The Crowded Short Vol Trade; Earnings drive swings; Monthly volumes

Dec 5, 2017

Observations & Insight

Cboe Throws Launch Date Punch at Crosstown Rival CME
Spencer Doar – JLN

Aren’t people supposed be getting into holiday mode? Isn’t December supposed to be slow, with nothing but junior staff running around trying not to mess things up? In the cryptocurrency space, that’s clearly not the case.

The CFTC on Friday said CME Group and Cboe Global Markets were okay to launch their respective bitcoin futures products through the self-certification process. CME quickly announced it would launch bitcoin futures on December 18, and then Monday morning, Cboe announced a December 10 launch date and free trading for the first month to help the contract gain traction. Cboe’s contract will trade on the CFE, its futures exchange.

Despite the velocity at which developments occur in the crypto space, Cboe CEO and Chairman Ed Tilly said the exchange’s “conversations with the CFTC were very, very intense and I think as thorough as I can ever remember in launching a new product.”

Read the rest HERE.


November 2017 Options Exchange Marketshare via OCC
(Click for larger image)

Lead Stories

The Crowded Short Vol Trade
Highly Evolved Vol
It is commonly accepted that shorting the volatility ETNs is a crowded trade. Is this true and what, if anything, does it mean?
First, we need to note that these ETNs are backed by VIX futures which are cash settled and, as futures have no fixed issuance, a traditional short-squeeze can’t happen. As the demand increases, the authorized participants can just create new shares. There is no limited supply as there would be with a stock or a physically settled future.

****SD: This is the short vol story you’ve been waiting for.

State Street Says Short-Volatility Trades Are Storing Up Trouble
Natasha Doff – Bloomberg
The chief investment officer of State Street Global Advisors is sounding the alarm bell on short volatility trades.
The billions of dollars backing bets that volatility in the stock market will keep sinking lower is “storing up trouble” for the future, according to Richard Lacaille, CIO of the $2.4 trillion asset manager. Investors will scramble to cover their short positions in the event of a rapid reversal, he said.

****SD: This is a variation on the short vol story you’ve seen before.

Earnings focus drives violent stock swings, creating opportunities
Helen Reid – Reuters
Shares reacted much more violently than usual to surprises in company results in the latest quarterly reporting season as investors put a laser-like focus on earnings, generously rewarding winners but mercilessly punishing laggards.

The Central Risk Book: Rethink Risk, Rethink Trading
Larry Tabb – TABB Forum
What if risk management within a bank could be used to manage profitability as well as risk?

Volatility is back — and tech is taking a beating
Joe Ciolli – Business Insider
For months, equity investors have been awaiting the return of volatility to the market. It now appears as if that time has come.
In the end, it was the Senate’s passage of the massive GOP tax bill that whipped up price swings, throwing the US stock market for a loop for several days running as investors position around the areas expected to benefit most. And no other sector has felt the brunt of this newly hectic trading to the extent that tech has.

Exchanges and Clearing

Cboe Futures Exchange (CFE) Authorized to Provide Automated Trading Services in Hong Kong
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today announced that Cboe Futures Exchange (CFE) recently received approval in Hong Kong to allow corporations that are licensed by the Hong Kong Securities and Futures Commission under Part V of the Hong Kong Securities and Futures Ordinance to become CFE Trading Privilege Holders (TPHs).

CME Group Reports Record Gold Futures Volumes, FX Flatlines
Finance Magnates
The Chicago-based CME Group is reporting record trading for gold futures in November. Whether it is on the heels of tax reform back and forth or the Trump administration’s geopolitical adventures, the activity on the market does not correspond to the lackluster trading range in this market.

Cboe Global Markets Reports November 2017 Trading Volume
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today reported November monthly trading volume and average revenue per contract (RPC)/net revenue capture data at

****SD: Futures volumes are up 8 percent percent month-over-month, 11.6 percent year-over-year and 22 percent year-to-date. Options volumes up 2.7 percent MoM, down 1.1 percent YoY and up 10.7 percent YtD.

ICE? Reveals Mixed Metrics for November, FX Volumes Down 50% YoY
Aziz Abdel-Qader – Finance Magnates
Intercontinental Exchange (NYSE:ICE), a global network of exchanges and clearing houses, has reported its latest aggregated volumes for the month ending November 2017, which were characterized by mixed results across both the monthly and yearly intervals, according to an ICE statement.

Euronext announces volumes for November 2017
…In November 2017, the overall average daily volume on derivatives reached 629,767 contracts, up +15.9% compared to November 2016 and up +26.5% compared to the previous month. In details,


CME’s long-serving global clearing head to retire
The Trade
Kim Taylor will retire at the end of the year after working at CME Group for more than 28 years.

****SD: All the best to Kim – statements about her being missed cannot be overstated.

Regulation & Enforcement

Hard Brexit impact on derivatives could cost schemes ‘hundreds of millions’
A hard Brexit could cost Dutch pension funds hundreds of millions of euros to rearrange derivatives transactions currently cleared through London, consultancy Cardano has suggested.

****SD: Quote in the piece from Thijs Aaten, managing director of the treasury centre for asset manager APG: “Existing contracts must be honoured, but what if an existing transaction leads to a new one, for example through calling an option? Would this be a new transaction and would it be subject to existing or new regulation?”

Bitcoin Futures Are Coming and Regulators Are Racing to Catch Up
CME Group Inc. and Cboe Global Markets Inc. are poised to offer bitcoin futures contracts, easing the way for mainstream investors to bet big while dragging regulators into a realm skeptics call a fad and fraud.
CME, the world’s biggest exchange owner, and smaller venue Cboe, known for its VIX volatility products, were allowed to offer the products after pledging to U.S. regulators that they comply with the law. CME said its contract will begin trading Dec. 18. Cantor Exchange, a subsidiary of Cantor Fitzgerald, also will offer bitcoin binary options.

Brussels ends Mifid fears with US derivatives trading ruling
Philip Stafford – Financial Times
Brussels has closed off one of the key outstanding concerns from its imminent new Mifid II rules by allowing European banks and companies to continue trading derivatives in US markets.

Cypriot or not? Suite disputes Frost & Fire’s place of business in case against Currenex
Financial analytic software firm Suite on Monday sought to prove that the process of service in a copyright infringement case against Currenex was not insufficient, as claimed by one of the defendants in the lawsuit – Frost & Fire.

Opening remarks at Asia 2017 by Walt Lukken
When I stood here last year, we were coming to the end of a year of substantial geopolitical change around the globe with the election of a new U.S. President just a few weeks earlier, following a summer of shock in Europe when the U.K. voted to leave the European Union.


How AI Will Invade Every Corner of Wall Street
Nishant Kumar – Bloomberg
It was AI versus Warren Buffett.
The artificial intelligence was unleashed by Winton, the London hedge fund, to test an old principle of the Berkshire Hathaway Inc. chairman with a view to trading on it: that major acquisitions usually hurt the buyers’ shareholders. Researchers collected and analyzed data on almost 9,000 U.S. deals back to the 1960s.

Fidelity clients suffer second website glitch in week
For the second time in a week, some clients at Fidelity Investments could not access their online accounts at the powerhouse retail trading brokerage on Monday morning in a glitch described by the company as a technical issue.


2018 Outlook: Institutional Investors Shrug Off the Volatility, Asset Bubbles and Fragile Markets They Expect Next Year, Natixis Survey Finds
Natixis via BusinessWire
Institutional investors are wary of fragile market conditions, distorted asset prices and systemic risks caused by central bank interventions and the growing popularity of passive investments, but they are confident their own portfolios can weather the storm with only modest changes, according to new survey findings released today by Natixis Investment Managers. To position their portfolios for the volatility they expect as central banks gradually remove the monetary life support system in place since the financial crisis, professional investors around the world are increasing allocations to non-traditional assets, including private equity, private debt, infrastructure and real estate, as they seek alternatives to bonds and hunt for higher returns in a crowded market.

The Pound is Enjoying a Fresh Wave of Confidence From Investors
Anooja Debnath – Bloomberg
Even as Brexit talks lurch from one hurdle to another, the pound is enjoying a rising wave of confidence among investors and analysts.

FX Option Market Update: December 5, 2017
Please click on the attached PDF for the latest FX options market update, including information on GBP puts and USDJPY.


JPMorgan’s CFO: Trading is down 15 percent this quarter
Liz Moyer – CNBC
Volatility low across the spectrum, the CFO of JPM said during a presentation on Tuesday.

Commentary: Goldilocks markets show 2017 was no year to be a bear
Jamie McGeever – Reuters
A year ago, the consensus view of the world economy and markets coming into 2017 was for a Goldilocks mix of strong growth, decent corporate profits, low volatility, a gradual drift higher in bond yields, and a continued “melt up” in stocks.

Ag barometer: Producer sentiment slips following harvest
Cme Group
Producers expressed lower sentiment toward the agricultural economy in November on the heels of fall harvest, according to the Purdue University/CME Group Ag Economy Barometer.

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