Investors clinging to maligned trade, setting up for more carnage: MS

Jun 6, 2018

Jeff Bergstrom

Jeff Bergstrom


Lead Stories

Investors clinging to maligned trade, setting up for more carnage: MS
Joe Ciolli – Business Insider
It has been said that repeating the same mistake and expecting a different result is a psychological fallacy.
If so, one group of investors missed the memo, because that group is once again heading down a dark path that led it astray mere months ago.
We’re referring to volatility short sellers, who were caught off-guard by a market shock in early February that left them scrambling to cover positions, putting even more pressure on existing holders. That, in turn, wiped out billions from the values of the investment products used by those traders, with some dissolving entirely.

****JB: “a psychological fallacy” instead of “the definition of insanity” really takes the fun out of that saying.

Capstone: the fund betting that market volatility has a future
Robin Wigglesworth – Financial Times
Paul Britton was working in Amsterdam’s options trading pit in the mid-1990s when he first appreciated how technology was reshaping markets and allowing savvier traders to exploit bouts of turbulence.
He would agree seemingly lucrative trades with rivals at Timber Hill, another options market-maker, only to repeatedly lose money as prices moved unfavourably. Timber Hill and its founder Thomas Peterffy were among the first to embrace the potential of computers to calculate the value of securities and ultimately automate trading. The humbling experience proved formative for Mr Britton.

Short-Volatility Complex Returns, Defying Wall Street Alarm
Dani Burger – Bloomberg
Here’s one to file under the market’s memory-loss.
The volatility complex — the selling or shorting of options tied to U.S. stocks — is back with a vengeance, shrugging off February’s vol-mageddon in its wake.
Hedge funds hold the most number of short positions on the Cboe Volatility Index since late January — before the record spike in the gauge that wiped out over $5 trillion in global stocks and jolted investors from their complacent slumber.

World Bear Market Would Likely Start in Euro Zone, Gavekal Says
Cormac Mullen – Bloomberg
Investors on the watch for a bear market in global equities should keep their eyes on Europe, according to Gavekal Research.
“This animal is the sneaky sort and victims rarely see it coming,” said Charles Gave, founder of the Hong-Kong based asset-allocation consultancy, in a note to clients Wednesday. “If a bear market is to unfold, this will probably start outside of the U.S.”

****JB: I never thought of bears as sneaky, but I suppose this particular kind can be.

Wall Street’s ‘fear index’ falls to more than 4-month low as tech stocks romp
Mark DeCambre – MarketWatch
One of Wall Street’s most popular indicators of market fear tumbled to its lowest level since late January as the Nasdaq Composite Index recorded a second record close in as many sessions, suggesting that the appetite for risk, perhaps alongside investor complacency, is re-emerging in the stock market.

Wall Street Gains Optimism As Worries On China, Canada Trade Ease A Bit
JJ Kinahan – Forbes
Although trade winds have been icy recently, there may be a thaw afoot.
Investors appear to be more optimistic about trade this morning after ABC News reported that Treasury Secretary Steven Mnuchin on Tuesday urged President Trump to exempt Canada from steel and aluminum tariffs. Meanwhile, China has offered to buy nearly $70 billion of U.S. goods if the U.S. will back off of tariffs against the Asian nation, media outlets reported.

U.S. Asks OPEC for 1 Million Barrel a Day Oil Output Hike
Jennifer Jacobs, Javier Blas, and Grant Smith – Bloomberg
The U.S. government has quietly asked Saudi Arabia and some other OPEC producers to increase oil production by about 1 million barrels a day, according to people familiar with the matter.
The rare request came after U.S. retail gasoline prices surged to their highest in more than three years and President Donald Trump publicly complained about OPEC policy and rising oil prices on Twitter. It also follows Washington’s decision to reimpose sanctions on Iran’s crude exports that had previously displaced about 1 million barrels a day, or just over 1 percent of global production.

Exchanges and Clearing

Cboe Global Markets Reports May 2018 Trading Volume
Cboe Global Markets, Inc. (Cboe: CBOE | Nasdaq: CBOE), one of the world’s largest exchange holding companies, today reported May monthly trading volume and average revenue per contract (RPC)/net revenue capture data at

Regulation & Enforcement

SEC Chairman Clayton says agency won’t change definition of a security
Kate Rooney – CNBC
The head of the Securities and Exchange Commission made it clear Wednesday that the agency won’t bend the rules for cryptocurrency when it comes to defining what is or what isn’t a security.
“We are not going to do any violence to the traditional definition of a security that has worked for a long time,” U.S. Securities and Exchange Commission Chairman Jay Clayton told CNBC Wednesday. “We’ve been doing this a long time, there’s no need to change the definition.”


Hanweck Introduces Volume Weighted Relative Liquidity Measure
Hanweck, a leading provider of real-time risk analytics on global derivatives markets and data provider for the Options Liquidity Matrix, introduced its new Volume Weighted Relative Liquidity (VWRL) measure. The Hanweck VWRL metric measures bid-ask spread as a percentage of option mid-point price. The measure normalizes metrics for different priced options, and places greater weight on those spreads with greater trading volume. The result is a metric that better reflects the true liquidity and spreads of a given options class.

GreenKey Files Patent on Fast, High-Accuracy Transcription Using Multiple Engines
GreenKey Technologies, creator of an artificial intelligence (AI) and voice-driven collaboration tool for financial market participants, announced today that the U.S. Patent and Trademark Office has accepted its application for improved speed and transcription accuracy of automatic speech transcription based on multiple speech-to-text engines.


Volatility sellers are “out of runway”
Yahoo Finance
Morgan Stanley reckons it’s the end of the road for volatility selling.
Cross-asset strategists at the U.S. bank turned buyers of volatility in mid-May, and argue
several factors are conspiring against the vol selling strategy which many espoused before
February’s volatility blow-up, and some are still in now. Here are their reasons to avoid the
short-vol trade:

Low Volume Has Been a Feature of the Bull Market
Helene Meisler – TheStreet
There is one question I get on an almost daily basis. It’s about the volume. Folks seem perplexed at how low volume is. I don’t have a good answer for why volume is relatively low but I have said here countless times that since 2009 rallies have tended to come on low volume, so I consider it the hallmark of this market.

The Smart Money’s Bailing As Markets Become Too Complacent
Adem Tumerkan – Seeking Alpha
The turbulence throughout the markets last week – thanks to Italy – has given investors their first taste of a frothy summer.
Especially the “smart money”- they’re bolting for the exits…

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