HFT – Not so flashy anymore; Vicious VIX; JPM Head Quant Warns Of “Catastrophic Losses” For Short Vol Strategies

Jun 14, 2017

Observations & Insight

An Excerpt of Note
Spencer Doar – JLN

I am re-reading “Liar’s Poker” because…I don’t really know why — maybe it’s just summer instinct with all these reading lists floating around.

Anyway, about a quarter of the way in, there’s a notable anecdote from Michael Lewis’ training program at Salomon:

“‘When you trade equity options,’ asked my friend Franky, ‘do you hedge your gamma and theta or just your delta? And if you don’t hedge your gamma and theta, why not?’

The equity options specialist nodded for about ten seconds. I’m not sure he even understood the words. We trainees were equally oblivious (it was an obnoxious question), but we felt that any self-respecting options trader should avoid being stumped by a trainee. The options trader lamely tried to laugh himself out of the hole. ‘You know,’ he said, ‘I don’t know the answer. That’s probably why I don’t have trouble trading. I’ll find out and come back tomorrow. I’m not really up on options theory.'”

I had such conflicting emotions after reading that section, mostly because I couldn’t help but be concerned about how often something akin to the above story happens these days in any trading setting. (The other emotion was general bemusement.)

My thoughts went in a few directions: Should retail investors buy volatility ETFs when they don’t understand the underlying’s structural qualities? Do regulators understand the instruments they are regulating? (I unfortunately hear that question quite a bit.) How do we enable investor confidence? Will education do the trick? How much education is “enough” education? How much are people aware of their knowledge gaps?


Bits & Pieces
By John J. Lothian

Congratulations to our friends in London for raising GBP30,000 for the inaugural David Setters cricket tournament on behalf of research into MND. Well done!

Welcome back to work for Terry Duffy. We hope you are fully recovered and in good health as you return to work.

Longtime market writer Darrell Jobman reached out to me asking for help finding a home for a lifetime collection of market related magazine editions and trading related books. He is downsizing into a condo and wants to find a good home for these prized items.

The collection includes magazines from the last 45 years, including Stocks & Commodities, CME Magazine, SFO, Trader, Omega Research and Corporate Risk Management. There are also trading books, trading courses and tapes. Contact me if you are interested and I will put you in contact with Darrell.

We have added Trading Technologies CFO Michael Kraines to our Chicago Friday session of the MarketsWiki Education event held at Trading Technologies‘ offices. We also have an agreement from Richard Rosenblatt of Rosenblatt Securities to join our New York series.

Since we passed the 100 million pageview mark on MarketsWiki on May 10, we have seen 2.5 million new pageviews.

Last, please share the information on our MarketsWiki Education World of Opportunity series events in Chicago and New York with your friends and colleagues. This is a great opportunity to show off our industry to some energetic young people. See www.marketswikieducation.com for details.


CME’s Knottenbelt Discusses International Plans and CME Europe Closure

This year the CME Group decided to close CME Europe and CME Clearing Europe, but the exchange group does not see the shuttering as changing overall international and European expansion plans. Rather, the investment CME put into Europe is going to continue to pay dividends as investors overseas realize the offsets CME has to offer given its broad product suite. In this first video from our Exchange Leader Series filmed at FIA IDX, William Knottenbelt, senior managing director, international, with CME Group, talks about the decision to close CME Europe and the international outlook for CME for the rest of 2017.

Read the rest and watch the video »



Lead Stories

HFT: Not so flashy anymore; After a string of M&A deals in the HFT space at the beginning of the year, does it spell an end to the traditional HFT business model?
Joe Parsons – The Trade
After the publication of Michael Lewis’s “Flash Boys” in 2014, the high-frequency trading (HFT) firms dominating financial markets in the shadows were brought to light. They were pictured as predators, using high powered computers to execute trades at a millionth of a second, putting other market participants at their mercy.

Vicious VIX: Jason Miller Made $53,000, But Larry Tabb Got Bilked
The Heisenberg – Seeking Alpha
The VIX debate has found its way onto the front page of the Wall Street Journal. By way of a series of amusing anecdotes, WSJ explains why it’s dangerous for retail investors and even some “pros” to trade volatility via popular VIX ETPs. The piece quotes Deutsche Bank’s Rocky Fishman, whose analysis I’ve been highlighting for months. Here’s an in-depth look at one of the more important issues facing markets today.

JPM Head Quant Warns Of “Catastrophic Losses” For Short Vol Strategies
Zero Hedge
It has been a while since we heard from JPM’s quant guru, Marko Kolanovic, who following the recent FANG crash and quant rotations and ahead of this Friday’s massive S&P op-ex, has published his latest latter, covering everything from the aforementioned market moves, to the ongoing drastic changes in the market structure, to the prevailing low levels of volatility despite the sharp market selloff on May 17 (with no follow through), and finally concludes with his latest near-term market outlook.

****SD: The first comment on the story is perfect: “But when I asked Jim Cramer ‘Am I Diversified?’ he gave my portfolio of 50% XIV and 50% SVXY a Boo-Yah.” Also, is it weird playing pool tag when your name is Marko?

DV Trading buys Chicago rival Eldorado Trading’s assets
Lynne Marek – Crain’s Chicago Business
Chicago high-speed electronic trading firm DV Trading is expanding, hiring employees from shuttering Chicago rival Eldorado Trading, and opening an office in London next month.
DV Trading added seven employees from Eldorado Trading recently, and acquired some of the firm’s trading hardware and software, DV Trading CEO Jared Vegosen said. He declined to say how much DV paid for the assets.

****SD: I guess this is one firm with a more rosy outlook than our lead story would suggest.

Options Market Is Not Buying OPEC’s Game
Matt Piotrowski – The Fuse
Options traders turn bearish after OPEC meeting and upticks in the rig count
Only a 13 percent chance that $55 will be reached for September Brent
Activity along the WTI curve suggests some shale producers hedging below $50
OPEC losing ability to use verbal intervention to support prices
Movement to the downside will increase the number of puts, driving prices down further

****SD: With so much production outside the realm of OPEC — see America Can Spin the Oil World on Its Axis for example — this is not surprising.

Bond Market Volatility Drops to Taper-Tantrum Lows as Fed Meets
Wes Goodman – Bloomberg
Treasuries fell in 2013 the last time volatility was so low; Jeffrey Gundlach says yields will probably rise by year-end
Volatility in parts of the bond market is getting so low that some investors are taking it as a warning sign.

****SD: More from Bloomberg on the Fed meeting – Fed to Update Inflation, Balance-Sheet Views: Decision-Day Guide and Options Traders Bet on Smaller Market Reaction to Fed

Bromance of Trading Veterans Gives Viola’s Virtu a New Chairman
Annie Massa – Bloomberg
Billionaire Viola passes chair role to ex-Nasdaq CEO Greifeld; Greifeld and Virtu CEO Cifu see new opportunities in KCG deal
The same November day that Bob Greifeld announced he was stepping down as chief executive officer of Nasdaq Inc., he met billionaire Vinnie Viola at a bistro on Manhattan’s Upper East Side.

****SD: You might think “bromance” is a strong word, but that’s not the case, as Greifeld says stuff like, “You want to be involved with people you have great personal affection for” in the article.

Exchanges and Clearing

Volume Rises for S&P 500 Options with P.M.-Settlement on 3rd Fridays
Matt Moran – CBOE Options Hub
In regard to the popular S&P 500 options, on May 1, 2017, CBOE changed the symbol for existing SPXPM option series to option symbol SPXW. Beginning last month, CBOE is offering both SPX options with a.m.-settlement, and SPXW options with p.m.-settlement, on third Fridays of the month. This conversion was designed to allow greater ease of access for those looking to place spreads from week to week. We have received some very positive feedback from institutional investors on this change to the symbol SPXW.

Euro Clearing Still in Balance
Shanny Basar – MarketsMedia
The European Commission has not ruled out forcing Euro clearing to relocate from London as it proposed stricter supervision of central counterparties.

Nasdaq MRX Migration to INET
Nadaq Options Trader Alert
As referenced in OTA#2016 – 20, we would like to share additional information regarding the migration of the Nasdaq MRX (MRX), formally ISE Mercury, option exchange to Nasdaq’s INET technology.

Regulation & Enforcement

London warns Brussels of risk in moving euro clearing business
Jim Brunsden and Philip Stafford – Financial Times
Leading figures in the City of London have warned that any moves by Brussels to seize Britain’s prized euro clearing business would harm European companies, as the EU moved to equip itself with powers to make such activities relocate after Brexit.

****SD: Also see FIA response to EC proposal on clearing in Europe and the European Commission’s release Commission proposes more robust supervision of central counterparties (CCPs)

U.S. plans threaten to undermine global bank reforms
Huw Jones and Michelle Price – Reuters
U.S. plans to delay globally-agreed reforms to make banks safer after the financial crisis will throw a system of international regulatory cooperation into confusion, European Union and Asian regulatory sources said on Tuesday.

****SD: “I know some people have the cilantro gene, but basil? Who doesn’t like basil? …. Ohh, Basel. Never mind.” – Gilda Radner as Emily Litella

Trump’s Wall Street game plan needs players
Pete Schroeder and Lisa Lambert – Reuters
Wall Street banks on Tuesday cheered U.S. President Donald Trump’s plans to loosen the leash put on them in the wake of the 2008 financial crisis but they do not expect significant change any time soon.


Traders are loading up on bets against Apple
Joe Ciolli – Business Insider
Historically viewed as one of the crown jewels of the stock market, Apple is adjusting to its new role as a lightning rod for bearish tech speculators.

Traders Anticipate MSCI China Verdict (VIDEO)
Options traders are taking bullish bets on China’s equities market as they await the MSCI’s decision on whether mainland shares will be included in the indices.

Hidden in Plain Sight: A Powerful Way to Beat the Market
Justin Lahart – WSJ
Companies are a little lazy about what they put into regulatory filings. Investors are profoundly lazy about reading them.
Compare a company’s most recent annual report to its previous one, and you will quickly notice the language doesn’t change much. Hot-dog seller Nathan’s Famous NATH 0.08% has talked about the damage done to its flagship Coney Island location in 2012 in the exact same language three years in a row.
Do investors still care?

****SD: How much money would you want to make to justify reading a 30,000 word document full of legalese? After all, time is money.

Some prop firms beat low volatility by selling weekly bank Nifty puts
Economic Times
A class of proprietary firms is raking it in even as most derivatives traders find making money increasingly difficult with low volatility, measured by India Vix, which has halved from its 52-week peak of 23.1 last November to about 11-level, currently.

****SD: “Theta is on my side, yes it is.” – Rolling Stones cover band composed of financial folks


The Global Economy Is Rebounding, But There’s One Big Problem
Chris Anstey and Enda Curran – Bloomberg
Emerging markets, led by China, have propelled world growth; Lack of EM safe-haven assets is a problem, says Stephen Jen
There’s a dark cloud building behind the world’s best period of synchronous growth among developed and emerging economies this decade — one that in time could rain down volatility in global markets.
The problem, identified by strategist and hedge fund manager Stephen Jen, is a deepening imbalance in the lack of new safe-haven assets as the world’s output expands.

A Two-Day Selloff Barely Dented Tech
Oliver Renick – Bloomberg
Tech stocks still soaring above peers a warning to bears; Relationships to indexes, stocks harken back to dot-com levels
The biggest two-day rout since Brexit did nothing to dislodge technology companies from the equity market penthouse. Even after surrendering $176 billion of market value since Friday, the S&P 500 Information Technology Index remains perched at the highest level relative to the full index since 2001. The ratio between the two sat at 0.40 before Friday, 25 percent higher than the 10-year average. Today’s its 0.39.

****SD: Who is responsible for the FAAMG thing? I get why, but FANG just had such a better ring to it.

Just 10% of trading is regular stock picking, JPMorgan estimates
Evelyn Cheng – CNBC
Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets, according to a new report from JPMorgan.

****JB: Not options related but it is interesting.

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