Observations & Insight

A Disruptive Environment: Sidley Austin’s Lisa Dunsky Offers Practical Compliance Tips for Firms and Traders

New rules and guidelines and a couple recent high profile criminal cases on disruptive trade practices have made compliance and supervision a high priority at trading firms and clearing firms. Lisa Dunsky, derivatives attorney and former counsel at CME Group, shares her insights on what firms and traders need to consider.

Lead Stories

If the Options Market Is Right, China’s Stock Rescue Is Doomed
Kana Nishizawa – Bloomberg
Options traders have never been so pessimistic on China’s stock market, betting the government’s renewed effort to prop up share prices is doomed to fail.
The cost of bearish contracts on the China 50 exchange-traded fund has surged to the highest level versus bullish ones since they started trading in Shanghai six months ago. The so-called skew also climbed to a record for a similar ETF in the U.S., even as government buying drove China’s benchmark index to a 10 percent rally in the final two days of last week.

***DA: Return on capital versus return OF capital. The latter is in doubt.

Goldman Sachs Thinks This Volatility Index Should Be Much Lower
Oh, how times have changed.
For much of the past year the story has been the extremely low levels of volatility in the market, but that trend came to a screeching halt last week when the Chicago Board Options Exchange Volatility Index rose to levels not seen since the financial crisis.

***DA: Differing opinions are what makes a market a market.

30-Minute VIX Frenzy Exposes Obsession With Volatility Hedging
Callie Bost – Bloomberg
Among the many scary things traders witnessed as stocks plunged last Monday, one of the most harrowing was the sight of the VIX, an index designed to measure investor fear, briefly going dark.
For almost 30 minutes as hundreds of billions of dollars were erased from equities, no signals were sent by the world’s most popular sentiment gauge as options prices turned erratic. When it switched on, the VIX jerked higher faster than anyone had ever seen, rising 82 percent on its first tick to 51, a level not reached since the financial crisis.

***DA: Like when you floor the accelerator but the turbocharger needs a second to kick in. Except longer and more violent.

China reporter confesses to stoking market ‘panic and disorder’
Patti Waldmeir in Shanghai, FT
A leading journalist at one of China’s top financial publications has admitted to causing “panic and disorder” in the stock market, in a public confession carried on state television.

***DA: You are only allowed to rant and rave like a lunatic on market rallies, not crashes.

China’s Stocks Cap Biggest Selloff Since 2008 on Rescue Doubts
China’s stocks fell, capping the benchmark index’s biggest two-month tumble since 2008, amid concern that government intervention to prop up the market will fail.

Fed Guessing Game Is On As September Dawns For Battered Markets
JJ Kinahan – Forbes
After one of the craziest weeks in memory, Wall Street digs in for more volatility as investors revalue the stock market. This mind shift plays out against China’s economic struggles and a new guessing game for Federal Reserve interest rate policy.
Contrary to what many may believe, the S&P 500 (SPX) actually finished last week higher, logging a 0.9% gain. This wrapped a volatile few days that included a loss of as much as 6.6% at one point last Monday (figure 1 and figure 2).

***DA: If the market’s health rests on whether there will be a 0.25 percent rise in the Fed Funds rate, we are already in big trouble.

Black Swans and Blockchains
Matt Levine – Bloomberg
The stock market finished up about 0.9 percent last week, down about 6.7 percent from its May high, but it’s about the journey, not the destination, and the journey left various people scarred or vindicated or clean-shaven. Mark Spitznagel’s Nassim-Taleb-associated, black-swan-oriented, S&P-500-put-buying Universa hedge fund made about a billion dollars last Monday, and I wonder if it gave up any of those gains as the market recovered later in the week?

U.S. Stock Swings Don’t Shake Investors
Saumya Vaishampayan – WSJ
Stock indexes’ wildest week in years rattled investors and fueled expectations for further price swings, but it failed to squelch the belief U.S. markets remain the best place to put money.
The Dow Jones Industrial Average slipped 11.76 points, or 0.1%, to 16643.01 Friday, capping a week marked by huge swings across global markets following several years of mostly placid trading and solid stock gains. When the smoke had cleared, the Dow was up 183.26 points, or 1.1%, for the week.

S&P 500 Index Heads Toward Worst Month in More Than Three Years
Oliver Renick and Adam Haigh – Bloomberg
U.S. stocks declined amid a swoon that has the Standard & Poor’s 500 Index on the verge of its worst month in more than three years, as investors grow anxious over the pace of global growth and Federal Reserve officials signaled they’re prepared to raise interest rates.

The Best of Times for VIX Futures Traders
Adam Warner – Schaeffer’s Investment Research
For CBOE Volatility Index (VIX) futures traders — the ones that go long: It’s the best of times. Here’s a comparison of the VIX term structure on Aug. 17, just before the market broke down, to the term structure on Friday, Aug. 28. In other words, here’s what happens to futures when VIX doubles in a little under two weeks:


NYSE Draws Users’ Ire With Fee Increases, Patent Charge Proposal
Sam Mamudi and Matthew Leising – Bloomberg
Intercontinental Exchange Inc., owner of the New York Stock Exchange and some of the world’s biggest derivatives markets, is setting up a clash with customers with its plan to generate income by licensing patents and boosting market-data fees.
The company has asked its biggest customers what they’re willing to pay for licenses to trading-technology patents it bought a year ago, according to executives at four different trading firms who asked not to be named because the discussions are private. ICE proposed to one company that it would waive the licensing fee if it directed stock transactions to the NYSE, which has seen its share of the equities business dwindle, instead of rival exchanges, an executive at the trading firm said.

Regulation & Enforcement

China ‘punishes’ nearly 200 for spreading rumors
By CHUN HAN WONG, MarketWatch
Chinese authorities said they punished nearly 200 people for spreading online rumors in connection with recent major news events, in a government crackdown on politically sensitive discourse.


BNY Mellon Aims to Fix Pricing Breakdown by End of Monday
Christian Baumgaertel – Bloomberg
Bank of New York Mellon Corp. said it aims to have a reliable fix by Monday for the system it uses to generate net asset values for mutual funds after the software broke down seven days earlier.
The technology, provided by SunGard Data Systems Inc., should be able to provide asset values for Friday by early Monday, Gerald Hassell, BNY Mellon’s chief executive officer, said on a conference call late Sunday from New York. Net asset values for Monday should be available by the end of the day or early Tuesday, the bank said.


Profiting From a Hellish Market With Options
Steven M. Sears – Barron’s
It is paradise in the options market when it is hell in the stock market.
Extreme fear—and that’s what China’s economic and financial crisis stirred up—sends the implied volatility of options to often unsustainable levels. To potentially profit, investors can sell puts on quality stocks.

The Week in Russell 2000 Trading – 8/24 – 8/28
Russell Rhoads – CBOE Options Hub
Once a month I leave CBOE for a couple of days and turn into a student attending a residency at Oklahoma State. I do my very best to leave the markets behind and focus on my studies. I did a pretty good job of tuning out what was going on toward the end of the week. This resulted in me being surprised that the Russell 1000 (RUI) gained almost 1% on a week over week basis with the Russell 2000 rising just over a half a percent. Both are lower on the year, with large cap stocks slightly outperforming when using RUI and RUT and large cap and small cap proxies.


The History of VIX Contango and Backwardation
Russell Rhoads – CBOE Options Hub
This morning (Sunday) I got a request from Eric Thompson at Thompson Capital Management to look into streaks of backwardation in VIX. There are different ways to measure backwardation. You will hear pundits say we are in backwardation whenever VIX closes higher than the front month future. Most market participants like to look to the relationship between the first and second month future since that relationship has a direct impact on the volatility oriented exchange traded products (think VXX). I personally prefer a full comparison of spot VIX, the first month, and the second month future.

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