Observations & Insight

Hurricane to Cost Tens of Billions, but a Quick Recovery Is Expected
Conor Dougherty and Nelson D. Schwartz – NY Times
The brutal storm pummeling the Houston area is likely to rank as one of the nation’s costliest natural disasters, with tens of billions in lost economic activity and property damage across a region crucial to the energy, chemical and shipping industries.
But economists say the region is likely to recover quickly and may even experience a bump in growth from rebuilding.


Deluged Texas Braces for More Rain, and Years of Recovery
Julie Turkewitz, Richard Perez-Pena and Jack Healy – NY Times
As one of the most destructive storms in the nation’s history pummeled southeast Texas for a fourth day, forecasts on Tuesday morning called for still more rain, making clear that catastrophic flooding that had turned neighborhoods into lakes was just the start of a disaster that would take years to overcome.

****SD: As you can see from the second part of these two headlines, it all depends on how you look at matters.

Lead Stories

Day Trading in Wall Street’s Complex ‘Fear Gauge’ Proliferates
Landon Thomas Jr. – NY Times
Each morning, at the market’s open, Seth M. Golden, a former logistics manager at a Target store, fires up the computer in his home office in northern Florida and does what he has done for years: Put on bets that Wall Street’s index of volatility, the VIX, will keep falling.
It has been a lucrative strategy as the so-called fear gauge has been, outside of the occasional spike, largely fearless — confounding experts by sloping persistently downward and in the process making Mr. Golden a multimillionaire.

****SD: This article caught a ton of traction with multiple sources and I’m using it as a jumping point for the rest of the newsletter’s main stories. Josh Brown (aka the Reformed Broker) had a blog citing the lede graf of this story titled “Holy f***ing s***”; eFinancialCareers has a piece called How to avoid banking and still make a fortune in finance; Dealbreaker has This Dude In Florida Is Raising $100 Million Just To Short The VIX, What’s Your Story?; and Matt Levine’s column today talks about it. Best thing to come out of the other stories: Golden’s LinkedIn profile “shows that also he’s spent the past two years trying to patent some kind of cooling system for the consumer goods industry.” So, he isn’t ALL in on the short VIX trade.

VIX ETPs: A Crowded Trade?
Stuart Barton – Seeking Alpha
Retail interest in short volatility products is growing.
VIX ETPs may have a larger impact on the volatility of the broader US equity market than most realize.
This article explains how a net short volatility position in ETPs may translate to higher market volatility.

****SD: It’s been established that there are plenty of retail traders out there playing a large role in these VIX ETPs and that maybe this represents the next retail wipeout ala day trading the dotcom boom. This Seeking Alpha article (it’s not the first to do so – don’t get me wrong) delves into the real systemic issues presented by those firms who make trading in these vehicles possible. Basically it goes like this: if the crowd is net short these VIX products (or long the inverses like XIV), then in times of market stress dealers in these products hedging their books with S&P futures/options/stock could have an outsized effect on markets.

VIX and volatility-linked funds are hot, and analysts worry these bets are like “picking up nickels in front of a steamroller”
John Detrixhe – Quartz
The US stock market has been calmly cruising along for a long time—so long that traders are starting to take risks that seem a little crazy. One is a bet that markets will remain as unusually placid as they have been in recent months.
Analysts have been confounded by the lack of volatility—the VIX index, often called the market’s “fear gauge,” has been bumping around record lows this year. The VIX tracks stock options tied to the S&P 500 index; it’s a gauge of traders’ expectations for the range of prices they expect the index to trade in over the coming month.

****SD: When publications such as Quartz that aren’t ‘hard’ finance pick up VIX ETPs it’s another indication this is going mainstream in a weird way. Let’s just say this effect goes hand in hand with the day trading story up top. Recall the anecdote of rich guy Joe Kennedy, who according to lore exited the market right before the 1929 crash because the kid shining his shoes had stock tips for him. Are we there yet? I think it’s kind of funny that the industry seems to love throwing shade at anything (rightly or wrongly) that the retail crowd gets in on. Cryptocurrency? Bubble. Passive investing? Presents systemic risks that could distort the market. VIX ETPs/any leveraged ETP? Underlyings are too complex/dangerous for the retail crowd.

Bull and Bear Market Volatility Look Very Different
Ben Carlson – Bloomberg
A storm in the financial markets may be fast approaching, yet history tells us that the calm typically lasts much longer.

****SD: It’s easy – one has hooves and one has claws.


Who Will Win Trading? The One With the Best Central Risk Book
Larry Tabb – TABB Forum
We have been reading about risk for years. When I started as a financial technology analyst at Tower Group in 1996, one of the firm’s senior analysts, Debbie Williams, wrote primarily about enterprise risk management. That was more than 21 years ago. She wrote and opined about the problems with institutional silos (the topic of a book published last year by the US managing editor of the Financial Times, Gillian Tett); the need for clean data (written about extensively by dozens and especially by the EDM Council); and the challenges of computing such complex analytics (a topic I covered in TABB Group’s very first research piece, V001:001, in 2003 – “Grid Computing in Financial Markets: Moving Beyond Compute-Intensive Applications” – this topic eventually morphed into Cloud Computing).

B3 Transfers Equities To Its Multi-Asset Clearing Platform
B3 (the Brazilian exchange and clearinghouse) successfully launched on Monday the equities, corporate bonds, and equities lending markets on its new multi-asset clearing platform. The clearing solution is delivered by Cinnober, built on its TRADExpress RealTime Clearing system.

****SD: Handles derivatives too.


ON THE MOVE: Academy Hires Capelo for Rates, Davison In at QB
John D’Antona Jr. – Traders News
J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, has chosen derivatives expert Bruce Tuckman as chief economist of the agency. Tuckman will succeed Sayee Srinivasan, who will become a special adviser to the CFTC.

****SD: Recap of some recent industry action in case you missed any.


Fear not the short-term volatility
Heightened political and policy uncertainty is stoking equity volatility, but we would view any short-term market weakness as a buying opportunity. Why? Underlying economic trends point to a sustained low-volatility regime that we believe favors equities.

Hedging against the unwind of QE in Europe
Peter Lee – Euromoney Magazine
At the end of August, Schroders became the latest investor to upgrade its growth forecasts for the euro area – to 2.1% for 2017, up from 1.8% previously and to 1.9% for next year up from 1.8%.

Hedge funds worried about North Korea risk, braced for market drop
Hedge fund managers braced against a market fall this month because of rising geopolitical risk between the U.S. and North Korea.
Tensions escalated again when North Korea launched a missile over Japan on Tuesday local time, driving U.S. stock index futures lower. In response, President Donald Trump later said in a statement, “All options are on the table” for North Korea.

****SD: Yesterday’s North Korea news used as a handy way to remind readers that Ackman/Dalio/Gundlach bought index puts.


Interactive Brokers Challenges Big Banks
Steven M. Sears – Barron’s
Interactive Brokers, which rose to prominence by offering individual investors market access and trading tools that were traditionally available only to institutional investors, is preparing to challenge commercial banks.
The company (ticker: IBKR), which used technology and low fees to disrupt and dominate the online brokerage industry, plans to employ a similar approach to help people better manage their finances.

****SD: Might have sold the Timber Hill market making operation but big plans remain.

World’s first diamond F&O trade launched
Times of India
Aimed at evolving a transparent pricing mechanism for diamond that will be useful to exporters, jewellers, hedgers and cutting & polishing companies, Indian Commodity Exchange (ICEX) on Monday launched the world’s first derivatives trading platform for this precious stone.

****SD: Plenty of commodities have idiosyncratic risks based around sovereign actions, output constraints, tariffs, etc, but how do you trade diamonds when DeBeers has around a 40 percent marketshare? (Which, astoundingly, is half what it was 30 years ago.)

ICE Benchmark Administration to operate LBMA Silver Price Auction from 25 September
Intercontinental Exchange
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced that ICE Benchmark Administration (IBA) expects to begin administering the benchmark and operating the Auction underlying the London Bullion Market Association (LBMA) Silver Price from 25 September 2017, subject to regulatory approval.

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