Observations & Insight

Volatile Words
Doug Ashburn – JLN

“Up and down, but in the end, it’s only round and round. Haven’t you heard? It’s a battle of words.” – Pink Floyd’s Roger Waters in the song “Us and Them”

This week, and today in particular, our newsletter has featured some of the breathless coverage of “the return of volatility.” You will not need to scroll down too far to see what I mean. If you have a few minutes, go into the archives and blow the dust off last week’s newsletters to see all the breathless coverage surrounding the lack of volatility.

Is either scenario cause for alarm, or is it simply a case of too many staff writers on deadline, with columns to fill on their web sites?

Financial writers (present company included) are like sump pumps. We are only needed a few times a year, but during those periods, we are indispensable.

But right now? Not so much. Markets are variable. The variability of markets is variable. But nothing we have seen in the past few months is worth some of the adjectives being used to describe this market. Volatility is generally soft in the summer. Summer is over. The VIX, at its high point this week, barely approached long term historical volatility.

And I admit it; I am guilty at times. Much, however, stems from the fact that when I started in the business, a 3 point move in the S&P 500 was a full standard deviation. Now it is a rounding error, or the bid/ask on a really large order. But now I see a 20-handle day in the S&P as significant when, really, it is par for the course.

Round and round.

Lead Stories

Weekly Wrap: Volatility Returns; Wells Fargo Stumbles
Wells Fargo gets dinged, but we still see value in the firm. Plus, central banks send markets gyrating, and Bayer snags Monsanto.

Citadel Securities is suing options exchanges again
Lynne Marek – Crain’s Business
Citadel Securities, Ronin Capital and Susquehanna Securities have filed another lawsuit in a multiyear campaign to force the Chicago Board Options Exchange and other exchanges to repay them for fees they claim were inappropriately charged.

The VIX and its derivatives
Enrique Sentana – VOX
Determining which risks are worth taking is one of the key problems facing financial market participants. Central to this is the time-varying nature of volatility. This column examines the Chicago Board Options Exchange volatility index, VIX, which has become the standard measure of volatility risk. Complementary approaches to pricing VIX derivatives are considered, and the tumultuous economy since the Great Recession is used to assess the empirical performance of the different models.

Most Active Weekly Options: Microsoft Corporation and Wells Fargo & Co
Schaeffer’s Investment Research
The 20 stocks listed in the table below have attracted the highest weekly options volume during the past 10 trading days. Names highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer’s Senior Quantitative Analyst Rocky White. Two stocks of notable interest are tech stock Microsoft Corporation and big bank Wells Fargo & Co.

Quadruple witching could add to volatility on Wall Street
U.S. stock futures were lower this morning, after the Dow broke a two-day losing streak Thursday, continuing its up-and-down week of big moves in both directions. A strong gain in Apple (AAPL) shares helped drive the market higher.

***DA: It always does. Except when it doesn’t.

Boo! The market is a new American Horror Story
CNN Money
Halloween is still more than a month away, but investors are already shaking in their boots. The stock market, after all, has been a bit of an American Horror Story lately.

Volatility erupts in currencies as stimulus appetite seen waning
The Globe and Mail
Volatility has reawakened in the $5.1-trillion (U.S.) foreign-exchange market, as traders start to imagine life without ultra-easy monetary policy. The impact is greatest in the currencies with most at stake from an end to years where stimulus only got more generous – the so-called high yielders. A gauge of expected swings in emerging-market currencies has surged above an equivalent measure for developed markets by the most since May.

***DA: And remember, next week is Fed week

What Happened to Grain Volatility?
Chris Lehner, Archer Financial Services, in Inside Futures
Highs were made in June for corn, soybeans and wheat and since then trading volume has slowed down. As traders liquidated long positions in June and the beginning of July there were a few active days, but throughout August and for the first two weeks of September trading has slowed to a snail’s pace.


OCC News August/September 2016
OCC has just released the latest issue of OCC News, a roundup of the news, interesting tidbits and company initiatives. In this issue:
OCC was named Clearinghouse of the Year by Global Investor/ISF Magazine
OCC General Counsel Joe Kamnik’s participation in a Wide World of Options podcast
Listed options industry responds to the BCBC leverage ratio framework
OIC Executive Director Mary Savoie talks about OIC program objectives and successes, as well as upcoming events
How pension funds can benefit from exchange-listed options
Sponsorship of “A Leg to Stand On”
Capitol Hill update

EQD Update: Increased Liquidity Seen On MSCI EM Contracts
Georgia Reynolds, EMEA Reporter via Eurex
Futures and options on the MSCI Emerging Markets Index listed on the Eurex Exchange are finding increased liquidity, with investors opting to trade the index given the constraints around trading the iShares MSCI Emerging Markets Index exchange-traded fund (EEM) for some clients.

How Is CME Benefiting From Volatility In Gold Prices?
Trefis (Free Subscription Required)
CME Group (NASDAQ:CME) has seen a significant increase in its metal contract trading volumes over the last two years.

Regulation & Enforcement

Senators Question Wells CEO About Getting Some Manager Compensation Back
Arguing that committing a massive fraud that creates millions of phony consumer accounts should not be the sort of thing that banking executives should be allowed to get rich doing, lawmakers are beginning to ask Wells Fargo CEO John Stumpf some tough questions about just what exactly it intends to do about all those executives it bonused extravagantly for cheating people.

***DA: The other options market – the one inside firms – and clawing back possible ill-gotten gains.

CFTC Guidance on FCM and DCO Investments in Money Market Funds
Dechert LLP, via Lexology
Divisions of the U.S. Commodity Futures Trading Commission (CFTC) on August 8, 2016 issued letters restricting futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) from investing in money market funds that have the authority to impose redemption restrictions under 2014 amendments to Rule 2a-7 under the Investment Company Act of 1940 (Amended Rule 2a-7). FCMs and DCOs will nonetheless continue to be permitted to make certain investments in other money market funds, as discussed below.


Nordic Capital Said to Weigh $500 Million Sale of Itiviti
Manuel Baigorri, Sarah Syed and Kiel Porter – Bloomberg
Scandinavian private equity firm Nordic Capital is exploring a sale of its financial technology and services business, Itiviti AB, in a deal that could fetch about $500 million, according to people with knowledge of the matter. The buyout firm is working with Morgan Stanley to find a buyer, the people said, asking not to be named as the talks are private. Representatives for Nordic Capital and Morgan Stanley declined to comment.

Mayor of London Boosts Trade Links between London and Chicago
Business Wire
London is the leading, global city for Chicago-based companies looking to establish an operation outside of the United States, the Mayor of London Sadiq Khan will announce today at an event hosted at the Chicago innovation hub 1871. The Mayor will be joined by Chicago Mayor Rahm Emanuel to highlight the opportunity to strengthen trade and investment links between Chicago and London, as part of his international trade mission to the United States.

***DA: CBOE was one of the firms specifically mentioned, in regard to the recent opening of its London office. Yes; I was there for the grand opening.

Is a federal fintech charter coming?
Banking Exchange
Limited purpose bank charters aren’t new in concept. But the idea that fintech players—some of whom reveled in their “unbankness” not so long ago—could get a special charter, a “charter lite,” or some variation on the theme had been floating around Washington even before Comptroller Thomas Curry indicated earlier this year that OCC was actually looking at a national fintech charter.


Options Insight: How to Play the SPDR S&P 500 ETF Trust
Yahoo Finance UK (VIDEO)
Dan Deming, KKM Financial’s managing director, discusses the performance of stocks and his options strategy for the SPDR S&P 500 ETF Trust with Bloomberg’s Oliver Renick on “Bloomberg Markets.”

Using Options to Simulate a Short Stock Position
Schaeffer’s Investment Research
Next week is not only the highly anticipated Fed meeting, it’s also the historically weakest week of the year for stocks, and tends to trigger a CBOE Volatility Index (VIX) pop. According to Schaeffer’s Senior VP of Research Todd Salamone, traders can hedge the broader equities market by picking up SPDR S&P 500 ETF (SPY) puts and/or VIX calls. Meanwhile, traders looking to make a bearish bet elsewhere could consider the synthetic short options strategy, which simulates selling a stock short.


A Wide-Angle View Of Volatility: Managing The Journey And The Destination
Raewyn Williams and Tom Lee, Parametric Portfolio Associates, in Seeking Alpha
The concept of portfolio volatility eroding returns was established by Messmore (1995),1 who identified a volatility drag (“variance drain”) associated with volatile returns. The concept is based on the mathematical proposition that the arithmetic mean of a return series will always exceed the geometric mean (unless the return numbers are identical). In an institutional investment context (where geometrically-linked performance measures are used), the difference between geometric means and arithmetic returns widens as we allow volatility into the portfolio.

What’s Gamma Exposure? –
SqueezeMetrics, via Seeking Alpha
We first mentioned Gamma Exposure, or “GEX,” in our last article, which introduced the idea of using dark pool data to forecast the direction of the S&P 500 index.
As the comments shown above demonstrate, our explanation may have been lacking.
So let’s fix that.

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