Equity volatility schemes seen widely used; Volatility risk endures; Laszlo Birinyi’s calls

Sep 29, 2017

Observations & Insight

Crypto Developments of the Week – There Were a Lot
Spencer Doar – JLN

The news just won’t stop in the crypto space and with the big exchanges making moves, new platforms seemingly launched every day, ETFs trying to get off the ground and regulatory concerns, it is worth reviewing some of the week’s news.

Most of the developments were setbacks. Reuters has an expose out today about how chaos and hackers stalk investors on cryptocurrency exchanges. Plus, there are ongoing concerns about about transaction and transfer costs in bitcoin as Bloomberg laid out in today’s Paying $15 to Send $25 Has Bitcoin Users Rethinking Practicality. The top cryptocurrencies themselves have had a bad month, as MarketWatch lays out here.

As for ETF news, the SEC got a little cheeky in response to VanEck’s application for its VanEck Vectors Bitcoin Strategy ETF, saying it would not review the application since the instruments it wanted to use in the fund – exchange-traded bitcoin derivatives – are not available yet. The potential availability of the derivatives products in question was itself dealt a blow this week when CME Group President Bryan Durkin said the exchange would not be rolling out a bitcoin futures contract “in the very near future,” though he was still bullish on the technological underpinnings of bitcoin.

That leaves the future of exchange-traded bitcoin derivatives, at least for the near-term, pretty much in the hands of LedgerX (recall it’s partner of MIAX) and CBOE. We’ll see something out of those folks by Q2 2018 at the latest (given recent guidance from the exchanges).

Yet, none of this stopped ProShares from filing for two of its own bitcoin ETFs on Wednesday (one is an inverse), despite relying on the same non-existent products in its filing as VanEck.

It’s not all bad – CFTC Chairman Christopher Giancarlo said the agency wants to use blockchain to help it monitor markets (and it’s far from the only outfit looking to use distributed ledger technology for efficiency).

I’ll leave you all with the super fun, sometimes mind-boggling story from Bloomberg on Tuesday – This Trader Made 295% on Cryptocurrency Derivatives. Again, direct your attention to this line: “‘I just put in an order for a Tesla, and I don’t even know how to drive,’ said the 29-year-old.”

If this didn’t sate your appetite, here are some more tales from the crypto world:
-Who are the players? – This 31-Year-Old Is Trying to Revolutionize Cryptocurrency Trading
-Are we ready? – Former SEC chief says regulator not equipped to take on bitcoin
-Can it be stopped? – What China Ban? Cryptocurrency Market Cap Rebounding


Lead Stories

Equity volatility schemes seen widely used -Fed survey
Strategies to profit from stock market volatility are seen as widely used among hedge funds, insurance companies and other institutional investors, a Federal Reserve survey released on Thursday showed.
For their hedge fund clients, nearly one-third of the primary dealers, or Wall Street’s top firms that do business directly with the U.S. central bank, said these volatility strategies or products were widely employed, according to the Fed’s latest quarterly senior credit officer opinion survey.

Swedroe: Volatility Risk Endures
Larry Swedroe – ETF.com
There are a multitude of alternative investments for investors to consider, largely because Wall Street is exceptionally good at creating products, and at creating demand for those products, even when there shouldn’t be. However, among the many alternatives from which to choose, there are really only a few you should contemplate.

An investing legend who has nailed the market at every turn just got even more bullish on
Joe Ciolli – Business Insider
With the stock market hitting yet another series of record highs, some investors may be inclined to take the money and run — or at least start to worry about the rally’s sustainability.
Not the legendary investor Laszlo Birinyi.

****SD: He “bought SPDR S&P 500 ETF $255 calls expiring December 29.”

This Month Is On Track to Be the Least Volatile September on Record for Stocks
Kinsey Grant – TheStreet
With just one trading session left, September is on track to be one of the least volatile on record, according to LPL Research.

Millennials – a new investor group with new needs
Gary Delany, OIC Director, Europe – OCC
Millennials are emerging as a distinct demographic to the investing community. Typically, they are in the 25-35 age range, as opposed to Generation X (36-51 years old) and baby boomers (52-70 years old). A 2016 study by Fidelity Investments shows that 60 percent of millennials interviewed had investment accounts and had started saving for retirement or an emergency fund. The study shows that 46 percent saw themselves as savers as compared to only nine percent who saw themselves as investors. Finally, 40 percent of those interviewed worried about the state of their finances.

****SD: In case you missed it earlier in the week, this is a great encapsulation of all things investing as it pertains to the “m” word — also known as the group that apparently does nothing but murder businesses.

Exchanges and Clearing

CBOE talks with ICE about Dutch clearing arm
Luke Jeffs – Global Investor Group
CBOE Holdings’ European arm, formerly Bats Europe, is in talks with the Intercontinental Exchange about the possibility of the US group’s Dutch arm clearing a new suite of CBOE European equity derivatives.
CBOE, which bought Bats Global Markets in February, is said by sources to be in early stage talks with Amsterdam-based ICE Clear Netherlands about that central counterparty acting as the clearing house for its proposed launch of European equity derivatives.

PHLX, NOM, BX, ISE, GEMX and MRX New Theoretical Price Calculator Tool for Obvious and Catastrophic Error Theoretical Price Determinations
Effective Monday, October 2, 2017, Nasdaq will begin using a new Theoretical Price Calculator Tool (“TP Tool”) for determining a theoretical price for obvious and catastrophic errors pursuant to NASDAQ Phlx Rule 1092, The NASDAQ Options Market Rule at Chapter V, Section 6, NASDAQ BX Rule at Chapter V, Section 6, Nasdaq, ISE Rule 720, Nasdaq GEMX Rule 720 and Nasdaq MRX Rule 720.

High participation a must for commodity Options trading to succeed: MMTC
Watch the interview of V Shunmugam Head-Research MCX, Rajesh Khosla MD, MMTC, Praveen Shankar Pandya Chairman, GJEPC and Keyur Shah CEO – Precious Metals Biz Muthoot Pappachan Group, with CNBC-TV18’s Manisha Gupta where they spoke about Options trading in commodities market.


ABN Clearing head of risk Duinstra quits the bank
Jack Ball – Global Investor Group
Ed van der Star will take over as chief risk officer on an ad interim basis

Regulation & Enforcement

Equivalence Becoming Urgent
Shanny Basar – MarketsMedia
Market participants warned that US and European Union entities may not be able to transact certain derivatives in January if there is no decision on the equivalence of trading venues before new regulations come into force.

Basel set to reopen NSFR derivatives debate
Louie Woodall – Risk.net
The Basel Committee on Banking Supervision is to launch a fresh consultation on how derivatives exposures should be treated under one of its key liquidity ratios, sources familiar with the matter say.

CFTC’s Giancarlo signals priorities; focus on swaps, algos, position reporting
Todd Ehret – Reuters
The U.S. top commodities regulator has been operating with as few as two commissioners in 2017 and hasn’t had a full slate of five commissioners for nearly three years. Now, finally after some recent confirmations by the U.S. Senate, the commission is nearing its intended size and is now signaling its priorities ahead.

FIA recommendations to streamline CFTC regulations and enhance market integrity
FIA responded to the CFTC’s call for suggestions on simplifying and modernizing CFTC rules via Project KISS today.

Compliance: A Big Picture
Terry Flanagan – MarketsMedia
Market participants have myriad regulations to comply with, at various stages of implementation, each with their own requirements and nuances.
But the diverse rule sets have some common themes, among them cybersecurity, regulatory reporting, market access, and identifying and preventing manipulative activity. So rather than managing each regulatory regime separately, it’s important for broker-dealers and hedge funds to have a cohesive strategy.

SEC chief froze sale of Chicago Stock Exchange at White House’s urging
Dave Michaels – MarketWatch
The Securities and Exchange Commission’s chairman made the decision to freeze his staff’s plan to approve the sale of the Chicago Stock Exchange to a Chinese-led group after consulting about the subject with the White House, people familiar with the matter said.

****SD: Not options, but indicative of a new angle affecting potential mergers and acquisitions in our industry.


Volatility Is Bound to Return, Right?
Helene Meisler – TheStreet
I saw a quote on Thursday attributed to Byron Wein, longtime legendary Wall Street strategist, that I must share with you. It said he expects that “low volatility is here to stay.”
I had some initial thoughts. The first was that we can put this in the category of “things you do not hear when the VIX is 20 or 30 or 40.” Another thought came courtesy of Peter Boockvar of the Lindsay Group as he noted that the net spec short position in VIX futures is at a record high.


A New Lesson for High School Economics Education
Jessica Donaldson – CME Group OpenMarkets
There are times when my students have trouble grasping economic concepts. But when those topics are transformed into an independent, interactive, and relevant learning experience, things definitely get easier. That experience is what Econ Essentials and the Facts About Food module aims to bring to the economics classroom.


UK the riskiest market after China, say finance and tech firms
Vivek Ahuja – Financial News
Political and economic uncertainty emanating from the Brexit vote have contributed to make the UK the second riskiest market in which to do business – after only China – according to a new survey of senior executives in the finance and technology sectors.

OTC Derivatives Markets Thriving Thanks To Financial Regulation
Mark Melin – ValueWalk
As the current deregulatory environment rages in Washington DC, post-crisis over-the-counter derivatives regulation stands as a rare epitome of government effectiveness, a new report claims. In the wake of financial crisis, the OTC derivatives markets are “alive and well because of, not in spite of, a slew of post-crisis legislation and regulation put in place over the past decade,” Greenwich Associates Head of Research for Market Structure and Technology Kevin McPartland wrote. While the system isn’t perfect, with a strong foundation in place it can be modified to improve effectiveness, he says.

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