Cboe Letter on Improving VIX Settlement Process; Matrix Executions’ High Touch Trading Desk for Options

Apr 24, 2018

Lead Stories

Letter from Cboe CEO Ed Tilly and President Chris Concannon regarding VIX activity
Over the past 25 years, the Cboe Volatility Index (VIX) has become the leading, global indicator of market volatility for the marketplace. It could only achieve this status through the support of our Trading Permit Holders and their customers, other market participants, our clients and investors.
****SD: More on this from a couple of sources below, but if you want a TL;DR – Cboe is working to make the VIX settlement better but does not acknowledge any manipulation.

A longer TL;DR – Cboe acknowledges that there is a bit of a liquidity issue in the SOQ which in turn means that legitimate trading activity can have a seemingly outsize effect on the VIX settlement, which is not a reflection on the efficacy of their calculation process. The execs point out that SPX options will be migrating to a hybrid market model at the end of April which will hopefully improve liquidity and increase participation in the SPX opening. They reiterate that the exchange’s surveillance and FINRA’s oversight is robust, and that were something nefarious to be discovered, those participants would “be rooted out, swiftly and decisively.”

Matrix Executions Announces the Creation of a High Touch Trading Desk for Options
Matrix Executions, LLC (“Matrix”), a newly formed agency only broker-dealer, has added high touch capabilities to its already robust offering of solutions for exchanges as well as institutional and retail trading professionals.

****SD: Tony Saliba is getting the band back together. We have some content regarding his new endeavor and the needs of the options industry in the pipeline.

Is the tail wagging the dog? The impact of VIX exchange traded products on equity volatility
Olga Maizels – Bank Underground
Volatility returned to markets in early February, sparked by strong US wage growth data. After months of calm, the S&P 500 equity index fell by 4% on 5 February and the VIX – a measure of US equity volatility that is sometimes referred to as Wall Street’s “fear gauge” – experienced its largest one-day move in its 28-year history. Interestingly, measures of volatility in other markets, including interest rates and currencies, moved by much less. So what caused the outsized spike in the VIX? Some of the rise was linked to rebalancing flows associated with VIX exchange-traded products (ETPs), which can amplify moves in the volatility market.

****SD: Bloomberg’s Matt Levine talks a bit about the paper here.

Cboe Working to Improve VIX Settlement Process After Wild Swing
Brian Louis – Bloomberg
Cboe Global Markets Inc. said it is looking at ways to improve the settlement process for its Cboe Volatility Index, whose swings before expiration have been looked upon with suspicion in the market.
Allegations of manipulation are “without merit,” the Chicago-based exchange operator said in a letter to customers and traders that was included in a filing Monday. “If our regulatory efforts were to uncover any manipulation, it would be rooted out, swiftly and decisively.”

****JB: Financial Times on the same subject HERE

How Did the Old -1X SVXY Work
Vance Harwood – Six Figure Investing
As of February 28th, 2018 SVXY will target -0.5 leverage instead of -1X. This change was in response to the events of February 5th, 2018 when a massive VIX futures spike occurred in the last 30 minutes of trading, probably in part due to the rebalancing required by the 2X UVXY and -1X SVXY funds. This change to SVXY will reduce its rebalancing requirements and make it less susceptible to a termination event if VIX futures were to increase 100% or more from the previous day’s close. This leverage change will reduce SVXY’s performance when VIX futures are dropping in value.

Exchanges and Clearing

Eurex Exchange’s Quarterly Equity Derivatives Highlights
Eurex Exchange
Eurex Exchange offers the broadest range of pan-European single stock options and futures with a product offering of more than 700 equity options and 800 single stock futures from more than 10 countries. Through bundling European equity derivatives exposure at Eurex, investors are able to maximize collateral utilization and benefit from cross margining efficiencies with Eurex Clearing. This update serves you with key figures and the most important developments in our equity derivatives segment during the first quarter of 2018.

ISDA Publishes Future of Derivatives Survey at 33rd ISDA Annual General Meeting
Press Release
Derivatives industry participants are optimistic about the future of derivatives markets, but have flagged a number of important changes that will have an impact on the future of the business, according to a new survey published by ISDA to coincide with the start of the 33rd ISDA Annual General Meeting (AGM) in Miami.

DTCC shines spotlight on OTC derivatives standards, data collection
The Depository Trust & Clearing Corporation’s latest report highlights the current challenges that remain for creating a globally recognized framework for reporting for over-the-counter derivatives trades. Effective monitoring, data consistency and aggregation are key hurdles.

Central trading of OTC derivatives stabilises the real economy, says SFI research
Institutional Asset Manager
In order to improve market liquidity and financial stability, the G20 countries decided in 2009 that over-the-counter (OTC) products should be centrally traded on electronic platforms.

Moscow Exchange Announces Launch Of Light Sweet Crude Oil Futures
On 25 April 2018, Moscow Exchange will launch a Light Sweet Crude Oil futures contract and futures-style options on the futures to facilitate investment in global commodity instruments by Russian participants and their clients.


Top SocGen trader exits after less than 6 months on job
Kevin Dugan – NY Post
Well, that didn’t take long.
Mark Bamber, a top options trader at Société Générale, left his job earlier this month after less than six months at the French bank — part of a larger exodus at the company’s Manhattan office, The Post has learned.

big xyt On-Boards Former Barclays Capital Executive
Arnab Shome – Finance Magnates
Frankfurt-headquartered data analytics firm big xyt has hired former Barclays Capital’s Senior Executive Mark Montgomery in a key role to support Strategy and Business Development.


Saxo Bank And Microsoft Partner To Shape The Future Of Cloud Services In The Financial Industry
Today, Microsoft and Saxo Bank announced a strategic partnership with the aim of running Saxo Bank’s entire technology stack on the Microsoft Cloud.


Trend-following strategies for tail-risk hedging and alpha generation
Artur Sepp Research Blog
Because of the adaptive nature of position sizing, trend-following strategies can generate the positive skewness of their returns, when infrequent large gains compensate overall for frequent small losses. Further, trend-followers can produce the positive convexity of their returns with respect to stock market indices, when large gains are realized during either very bearish or very bullish markets. The positive convexity along with the overall positive performance make trend-following strategies viable diversifiers and alpha generators for both long-only portfolios and alternatives investments.

****SD: Full PDF of the paper this blog post is based on here.

Volatility prompts 42% to rethink equity strategy
David Robinson – International Adviser
February’s spike in volatility caused nearly half (42.1%) of investors to adjust their equity market outlook, according to the results of a survey published by BarclayHedge and Markov Processes International (MPI).

FX Options Market Update: April 24, 2018
Dan Larsen – TradingFloor.com


Economists bulls*** for a living : N. Taleb gives Kaushik Basu a lesson on ‘Skin in the Game’
Nassim Nicholas Taleb is one of the deepest, and more importantly, most independent thinkers of our time. His writings are among the clearest expositions on varied topics such as rationality, religion and minority populations, and these constitute arguably the best debunkings of simplistic but grandiose and judgmental liberal takes on these topics.

****SD: I am a fan of the acronym Taleb coined – IYI is an “intellectual yet idiot.”

Greenwich: the rich town on the frontline of US hedge fund fight
Lindsay Fortado – Financial Times
Bruce McGuire, the president of the Connecticut Hedge Fund Association, was holding court at a cocktail reception at Greenwich harbour late last year when he spotted one of his security detail milling about.

Stocks could see more turbulence as 10-year yield inches to important 3 percent level
Rising interest rates are likely to sting the stock market, but a 3 percent or even higher 10-year Treasury yield isn’t enough to cause a meltdown.

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