Lead Stories

Low VIX Masks Insurance Markup Options Traders Are Paying
Cecile Vennucci – Bloomberg
Here’s another sign that beneath the surface of placid stock markets, investors aren’t exactly sound asleep. It’s the persistently high premium traders are paying for equity options, visible in the difference between implied and realized volatility in the S&P 500 Index. The gap, definable as the intangible cost of stock insurance over and above what is accounted for by the market’s swings, has now lingered for 51 trading days.
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****SD: Volatility = rough play right now. Semi-related retail investor story below about the use of VIX products.

42% Rise for the SMLC Sentiment-Based Index That Analyzes Twitter Traffic
Matt Moran – CBOE Options Hub
In recent months many press stories have covered the topic of how Twitter tweets possibly could influence the prices of stocks or the direction of the economy. News reports indicate that there are hundreds of millions of tweets posted per day. One challenging question for investors could be – can useful actionable information be gleaned from Twitter postings to identify stocks that have positive bullish sentiment?
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****SD: Joe Gits of SMA has said that Twitter sentiment will provide significant alpha for many years to come. (Not this flash in the pan Trump tweet stuff — the bigger social media picture.) The question is how soon will these CBOE indexes turn into tradeable products…

Finding Volatility in the US Markets
Russell Rhoads – VIX Views
VIX is low, we all know VIX is low. I type that and feel I need to stop channeling Dr. Seuss. However, there are some pockets of volatility in the US equity markets, we just need to know where to look. Since CBOE quotes several volatility indexes that are based on the US markets I went searching for places where the market is still pricing in a little concern about the future. Two areas that stood out – tail risk and small cap risk. Let’s start with tail risk.
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Euro Volatility Jump Lifts Cost to Hedge French Vote Risk: Chart
Vassilis Karamanis – Bloomberg
Mounting euro-area political risks centered on France are driving up the cost of hedging against fluctuations in the common currency. The implied volatility on three-month euro-dollar options, whose tenor now captures the final round of French presidential elections due May 7, surged 100 basis points Wednesday to 10.25 percent. That’s the biggest increase since mid-December and the highest level in more than a month.
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BlackRock CEO Fink sees ‘dark shadows’ in financial markets
Trevor Hunnicutt – Reuters
BlackRock Chief Executive Larry Fink on Wednesday said the U.S. economy is in the midst of a slowdown and financial markets could see a significant setback, because of uncertainty over global trade and the Trump administration’s plan to cut taxes.
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****SD: Yo, Larry – all shadows are dark.

Investors Continue To Buy VIX Despite High Cost And Increasing Risks
Rupert Hargreaves – ValueWalk
It’s a well-known fact that VIX ETFs are a poor way of trying to play this key measure of volatility but this doesn’t seem to be stopping retail investors. According to a funds flow report from JP Morgan, published at the end of last week, retail investors continue to plough money into VIX ETFs in an attempt to profit from their belief that the current combination of very low realized equity volatility and record high equity prices is unsustainable.
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****SD: Since when do the sheeple listen?

Options Trading Points to Resurgence in Mexican Peso
Gunjan Banerji – WSJ
Options traders are betting that the Mexican peso’s recent resurgence against the dollar will continue, following a year in which U.S. President Donald Trump’s pledges to build a border wall and renegotiate trade agreements pressured the currency. A measure of options prices known as skew has fallen since late 2016, according to Bank of America Merrill Lynch data, indicating investors are taking a
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****SD: In the words of Chumbawamba, “I get knocked down, but I get up again.”

Sebi board to consider options in commexes
Economic Times
Mumbai: The Securities and Exchange Board of India (Sebi) will soon issue a framework to enable commodity exchanges like MCX and NCDEX to launch options. The market regulator, at its board meet this Saturday, will consider amendments to be made to the Stock Exchanges and Clearing Corporation (SECC) Regulations, 2012, that would permit exchanges to launch options with commodity futures as the underlier.
/goo.gl/V7Wzhu

****SD: Not that I couldn’t have guessed it would play out this way, but this process is dragging. I would wager that the expected April 1 rollout date won’t be met.

Oil benchmark futures play back in vogue as U.S. debates import tax
Dmitry Zhdannikov and Amanda Cooper – Reuters
After several years of neglect, oil investors are again betting heavily on the price difference between two global benchmarks – Brent and U.S. crude futures – due to a push in Washington to impose a controversial import tax.
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Exchanges and Clearing

CBOE, Maker of VIX, Rises; BATS Acquisition Coming Soon
Crystal Kim – Barron’s
CBOE Holdings, maker of the volatility index, reported better-than-expected fourth-quarter results. Shares are up nearly 2% since. CBOE (CBOE) reported revenue of $163 million and operating earnings per share of 63 cents, beating consensus estimates for EPS of 60 cents.
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****SD: Also see MarketMedia’s Bats Acquisition Nearly Complete

Nasdaq’s Adena Friedman on IPOs, Unicorns, and Roundhouse Kicks
Michael P. Regan and Joel Weber – Bloomberg
The Roland Park Country School is just a few miles—but worlds away—from the hardscrabble streets of Baltimore that The Wire made famous. Yet this all-girls prep school was where Adena Friedman learned a lesson that’s helped her thrive in the historically all-boys club located on one of the meanest streets there is for smart, ambitious women like her: Wall Street. “You can be anything,” she recalls her teachers telling her. And it was something about financial markets that captivated young Friedman’s imagination when she visited her dad at T. Rowe Price, long before Take Our Daughters to Work Day was a thing.
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****SD: I’m a huge fan of the show, but will there ever come a time that you can talk about Baltimore and not bring up The Wire? I’m guessing the answer is no — after all, when travelling internationally plenty of people hear “Chicago” and immediately think of Al Capone.

Deutsche Börse, LSE Merger on Track Despite Few Concessions Offered
Jeff Patterson – Finance Magnates
Deutsche Börse and the London Stock Exchange Group’s (LSE) landmark merger is barreling ahead, despite widespread resistance from European exchanges and regulators. Still, in a sign of confidence the merger will be unobstructed, the two groups have ceded little ground as they look to overcome antitrust concerns that have attempted to stall the deal.
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Spain’s BME to expand Mifid II regulatory services
Merle Crichton – Futures & Options World
Spanish exchange plans to act as an approved publication arrangement (APA)
The Spanish exchange has said it will broaden its range of regulatory compliance services to allow clients to comply with upcoming European directive Mifid II ahead of its introduction in January 2018.
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Technology

The Race to the Speed of Light Is Accelerating
John Detrixhe – Bloomberg
Tower Research Capital LLC has bought a stake in a company that builds microwave radio systems for buying and selling in electronic markets, helping the network operator compete in a race to transmit data at speeds ever closer to the speed of light.
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****SD: But there are hurdles – for instance, the Dover council.

DTCC’s Institutional Trade Processing Product Suite Reaches ~One Billion Trades In 2016, Driving Market Efficiencies And Reducing Costs – Readies Industry For U.S. T+2 Go-Live In September 2017 And Implementation Of MiFID II In January 2018
Mondovisione
The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, today announced that its full-service institutional straight-through-processing (STP) suite of products, which automate trade lifecycle events between 3,800 investment managers, broker/dealers and custodian banks, processed close to one billion trades, for the first time, in 2016, including equities and fixed income trades as well as equity swap and repurchase agreement trades.
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Ancoa delivers AWS hosted market surveillance platform to Convergex
Mondovisione
Ancoa, provider of contextual surveillance and insightful analytics for exchanges, regulators, and buy & sell-side firms, today announced that Convergex, an agency-focused global brokerage and trading related services provider, has deployed Ancoa’s market surveillance platform to monitor all trading activity across its domestic (U.S.) and international cash equities and options brokerage businesses. The deployment monitors trading activity of all lit and dark venues including Millennium, Convergex’s proprietary ATS.
/goo.gl/I9aPS1

Fidessa Expands Partnership Program with ChartIQ
John D’Antona Jr. – Traders News
Fidessa announced that it has added ChartIQ to its Partnership Program, which was launched in September 2015. The aim of the Program is to allow Fidessa’s trading community to access the latest third-party tools and technologies, and for partner firms to leverage Fidessa’s workflow and distribution.
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JPX Takes Minority Stake in DErivatives Data Provider OpenGamma
John D’Antona Jr. – Traders News
The Japan Exchange Group (“JPX”) has taken a minority stake in OpenGamma, a provider of derivatives risk analytics.
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As Goldman Embraces Automation, Even the Masters of the Universe Are Threatened
Nanette Byrnes – MIT Technology Review
At its height back in 2000, the U.S. cash equities trading desk at Goldman Sachs’s New York headquarters employed 600 traders, buying and selling stock on the orders of the investment bank’s large clients. Today there are just two equity traders left.
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****SD: Someone needs to put together an infographic that casts Wall Street execs as actual Masters of the Universe characters. Who would you liken to Zodac? Beast Man? Who gets to be He-Man?

Regulation & Enforcement

Trade bodies ask watchdogs for leniency on margin rules
Julie Aelbrecht – Futures & Options World
Trade bodies said new variation margin rules may result in unhedged exposures
A group of trade bodies has warned regulators of the negative effects of the variation margin rules set to take effect in March and called on the authorities for leniency in how the rules are applied. Seven financial trade bodies, including the International Swaps and Derivatives Association and the Global Financial Markets Association, have written to twenty regulators, including the Commodity Futures Trading Commission and the Financial Conduct Authority, to request a period of leniency following the March 1 variation margin (VM) deadline.
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U.S. Judge defers ruling on dismissal of Cooperman insider trading case
Suzanne Barlyn – Reuters
A U.S. judge on Tuesday held off ruling on whether to throw out a government complaint against billionaire investor Leon Cooperman and his firm, Omega Advisors Inc, after the defendant’s attorneys requested a dismissal, in a case that could set a legal precedent on insider trading. The case’s outcome could affect the way traders across Wall Street go about making investment decisions. U.S. District Judge Juan Sánchez in Philadelphia said after 90 minutes of oral arguments that he would take the request by Cooperman’s lawyers to dismiss the U.S. Securities and Exchange Commission civil case “under advisement.”
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Debating Whether Dodd-Frank Is Worth Saving
Tyler Cowen & Noah Smith – Bloomberg
President Donald Trump wants to dismantle much of the Dodd-Frank Act of 2010, which was designed to prevent another financial crisis. The law barred banks from many profitable but risky businesses, forced them to add loss-absorbing capital, and required them to make detailed plans for how to shut down in a crisis. Critics say it made banks wary of lending by overburdening them with rules, hampering the economic recovery. Bloomberg View columnists Tyler Cowen and Noah Smith met online to debate Trump’s proposal.
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Office Of Financial Research Update
Mondovisione
The U.S. Office of Financial Research today posted a research brief, entitled, “Capital Buffers and the Future of Bank Stress Tests,” and an accompanying blog, entitled, “The Case for Including Capital Buffers in Stress Tests,” by Deputy Director for Research and Analysis Stacey Schreft. The brief says U.S. bank regulators are phasing in new capital buffers to cushion against shocks. Systemically important banks will hold three buffers, while most banks will hold one.
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Strategy

Is your trading average?
TradingFloor.com
The zero sum theory and skewed zero sum theory has been described many times before by myself, so let’s ignore the mundane probability scenarios today.
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How Has Currency Affected Portfolio Risk?
Christoph V. Schon – Traders News
In its new survey, “FX Trumps Correlation,” Axioma takes a look at how currency effects dominated portfolio risk in the aftermath of the US presidential election as well as other major market events in 2016, such as Brexit and the Fed rate hike. The study was conducted by Christoph Schon, CFA, CIPM, executive director of applied research at Axioma, which provides investment risk and portfolio management solutions to financial institutions.
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January Barometer Rings Positive?
Kira Brecht – The Ticker Tape
The positive reading for the S&P 500 at the end of January may be a bullish signal for the year, according to the market history books. The so-called January Barometer follows the simple guideline that “as the S&P 500 goes in January, so goes the year.” Devised in 1972 by Yale Hirsch, then editor of the Stock Trader’s Almanac, the January Barometer has since had an impressive accuracy rate.
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Indicator of the Week: Did Tom Brady Just Doom the Dow?
Rocky White – Schaeffer’s Research
Historically, stock markets have underachieved when the AFC team wins the Super Bowl. The numbers are broken down in the table below. Despite the data, I doubt anyone is adjusting their trading strategy based on the outcome of the big game. It is nonsensical to think a football game can affect the stock market. Because it’s so ridiculous, we don’t have to think a whole lot to know the results happened like that simply due to randomness or, in other words, just by accident. Results like that should be a reminder to look skeptically at other stock market statistics we see, even ones that seem more reasonable.
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****SD: Totally absurd studies for your enjoyment.

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