John Davidson, OCC; Cleverness vs. Manipulation?

Apr 26, 2018

Observations & Insight

Miscellany of the day
Spencer Doar – JLN

According to the most recent post on the Bank of England’s Bank Underground blog, the “volatility exposure of leveraged ETPs has fallen by around three quarters since early February.” Another quote from the piece: “In addition to making spikes in volatility sharhper, VIX ETPs also have the potential to make them shorter-lived.”

Recall that SVXY, one of the key VIX ETPs (and a surviving inverse instrument), started targeting -0.5 leverage instead of -1 at the end of February.

At the end of March, Cboe and Wall Street Horizon put on an event titled “Finding an Edge: How Options Traders Use Alternative Datasets.” The videos of that event are now available here. The moderator was Cboe’s Global Head of Information Solutions Catherine Clay and the panelists were FT Options CEO Michael Izhaky, TradeAlert President Henry Schwartz, big xyt CEO Robin Mess and Wall Street Horizon CEO Barry L. Star.

The following is a recap of the options-related videos from our Annual FIA Boca Industry Leader Series:

Ready to Follow Through – Chris Concannon, Cboe
2017’s Low Volatility Was Not a Problem – Julie Winkler, CME
Cybersecurity and Technology Upgrades – John Davidson, OCC

In terms of increased trading activity yesterday, the ETF winner was SMH (semiconductors ETF) with 125,949 contracts traded. Meanwhile in indices, there were 231 XDE (euro index) contracts traded – a drop in the bucket but I found it notable as XDE rarely sees much of any activity. In equities, Twitter was the winner with 327,491 contracts traded (AMD was up there but it’s a $10 – $11 stock, so…).

Lead Stories

A Decade After the Financial Crisis, These Lessons Can’t Be Forgotten
John Davidson, OCC President and COO – OCC
During the 2008 financial crisis, everyone in the business world, and many observers outside of it, were riveted to the news of the chaos unfolding daily in the markets. I viewed the crisis from a much different seat from the one I occupy now, having been effectively on the front row as the turmoil spread around the globe.

When Cleverness Becomes Manipulation
Matt Levine – Bloomberg
What is market manipulation? Well I certainly don’t know. From first principles, it seems like it would mean doing something to a market to make the price move, as opposed to just leaving the market alone to work itself out. But in practice, any time you interact with a market, you will do something to it: Any time you buy a thing, you will tend to push its price up; any time you sell it, you will tend to push the price down. Everyone who participates in a market necessarily manipulates it, in the minimal sense. There’s the famous definition given by a cotton trader, that manipulation means “any operation of the cotton market that does not suit the gentleman who is speaking at the moment.”

****SD: (He goes full VIX in the second part of the column.) I think he really gets at the philosophical root of the issue in the last paragraph: “You can do a legitimate trade to hedge or replace a position that also moves the price in order to benefit that position; your intent can be both virtuous and manipulative. The deep problem of market manipulation is that legitimate trading moves markets too, and sometimes it’s even meant to.”

25 Years of the VIX Index: By the Numbers
Cboe Blog
The growth of VIX and volatility trading has been an amazing story. As our month-long celebration of the VIX Index wraps up, we hope you have enjoyed learning about the past, present and future of VIX by following along on Twitter at #VIX25. Check out this recap of milestones in VIX history.

****SD: Also on the Cboe blog – 25 Years of the VIX Index: A Panel Wrap-up

Oil: How the Market Dynamics Have Changed
Bluford Putnam – CME Group
Oil prices are rising, driven by strong global growth and the reemergence of a Mideast risk premium. The market dynamics of this round of oil price increases, however, are strikingly different from recent episodes, such as in 2008 or 2012-2013. There are two key differences this time around that deserve our focus: (1) shale oil supply may respond more rapidly to price incentives than older technologies, and (2) the U.S. is now an oil exporter (as well as importer). As we explore these two topics, we will see some special nuances and caveats, too.

Exchanges and Clearing

Wall Street clearing firm stretches legs in Cypress Waters, explores blockchain
Jon Prior – Dallas Business Journal (SUBSCRIPTION)
“We have dedicated resources looking at blockchain and distributed ledger. It definitely is a big industry buzz word right now,” said Options Clearing Corp. Vice President Mike Hansen, who is based in the company’s new Dallas office.

****SD: Well, I would push back a bit against the “Wall Street” aspect of the title…

CME Group Secures Record Revenues for Q1 2018
Finance Magnates
Chicago-based CME Group (NASDAQ: CME), one of the world’s paramount exchange operators, has published its financial results for the first quarter of 2018, which were largely better when weighed against its 2017 equivalent, according to a CME statement.

MCX’s gold options shine brighter after market making boost
Hindu Business Line
MCX, the country’s largest commodity exchange, breathed new life into gold options trading on Tuesday by allowing market making through a liquidity enhancement scheme.

Regulation & Enforcement

Canadian Derivatives: Registration Regime For Dealers And Advisers Gets Momentum
On April 19, 2018, the Canadian Securities Administrators (CSA) took a major step toward adopting a comprehensive regime for the regulation of those in the business of trading derivatives or advising on derivatives. The CSA published for comment Proposed National Instrument 93-102 Derivatives: Registration (Proposed Registration Rule), along with a proposed Companion Policy.


Man and machine: The combination of AI and investment expertise helping generate alpha
Quant Insight – The Trade
In today’s increasingly complex world, discretionary managers have to distill a huge number of potential market-moving variables, ever greater geographical inter-connectedness and cross-asset correlations into a coherent view and enhanced performance. Moreover, while the discretionary manager’s job has become harder, cheaper and ever more sophisticated, processing power means the machine (passive funds) have become increasingly prevalent. Fund managers face the twin dilemma of pressure to perform and pressure on margins. Using AI and machine learning to arm discretionary managers with additional insights will be the only way to improve the bottom line and deliver the alpha they seek.


Convexity can deliver market diversification, says rated PM
Jessica Beard – Citywire Select
European markets lack diversification and investors need to get smarter on convexity to produce meaningful returns, Edmond de Rothschild AM’s Michaël Nizard has said.

FX Option Market Update: April 26, 2018
Dan Larsen – Saxo Group

Amazon stock options suggest a big move after earnings
Tomi Kilgore – MarketWatch
The Wall Street bookmakers’ line on how much Amazon.com Inc.’s stock will move after earnings suggests a tamer-than-usual reaction, but that doesn’t mean it will be a snoozer.

Nearly $100B has been wiped off FANG this week. Here’s how to trade it
Keris Lahiff – CNBC
The FANG stocks have said goodbye to roughly $88 billion in market cap this week. One strategist has a game plan for how to trade the acronym in case of more downside.


S&P Global Reports First Quarter Results
PRNewswire via Virtual-Strategy Magazine
…”We are off to a solid start to 2018 despite weak bond issuance and the return to volatility. In fact, the volatility led to record exchange-traded derivatives revenue in our Index business…”

Sell-side will seek “deeper partnerships” as margins shrink
Hayley McDowell – The Trade
Increasing pressure on margins at sell-side institutions will see some consolidation and “deeper” partnerships forming over the next few years, according to leading market participants.
Speaking on a keynote discussion panel at TradeTech in Paris, panelists from ITG, Goldman Sachs, SEB and SIX Swiss Exchange agreed that significantly higher costs have crippled margins at sell-side firms.

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