Don’t hate the game, hate the players; Volatility investors – once bitten but not shy; Vol funds worked – that’s the problem

Feb 8, 2018

Observations & Insight

The VIX Can’t Cause Vol – Cboe’s View on Volatility ETPs
Spencer Doar – JLN

As volatility began to surge in February, and then exploded on the fifth of the month, exchange traded products (ETPs) that shorted or provided inverse exposure to VIX futures came under fire.

The two most popular, Credit Suisse’s VelocityShares Daily Inverse VIX Short-Term exchange traded note (ETN), ticker XIV, and ProShares’ VIX Short VIX Short-Term Futures exchange traded fund (ETF), ticker SVXY, were the main focus, as they suffered huge losses. Trading in them was halted and then Credit Suisse announced it would liquidate its note. Those two products, more than any other, put intense scrutiny on such volatility products and the Cboe’s VIX itself.

Cboe saw its own shares tumble from around $135 to $115 in the ensuing days’ trading, a fact attributed to the exchange’s connection with the instruments in question. Some big banks downgraded Cboe stock. On Wednesday, Cboe’s executives addressed the attention surrounding volatility with the aim of clearing up “misconceptions.”

Read the rest HERE.


Warning Credit Suisse and Nomura could face mis-selling claims on short volatility funds; Access to non-sophisticated investors
Mike Sheen – InvestmentWeek
Credit Suisse and Nomura are in danger of facing mis-selling claims after the closure and suspension of a suite of short volatility exchange-traded note (ETN) products in this week’s market sell-off, according to legal advisory firm RPC.

****SD: This goes hand in glove with Cboe President Chris Concannon’s outlook on regulatory repercussions mentioned in the above piece.


VIX-Yield Curve: At the Door of High Volatility?
Erik Norland – CME Group
We freely admit: Figure 1 is probably the strangest chart that you will ever see, at least in finance. You may be wondering: did they throw blue spaghetti noodle on paper for inspiration and then write an economics article about it? Or, have they spent too much time with disciples of psychologist Timothy Leary, a proponent of experimenting with psychedelic drugs?

****SD: Same story from a few weeks ago, but seems even more relevant now. (Plus, I love the blue spaghetti graph.)

Lead Stories

Don’t Hate the VIX Game, Hate the ‘Tourist’ Players
Mark Sebastian –
The VIX complex, and to a lesser extent the S&P 500 options, were completely thrown off by the move in the VIX futures on Monday caused by buying algorithms triggered around the VIX ETPs, VelocityShares Daily Inverse VIX ST ETN (XIV) and ProShares Short VIX Short-Term Futures (SVXY) .

****SD: Surprised I haven’t seen this title yet! Thanks, Mark.

Volatility Funds Worked as Intended. That’s the Problem
Jared Dillian – Bloomberg
The standard response to the collapse — and in some cases, the liquidation — of inverse volatility exchange-traded products has been, “Why the heck do we need these things?”
It’s a reasonable question.

****SD: Similar theme from Reuters – Meltdown raises fears of ‘financial innovation the planet doesn’t really need’

Volatility investors: once bitten but not shy
Trevor Hunnicutt, Saqib Iqbal Ahmed – Reuters
Investors burned this week by the steep drop in the value of financial instruments that bet on stock market calm have a counterintuitive reaction: wade straight back in.

****SD: Seth Golden makes another appearance! Reuters could not verify his portfolio’s performance. For more, see MarketWatch’s Former Target manager aims to bounce back with $600,000 bet against volatility.

??Is This Obscure Wall Street Invention Responsible for the Market Selloff?; Risk-parity funds, which balance portfolios based on the volatility of assets, were blamed for the price swings, but some outperformed the broader market
Corrie Driebusch and Rob Copeland – WSJ
The surge in market volatility this week, after a long period of tranquility, left investors seeking a culprit. Critics began pointing to an obscure investment strategy pioneered by the world’s largest hedge fund, Bridgewater Associates.

For Millennial Investors, a Harsh Lesson in Market Gyrations
Tiffany Hsu – NY Times
Watching the wild swings in the stock market has been a heartbreaking experience for Jasmine Okougbo, who started investing only last month.

****SD: Well, my generation did coin the terms HODL, rekt and gainz- so, yeah, a well deserved harsh lesson. Also see Bloomberg’s Amateur Investors Get Burned by Wall Street’s Hottest Trade

Trillion-dollar risk lurks if market volatility doesn’t abate
Saikat Chatterjee and Saqib Iqbal Ahmed – Reuters
As world markets catch their breath after a week of turmoil, investors are concerned that a new era of heightened volatility could eventually lead to a second wave of selling as investment strategies popular for years are forced to unwind.

Fed’s Kaplan Says Market Volatility ‘May Be a Healthy Thing’
Catherine Bosley and Alessandro Speciale – Bloomberg
Federal Reserve Bank of Dallas President Robert Kaplan said the recent financial market upheavals may actually be beneficial and he doesn’t expect them to have a negative impact on the economy.

Exchanges and Clearing

CME Group Announces Record Open Interest and Options Volume on Feb. 6
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, announced it set a total open interest record of 129.5 million contracts on Feb. 6, 2017. The previous open interest record of 129 million contracts was set on June 14, 2017.
CME Group also achieved a new daily volume record for its options complex of 9.2 million contracts on Feb. 6, surpassing the previous record of 8.1 million contracts set on Nov. 9, 2016. In particular, equity index options volume hit a new record of 3.8 million contracts. The previous equity index options volume record of 3.6 million contracts was set on Feb. 5, 2018.

****SD: Lower Costs, Structural Changes Driving FX Futures Growth

Exclusive: CME mulls changes to soy, corn contracts – customers
Tom Polansek, Michael Hirtzer – Reuters
CME Group Inc is talking to customers about potential changes to its biggest agricultural futures markets – corn and soybeans – to address concerns the contracts’ prices are not accurately reflecting the underlying U.S. cash grain markets, the company’s clients told Reuters.

Nasdaq to move New York headquarters to Times Square from downtown
Herbert Lash – Reuters
Nasdaq Inc said on Wednesday it would relocate its global headquarters from downtown Manhattan to midtown, expanding its lease at the Times Square office tower from where it broadcasts the market opening and closing bell ceremonies.

Market Structure 2018, Part 1: The Unintended Consequences of Market Structure Change
Steve Tumen, Deep Systems – TABB Forum
The purpose of an exchange is to bring together natural buyers and sellers with rules designed to promote just and equitable trading practices. But nearly every major structural change over the past 20-plus years has moved the marketplace further from the principles underlying the Securities Act of 1934. Today’s markets are more fragmented and opaque, and trading is less ‘just and equitable,’ than at any time in memory.

SGX welcomes Rui Da International as Derivatives Trading Member
Singapore Exchange (SGX) today welcomed Hong Kong-based Rui Da International Finance Holding Limited (Rui Da International) as a Trading Member of its derivatives market.

Intercontinental Exchange Announces Record Daily Volume in Low Sulphur Gasoil Contract
Press Release
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced that the ICE Low Sulphur Gasoil contract achieved a daily volume record of 876,011 contracts on 7 February, 2018. The previous daily volume record was 766,054 contracts on 1 November 2016.

****SD: Does high sulfur gasoil smell like bad eggs?

Regulation & Enforcement

Commodity traders gain relief on position limits under Mifid
Gregory Meyer and Philip Stafford – Financial Times
The UK financial regulator handed out more than a thousand exemptions to commodities traders in January after the introduction of wide-ranging markets reforms, underlining a scramble to comply with rules years in the making.

Billionaire Cooperman: Crack Down on VIX-Related Securities
The hedge-fund mogul called on regulators and the industry to “deal with the crazy instruments that have been created that are destroying the best capital market in the world.”

Swiss regulator in contact with Credit Suisse over Vix-related products
Pan Kwan Yuk and Ralph Atkins – Financial Times
Switzerland’s financial regulator has been in contact with Credit Suisse over its volatility-related trading products, just a day after the bank was forced to shut down one of its Vix funds in the wake of Monday’s dramatic market sell-off.

Hedge Funds Dug Into Stocks Right Before the Market Went Mad
Lu Wang and Melissa Karsh – Bloomberg
You didn’t have to be some dad with an E*Trade account or an ex-manager for Target Corp. shorting the VIX to get burned. The smart set took its lumps in the downdraft, too.
Days before the S&P 500 Index’s biggest selloff since 2015, bullishness among hedge funds specializing in stocks surged to the highest in more than three years, according to client data compiled by JPMorgan Chase & Co. The bank looked at a value called net exposure, which subtracts short positions from longs.

ICE chief Sprecher bullish on MiFID II prospects
Hayley McDowell – The Trade
The Intercontinental Exchange’s (ICE) chief executive has expressed his optimism regarding MiFID II in Europe as a direct result of increased demand for regulatory products.

Bart Chilton: ‘Crazy’ products need to be regulated
Michelle Fox – CNBC
“Crazy” products like the one that contributed to the recent market volatility need to be regulated, former financial regulator Bart Chilton told CNBC on Wednesday.
“Even Vegas … they haven’t come up with as wild of bets as we have for these ETNs,” said Chilton, referring to exchange-traded notes.

****SD: Hyperbole much? I’m not saying VIX ETPs can’t be dangerous in the wrong investors’ hands, but it seems El Barto doesn’t know much about the history of gambling. Ever heard of the four millennials who put $125k on one spin of the roulette wheel? Or the poker player who bet he could play four rounds of golf in a day with 100 degree of Vegas heat with a score under 100 on each round? Well, he won.

Trump Receives Oval Office Briefing on Derivatives Rules
Andrew Ackerman – WSJ
President Donald Trump met with the top U.S. derivatives regulator in the Oval Office on Wednesday, amid tensions between American and European policy makers on their efforts to coordinate on postcrisis regulation.

Former Lawmaker Who Was Rejected as Ex-Im Bank Chief to Join SEC
Dave Michaels and Andrew Ackerman – WSJ
Scott Garrett, a former Republican lawmaker known for criticizing what he considered government overreach by Wall Street regulators, has landed a senior role at the Securities and Exchange Commission.


Market surveillance spending to reach $1.4bn by 2021
Hayley McDowell – The Trade
Spending on technology for market surveillance will increase to $1.4 billion by 2021 as institutions battle with regulatory pressures and the prospect of fines.

FX Traders Are Going to Be Hooked on Algos
Lananh Nguyen – Bloomberg
One in 10 currency traders uses algos: Greenwich Associates; Adoption of trading algorithms seen as a future need
In a few years, currency traders will be hooked on algos like their stock-market colleagues.


This Unusual Link Between Stocks and Volatility Says the Turbulent Times Aren’t Over
Luke Kawa – Bloomberg
The rebound in S&P 500 Index futures from a 5 percent drop Monday could be seen as a sign that the stock market is still recovering from its wounds, but a closer look at the curve of volatility futures shows it may still need intensive care.
Since stocks started tumbling on Feb. 2, a close relationship has developed between the active S&P 500 futures contract price and the spread between first and second-month VIX futures contracts. This correlation only appears during turbulent times.

Bond Traders Have Gone From Hoping for Volatility to Worrying About It
Brian Chappatta – Bloomberg
and Liz McCormick
Anxiety builds as yields bounce back toward 4-year high; Markets can’t bank on Fed backstop as Powell takes the reins
For bond traders, the days of begging for more volatility may be over. Now they’re fretting about just how grisly the selloff can get.

In Battle of Havens, Investors Bet on Yen Over Swiss Franc
Anooja Debnath and John Ainger – Bloomberg
Investors are betting that the Japanese yen will do better this year than its haven counterpart, the Swiss franc.

Do Economic Reports Affect Volatility?
Sage Anderson – tastytrade blog
As volatility traders, market events are fairly important to our daily lives, particularly the unexpected type.
Some of the most common events tracked by volatility traders are earnings reports, which typically impact implied volatility as well as the underlying price (on the day of the release).
Other events tracked by volatility traders include elections, referendums, worldwide military conflicts, and a variety of legislation from around the world that affects trade and taxes.

****SD: Surprisingly, the research says “no.”

VIX May Form the ‘Mother of All Inverted Vs’
Joanna Ossinger – Bloomberg
SocGen expects term structure to normalize in coming weeks; MKM sees ‘floor’ elevated above 10-11 level of recent years
The Cboe Volatility Index may not go back to its extreme lows of the past few years, but strategists at Societe Generale and MKM Partners LLC think it’s headed in that direction.

The ‘buy the dip’ mantra faces unexpected test
Nicole Bullock and Eric Platt yesterday – Financial Times
It took less than a day to debunk the longstanding mantra that financial markets are in an era of low volatility. As the shockwaves ripple out from this week’s ructions, another truism of recent years — that investors should “buy the dip” — faces scrutiny.

A hedge fund manager who makes a killing when stocks go haywire told us there’s about to be a market avalanche
Ben Moshinsky – Markets Insider
Feedback loops hidden within the structure of global markets are creating the conditions for an “avalanche” in equities, Jerry Haworth, CEO of London-based hedge fund 36 South, said in an interview.
“I think the market is structurally unstable,” Haworth, whose fund profits from market volatility, said.

FX Options Market Update: February 8, 2018


Gundlach: Market unwind will be ‘turbulent,’ not over in a few days
Jennifer Ablan – Reuters
Jeffrey Gundlach, chief executive of Doubleline Capital, said on Wednesday that the “low rate-low volatility” market environment went on for so long that now “the unwind will be turbulent and not over in a couple of days.”

The Market Time Bomb That’s Bigger Than the VIX; Loan funds pose a potential liquidity problem, which could have a destabilizing effect.
Stephen Gandel – Bloomberg
As bad as the stock market turbulence has been from volatility-linked products, it could be even worse some day because of exchange-traded loan funds.

Three Least Likely FOMC Meetings to Hike Rates
Blu Putnam – CME Group
The Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) did nothing at its January 31 meeting; however, Federal Funds futures are signaling as many as three rate hikes are probable in 2018. In this report, we take another perspective, and explain which are the least probable FOMC meetings for a rate hike. Our analysis suggests that the FOMC meetings ending on Wednesday, May 2, 2018, and Thursday, November 8, 2018, are unlikely to see rate hikes; and the summer vacation meeting on Wednesday, August 1, 2018, is not far behind as a snoozer. Here is the full story.

At least four IPOs price in New York despite jarring market volatility
Reuters via CNBC
At least four companies managed to price their initial public offerings (IPOs) in New York on Wednesday, defying this week’s stock market volatility which led to three other stock market flotations being postponed.

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