Cboe lawsuit; Background on LJM losses; Vol to stay?

Apr 11, 2018

Cboe lawsuit; Background on LJM losses; Vol to stay?

Apr 11, 2018

Jeff Bergstrom

Jeff Bergstrom


Observations & Insight

Access-Fee Pilot: Fewer Fees, More Fragmentation?
Rob Daly – MarketsMedia
The access-fee pilot proposed by the U.S. Securities and Exchange Commission may increase fragmentation in the equity markets as Cboe Global Markets considers launching two additional order books to offset the pilot’s fee caps and prohibitions.
“We have six exchanges, but we use four for equities and four for options,” said Chris Concannon, president and COO of Cboe, during the National Security Traders Association’s 2018 Market Structure Symposium in Chicago. “I promised the industry previously that we would not light up those books, but with the access-fee pilot, that is off the table.”

****SD: I have my notes from the symposium below. Other stories out of that symposium are Clayton Says ‘Sooner the Better’ for SEC Fiduciary Rule; Clayton and Redfearn address equity market structure and Widespread Fraud in ICOs and Penny Stocks Shocked SEC’s Jay Clayton


A Reg Wrap
Spencer Doar – JLN

SEC Chairman Jay Clayton and SEC Director of the Division of Trading and Markets Brett Redfearn were in Chicago yesterday for an STA Equity Market Structure Symposium at the University of Chicago’s Gleacher Center. Here are some takeaways:

Perhaps biggest of all the endeavors on the SEC’s plate is the newly announced transaction fee pilot. While the agency has not established a quantitative measure to determine success or failure of the pilot, the hope is that the data gathered will finally shed light on the best way to revamp existing liquidity-related rebates and fees.

Clayton is very concerned about the Consolidated Audit Trail. Issues have arisen that were not considered in the (multi-year) planning period. He said the industry undoubtedly needs an audit trail and the firms charged with building it are more than capable. But that’s about it – questions about progress on the CAT were left hanging in the air. There was not a satisfactory answer or explanation for its delays or when it might be on track. He offered a rather glib response at one juncture, simply saying we’re at the stage where people know they have to mail a letter, but there’s no mailbox to put it in.

Clayton said during his tenure at the helm of the agency he has been shocked by the amount of fraud in ICOs and penny stocks.

It does seem like the SEC’s agenda for 2018 is one of the most ambitious in recent years. There will be three roundtables in 2018 to address some of the issues the SEC has prioritized. The first roundtable will deal with illiquid stocks. Does the industry need a one-size fits all market structure when 15 percent of listed equities account for less than one percent of daily volume? The second roundtable will deal with how to improve investment and development of the SIP. That will also serve as an opportunity to address market data in general. The third roundtable will address retail fraud.


So far in our annual series with industry leaders that we film at FIA Boca we have released videos of former Liffe and LME CEO Garry Jones; CME Chief Commercial Officer Julie Winkler; Trading Technologies CEO Rick Lane; ASX Deputy CEO Peter Hiom; Cboe President and COO Chris Concannon; Cinnober Executive Chairman Nils-Robert Persson; Greenkey CEO Nader Shwayhat; LME CEO Matt Chamberlain; SGX EVP and Head of Derivatives Michael Syn; TMX CEO Lou Eccleston and Eurex CEO Thomas Book. (And there are plenty more to come!)


Lead Stories

Quinn Emanuel Urquhart & Sullivan, LLP Files VIX “Fear Gauge” Manipulation Class Action Suit against the VIX Exchange CBOE
Quinn Emanuel Urquhart & Sullivan, LLP (“Quinn Emanuel”) today announced that it has commenced a class action on behalf of investors who held or traded S&P 500 (“SPX”) option contracts (“SPX Options”), CBOE Volatility Index (“VIX”) option contracts (“VIX Options”), futures based on the VIX (“VIX Futures”), or VIX Exchange Traded Products (“VIX ETPs”) on exchanges run by Cboe Global Markets, Inc. (formerly known as CBOE Holdings, Inc.) and its affiliates (“CBOE”) during the following time periods (“Class Period”):

****SD: This is the same Bueno v. Cboe case that the Robbins Geller Rudman & Dowd LLP Files VIX “Fear Gauge” Manipulation Class Action Suit against the VIX Exchange CBOE press release from last week pertains to. The class action complaint says “jury trial demanded” – if this goes to a jury trial, how the heck are you going to make 12 people understand the subject matter let alone determine which view is right? The other VIX-related case from last week was Federman & Sherwood Announces Filing of Securities Class Action Lawsuit on Behalf of Investors in Credit Suisse VelocityShares Inverse VIX Short Term Exchange Traded Notes.

LJM’s market-volatility bet busted its mutual fund
Lynne Marek – Crain’s Chicago Business
Mutual fund manager LJM Partners was riding high in June when it won a big accolade: In front of 200 peers at the Four Seasons Hotel in Chicago, a top LJM executive accepted a Pinnacle Award, one of the highest honors in the derivatives industry, for best options strategy.
The glory was short-lived. Last month, LJM took center stage again when a phalanx of lawyers arrived at the federal courthouse in Chicago representing clients seeking amends for millions of dollars in losses at the fund.

****SD: Fell through the weekend cracks!

Volatility looks set to stay with many big swings in 2018
Joe Rennison – Financial Times (SUBSCRIPTION)
If you are an equity investor trying to pick the dominant theme of 2018, there is plenty of choice.
There was the inflation scare in the early part of the year, which has recently been overshadowed by fear of a trade war and the regulatory threat to Big Tech. Then there is the concern that the robust global economy that has underpinned the US stock rally is slowing.

EU Exchange-Traded Derivatives Market Worth EUR200tr
Shanny Basar – MarketsMedia
The European Securities and Markets Authority said the market for exchange-traded derivatives has an average daily turnover of EUR1.3 ($1.6) trillion, based on data which will allow the regulator to track changes due to new regulation.
Esma also said in a report, Trends, Risks, and Vulnerabilities (TRV) Report No. 1, 2018, that the total trading volume of the exchange-traded derivatives market is approximately $200 trillion.

Oil Options Traders Are Most Bullish Since Crude Was Over $100
David Marino – Bloomberg
Missile attack on Riyadh, Trump Syria threat boost futures; Call skew on WTI crude rises to highest since June 2014
The last time oil options traders were this bullish, crude was selling for $105 a barrel.

The 50 cent options trader who bets on market volatility says a financial ‘earthquake’ is coming
Sam Jacobs – Business Insider
The market meltdown in early February — when US stocks had their biggest one-day fall in six years— proved to be more of a financial tremor, but the threat of an actual earthquake remains.

****JB: Same story at the Financial Times

Russian rouble implied volatility soars on escalating market stress
Short-dated options in the Russian rouble jumped to multi-year highs on Wednesday as punitive new U.S. sanctions and the escalating tensions over the conflict in Syria intensified a selloff in the currency.

China suspends OTC options market to curb risks: sources
China has halted its loosely-regulated and fast-growing over-the-counter (OTC) options market in the government’s latest effort to reduce risk in the financial system, according to sources at brokerage firms.

Segregated Funds, Market Crashes & Under-Seg
Tod Skarecky – Clarus Financial Technology
Today I want to look briefly at the reported solvency of FCM’s during the most recent market panic.
Back on February 5th of this year, the US equities market suffered a volatile day and significant losses. The Dow Jones index had its worst ever one-day loss in terms of points (down 1,175), and other indices were similarly hit. The story of the day was that volatility was back in the equities market, with the volatility “index” (the VIX) more than doubling during the day. Further, crowded trades betting against volatility, such as in the inverse VIX (the XIV), saw losses of 90%, as prescribed hedging/selling had to take place. Interest rates were also volatile with the 10-year rate off 6 basis points, and just about every asset class saw some sort of panic.

Exchanges and Clearing

SGX updates on India equity derivatives plans
SGX will list new India equity derivative products in June 2018, to provide market participants with continuity and the ability to seamlessly transition their current India risk management exposures. These products also add to the existing India Single Stock Futures offering, which has garnered active participation from global institutional clients since its launch, demonstrating the demand for access products.

****SD: In other SGX news, FIA responds to proposed clearing fund changes at SGX

Regulation & Enforcement

The VIX Index Now Under the Regulators’ Spotlight
Samantha Barnes – International Banker
On February 5, the US stock market the Dow Jones Industrial Average suffered its largest ever decline for a trading day. The benchmark stock index ended up dropping more than 1,000 points on the day, while fellow benchmark the S&P 500 shed more than 4 percent of its value.

Sebi to make physical settlement mandatory in phased manner
Business Standard News
Markets regulator Sebi today decided to make physical settlement of stock derivatives mandatory in a phased or calibrated manner, a move that could bring some much-needed balance between equity cash and derivative segments.


Successful stock strategy no longer working, bubble has burst: BAML
Joe Ciolli – Business Insider (SUBSCRIPTION)
For much of the nine-year bull market, the stock-trading strategy known as “buy the dip” was basically synonymous with “free money.”
That’s because, following any period of sharp weakness, traders could simply scoop up shares at bargain prices, and the market would recover.
Bank of America Merrill Lynch went as far as to crunch the numbers, and the results are astounding. Dating back to 2012, buying any 5% dip in S&P 500 futures — and holding until either the move retraced or 20 days passed — would have been successful 82% of the time, the firm’s data found. Further, since 2014, BAML says, such a strategy has consistently outperformed the benchmark.

Insights From Backtesting Short VIX Strategies
Sage Anderson – tastytrade blog
When volatility pops, as it has during the first quarter of 2018, the eyes of most volatility traders usually get a little bigger.
After all, heightened volatility adds a lot of drama to the action, much like overtime during the playoffs of a professional sport.
This is also a time that many volatility traders start filtering for short premium opportunities, depending of course on one’s own unique strategy, outlook, and risk profile.

Options Signal Flashing for First Time Since Election
Andrea Kramer – Schaeffer’s Investment Research
After a slow burn to record highs in 2017, the U.S. stock market has been on a roller coaster this year, with volatility ramping up in a big way. As such, the Cboe Volatility Index (VIX) — also known as Wall Street’s “fear gauge” — kicked off 2018 with a bang, logging its best start to a year ever. Against this backdrop, near-term put open interest on a handful of major equity exchange-traded funds (ETFs) has surged, sending up a stock signal not seen since before the November 2016 presidential election.


Renaissance, Cambridge Analytica Connection Should Be Questioned, Experts Say
Richard Teitelbaum – Institutional Investor
Mushrooming scandals at Cambridge Analytica, the embattled quantitatively driven consulting firm accused of misappropriating data and possible violations of U.S. election laws, are inexorably pushing pensions and other investors toward a decision: whether to pull their money from Renaissance Technologies, arguably the world’s most successful hedge fund firm.
Cambridge Analytica is largely bankrolled by Robert Mercer, a backer of Breitbart News and other ventures, who stepped down on January 1 as co-CEO of Renaissance following public criticism of his political activism. Mercer continues as a top researcher and part owner at Renaissance.

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Covering Your Downside – Shielding Against Market Downturns

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