Observations & Insight

You’re Invited to FOW-John Lothian News Trading Chicago on June 28th!

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This one-day event at the Swissotel on June 28th is aimed largely at the end-users of the markets: commodity trading advisors, asset managers, hedge funds and proprietary traders.

The conference will cover the issues that impact those firms directly – regulation, technology and market structure, with an underlying thread of trading in an age of uncertainty. All of this will be delivered in a variety of formats, from an Oxford-style debate on the Dodd-Frank Act’s repeal to TED-style talks to panel discussions.

The event is free to attend for CTAs, asset managers, props and hedge funds. For full conference information, click HERE.

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Lead Stories

Cost of ‘Black Swan’ bet on falling markets hits pre-crisis low
Miles Johnson – Financial Times
The cost for hedge funds of taking out “Black Swan” insurance against a sharp fall for US equities has fallen to the lowest level since before the financial crisis as stock markets continue to touch all-time highs.
Months of low market volatility has forced down the price of options allowing hedge funds to place bets that would make them 25 times on their money if the S&P 500 index fell by 7 per cent over the next month.

****SD: Does a 3-7 percent pullback equate to a Black Swan event? I’d argue not at all, but I can see how it might seem that way in this environment. I’d say a double figure pullback starts getting into that swan range.

The one cheap thing in financial markets today
Miles Johnson – Financial Times
It is a frequently repeated claim that we are living through one of the most hated bull markets in history. Fund managers across the world sit at their desks each day face palming at the fact that every conceivable type of investment appears expensive. Stock markets have entered the eighth year of their post-crisis recovery, while record-low interest rates in developed markets have driven yields on all manner of bonds into the floor. In short, many now believe there exists no single asset on this planet, from fine wines to Latin American junk debt, priced attractively enough to be bought today without worry.

You Don’t Know VIX: Wall Street’s Fear Gauge Is Now a Multibillion Dollar Market
Asjylyn Loder and Gunjan Banerji – WSJ
Wall Street’s “fear gauge” has neared all-time lows this year. That hasn’t stopped retail investor Jason Miller from making a nice chunk of change betting it will go even lower.

****SD: If the VIX were a person, it’d have a lot of attitude.

Can VIX Finally Break Higher?
Peter Tchir – Forbes
After a period of setting new long-term lows on an almost daily basis, VIX has finally started rising. This morning it is approaching its 50 day and 100 day moving averages – a potential catalyst to its 200 day moving average – which is at 12.8
This coincides nicely with two things:
The lack of hedging ahead of last Thursday’s Event Risks (Comey, Draghi and May)
The growing reliance on using treasuries as a hedge for equities and that strategy not working as well

****SD: Hard to hedge with assets which were all moving in lockstep.

BlackRock global trading head sees ‘price maker’ role for buy-side
Joe Parsons – The Trade
Buy-side firms are increasingly facing pressures to move to new market making and liquidity providing roles, however most are sceptical of the added capital requirements this will bring. Speaking to The TRADE Derivatives Supurna VedBrat, head of global trading at BlackRock, the world’s largest asset manager, believes the buy-side can take on an alternative role in disclosing prices as opposed to making markets.

As global economic uncertainty rises, so should market volatility
The gap between an index of Economic Policy Uncertainty and the Chicago VIX, an index of market volatility, may be closed soon and the tight historical correlation between the two re-established by an increase in market volatility

C$ options pricing may signal bad news for currency’s bears
Fergal Smith – Reuters
The foreign exchange options market is showing much less risk of a sharp drop in the Canadian dollar than before last November’s U.S. election, which could spell bad news for speculators who have heavily shorted the underperforming currency.

Exchanges and Clearing

Dalian Commodity Exchange: Soybean Meal Options To Meet First Expiry Date
June 7 is the last trading day and expiry date of the m1707 contract series of the options on the soybean meal futures (the “soybean meal options” for short), which is also the first expiry date since the trading of the options, when the positions of the July Contract of soybean meal options that have not been liquidated or exercised will expire. An official of Dalian Commodity Exchange (DCE) reminded the investors to get ready for relevant transactions or exercise.

Brussels insists on power to control euro clearing after Brexit
Jim Brunsden and Philip Stafford – Financial Times
Brussels has decided it must have the power to force parts of London’s lucrative euro clearing business to relocate to the EU after Brexit if needed to preserve financial stability.
The European Commission will say on Tuesday that it wants a new system to vet whether, and under what conditions, non-EU clearing houses should be allowed to handle large volumes of euro-denominated business.

How Stock Exchanges Are Experimenting With Blockchain Technology
Prableen Bajpai – Nasdaq
“Today, blockchain—the technology behind the digital currency bitcoin—might seem like a trinket for computer geeks. But once widely adopted, it will transform the world,” says Ginni Rometty, CEO of IBM. How right she is.

Today, some of the most prominent stock exchanges are looking at ways to leverage the distributed ledger technology (DLT) in order to fundamentally overhaul traditional mechanisms.

Lower charges help BSE overtake NSE in currency derivative trading
Ram Sahgal and Saikat Das – The Economic Times India
MUMBAI: The BSE is the latest favourite with currency derivative traders, with daily trading volumes of hedging instruments on Asia’s first bourse rising past those on the competing and well-equipped National Stock Exchange (NSE).
Since May this year, BSE has overhauled the NSE because of lower transaction charges: For trades on the BSE, the bourse charges Rs 20 per 1 crore, compared with over Rs 100 per 1 crore on NSE. BSE has offered concessional rates to grab market share once dominated by the NSE, which has now just obtained a new boss Vikram Limaye Friday after a recent spell of organizational changes at the top.

****SD: It’s all about fees all over the world.

Regulation & Enforcement

Trump to nominate ex-NYSE Euronext VP Dawn DeBerry Stump to CFTC
U.S. President Donald Trump intends to nominate Dawn DeBerry Stump, a former vice president at NYSE Euronext, to serve as commissioner on the Commodity Futures Trading Commission, the White House said in a statement on Friday.

Asia Traders Overwhelmed by New Europe Law as Deadline Looms
Benjamin Robertson and Viren Vaghela – Bloomberg
MiFID II will impact all areas of market infrastructure; Hong Kong landlords position satellites for time accuracy
Asian institutions have been overwhelmed by the breadth and scope of sweeping changes to Europe’s financial rules due in January, according to an industry group.


Hedge Funds Holding Bitcoin Beat the Market
Jon Buck – CoinTelegraph
Hedge funds have had a difficult year. Stock market volatility (especially the S&P 500) has squashed gains for most “smart money” funds, except for those holding Bitcoin.
According to Hedge Fund Research Index (HFRI), hedge funds this year returned a paltry 3.5 percent, while the S&P doubled that number. Further, the HFRI Composite Index added just half a percent in May, though the market added a whole percent. After eight years of bull market and strong gains in the S&P, hedge funds continue to underperform compared to indexed funds.

After VIX Spike, NASDAQ Sell-Off, Time To Reevaluate Positions
A potential increase in risk may create massive opportunities for investors.
Throughout our ongoing analysis of the US markets, metals, energy and other market sectors, one thing we have seen over and over is that markets can, and often do, develop longer term trends than most people believe are possible or believable.

Human Behavior Creates Predictable Chart Patterns
Bob Lang – CBOE Options Hub
It was an interesting week in the stock market, with plenty of fear and greed to go around. Same as it ever was, right? As we analyze emotions and behavior they seem to parallel the price action in markets. Excessive greed pushes prices ever higher, We saw new highs this week in names like Amazon and Google, while all of the most prominent indices at some point hit record highs during the week.

P/L Ramifications of Trading Delta Neutral
Sage Anderson – tastytrade blog
In options trading, the “Greeks” provide valuable insight into the risk profile of a particular option or position.

****SD: I’m also airplane agnostic.


Market Update: Expiration Phenomenon (VIDEO)
OpenMarkets CME Group
The market reacted as expected to James Comey’s Thursday testimony — a rally in stocks, pull back in bonds, says Jack Bouroudjian. He also explains the expiration phenomenon that is going to be dominating the trade over the next few trading days, and how that may tell the story of equity and bond markets this summer.

****SD: Aka keep on eye on Friday.

Weekend Review of VIX Options and Futures – 6/5/2017 – 6/9/2017
Russell Rhoads – CBOE Options Hub
VIX was higher by about 10% last week, but that did not have much of an impact on the rest of the term structure. The futures were mixed which can be attributed to just how steep the VIX curve was going into the week.

Weekend Review of Volatility Indexes and ETPs – 6/5/2017
Russell Rhoads – CBOE Options Hub
That little bump in VXST that shows up on the far left side of the diagram below can be attributed to Friday afternoon activity. VXST rose 0.75 Friday while VIX was up 0.54. Shorter dated SPX option pricing is used to calculate VXST than VIX. It may be the weakness Friday afternoon in large cap tech stocks may have traders worrying about the direction of the stock market over the short term.

Weekend Review of Russell 2000 Options and Volatility – 6/5/2017
Russell Rhoads – CBOE Options Hub
Small cap stocks prevailed last week as the Russell 2000 (RUT) gained over 1% while the Russell 1000 (RUI) was lower by about 1/3 of 1%. Large cap stocks still hold a lead over small caps in 2017, but the Russell 2000 has kept pace with the Russell 1000 since the end of the first quarter so all the large cap outperformance may be attributed to the first three months of 2017.


Managed futures setting stage for dramatic growth
Christine Williamson – Pensions & Investments Online
Investment in managed futures strategies is on the rise as asset owners tap into the equity risk reduction and downside protection inherent in systematic trend-following approaches.
Institutional investors have been pumping assets into managed futures strategies, with especially strong asset gains in the early months of 2017.

Fed’s Effort to Guide Markets Falls Short
David Harrison – WSJ
The Federal Reserve’s interest-rate increases aren’t having the desired effect of cooling off Wall Street’s hot streak.
While Fed officials meeting this week will likely decide to raise short-term interest rates for a fourth time since December 2015, much of that tightening effort has yet to be felt in financial markets, where stocks have rallied to records this year and bond yields have fallen, developments that tend to prompt more borrowing, faster economic growth and more market speculation.

Rivals sound out Noble Group’s oil trading unit
Neil Hume and David Sheppard – Financial Times
Noble Group has received approaches for its oil business as the commodities house remains locked in talks with its lenders over a deal to stave off a debt restructuring or liquidation, according to four people familiar with the situation.

****SD: Is anybody else a fan of the ’80s mini-series “Noble House” starring Pierce Brosnan? It is actually about a British/Asian trading firm that runs into trouble. Worth watching if you can find it.

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