Observations & Insight

Other VIXes
Spencer Doar – JLN

Of all the CBOE’s products, none gets media attention like the VIX. But CBOE has plenty of other VIX products, ranging from the BPVIX (CBOE/CME FX British Pound Volatility Index) to the GVZ (CBOE Gold ETF Volatility Index).

The VIX plummeted yesterday to the 10 handle after the results of the first round of the French election were interpreted as positive (VIX is around 10.6 as of this writing). The media will sometimes give markets the gloss over treatment, look at the VIX and only the VIX, and declare “where’s the fear?” given so much geopolitical uncertainty floating around. Knowing that nothing can be distilled to one metric and one metric only, I thought I’d look at the CBOE’s other volatility measurements and see if any were actually headed in the other direction.

The joke is on me as out of all the major VIXes that the CBOE shows on its volatility indices page, none presented a compelling 6-month chart (I had to pick some time frame) that flew in the face of the VIX mothership. A few of the indices that measure volatility of single stocks — the VIX of Amazon (VXAZN) and Apple (VXAPL) specifically — popped over the last month or so, but even those were more a return to normalcy (slightly under historical norms for that matter).

OVX, the vol of crude oil — a big meh. Gold and gold miners — shrug. Currencies? Crushed by the developments in France. Even the VIX of FXI, the main China ETF, doesn’t show much in the way of volatile expectations. And it’s China.

So, yeah, thanks Macron, for crushing the dreams of market makers everywhere.

And speaking of the plight of market makers, the first story from the OCC’s John Fennell ties in nicely.


Lead Stories

OCC Says Implementation of SA-CCR Important For Liquid and Orderly Listed Options Markets
John Fennell, Executive Vice President and Chief Risk Officer – OCC
As the agency for all U.S. options exchanges and in our role as a Systemically Important Financial Market Utility, OCC is a strong advocate for our exchanges, clearing firms and all market participants. Our clearing members commit capital and provide a secure environment for the clearance and settlement of transactions originating with direct trading participants in the listed options market, including market makers. These market makers are critical to enhancing the overall resilience of the options markets by providing liquidity and ensuring an orderly market by taking the opposite side of trades from options buyers and sellers, especially during times of market stress. This is evidenced by the fact that registered market makers currently account for one side of approximately 90 percent of all customer originating trades executed on the Chicago Board Options Exchange.

****SD: Huge deal.

Seventeen years after 5,000, Nasdaq tops 6,000
Chuck Mikolajczak and Rodrigo Campos – Reuters
The Nasdaq Composite index crossed the 6,000 threshold for the first time on Tuesday, aided by gains in a handful of large-cap tech names, more than 17 years after it last marked a 1,000 point milestone.

What Markets Should Conclude From France’s Election
Mohamed A. El-Erian – Bloomberg
While French voters didn’t shock markets by sending both presidential candidates from the far left and far right to the decisive second round in two weeks, investors did not get their dream lineup: A contest between Emmanuel Macron and Francois Fillon, the two most pro-market candidates.

VIX ETPs Have Produced A Return Of -80.7% Per Annum Since 2005
Rupert Hargreaves – ValueWalk
Exchange-traded products have opened up new markets to investors across the world. Whereas before private investors would have found it hard to trade frontier stock markets, emerging market debt, commodities and even the VIX, ETFs and ETPs have brought these products into the mainstream. However, while these markets are now easy to access, it doesn’t mean they are suitable for every investor because ETFs and ETPs are usually unable to track the markets they’re designed to track directly, and have to make use of options or derivatives to give exposure.

****SD: Hah!

ECB Meeting Comes at a Precarious Time for Markets
Ben Emons – Bloomberg
The recent economic data out of the euro zone is encouraging. Production, manufacturing and confidence are robust, and inflation has stabilized. That’s not to say that there aren’t risks to the downside, such as growing populism, global geopolitical tensions, and uncertainty about sustainability of the economic recovery. To insure against these risks, the European Central Bank, which has a monetary policy meeting Thursday, has the option of boosting asset purchases.

North Korea On Brink As Nuclear Missile Tests Could Lead To War: Rex Tillerson
Mark Melin – ValueWalk
With all the bluster coming from North Korea – nuclear missile tests, talk of protracted war with a nuclear threat hanging overhead – a Bank of America Merrill Lynch piece thinks the worst potential outcome, while chilling and difficult to price into markets, nonetheless remains a “tail risk.”

Investors take another look at opinion polls after French vote
Jamie McGeever – Reuters
Pollsters picked the two candidates to make it into next month’s French presidential election run-off, going some way to restoring their reputation in financial markets before other important votes across Europe.

****SD: “Trust no one.” – every mysterious man in thriller/adventure movies ever

Investors Bet on Stock-Volatility Decline Like in 2013: Chart
Cecile Vannucci – Bloomberg
With the CBOE Volatility Index down as much as 24 percent on optimism that centrist Emmanuel Macron will become the next French president, wagers for easing equity turbulence may continue thriving.

Exchanges and Clearing

Saudi exchange may be ready for equity futures, options in 24 months
Andrew Torchia and Marwa Rashad – Reuters
Saudi Arabia’s stock exchange should be ready to introduce equity futures and options in about 24 months, after it completes reforms to help it manage the risks of such products, the exchange’s chief executive Khalid al-Hussan said. Futures and options would provide hedging tools for the foreign institutional investors that are expected to enter Saudi Arabia with the listing of national oil giant Saudi Aramco, expected next year, and with the market’s entry into MSCI’s emerging market index, which may occur in mid-2019.

****SD: Kind of amazed that after opening the exchange to foreign institutions in mid-2015 only 60 entities have become “Qualified Foreign Investors.”

Introduction of seven new options on iShares ETFs
Eurex Group
Since 2015, Eurex has cooperated with both liquidity providers and ETF issuers to facilitate trading and hedging activities for, among others, ETF asset holders using options on ETFs. Liquidity has attracted further institutional interest, and in 2016, with nearly 300,000 traded contracts, Eurex recorded a sevenfold increase in ETF options volume.

Exchanges compete for dominance in derivatives
Nikkei Asian Review
As derivatives trading continues to expand across the world, competition is heating up among securities exchanges vying to carve out a hefty share of this lucrative market. Derivatives trading volume hit 25.2 billion contracts in 2016, a 2% increase from 2015, marking a record for the first time in five years, according to the Futures Industry Association in the U.S. Trading was brisk last year as investors sought to hedge their investments amid a slew of key political events, including the U.S. presidential election.

****SD: A rehash of some recent stats from a Japanese perspective.


LME Clarifies Executive Leadership Team
FTF News
Matthew Chamberlain, the interim CEO for the London Metal Exchange (LME) since January, has been appointed to the post on a permanent basis, subject to the approval of the Financial Conduct Authority (FCA) a U.K. regulator, officials say.

****SD: Just a recap of some recent moves.

Regulation & Enforcement

Will MiFID II Destroy European Exchanges?
Larry Tabb – TABB Forum
While a lot of time has been invested in analyzing MiFID II’s impact on research and unbundling, the impact of the regulation on European market structure perhaps will be even greater. The rules around dark pool caps and Systemic Internalizers could facilitate the disaggregation of the European equities marketplace, leaving the exchanges with order flow that no one else wants to interact with. As a result, says Larry Tabb, on-exchange spreads will widen, which will degrade the exchange/MTF flow even further and eventually diminish the value of the exchanges’ market data, co-location, and infrastructure franchises.

FinTech – The CFTC’s Silver Bullet?
Katherine Kirkpatrick – TABB Forum
The appointment of Christopher Giancarlo – a longtime critic of the CFTC’s approach to ‘backward looking,’ post-crisis regulatory acts – as chairman of the US Commodity Futures Trading Commission may result in more targeted, technology-focused investigations. Giancarlo seems intent on leveraging FinTech to maximize the resources of a regulator struggling to prioritize efforts and work within the financial constraints of a budget freeze.


Avoid Falling Victim to Hybrid Cloud Hype
Andrew Hillier – Data Center Journal
Everyone seems to be moving to the cloud—and for good reason. Cloud computing provides immense benefits for everyone from small and medium-size businesses to large enterprises. It gives companies the ability to scale up or down with demand while also offering the flexibility to add new services and respond to business needs quickly. Despite the many cloud benefits, most IT departments have yet to figure out how to manage their cloud usage effectively. DevOps is often still in control of cloud deployments and, in many cases, costs are spiraling out of control.

****SD: I like a good reality check. And the author would know – he’s CTO of CiRBA which counts companies like Citi, IBM, FIS and AIG as customers.


The Trump Trade Is at a Moment of Truth as the President’s Tax Proposal Looms
Lu Wang – Bloomberg
Traders fixated on the Trump trade are about to get an idea of how far the president will go to stimulate the economy, after months speculating over the timing and size of his tax plan.

A Game of Volatility Chicken
The question everyone is asking it where does volatility go from here. It’s at its lowest levels since the 1960’s, despite major economic unknowns like a looming government shutdown and a guy in the White House who was supposed to be all volatile, all the time. But each spike is met with “meh.” Of course, the VIX itself doesn’t go back into the 60’s. For that, PIMCO released this chart – measuring volatility by the simple average of volatility of the top 100 current stocks in the S&P 500 – and their commentary:

ETF Flopper: The VIX’s Sixth-Worst Decline in History
Crystal Kim – Barron’s
The broad market’s gain was volatility traders’ pain. While the Dow Jones Industrial Average and the S&P 500 finished up more than 1%, short-term VIX futures exchange-traded funds were the biggest flops.

****SD: “Worst” is in the eye of the beholder. After all, as the following article notes, “timely investors” won.

Volatility Crashes, Timely Investors Win
Brandon Dempster – Seeking Alpha
Volatility collapsed during Monday’s session, with the VIX declining nearly 25%.

Reviewing a SPX Option Day Trade from Monday
Russell Rhoads – CBOE Options Blog
I have a handful of former Options Institute students who like to keep me up on their trading. Yesterday morning I got an email from one who decided to take the other side of the big move to the upside in the S&P 500 (SPX).

Banks and Trump: ‘The rally has met reality’
Banking is the one industry above all others that should cruise higher during a Trump administration, but the road likely won’t be smooth.


AI Will Not Replace the Analyst
Rob Daly – MarketsMedia.com
Artificial intelligence and machine learning application may provide financial analysts with invaluable tools that process greater amounts of data, but they will not supplant the role of the research analyst completely, according to one industry watcher.

Hedging against low wind: 5 things you should know about weather risk transfer structures
Geoffrey Taunton Collins – Windpower Engineering & Development
As the global wind sector matures, the risk profile of development and operations is changing rapidly. Once confined to more developed and secure markets, the U.S. wind industry is now facing logistical and technical challenges of building and operating projects offshore, and in testing lower-wind onshore locations.

****SD: Yes, there’s an obligatory “Gone with the Wind” reference, but this is interesting. Did you know that “the global installed wind base is missing out on $56 billion in total asset value as a result of a failure to efficiently manage the financial impacts of weather risk.” I will say it is strange that the article spends the whole time talking about options but yet never says the word “options,” rather “weather risk transfer mechanisms.” Could you imagine if people never said options, instead opting for “volatility risk transfer mechanism?”

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