Judge dismisses Wall Street ‘fear gauge’ lawsuit against Cboe; Morgan Stanley Sees Cheap Emerging Market Hedges Amid Virus Risk

Jan 28, 2020

Lead Stories

Judge dismisses Wall Street ‘fear gauge’ lawsuit against Cboe
Jonathan Stempel – Reuters
A federal judge on Monday dismissed an antitrust lawsuit by investors who accused the parent of the Chicago Board Options Exchange of letting anonymous traders rig the “fear gauge,” Wall Street’s main gauge of future stock market volatility, at their expense.
U.S. District Judge Manish Shah in Chicago found no proof that Cboe Global Markets Inc intended to defraud investors by letting the “John Doe” traders manipulate options and futures tied to the fear gauge, known as the VIX, to generate higher transaction fees.

Morgan Stanley Sees Cheap Emerging Market Hedges Amid Virus Risk
Joanna Ossinger – Bloomberg
The deadly coronavirus is threatening the recent rally in emerging assets, but there’s cheap options to buy some protection, according to Morgan Stanley.
“We suggest taking advantage of low volatility to hedge a portfolio of EM risk assets,” Morgan Stanley strategists including London-based James Lord wrote in a note Monday. “With volatility at historical lows across many asset classes, a temporary pullback in EM currencies and high-yield credit is possible.”

Avenatti Googled ‘Insider Trading’ Before Nike Meeting
Erik Larson – Bloomberg
Celebrity attorney Michael Avenatti did internet research on put options and insider trading before trying to extort millions of dollars from Nike Inc., federal prosecutors told a judge. Lawyers for the government on Monday told U.S. District Judge Paul Gardephe in Manhattan that they intend to show Avenatti’s search history to jurors at a two-week trial getting underway this week, calling it evidence of the California attorney’s state of mind during the alleged crime. At the time, Avenatti was representing a youth basketball coach with claims against Nike.

*****We had an article covering this story yesterday, but this one delves a little deeper.~MR

Inside Volatility Trading: January 28, 2020
Kevin Davitt – Cboe blog
On the December 1956 cover of Mad Magazine, Alfred E. Neuman made the first of his many appearance as a write-in candidate for President of the United States. As one of the longest running satirical publications in US history, the writers of Mad Magazine both parodied and captured the omnipresent state of uncertainty.

I Said Don’t Panic. I Didn’t Say Don’t Worry.
John Authers – Bloomberg (Opinion)
World stock markets have just had their worst day since August last year, when the U.S.-Chinese trade conflict was deepening, and an inverted U.S. yield curve convinced many that a recession was on the doorstep. There is no mystery about the prime cause this time; the emergence of a novel coronavirus adds a frightening new risk, which cannot be glibly dismissed. It is beyond doubt that it will have a negative impact on this quarter’s economic growth in China, as holidays are extended and travel is curtailed.

Exchanges and Clearing

Futures Trader Alert #2020 – 7 Notice of NFX to Nodal Power Futures and Options on Futures Migration Schedule
The NFX to Nodal Clear US Power Futures and Options on Futures Migration (Power Migration) is schedule for Thursday, February 6th.

Special Executive Report DATE: January 28, 2020 SER#: 8528 SUBJECT: Initial Listing of GBP/USD, CAD/USD, JPY/USD, AUD/USD, and EUR/USD FX Weekly Monday Options
CME Group
Effective Sunday, February 23, 2020 for trade date Monday, February 24, 2020, and pending all relevant CFTC regulatory review periods, Chicago Mercantile Exchange Inc. (“CME” or “Exchange”) will list Weekly Monday Options on: British Pound/U.S. Dollar (GBP/USD) Futures, Canadian Dollar/U.S. Dollar (CAD/USD) Futures, Japanese Yen/U.S. Dollar (JPY/USD) Futures, Australian Dollar/U.S. Dollar (AUD/USD) Futures and Euro/U.S. Dollar (EUR/USD) Futures contracts (the “Contracts”) as in the table below for trading via open outcry on the CME trading floor and on the CME Globex electronic trading system and for submission for clearing via CME ClearPort.

Regulation & Enforcement

Fund That Lost $700 Million on Bearish Bets Fined for Misleading Investors
Dave Michaels – Wall Street Journal
A mutual-fund manager that lost 20% with wrong-way bets against the stock market agreed to pay $10.5 million to settle regulatory claims that it misled investors about its procedures for limiting losses. Catalyst Capital Advisors LLC and its chief executive, Jerry Szilagyi, settled the regulatory probes Monday without admitting or denying wrongdoing. The Securities and Exchange Commission and the Commodity Futures Trading Commission also both filed civil fraud lawsuits against Edward Walczak, the portfolio manager who ran the Catalyst Hedged Futures Strategy Fund.


Rare VIX Inversion Points to Potential End of U.S. Equity Rout
Gregory Calderone – Bloomberg
An uncommon phenomenon in volatility markets is signaling that the U.S. equity rout may almost be over.
Monday’s slump in the S&P 500 has created the rare situation where the term structure for the Cboe Volatility Index is inverted. As the VIX surged to its highest level since October, the spot price exceeded the March future prices, indicating more perceived risk in the immediate term rather than the longer term.

‘Buy the dip,’ one stock options signal says
April Joyner – Reuters
As concerns over the spread of the coronavirus rattle stocks, a corner of the options market is signaling that the current selloff may be short-lived.
The term structure between first-month futures VXc1 and second- VXc2 and third-month VXc3 futures on the Cboe Volatility Index .VIX inverted for the first time since early October.

What the Options Market Says About Super Tuesday
Steven M. Sears – Barron’s
What’s scarier to investors than the Wuhan coronavirus that has sent global stocks sharply lower? A Democratic president.
Some investors will find that statement to be odious, but the stock and options market say otherwise. Since we alerted readers in late November that investors had begun hedging stocks well in advance of the Democratic primaries, the issue has advanced to become one of the financial market’s main risk factors.

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