Cboe says Vix products not to blame; Credit Suisse liquidates vol fund; The market is not the economy

Feb 7, 2018

First Read

Hits & Takes
JLN Staff

Electronic Interest Rate options ADV reached a record 1.43 million in January, including a single-day record on January 18th in which 1.3 million Eurodollar options traded on CME Globex, surpassing the daily pit volume.~JJL

SGX FX futures volume hit a new record of $65 billion in January with ADV of $3 billion.~JK

In light of all the VIX ETP drama, which was covered in yesterday’s Options newsletter, check out our blog post Vol-cano Erupts – How’s Seth Golden Doing? It was a response to the seeming surprise amongst pundits about how volatility products would react to sudden selloff. (We will have more ETP drama today, too.)~SD

Venture capital investment in UK fintech firms more than doubled in 2017 to reach $1.8 billion, with 54 percent coming from overseas VCs who appear largely untroubled by the UK’s imminent break from the European Union, according to Innovate Finance.~JK

INTL FCStone Inc. announced that the broker-dealer division of its wholly owned subsidiary, INTL FCStone Financial Inc., ranked as the top market maker in 2017 for international securities traded over-the-counter (OTC), and first by dollar value traded for approximately 2,600 securities, according to data from FINRA’s Over-the-Counter Reporting Facility (ORF) and Bloomberg RANK.~JJL


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History of the World Part III
Steve Grob – Fidessa
Those of us who have been in the industry for a while will remember what became known as the “Battle of the Bund” back in the early 1990s. The quick version is that newly formed DTB (now Eurex) managed, in just a few months, to repatriate trading in the benchmark Bund futures contract from London based incumbent, LIFFE.

**Can Deutsche Boerse repeat history with Euro denominated clearing?~JK


SpaceX: Craigslist Ad Lists Falcon 9 Rocket for $9.9M
Tom Huddleston Jr. – Fortune
If you’ve thought about buying your own orbital space rocket in the past, only to balk at the massive price tag, today might be your lucky day.

****JB: The ad claims it was “gently used” so it must be in good condition. In case you missed it, Elon Musk sent his Tesla Roadster into space yesterday. Really…you can see it in orbit here. Worth noting, the car has an astronaut mannequin in the seat, the dashboard display has the words “Don’t Panic” in large, friendly letters on it and there is a towel in the glovebox (Hitchhiker’s Guide to the Galaxy fans will understand). Also, David Bowie is playing on the radio which brings this whole thing full circle. David Bowie played Tesla in the movie “The Prestige” and now Tesla is playing Bowie in space. ~JB


Here Are the World’s Virtual Currency Billionaires (or at Least They Were)
Nathaniel Popper – NY Times
The creators of the famous Forbes rich list have made their first attempt to identify the wealthiest people in the virtual currency industry. Yet the list that was published on Wednesday, right after major drops in virtual currency prices, inadvertently also served as a reminder of the fleeting nature of that wealth.

**Do the Winklevoss twins wear different sweaters all the time so you can tell them apart?~JK


Market Movers: February 8 Crop Report
CME Group
Industry experts Dave Hightower, Founding Principal of The Hightower Report, and Dan Basse, President of AgResource Company, preview the February 8 USDA report discussing corn and soybean yields in advance of its publication.

**Nothing fires you up like a crop report in February.~JK


Tuesday’s Top Three
Ok, I thought the headline might be real and so did you. Our top story was the short satire from The New Yorker Trump Considering Firing Dow Jones Industrial Average. Second went to the truly serious issue of spoofing and just how accountable technology firms are for the actions of their customers in Spoofing Cops Knock On ISVs’ Door, from Trillium. Third went to the New York Times piece As Bitcoin Bubble Loses Air, Frauds and Flaws Rise to Surface

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Lead Stories

Cboe says Vix products not to blame for market rout; Exchange group defends flagship volatility index as recriminations fly
Joe Rennison, Gregory Meyer and Nicole Bullock in New York – FT
Cboe Global Markets has defended its flagship Vix volatility index, after investors and analysts blamed products that seek to track the measure for exacerbating this week’s ructions across global stock markets.

Credit Suisse ‘volatility’ fund liquidated after market selloff
Michael Shields, Trevor Hunnicutt – Reuters
Credit Suisse (CSGN.S) said on Tuesday it would terminate the second-largest publicly traded product betting on future swings in the S&P 500 after its value plunged during the global market rout.

**** FT has Credit Suisse and Nomura liquidate ETN products amid market volatility but if you want to know the mechanics of the fund check out WSJ’s Born to Die: Inside XIV, the Busted Volatility ETF. Bloomberg has a quick Q&A with Devesh Shah – An Inventor of the VIX: ‘I Don’t Know Why These Products Exist’

Don’t Mistake the Stock Market for the Economy; The selloff doesn’t reflect solid global growth.
Robert Burgess – Bloomberg
It may not be as bad as you think. Photographer: Spencer Platt/Getty Images
The gut-wrenching moves in equities in recent days raise a number of questions. For one, are the declines indicative of an underlying problem in the global economy? And two, do the losses threaten to spark some sort of contagion?

Inside Wall Street’s $8 Billion VIX Time Bomb
Dakin Campbell, Dani Burger Donal Griffin and Carolina Wilson – Bloomberg
Before whirlwind, banks turned volatility into the hot item; VIX was seen as sure thing — until it suddenly wasn’t anymore
It was the hot trade on Wall Street, a seemingly sure thing that lulled everyone from hedge fund managers to small-time investors.

Quants Embrace Recent Selloff Even as Everyone Blames Them For It
Bradley Hope – WSJ
A day after the stock market plummeted more than 1,100 points, quantitative traders were made the scapegoat by many investors and even the treasury secretary.

Quants? Bubble on the Brink? The Fed? It’s 1998 All Over Again
Elena Popina and Sarah Ponczek – Bloomberg
Tech megacaps lost a third of their value in March – May 2000; Just as in 1998, the rally was driven by technology companies
Does the chaos embroiling equity markets have an obvious precedent that can guide investors on how it plays out?

Regulators Let Wall Street Turn VIX on Its Head; Products tied to volatility make it worse for the market and individual investors.
Stephen Gandel – Bloomberg
The best thing you can say about sudden market drops is that they can point out the market’s weaknesses and create a road map for regulators to clean up any excesses. The bad news is that regulators look increasingly uninterested in protecting investors from the market’s potholes.

Before the Machines, Human Emotions Set the Stage for a Selloff
Elena Popina and Sarah Ponczek – Bloomberg
Pace of EPS increase is 4 times faster than any time since ’12; Wall Street’s EPS estimates will come down later in ’18: BofA
You’ve heard all about the robots. But the selloff that’s ripped through the stock market over the last six days would never have gotten off the ground without people at the controls.

Virtu Financial, Flow Traders rise in volatile trade
Philip Stafford – FT
Sudden market volatility isn’t bad for everyone. High-frequency traders have stumbled across an oasis in the desert.

Business Wire sees persistent cyber attack on website
Berkshire Hathaway’s Business Wire said on Tuesday its website has been under cyber attack since Jan. 31.

VIX, Shmix. The Debt Ceiling Is a Real Worry
Randall Forsyth – Barron’s
Here we go, again. The debt ceiling looms and Uncle Sam stands the chance of (technically) defaulting again unless Congress gets around to increasing the federal government’s borrowing limit.

Exchanges, OTC and Clearing

Short-vol collapse may deal lasting blow to CBOE ó JPMorgan; Bank warns of ‘tip of the iceberg’ for products focused on volatility
Adam Samson – Financial Times
The collapse this week of a clutch of high-profile exchange-traded products may be the “tip of the iceberg” of a rethink on bets against volatility, a shift that would in turn deal a blow to CBOE Global Markets, JPMorgan said on Wednesday.

Worries About VIX Funds Drag Cboe’s Shares to a Record Decline
Annie Massa and Brian Louis – Bloomberg
One big VIX fund is closing, another lost most of its value; VIX derivatives provide about a quarter of Cboe’s revenue
Cboe Global Markets Inc.’s been one of the surest bets out there, rallying seven straight years on the back of its famous VIX franchise. But a crack just formed in that pillar of growth for the company, sending its shares tumbling a record 17 percent.

****FT – Cboe hit as Vix product woes spark trading volume concerns

Intercontinental Exchange Announces 20% Increase to its Quarterly Dividend
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, announced board authorization of its first quarter 2018 dividend of $0.24 per share, up 20% from its previous $0.20 per share quarterly dividend in 2017.

Intercontinental Exchange Reports Fourth Quarter 2017 GAAP Diluted EPS of $2.08 on Revenues of $1.1 Billion; Fourth Quarter 2017 Adjusted Diluted EPS of $0.73
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses and provider of global data and listing services, today reported financial results for the fourth quarter and full year of 2017. For the quarter ended December 31, 2017, consolidated net income attributable to ICE was $1.2 billion on $1.1 billion of consolidated revenues less transaction-based expenses. This included $764 million of a deferred tax benefit related to U.S. tax reform. Fourth quarter GAAP diluted earnings per share (EPS) were $2.08. On an adjusted basis, consolidated net income attributable to ICE was $433 million in the fourth quarter, and diluted EPS were $0.73.

China securities regulator approves launch of hog futures: exchange
Dominique Patton, Hallie Gu – Reuters
China’s securities regulator has approved plans for a long-awaited live hog futures contract, taking the Dalian Commodity Exchange a step closer to launching a product that will allow farmers in the world’s top pork market to hedge livestock costs.


NEX Regulatory Reporting Partners with Delta Capita To Provide SFTR Advice To Clients
Press Release
NEX Regulatory Reporting announces today that it has partnered with Delta Capita, an international business and technology consulting provider, who will offer specialist advice to clients ahead of the Securities Financing Transactions Regulation (SFTR) coming into effect.

Money and trust: lessons from the 1620s for money in the digital age
Isabel Schnabel and Hyun Song Shin – BIS Working Papers
We look to history for lessons on the nature of money and the role of central banks in building trust in the use of money in society. The issue of trust has again come to the fore in debates on the durability of cryptocurrencies such as Bitcoin, and how far private money can supplant central bank money as a medium of exchange

Paul Thomas Joins FlexTrade as Vice President, FX Business Development in U.S.
FlexTrade Systems
FlexTrade Systems, a global leader in multi-asset execution and order management systems, today announced the appointment of Paul Thomas as Vice President, FX Business Development with responsibility for both the buy-side and sell-side markets in the Americas.


Treasury Secretary Tries to Ease Concern Over Stock Market Fall; Mnuchin tells lawmakers stocks are undergoing a ‘normal market correction’ and the underlying economic fundamentals were strong
Kate Davidson – WSJ
Treasury Secretary Steven Mnuchin on Tuesday tried to dampen concerns over the recent stock market fall, which he said was not tied to any issues of financial stability and didn’t overly concern him.

US trade deficit jumps 12.1% in Trump’s first year in office
Shawn Donnan – FT
Ignore the markets tumbling for a second. Here’s another number Donald Trump is not going to like. The US trade deficit grew 12.1 per cent, or $61.2bn, to $566bn in 2017, according to data just out from the US Commerce Department.

Fake news sharing in US is a rightwing thing, says study; University of Oxford project finds Trump supporters consume largest volume of ‘junk news’ on Facebook and Twitter
Alex Hern – The Guardian
Low-quality, extremist, sensationalist and conspiratorial news published in the US was overwhelmingly consumed and shared by rightwing social network users, according to a new study from the University of Oxford.

When Words Lose All Meaning
Jonathan Bernstein – Bloomberg
I really don’t want to write about Donald Trump’s rejection of democratic norms all the time. Plenty of people handle that. And yet, it feels wrong to ignore authoritarian statements by the president of the United States. So here we go again.


Lawsuit claiming Citigroup ran ‘boys club’ dismissed by U.S. judge
Jonathan Stempel – Reuters
A federal judge in Manhattan on Tuesday dismissed a lawsuit by a fired Citigroup Inc (C.N) financial adviser who said the bank’s “culture of gender discrimination” made it clear that “the boys were in charge.”

Senate cryptocurrency hearing strikes a cautiously optimistic tone
Taylor Hatmaker – TechCrunch
In a hearing today before the Senate Banking Committee, Securities and Exchange Commission Chairman Jay Clayton and Commodity Futures Trading Commission Chairman Christopher Giancarlo opened up about what the near-term U.S. regulatory fate of cryptocurrency might look like. In a week of plunging prices and bad news, the hearing struck a tone that coin watchers could reasonably interpret as surprisingly optimistic.

Remarks of Chairman J. Christopher Giancarlo at the Black History Month Celebration
Good morning and welcome. It was almost 50 years ago, in March 1968, that Dr. Martin Luther King, Jr., gave his last Sunday sermon before his martyrdom. It was here in Washington, just a few blocks away at the National Cathedral.

ESMA Publishes The Responses To Consultation On Proposed Amendment To MiFID II RTS 1
The European Securities and Markets Authority (ESMA) has published the responses received to its Consultation on proposed amendment to MiFID II RTS 1.

Investing and Trading

Buying the Dip Works Nicely, a 30-Year History of Routs Shows
Cormac Mullen – Bloomberg
As the dust settles for now after the turmoil of the last few days, a chorus of buy-the-dip calls from fund managers and strategists is still ringing in equity investors’ ears. History suggests they have a point.

People Are Worried About the Stock Market; Also VIX ETPs, Morgan Stanley, crypto-Ponzi hacking and Uber.
Matt Levine – Bloomberg
People are worried that people aren’t worried oh wait no.

Bitcoin Volatility Less than Stocks’ ‘VIX’ Index, SEC Says
Jen Wieczner – Fortune
The stock market’s wild swings are making Bitcoin’s price crashes look tame.
As the Dow Jones industrial average continued seesawing Tuesday after plunging a record 1,175 points the previous day, the heads of the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission were on Capitol Hill answering lawmakers’ questions about the risks posed by another highly volatile asset class: cryptocurrencies such as Bitcoin.

Bitcoin’s Crash Looks Spookily Familiar; There are similarities between this week’s crypto and markets routs.
Lionel Laurent – Bloomberg
Bitcoin has been a plaything for risk-hungry traders and punters rather than a widely held investment or real-world currency. It’s been shunned by banks and banned by governments.

Don’t Forget What Causes a Recession; They have this nasty habit of showing up when least expected.
Noah Smith – Bloomberg
Remember recessions? Those times where the stock market goes down, unemployment goes up and businesses stop investing? There was a really big one about a decade ago, but that was a long time ago — there are plenty of young workers now who were kids back when names like Lehman Brothers and Ben Bernanke were in the news. According to the indicators compiled by the National Bureau of Economic Research, the U.S. economy hasn’t been in recession since June 2009 — almost nine years ago. If the economy sustains its expansion for just 14 more months, this will be the longest the country has gone without an economic downturn in recorded history, surpassing both the 1960s and 1990s booms in duration:


Goldman Hails Outlook for Commodities as Market Turmoil Subsides
Jasmine Ng and Tom Mackenzie – Bloomberg
Currie says raw materials do well during rate-hiking cycles; Backwardation seen in crude oil means ‘it pays you to be long’
Goldman Sachs Group Inc. is standing by its bullish call on commodities, saying the recent global markets selloff only bolsters its view that raw materials are set to perform well in months ahead

FXSpotStream breaks record volumes as State Street’s liquidity goes live FEBRUARY 7, 2018 Ricardo Esteves – The Industry Spread
FXSpotStream LLC, a bank-owned consortium that provides the infrastructure to facilitate the route of trades from clients to liquidity providers, announced that State Street, its 13th bank available to clients connected to FXSpotStream’s price aggregation Service, is now live and trading globally.

Hedge Funds Shorting Volatility ‘Forced to Puke’ as Stocks Drop
Suzy Waite, Nishant Kumar and Saijel Kishan – Bloomberg
Option Solutions lost up to 65 percent amid stock selloff; Spike in volatility is set to continue, a hedge fund firm says
Hedge funds betting that stocks will surge and volatility is likely to remain muted were hit the hardest as an equity-market rout wiped about $1.25 trillion from U.S. shares.

Wall Street FX Strategists Hit Reset After Euro Calls Fall Short
Alexandria Arnold – Bloomberg
Euro up more than 3% in 2018, above prior targets for year-end; Some analysts now predicting move toward $1.30 area for euro
Wall Street’s top currency strategists had the right idea when it came to the euro — they just weren’t right enough.

For Banks, This Volatility Is Too Much; Bank investors like some market volatility, but only within reason
Aaron Back – WSJ
Banking stocks have been hit along with everything else the past couple days. Are investors making a mistake?

Why Banks Will Cut Stock Market Fuel Supply; Loans that boost stock market bets look riskier after last year’s big loss
Paul J. Davies – WSJ
When stock markets hit air pockets like the past couple of days, margin calls are never far behind. This time, banks already have reason to be nervous about lending against shares.

Bill Gross Fares Worst Among Go-Anywhere Bond Fund Managers in Selloff
John Gittelsohn – Bloomberg
Janus Henderson vehicle fell 0.8% on Monday, most in a year; His $2.2 billion fund held up far better than stock markets
Bill Gross was having a good 2018, until he wasn’t.


One Man’s Fight Against the Lions of Japanese Investing; When Haruhiro Nakano tried to set up a mutual fund in Tokyo, he quickly realized he’d have to overcome a lifetime of resistance.
Tom Redmond, Yuko Takeo and Nao Sano – Bloomberg
In a tiny, windowless meeting room high above the streets of Tokyo, Haruhiro Nakano starts to cry. The rail-thin, 54-year-old fund manager, who looks like a faded former J-pop star, has just shared his investing pitch, which sounds so deceptively simple you may not appreciate just how radical it is: Japanese workers, Nakano says, should invest for retirement using the capital markets rather than letting more than $8.6 trillion fester in bank accounts.

China’s Love Affair With Gold Heating Up on Property Riches
Ranjeetha Pakiam and Daniela Wei – Bloomberg
Showrooms in Shenzhen busy, wholesalers see clients returning; World’s biggest jeweler expects sales to keep expanding in ’18
China’s growing throng of affluent consumers is driving a rebound in demand for gold rings, bracelets and necklaces as a property boom and high stock market valuations boost wealth in the largest bullion market.

Euphoria in Emerging Markets Is Over, According to $119 Billion Japanese Fund
Yumi Teso – Bloomberg
Poland, Czech Republic, Malaysia, Mexico among favored markets; Investors are becoming selective and pace of gains will slow
The days when you could buy almost anything in emerging markets and expect to reap returns are over.

Inside Mexican Capital Markets with Jaime Lazaro, CFA
Ron Rimkus – CFA Institute
Latin American markets are changing economically and politically. Recently, Jorge Castaneda suggested that Latin America is at a turning point: Democracy is taking root, corruption is being punished, stifling business regulations are being reduced, and, of course, the region largely remains rich in natural resources. Of course, there are still significant challenges.

India ETFs Wrap-up: 2017
Mahavir Kaswa – S&P Indexology Blog
Until 2013, the exchange-traded fund (ETF) industry in India was in a nascent stage, with negligible assets under manager (AUM). As of Dec. 31, 2013, the total AUM for ETFs was INR 8,000 crores (or USD 1.2 billion), out of which commodities-based ETFs tracking gold noted the largest share, with total AUM of INR 6,500 crores (USD 1 billion).


Brexit could cut manufacturing exports by a third, experts warn
The Guardian
Leave-voting areas such as Sunderland to be worst hit by government strategies

Brexit issues for carbon market must be solved soon
UK departure from EU ETS is causing headaches for energy traders and risk managers, writes energy consultant

Theresa May and ministers gather for key Brexit meeting
Theresa May is to chair the first of two key Brexit meetings with her senior ministers as the government faces more calls to clarify the UK’s position. The Brexit cabinet committee is to sketch out what the future relationship between the UK and EU might look like.

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