Machines are coming for your pricing models; Long VIX call gains; VIX MDL Update

Aug 6, 2019

Observations & Insight

The Spread – Moving on Up
On the heels of LSEG’s move to buy Refinitiv, ICE announced it would be purchasing BAML’s MOVE family of indices. This week’s episode of “The Spread” takes a look at this fixed income volatility development.
Watch the video and see the stories referenced here »


Looking at Monday’s Record Day
Spencer Doar – JLN

Yesterday, August 5, the OCC had its busiest day of 2019, clearing 31,968,074 contracts, 63% more than the average daily volume in 2019. Futures accounted for 679,680 contracts of the total volume, more than double the YTD average of 311,205 contracts.

More than 1.6 million VIX options traded yesterday – triple the recent average. Also note that MIAX’s nascent SPIKES options had another four digit day – more than 6k SPIKES options crossed the tape.

The big winner by marketshare was Cboe, followed by Nasdaq, NYSE, MIAX and BOX – see below.

As stellar a day as it was, it was not enough to top the activity on December 21 during the “Santa Claus Selloff” when total cleared volume was 32,139,795 contracts.

It’s looking like today will be another great day as well.

Lead Stories

The machines are coming for your pricing models
Kris Devasabai –
Financial models are not perfect. The markets are so complex that to explain their behaviour, models make all sorts of simplifying assumptions, leave out lots of the details and try to capture the main dynamics.
The Black-Scholes options pricing model, for instance, ignores trading costs and assumes that stock prices follow a random path, with constant volatility and drift.
Everyone knows these assumptions are not really true. Good traders treat financial models as a guide and use their experience and intuition to fill in the gaps. Failure to do so is often costly.

****SD: The above story is not paywalled. For more, see the longform (paywalled) piece Deep hedging and the end of the Black-Scholes era.

Long VIX calls approach $100M in gains
Henry Schwartz via LinkedIn
A quick look at the largest VIX call blocks opened during the week of July 22nd shows remarkable returns, with positions opened in the 45c range now trading at $2, turning the 200K Aug 20 calls bought July 24th for 33c and 35c into 450% winners. Data shows nearly 900K VIX calls were opened in the past two weeks as VIX has lifted nearly 9 points, or 40%, from the 12 to 21 level. Although 30K of the Aug 20 calls were closed last week, the majority of the positions remain open, including nearly 200K each of the Aug 20 calls, Sep 23 and 24 calls, and 100K each of the Aug 18 and 19 calls.
See post here.

****SD: Check out the accompanying chart by following the link.

Kessler Topaz Wants Back On Top Of VIX Manipulation MDL
Kessler Topaz has told an Illinois federal court it wants to be bumped back up to co-lead counsel in multidistrict litigation over the alleged manipulation of the Chicago Board Options Exchange’s volatility index.

****SD: The complications regarding this already complex multidistrict litigation (MDL) revolve around Kim Justice (yes, real name), who at the time of being appointed co-lead counsel was a partner at Kessler Topaz. But Justice left Kessler in April to join another law firm and retained co-counsel responsibilities. This is an update on how Kessler is fighting its way back into the case. It’s a sticky subject – does the employer or the lawyer “own” the gig?

Asset managers farm out trading as costs and complexity climb
Thyagaraju Adinarayan, Helen Reid – Reuters
It’s 10 o’clock at night, and Benjamin Arnold’s day is just beginning. The former Goldman Sachs trader is gearing up to trade equities in Asia from his small office thousands of miles away in Park City, Utah.

Markets brace for volatility surge as currencies enter trade war
Tommy Wilkes – Reuters
China’s decision to let its yuan plunge through a previously sacrosanct level means a tit-for-tat trade conflict could morph into a currency war, injecting volatility into long-dormant foreign exchanges and piling pressure on world markets.

Nomura’s McElligott Weighs In On Monday Mayhem: ‘Never Get Caught Short Gamma In August’
Heisenberg Report
Markets could be in for a messy couple of days, as two local risks are now squarely in play.
Last week, after Donald Trump reignited the trade war, we noted that although one bank’s popular CTA model still had spot SPX well above levels that would trigger de-leveraging from trend followers, the market was through levels where dealers’ gamma profile likely flipped negative.

****SD: It’s hard to remember all of the “never do ____” rules in trading.

Wall Street’s Top Equity Bull Warns Over Quant-Driven Selling
Lu Wang – Bloomberg (SUBSCRIPTION)
The spike in market volatility risks turning one of this year’s biggest stock buyers into a seller, according to Wall Street’s top equity bull.
Computer-driven traders, who make bets based on momentum and volatility signals, may dump more than $70 billion of shares in coming weeks should the market turbulence persist, estimates Binky Chadha, chief global strategist at Deutsche Bank, whose year-end target for the S&P 500 is the highest among those tracked by Bloomberg.

****SD: More on quant activity from Bloomberg – The Fast Money Was Just Getting Bullish Before It Got Burned.

Exchanges and Clearing

Cboe Global Markets Reports July 2019 Trading Volume
Futures ADV up 7% over July 2018; Options ADV up 5% over July 2018
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today reported July monthly trading volume.

Wall Street split over stock exchange’s 4-millisecond trading ‘speed bump’
Declan Harty – S&P Global
Wall Street is divided over the latest plan to put speedy traders on notice. Three years ago, IEX Group Inc. ignited a debate across the U.S. stock market when it proposed to launch a national securities exchange that featured a 350-microsecond delay known as a speed bump. The mechanism was designed to level the playing field between slow-moving market participants and faster traders who use sophisticated algorithms and technologies to move in and out of their positions at breakneck speeds.

NSE, SGX win approval for joint derivatives project at India’s GIFT city
India’s National Stock Exchange (NSE) and the Singapore Exchange (SGX) have been given the go-ahead for their international financial centre in western India, they said in a joint statement on Tuesday.
The proposed NSE International Financial Service Centre (IFSC)-SGX Connect aims to bring together the trading of Nifty products in Gujarat International Finance Tec-City (GIFT) and create a larger pool of liquidity comprising international and home market participants, the release said.

****SD: SGX press release here.

Intercontinental Exchange Reports July Statistics
Intercontinental Exchange
…Record OI reached in total oil futures and options of 13M contracts on 7/25; total oil futures OI up 10% y/y at the end of July

****SD: NYSE equity options volumes in July were lower than the levels reached in each of the twelve preceding months.

CME Aims To Be “One-Stop Shop” For Clients’ Data
Trey Berre, global head of data services at CME Group, said the exchange group aims to become a one-stop shop for customers’ data needs as it integrates NEX and BrokerTec, partners with third party data providers, and invests in new distribution methods.

Moscow Exchange: Client Registration On Derivatives Market Reduced To A Few Seconds
From 5 August 2019, Moscow Exchange has implemented an online registration service for new clients on the Derivatives Market. The service is now available for participants of all MOEX’s main markets: the Equity & Bond, FX and Derivatives Markets.


Some Wall Street workers face pay slump in 2019: report
Many Wall Street workers will see their pay stay flat or decline this year, as big banks and money managers continue to cut costs, according to a report on Tuesday by compensation consultancy Johnson Associates.

Securing a Wall Street job now is harder than ever: insiders
Kevin Dugan – NY Post
The US labor market may be booming — but it’s been a bloodbath on Wall Street. A recent wave of layoffs from some of the biggest banks is making it harder than ever to get a job on Wall Street, recruiters and other insiders say.

Regulation & Enforcement

Seoul vows to step in to curb market volatility
Jhoo Dong-chan – Korea Times
The government has vowed to take stern measures to stabilize the nation’s financial market if volatility continues to increase, signaling a possible intervention in the currency market.
It also said it has mapped out a contingency plan to curb market unrest, including temporarily suspending “shorting” in the nation’s stock market.
The government’s move followed Washington’s decision to designate China as a currency manipulator, Monday, which sent a shudder through both domestic and global financial markets.


Credit Suisse completes turnaround of algorithmic trading platform
Joe Parsons – The Trad
The chief executive of Credit Suisse has hailed the turnaround of its flagship algorithmic trading platform following a revamp, as the Swiss bank came out on top ahead of its main trading rivals in Q2.


The Tale of Two Backtests: Why Aren’t Opposite Strategies Absolute Returns Equal?
You might think a strategies like short call spreads and long call spreads should have equal and opposite returns given the same trading rules.

Nomura: A second market sell-off could be ‘Lehman-like’
Yun Li – CNBC
Investors shouldn’t take much solace from Tuesday morning’s slight rebound, says Nomura. They are warning the next sell-off could resemble a crisis-level plunge like the one that followed Lehman Brothers’ collapse.

UBS, Credit Suisse Tout Nasdaq Hedge as Protection Costs Spike
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.
The explosion in volatility from the escalated U.S.-China trade war has made hedging more expensive than it was just a few days ago but strategists still see relative opportunities in downside bets on the Nasdaq 100.


Relying on liquidity risks leaving investors in hot water; Economic and political headwinds are poised to frustrate profitable strategies
Mohamed El-Erian – Financial Times (SUBSCRIPTION)
Long spoiled by the comforting support of central banks, investors are getting a feel for what it would be like when economic concerns, rather than central banks’ monetary policies, take a bigger role in determining asset prices.

This act of Congress could save the stock market from steeper losses
Mark Hulbert – MarketWatch
Here’s some good news for beleaguered stock market bulls: Congress is in recess.
What does that have to do with the U.S. market, where the Dow Jones Industrial Average DJIA, has plunged some 1,600 points in the past couple of weeks — including almost 800 points on Monday of this week alone. The Fed’s interest-rate policy and the latest Trump tweet about Chinese tariffs would certainly seem to be far more relevant than Congress’ summer holiday.

Speed Bumps & the Transaction Fee Pilot: Two Wrongs Don’t Make a Right
Larry Tabb – TABB Forum
Though moving forward with an asymmetric speed bump as a liquidity provider incentive may somewhat cancel out the incentives lost by banning rebates, two wrongs don’t make a right. Both of these initiatives would be unhealthy for the markets, argues TABB Group founder and research chairman Larry Tabb.

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