Cboe wins dismissal of VIX manipulation lawsuit; Volatility, Accidental Alpha and the Ghost of GETCO

May 30, 2019

Lead Stories

Cboe wins dismissal of Wall Street ‘fear gauge’ manipulation lawsuit
Jonathan Stempel – Reuters
A federal judge on Wednesday dismissed a lawsuit in which investors accused the parent of the Chicago Board Options Exchange of letting anonymous traders rig Wall Street’s main gauge of future stock market volatility at their expense.

****SD: Big news. Other sources – WSJ, Law360 and Bloomberg Law. But when one lawsuit goes away, another one sometimes pops up – see below.

U.S. exchanges must face renewed high-frequency trading claims: judge
Jonathan Stempel – Reuters
A Manhattan federal judge has ordered seven U.S. stock exchanges to face proposed class-action claims that they defrauded ordinary investors by quietly enabling high-frequency traders to trade faster and at better prices.

Volatility, Accidental Alpha and the Ghost of GETCO…
Paul Rowady – Alphacution Research Conservatory
For this one we need to go all the way back to the first time we illustrated the fact that KCG’s market making operation – the artist fka GETCO (or, Octeg for the uber-insiders) – was more sensitive to volatility than Virtu’s market making operation, as illustrated below:

****SD: More good stuff from Alphacution.

Investors grow anxious over Trump-Xi G20 meeting; Markets are pricing in a surge in volatility around next month’s encounter in Japan
Joe Rennison and James Politi – Financial Times (SUBSCRIPTION)
Investors are placing bets on a surge in market volatility around the G20 summit next month, as US President Donald Trump and Chinese President Xi Jinping have downplayed the chances of a breakthrough in talks to resolve their trade dispute.

Global EQDerivatives 2019: Raising the Bar
Volatility and Alternative Risk Premia portfolio managers and traders converged at the Wynn Resort & Casino in Las Vegas last week along with allocators, exchanges, and technology solution providers for the 5th annual Global EQ Derivatives (“EQD”) conference. As always, EQ Derivatives founders Peter Thompson and Robert McGlinchey, working alongside their team, didn’t disappoint with a content lineup curated by the ever-impressive Elinor Comlay.

Economist Komileva Views U.S. 10-Year Yield as the ‘New VIX’
Bloomberg Video

Exchanges and Clearing

Futures exchanges eye shift to ‘Flash Boys’ speed bumps; High-frequency traders fight effort to put brakes on ultrafast transactions
Philip Stafford – Financial Times (SUBSCRIPTION)
After years of trying to cater to their quickest customers, the world’s biggest futures exchanges are now looking to slow them down. Deutsche Börse’s Eurex will start a pilot scheme next week that introduces tiny delays, or “speed bumps”, to the trading of options on French and German stocks. The London Metal Exchange is also set to receive approval for a similar initiative, from UK authorities.

Have regulators created a new type of financial monster?
The Economist
Grimstad, Norway, is an unlikely setting for financial-market shenanigans. But the fishing town is home to Einar Aas, a trader who took huge bets on Scandinavian energy markets. His 15 minutes of infamy came in September 2018, when his bets went spectacularly wrong. Unable to cover his losses, he blew a EUR114m ($133m) hole in the capital buffers of Nasdaq Clearing, which handled his trades. Other members of the clearing house—mostly banks and energy-trading companies—were called upon to replenish its buffers.

Regulation & Enforcement

Gov’t to boost derivatives trading
Kim Bo-eun – Korea Times
The government pledged Thursday to boost derivatives trading by relaxing some of its regulations governing futures and options investments within this year.

Cboe Disciplinary Notice – Sumo Capital, LLC
…The acts, practices, and conduct described in Paragraph 5 constitute violations of Exchange Rule 4.2 and Rule 14e – 4, promulgated under the Exchange Act, by Sumo, in that Sumo tendered 1,600 shares for the partial tender offer in WY in excess of its net long position.

****SD: The result is a $20,000 fine and $543 disgorgement.


Machine Learning Plays a Critical Role in Improving Data Quality
Bloomberg via TABB Forum
The world of data is growing at an almost incomprehensible rate: The size of the digital universe will double every two years at least. According to research by market intelligence firm IDC, the world will create 180 zettabytes of data (or 180 trillion gigabytes) in 2025, up from less than 10 zettabytes in 2015. A zettabyte is one sextillion bytes. That’s 10 with 21 zeros.


White Paper Shows Volatility Risk Premium Facilitated Higher Risk-Adjusted Returns for PUT Index
Matt Moran – Cboe
Using more than 32 years of analysis, University of Illinois at Chicago Professor Oleg Bondarenko explored if certain strategies could exploit the richness in pricing of index options. He shared his findings in the recent white paper, “Historical Performance of Put-Writing Strategies” and discussed his research at the 35th annual Cboe Risk Management Conference.

The Stock Market Is Getting Scary. How to Protect Yourself With ‘Exchange Stocks.’
Steven M. Sears – Barron’s
Like the little birds that come sputtering out of cuckoo clocks at the appointed hour, small investors are following a time-honored script. They’re getting nervous.

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