Inflationary VIX shock potential and other vol catalysts; Bitcoin pushback

Dec 7, 2017

Observations & Insight

North Korea says U.S. threats make war unavoidable as China urges calm
Soyoung Kim, Heekyong Yang – Reuters
Two American B-1B heavy bombers joined large-scale combat drills over South Korea on Thursday amid warnings from North Korea that the exercises and U.S. threats have made the outbreak of war “an established fact”.

****SD: We’ve made it this far in the “year of low volatility.” This North Korea update and the below Palestinian story are two of the first things I see scanning my feeds this morning. The other story I saw? Bitcoin hits $16k. No words…


Hamas calls for Palestinian uprising over Trump’s Jerusalem plan
Dan Williams, Nidal al-Mughrabi – Reuters
The Islamist group Hamas urged Palestinians on Thursday to abandon peace efforts and launch a new uprising against Israel in response to U.S. President Donald Trump’s recognition of Jerusalem as its capital.


Two Powerful Futures Industry Female Leaders Step Down
John Lothian – JLN
Kim Taylor of the CME Group and Maureen Downs of RCG have stepped down from prominent positions of power in the futures industry in the last couple of weeks.

Lead Stories

What Could Stir Up the VIX? Higher Inflation; A surprise spike in inflation is the most obvious catalyst for a sustained increase in stock-market volatility
Chris Dieterich – WSJ
A summary of markets this year requires only two words: Low volatility.
Stocks climbed to repeated record highs at such a leisurely pace that 2017 may be among the least choppy years in history. The Cboe Volatility Index, the market’s so-called “fear gauge,” hit an all-time low and the S&P 500 observed its longest streak without falling more than 0.5% in five decades. There have been zero daily 2% price swings; last year, there were eight.

Bitcoin Futures Criticized by Brokers for Overlooking Risks
Sam Mamudi – Bloomberg
Some of the world’s biggest derivatives brokerages criticized plans by U.S. exchanges to offer bitcoin futures and options, saying the contracts have been rushed to market without proper consideration of the risks.

****SD: Bloomberg – Bitcoin Passes the $16,000 Mark. Here’s how I see the storyline thus far: Pushback to bitcoin adoption = bitcoin goes higher. Bitcoin gets a new proof of concept = bitcoin goes higher. Theft of bitcoin = bitcoin goes higher. Regulatory crackdown = bitcoin goes higher. Bitcoin goes down = bitcoin is about to go higher. (The FIA open letter the article is based upon is in our regulation section.)

Tempest in a Teacup: Does a Jumpy VIX Have Room to Rise?
Jennifer Waters – The Ticker Tape
What might the fear index be telling investors about the stock market? Last week, the fear index that Wall Street monitors for volatility, was quite jumpy, rising nearly 30% on Friday alone when volume on the Cboe Volatility Index (VIX) also touched a record high, according to Cboe Global Markets.

Are Broker Dealers Ready for FINRA to Analyze their Routing?
David Weisberger – Traders
Finra recently informed all of its member brokers that it would be conducting a review of their order routing practices and decisions. While I think that such an analysis is much overdue, it should cause a great deal of consternation among the broker dealer community. In addition to the actual decision-making that goes into firms Smart Order Routers (SORs), the FINRA review will likely dig into each firm’s best execution policies to ensure that they properly evaluate routing choices. Importantly, this means that research and decisions made by the quantitative developers or traders at firms will need to be documented for best execution review purposes.

****SD: My general rule of thumb is when someone rhetorically asks if something is ready, the answer is “no.” If the answer were yes, it’s usually not as good a read. However, if I saw the headline, “Everyone Prepped for MiFID; Anxious to Prove Themselves in January,” it would be a really interesting story.

NFA Swells Futures, Options Fees to ?$0.02 for Each Trade Side
Finance Magnates
The latest hike marks only the fourth time in NFA’s 31-year history that it has ?increased the fee.

Exchanges and Clearing

Bitcoin Futures: The Back Alley To A Surprise Destination
Kurt Dew – Seeking Alpha
The current center of attention in financial markets is the soon-to-be-listed Bitcoin futures contract.
The Bitcoin futures contracts are doomed to failure, riding a lame horse.
But CFTC approval of an unregulated financial instrument at an untested exchange, LedgerX, shows that the exchanges have a green light to innovate in both spot and futures markets.

****SD: From Bloomberg – Bitcoin’s Future Is All Mapped Out

BOX Appoints Two New Directors
BOX Options Exchange LLC, an innovator in market structure and client services, is pleased to announce the additions of Sean Flynn and John F. Sandner to the Exchange Board of Directors.

CME Group Inc. Declares Annual Variable Dividend of $3.50 per Share
CME Group Inc. (NASDAQ: CME) today declared its annual variable dividend, amounting to $3.50 per share. The dividend is payable January 15, 2018, to shareholders of record on December 28, 2017. When CME Group adopted its annual variable dividend structure in February 2012, the intention was to determine the excess cash available at the end of each year, with the level to increase or decrease from year to year based on operating results, potential investment activity and other forms of capital return.

Nadex Announces Launch of Bitcoin Spreads
Digital Journal
Nadex (North American Derivatives Exchangeô) today announced that they will offer trading in Nadex Bitcoin Spreads beginning at 6pm ET Sunday, December 17, 2017.

Regulation & Enforcement

Securities Regulation Daily Wrap Up, TOP STORYóCFTC Talks about Bitcoin futures contracts
Wolters Kluwer
In a recent CFTC Talks podcast, a number of Commission leaders engaged in a lively roundtable discussion to explore a wide arrange of issues associated with the much talked about Bitcoin futures contracts. The new trading products are scheduled to be launched by year-end at the Chicago Mercantile Exchange, Inc. (CME) and the CBOE Futures Exchange (CFE).

Banks could take a $4.4 billion hit from new reforms ó and traders will bear the brunt of it
Alex Morrell – Business Insider
The European operations of investment banks are expected to lose $4.4 billion from new regulatory reforms, known as MiFID II. Traders will shoulder the bulk of the losses, with equity and debt markets teams expected to lose a combined $2.5 billion.

Open letter to CFTC chairman Giancarlo regarding the listing of cryptocurrency derivatives
On December 6, FIA CEO and President Walt Lukken wrote an open letter to CFTC Chairman Christopher Giancarlo outlining concerns with the process in which cryptocurrency futures have come to market.


Derivatives With a Twist: Options on Futures vs. Equity Options
Doug Ashburn – The Ticker Tape
Tax audit. Crash. Emergency liquidation. Let’s face itósome financial terms are scary, perhaps for good reason. But here’s a term that may sound scarier than it is: derivatives.


FOW International Award winners 2017
Luke Jeffs – FOW
Taifex took home the Global Exchange of the Year on Wednesday night becoming the first regional market to scoop the award after a year of impressive growth and innovation.

Goldman, BlackRock, and Blackstone: Will They Still Rule Wall Street in 10 Years?
Melissa Mittelman, Sabrina Willmer and Dakin Campbell – Bloomberg
The three titans face different challenges in keeping their reign alive.

Saxo Bank’s Outrageous Predictions for 2018
2017 was supposed to be the year of volatility. We entered the year with existential concerns in Europe, a startling new US presidency, and Chinese policy concerns as markets eyed October’s 19th Party Congress.
All in all, it seemed as if this would be the year we would see a more rambunctious monetary policy impulse, more dramatic gyrations, and a more turbulent climate in general.
Instead, the European elections went smoothly, the Trump administration proved unable to push policy, and Chinese leaders kept their economy running smoothly even as the country’s dangerous credit bubble inflated further.

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