Observations & Insight

Risk of sharp currency moves drives investors into hedged ETFs
Helen Reid, Saikat Chatterjee and Trevor Hunnicutt – Reuters
Investors have been piling into currency-hedged equity tracker funds, seeking protection against big moves in foreign exchange rates. Typically foreign investors buy un-hedged equities since share prices are usually negatively correlated to currencies. In fact, they offer a partial hedge against sharp moves in foreign exchange.

****SD: How do ETF providers do this? Generally with forwards and options. The “o” word is only mentioned once in the article, but currency derivatives are really the heart of the story. It’s not the same as the piece earlier in the week about the increasing (but still small) presence of ETFs that deploy specifically options-centric strategies, but it’s related. There’s this trickle down – maybe flood down? – volume effect on derivatives as a byproduct of these instruments. Just look at the booming popularity of the dozens of VIX-linked ETPs. The ~$4 billion AUM of those funds is a key factor in increasing VIX futures liquidity. (I can’t find the tweet from a few weeks back with the exact percentage, but it pointed out the majority of front month VIX futures were help by those vol ETPs.) Average daily trading volume in dollar terms related to VIX ETPs is estimated to be some $2.6 billion by Goldman.

Lead Stories

Expectations of euro and dollar volatility rise ahead of Jackson Hole
Nicholas Megaw – Financial Times
Markets may be mostly sleepy ahead of the Kansas City Fed’s economic symposium at Jackson Hole later today, but there are tentative signs that traders are preparing for a pick-up in volatility as the summer lull comes to an end over the next few weeks.

****SD: From Bloomberg today Bond Routs, Stock Surges: Jackson Hole Can Be Messy for Markets and from TheStreet Brexit Talks Seem Stalled; Prepare for More Volatility

Debt-ceiling drama could cause serious volatility ahead
Rebecca Ungarino – CNBC
The chance of a government shutdown in the fall, should Congress fail to reach an agreement around the debt ceiling, may cause a surge in market volatility ahead.

Credit Suisse hires BAML’s Ebert for equity derivatives job -memo
Joshua Franklin – Reuters
Swiss bank Credit Suisse has hired Michael Ebert from Bank of America Merrill Lynch as its global head of equity derivatives, according to a memo seen by Reuters.

Younger, Cheaper, Smaller, Smarter: Meet the New Breed of Quants
Julie Segal – Institutional Investor
A new generation of computer whizzes doesn’t want a job with Renaissance or Two Sigma — it wants to make them obsolete.

****SD: The new quant Renaissance is anti-Renaissance. From Bloomberg – The Hot New Hedge Fund Flavor Is ‘Quantamental’

The White Moose
RCM Alternatives
Raise your hand if you’ve been terribly, awfully, 180 degrees wrong about this nearly 10-year-old bull market at one point or another?

****SD: It’s a meta argument – the real black swan has been the absence of a black swan which is deemed the “white moose.”

Exchanges and Clearing

Open Interest Grows for CBOE Options on EAFE and EM Indexes
Matt Moran – CBOE Options Hub
Investors who wish to explore large-sized cash-settled index tools that can help manage global equity risk are taking a look at CBOE’s options on the MSCI EAFE Index (ticker MXEA) and on the MSCI Emerging Markets Index (ticker MXEF). These index options have the potential to generate more income by receiving options premiums, and to help protect a portfolio from damaging huge drawdowns. The combined aggregate open interest for MXEA and MXEF options grew from around 3,200 contacts at the beginning of this year, to more than 21,000 contacts earlier this week.

****SD: Using VWO as a proxy, EM up more than 20 percent YTD.

CME extends and expands FX futures incentive scheme
Julie Aelbrecht – Global Investor Group
The Chicago Mercantile Exchange has extended its incentive program for FX futures and expanded the number of possible participants.

****SD: Plan extended six months and includes EUR/GBP options.

Yossi Beinart, former CEO of Tel Aviv Stock Exchange, dies at 61 – Business
Eran Azran – Haaretz
Yossi Beinart, who served as Tel Aviv Stock Exchange CEO for three years after a long career in the United States as an expert of algorithmic trading, died late on Wednesday after a long illness. He was 61.

Regulation & Enforcement

Final US position limits rule will take ‘at least a year’ CFTC expected to draft a narrow list of contracts in scope
Joanna Wright – Risk.net
Both newly confirmed commissioners at the US Commodity Futures Trading Commission (CFTC) have promised to finalise position limits for commodity exposures – but even with the agency almost at full strength for the first time since 2014, the rule will take at least a year to complete, say regulatory advisers.

****SD: Not paywalled.

Executives Warn MiFID Has Firms Caught Like ‘Deer in Headlights’
Lukanyo Mnyanda – Bloomberg
German brokerage executive Reinhard Loose said the firm’s been “struggling.” Jeffrey Solomon of boutique investment house Cowen Inc. likened his clients to “deer in the headlights.” And Hargreaves Lansdown chief Chris Hill spoke of a “huge amount of change” to the way he does business.

SEC halts trading in First Bitcoin Capital shares, which have gained more than 6,000% in 2017
Ciara Linnane – MarketWatch
The Securities and Exchange Commission on Thursday temporarily suspended trading in shares of First Bitcoin Capital Corp. because of concerns about the accuracy and adequacy of public information on the Canadian company.
The concerns relate to the value of the company’s assets and its capital structure, the SEC said in a statement.

MiFID II External Resources for FIA PTG Firms
FIA Principal Traders Group
In addition to the documents, webinars, and guidance provided by FIA, FIA PTG is collecting external resources for member firms working to implement MiFID II.


Options Market Likes China’s Mobile-First Revolution
Ash Alankar – Bloomberg
China is no stranger to revolution, be it cultural, political or economic. But the ready adoption of a mobile-first approach to technology, which has propelled the most populous country to the global forefront — and storefront — of the digital age, may be the most far-reaching reformation yet.

Citi Risk Aversion Signal Turns Bearish for First Time in a Year
Cormac Mullen – Bloomberg
A potential equity trading signal based on global risk aversion turned bearish yesterday for the first time since the middle of last year, according to Citigroup Inc.


Grain inventories forecast to fall for first time in five years
Emiko Terazono – FT
Are we at a turning point in the grains markets after years of bumper supplies? With grains consumption climbing, total inventories are forecast to fall for the first time in five years, according to the International Grains Council.

Bitcoin ETF Has ‘New Hope’ of Success: Bloomberg Analyst
William Suberg – The Cointelegraph
Bloomberg has confirmed there is “new hope” of a Bitcoin ETF gaining US regulatory approval.
Speaking in a segment of the publication’s Bloomberg Technology, analyst Eric Balchunas said that a combination of people reshuffling and a “softened” SEC increased the potential for a legal fund appearing in the future.

****SD: Well, someone missed a great chance for Star Wars references…

Jackson Hole Bingo! Play Along to Avoid Jargon-Induced Lethargy
Luke Kawa and Sid Verma – Bloomberg
Jackson Hole is one of the most anticipated central bank-events on the calendar, even though it’s been five years since it delivered anything resembling a policy prescription.

****SD: If you turn this into a bingo drinking game, maybe don’t trade today.

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