MIAX Challenges Nasdaq Options Patents; Crisis hedge funds’ lackluster performance
Observations & Insight
With trade war, U.S. and China stumble into the Thucydides Trap
John Kemp – Reuters
The United States and China have fired the opening shots in a trade war that may be hard to stop.
****SD: Regardless of the situation, whenever I see Thucydides mentioned I have to reread the Financial Times Alphaville article For the love of Zeus, stop misusing Thucydides from last summer for context. It’s well worth the more in depth history lesson/tuneup. Surprisingly, three of the four Trump officials referenced in the piece who are known for their Thucydides fandom are actually still in the administration. How ’bout dat? Some more on the morning’s market action from TD’s JJ Kinahan.
Russian spy chief says feels like Cold War is back
Russia’s foreign intelligence agency chief Sergei Naryshkin said on Wednesday that Washington’s actions toward Russia mean its possible to start speaking of a return to the Cold War era.”Washington has become fixated with the fight against a non-existent, so-called Russian threat. This has reached such proportions and acquired such absurd characteristics that it’s possible to speak of a return to the dark times of the Cold War,” the spy chief said, speaking at a security conference in Moscow.
****SD: What year is it again? I almost wrote 1984 on my rent check.
The 2018 Trading Tech 40
To the top innovators in trading technology, concepts like machine learning and distributed ledgers are anything but vague and futuristic.
Nasdaq Options Trading Patents Challenged by Rival MIAX Exchange
Susan Decker, Annie Massa – Bloomberg
Patents cover routing security orders, financial price quotes; Nasdaq is embroiled in patent lawsuits with MIAX and IEX
Nasdaq Inc. is trying to claim that it invented the concept of options trading, rival Miami International Holdings Inc. said in a series of petitions seeking to have seven of Nasdaq’s patents canceled.
****SD: The war continues! Just some of the backstory, also from Bloomberg – Nasdaq Sues Rival Exchange, Alleging Stolen Tech Secrets. The MIAX press release about the patents is in our “Exchanges” section.
Bet Against Volatility? You Lost. Bet On It? You Lost Too!; Crisis hedge funds’ lackluster performance showcases the limits of protection against volatility
Laurence Fletcher and Jon Sindreu – WSJ
One group of hedge funds has long pitched to investors the idea they can protect investors and even prosper when markets fall sharply. But when volatility returned to markets recently, these funds failed to capitalize. Their woes showcase the pitfalls of volatility-related trading, which can simultaneously foil those betting in favor and those betting against it.
****SD: Heads I win, tails you lose.
Market Paradigms Have Quickly Shifted on Investors
Dean Curnutt – Bloomberg
Two months after the meltdown of poorly designed exchange-traded volatility products became front page news, the broader environment for market risk is in transition. Corporate profits and economic growth are strong, but there is unease about the future path of Federal Reserve interest-rate increases, the impact of rising fiscal debt and deficits and the potential for trade wars. Realized volatility in the S&P 500 Index was 20 percent last quarter, up from just 6 percent in the fourth quarter. That is a tremendous increase.
****SD: Dean Curnutt is CEO of Macro Risk Advisors, employer of the oft-quoted derivatives strategist Pravit Chintawongvanich.
Your Diversified Portfolio May Face Harsh Lessons in Volatility
Tanvir Sandhu – Bloomberg
Cost-efficient long-volatility exposure may be the new focus; Portfolio diversification gets exposed when correlations rise
The world is short volatility. How long it can remain so is another matter.
****SD: This piece kind of feels like an updated TL;DR of an Artemis Capital research note.
No, Washington is not to blame for the volatility
Russ Koesterich – BlackRock Blog
Many are pointing a finger at Washington for the recent spike in volatility. But, as Russ explains, the catalysts lie elsewhere.
****SD: However, it’s hard to argue Washington is not responsible for some of the heightened volatility in certain – *cough* Amazon *cough* – names.
Confusing market signals create a minefield for central banks
John Plender – Financial Times
Something curious is afoot in global funding markets, starting with the much-remarked recent surge in the London interbank offered rate. The difference between Libor and the overnight indexed swap rate has soared to its highest level since the financial crisis. A widening Libor-OIS spread, a seemingly arcane financial relationship, is important, not least because it usually implies stress in the interbank market.
****SD: Speaking of central banks, from Bloomberg – Fed’s Powell Shows Markets He Won’t Be Rattled by Volatility
If It’s the Big One for Stocks, Hedgers Are Looking Unprepared
Dani Burger – Bloomberg
Maybe the warnings got boring.
Trade tensions between the U.S. and China are escalating, the Nasdaq 100 Index is set for its ninth straight 1 percent swing, and safe havens are in fashion around the world. Yet hedging activity is decidedly muted, all things considered.
Exchanges and Clearing
MIAX Exchange Group Reports March 2018 Trading Activity; MIAX Files Petitions with USPTO to Invalidate Seven Nasdaq Patents
Miami International Holdings, Inc. today reported the March 2018 trading activity for its two fully electronic options exchanges – MIAX Options and MIAX PEARL (together, the MIAX Exchange Group). The MIAX Exchange Group collectively executed over 31.7 million contracts in March 2018 for a combined average daily volume (ADV) of 1,511,612 contracts, representing a total U.S. equity options market share of 8.25%.
…In other news, the MIAX Exchange Group recently filed seven petitions at the U.S. Patent and
Trademark Office, each seeking a determination that the subject Nasdaq electronic trading patents that Nasdaq asserted against MIAX last September are invalid under the current law.
Intercontinental Exchange Podcast: ICE Founder and CEO Jeff Sprecher: Two Decades of Disrupting Markets
Inside the ICE House
In the early 2000s, Intercontinental Exchange Chairman and CEO Jeff Sprecher introduced electrification and transparency to the trading of energy commodities. In quick succession, he took on the futures, credit, and equities markets, building ICE from a little known exchange that he paid a dollar for to a global Fortune 500 Company. He joins the podcast to talk about how he did it, and the future of data as the life blood of trading.
Intercontinental Exchange Reports March and First Quarter 2018 Statistics, Including Record Futures Average Daily Volume and Open Interest
Intercontinental Exchange, Inc., a leading operator of global exchanges and clearing houses and provider of data and listings services, today reported March and first quarter 2018 trading volume and related revenue statistics, which can be viewed on the company’s investor relations website at http://ir.theice.com/ir-resources/supplemental-information in the Monthly Statistics Tracking spreadsheet.
NYSE Announces B & C Tape Fees
In a Trader Update posted April 2, the New York Stock Exchange announced trading fees for Tape B and C securities.
The bourse also added that the next phase of NYSE Pillar will be the expansion of NYSE electronic and floor trading to all Reg NMS securities beginning on April 9, 2018.
CME Group and GCSA Capital Collaborate to Deliver the Prefunded Treasury Facility Collateral Program for Meeting Performance Bond Requirements
CME Group … and GCSA Capital … today announced they have collaborated to develop the Prefunded Treasury Facility as a permitted form of collateral at the clearing house division of CME for performance bond (initial margin) requirements for clearing members’ proprietary positions in futures and options contracts.
Exchanges Diversify, Expand Data and Technology Revenues
Larry Tabb – TABB Forum
While US exchange transactional and market data revenues have experienced downward pressure since 2010, revenues from exchange connectivity and non-traditional data, technology and services have increased, from $94 million in 2010 to $858 million in 2017. TABB Group begins tracking these numbers in its latest quarterly Equity Digest, which breaks down all the US equity volume for Q4 2017.
EEX achieves new record on emissions secondary market
****SD: EUA options set a record, breaking February’s record by three-fold.
Lendingblock appoints new CTO
Luca is an experienced software engineer and quant developer, having worked as a CTO, lead software engineer and senior quant developer at BAML, BMLL Technologies and Citigroup. During this time, he had extensive experience as a senior quantitative developer on trading desks working closely on interest rate options and exotics.
****SD: Emphasis added. Lots of people are finding the crypto action appealing.
Regulation & Enforcement
Algo trading India: Sebi eases algo trade rules in commodity exchanges
In a bid to relax algorithm trading norms at commodity derivatives exchanges, markets regulator Sebi today raised the limit to process up to 100 orders per second by a user for such trade from the existing limit of 20 orders per second.
Fidessa postpones vote on Temenos bid to await possible counter offers
Justin George Varghese – Reuters
British software firm Fidessa (FDSA.L) postponed an imminent shareholder vote on whether to back a 1.4 billion pound ($2 billion) takeover bid from Switzerland’s Temenos (TEMN.S), saying it might receive two more offers.
Saxo Bank launches new trading platform
Asset Servicing Times
Saxo Bank has launched SaxoTraderPRO, a new trading platform for active traders and institutional clients.
The platform is a multi-screen trading platform offering a workspace for both Windows and Mac with no monthly fees.
SaxoTraderPRO will give clients access to exchange-traded funds, stocks, bonds, contract for difference, forex, futures and options that are cross margined from a single account.
Trading Technologies Extends TT Platform into Tokyo
Trading Technologies International, Inc. (TT), a global provider of high-performance professional trading software, announced today the availability of execution and client connectivity services in Tokyo via its TT platform. This move strengthens TT’s presence in the Asia/Pacific region, providing users there with increased accessibility to low-latency execution through TT’s worldwide network of colocated data centers.
****SD: TT also looking to colocate with Korea Exchange by Q1 2019.
Equity volatility: To hedge or not to hedge?
Sarfraz Thind – The Trade
After a freakishly calm year with volatility levels tethered to record depths the VIX, the de facto gauge for volatility, exploded on 2 February as the market was jolted by a surprisingly high US inflation number and investors rushed to hedge positions in the options markets as a result.
Best stock market trade of 2018 is a total reversal from last year
Joe Ciolli – Business Insider
When the stock market gives you lemons, make long-volatility bets.
If you’ve heeded this advice this year, it has most likely been a lucrative approach. After all, as major US indexes have tested multimonth lows — including the tech-heavy Nasdaq 100 erasing its year-to-date gain entirely on Monday — volatility-linked products have surged.
Don’t Sweat the Volatility. It’s Time for Risk, Cantor Advises
Joanna Ossinger – Bloomberg
Still too early for sell-off to ‘take on a life of its own’; Volatility in stocks hasn’t spread to other assets
It’s time to take on risk in U.S. equities, Cantor Fitzgerald says.
Surging Apple Hedging Costs Show It’s Reeling From Trade Spat
Elena Popina – Bloomberg
Protection prices at 2-year high, top other S&P 500 stocks; Trade spat worries mount as China is 2nd-most important market
While U.S. equities continue to struggle amid trade concerns, it’s a stock that has remained relatively unscathed that hedgers are focusing on.
Be Smart, Not Frightened, by Volatility
Bob Seawright – Investment Advisor
Since the Great Financial Crisis, investors have been spoiled. From March 2009 through January 2018, the S&P 500 has returned 18.3 percent annualized. Moreover, despite high levels during the GFC and spikes in 2011 and 2015, volatility has been surprisingly low for much of the past 15 years. At the end of 2017, the S&P 500 One-Month Realized Volatility Index dipped under 6 percent. For investors, high returns and low volatility are a fantastic combination.
LME options landscape suggests one last bull hurrah for zinc
Andy Home – Reuters
Is that it for the zinc price or does the market have one last hurrah before the bull cycle turns?
Hedge fund oil bulls downplay macro risks
John Kemp- Reuters
Hedge fund managers have turned bullish again towards oil prices, casting aside the caution that prevailed during much of February and March.
David Einhorn’s Greenlight Capital: ‘Difficult to fully explain’ lost money
Business Insider (SUBSCRIPTION)
David Einhorn’s hedge fund, Greenlight Capital, is having a rough 2018. The firm’s flagship fund is down nearly 14% in the first quarter, and Greenlight isn’t completely sure why.
****SD: Lol – that’s not encouraging.
Fed’s Powell Shows Markets He Won’t Be Rattled by Volatility
Danielle DiMartino Booth – Bloomberg
Markets are unmoored. Tried-and-true patterns that dictated trading behavior have broken down, leaving many investors at a loss, both figuratively and literally.
The Cboe Volatility Index, or VIX, a gauge of stock market volatility derived from the prices of options tied to the S&P 500, has almost doubled in this year’s first quarter.
MIAX Challenges Nasdaq Options Patents; Crisis hedge funds’ lackluster performance
Volatility May Be the World’s Only Undervalued Asset Class
Doug Kass – RealClearMarkets
I have argued that risk is underpriced because in large measure of the structural changes in the markets and participants positioning. Risk is an ever-present condition that cannot be eliminated, though it can be shifted through time and redistributed in form.
Sometimes You Beat the Bear. Lately, the Bear Beats You.
Stephen Gandel – Bloomberg
Investors have spent at least $2.6 billion this year on funds that are supposed to protect their portfolios in a market crash. Instead, those funds, rather than insuring their assets, have lost nearly $2.8 billion, according to data from Bloomberg Intelligence.
****SD: I feel like this article is framed incorrectly. If you’re going to use the insurance analogy, then stick with it. If the flood didn’t materialize, was the insurance a waste? It is very hard to determine motive when it comes to these instruments as ProShares’ Rich Ledee mentioned at a Cboe panel about VIX futures last week. Some action is purely speculative, some is intraday hedging and some is actually buy-and-hold moves by institutions that know what they’re getting into. Then there’s all the short interest. It is an oversimplification of a complex suite of products. Moreover, the article doesn’t mention why these funds, by virtue of using VIX futures, degrade over time, while harping on their “poor performance.” They’re acting the way they’re supposed to. What about “beating the bear” with inverse volatility? XIV has been a standout and the inverse side of the puzzle isn’t mentioned here either. See Matt Moran’s story two below for more on the panel I referenced.
The market is acting like risk no longer exists, Bank of America says
Fred Imbert – CNBC
As stocks have climbed to record levels this year, investors are neglecting one very important aspect of financial markets, according to analysts at Bank of America Merrill Lynch.
****SD: If risk rears its head in the forest and no one’s there to be fearful, is it still scary?
Chicago Panel Discusses Current Dynamics of the VIX Market
Matt Moran – Cboe
Over the past year a number of media stories have noted that the VIX Index appears to be somewhat “low” in light of worldwide geopolitical tensions. At a conference I heard Professor Richard Thaler opine that the “low” level of the VIX Index is one of the biggest financial mysteries of our time. Earlier in 2017 the minutes of a meeting of the Federal Reserve Board “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty …”
How an Analyst Thinks Bitcoin’s Volatility Is Predictable
Steven Russolillo – WSJ
J.C. Parets, founder of Eagle Bay Capital and author of the All Star Charts blog, reckons the Fibonacci sequence is the key to the cryptocurrency’s twists and turns.
Weekly Realized Volatility Rankings
Robert Krause – LinkedIn
****SD: According to Krause’s RealVol indices, livestock, cocoa and OJ are the assets with higher than average volatility.
Why Has Stock Market Volatility Been So Low in 2017?
Victor Xing – HuffPost
Put it simply, with policy-induced excess liquidity permeating financial markets, risk premium and volatility of various asset classes are consistently suppressed by “yield-seeking” investors.
Exchanges and Clearing
Nasdaq Reports Third Quarter 2017 Results; Delivers Strong Profitability And Income Growth
Nasdaq, Inc. (Nasdaq:NDAQ) today reported financial results for the third quarter of 2017. Third quarter 2017 net revenues were $607 million, up $22 million or 4% from $585 million in the prior year period. The third quarter increase in net revenues included a $15 million, or 3%, increase due to organic growth and a $7 million favorable impact due to changes in foreign exchange rates.
Big Bank Turns to Nasdaq for Help Running Its Currency Trading
Annie Massa – Bloomberg
Nasdaq Inc. won its first deal to help power a bank’s currency trading, its latest attempt to branch out from its original business of running a famous stock exchange.
Nasdaq didn’t identify the new customer beyond calling it a “Tier 1 bank,” according to a statement Wednesday. The bank will use Nasdaq’s matching technology, the software that pairs up buyers and sellers.
Intercontinental Exchange Announces Strategic Stake in Euroclear
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, announced it has acquired a 4.7% stake in Euroclear for EUR 275 million. ICE anticipates having one representative join the Board of Euroclear. Euroclear is a leading provider of post-trade services, including settlement, central securities depositories and related services for cross-border transactions across asset classes.
****SD: ICE also announced it would acquire Virtu’s BondPoint. This comes on the heels of its completed acquisition of BAML’s Global Research Index Platform. Starting to make sense why ICE was named to the Fortune Future 50, eh? Of course, it’s not like ICE acquiring a business is anything new.
SGX reports 1Q FY2018 net profit of S$91 million
Singapore Exchange (SGX) today reported 1Q FY2018 net profit of S$90.7 million (S$83.1 million), on the back of revenues of S$204.5 million (S$190.8 million). Operating profit rose to S$106.0 million (S$97.2 million), while earnings per share increased to 8.5 cents (7.8 cents). The Board of Directors has declared an interim dividend of 5 cents (5 cents) per share, payable on 9 November 2017.
Top investors want Deutsche Börse chief to resign
Olaf Storbeck in Frankfurt – Financial Times
Three big investors in Deutsche Börse want chief executive Carsten Kengeter to resign after a court in Frankfurt blocked his efforts to settle a criminal insider-trading investigation.
The shareholders, who between them control more than 6 per cent of the exchange group’s share capital, told the Financial Times that the court’s rejection on Monday of a deal that would have seen him pay EUR500,000 and avoid charges had fatally undermined the CEO.
LSE’s clearing boss eyes New York amid Brexit row
Samuel Agini – Financial News
The new chief executive of LCH capped his first week on the job by warning that Brexit, and the EU’s ensuing efforts to seize business from the City, could force the London Stock Exchange Group’s majority-owned clearing house to shift all or part of its operations to the US.
CurveGlobal plans futures on Libor successor
Helen Bartholomew – Reuters
CurveGlobal, the London Stock Exchange Group’s fixed income derivatives platform, plans to launch futures contracts referencing the Sterling Overnight Index Average, a Bank of England-administered unsecured lending rate that has been selected as the preferred Libor replacement for sterling financial contracts.
****SD: But what about the options?
Overstock.com to launch massive ICO
E-commerce veteran Overstock.com is planning to sell up to 500 million digital tokens via an initial coin offering that will launch next month, CEO Patrick Byrne announced today at the Money 20/20 conference in Las Vegas.
Regulation & Enforcement
EU scraps its answer to U.S. Volcker Rule for banks
The EU has scrapped a draft law that could have forced the bloc’s biggest banks to split up in order to reduce the risk of them being “too big to fail”, in a rare move that will cheer major trading firms.
FIA’s Puleston Jones speaks at UK House of Lords hearing
FIA’s Head of Europe, Simon Puleston Jones today spoke alongside LCH Group CEO Daniel Maguire at a hearing of the UK Parliament’s House of Lords EU Financial Affairs Sub-Committee.
Horizon Software Joins The QuantHouse qh API Ecosystem For End-To-End Performance And Global Reach
QuantHouse, the independent global leader of end-to-end high performance market data and trading API based technologies, today announced that Horizon Software, the leading provider of electronic trading solutions and algorithmic technology, has joined the qh API Ecosystem to benefit from global reach and end-to-end performance.
Hedging Your Portfolio to Protect Your Profits
Steven Sears – Barron’s
Monkeys throwing darts at a list of stocks can often outperform professional stockpickers, but knowing what to do with low volatility is much more nuanced.
That fact is easy to forget because on almost any day of the week, at practically every hour, someone is chirping about the CBOE Volatility Index’s unusually low level as they draft some magnum opus about investor complacency.
What are my options for protection?
Gary Delany – TradingFloor.com
In this short refresher we revisit some of the options strategies investors may consider when seeking protection from adverse market moves.
Exchange-listed options can be used in a variety of ways. Investors often use options to construct a defined risk strategy; to put less capital at risk versus buying the underlying asset; harnessing leverage; and to use options as protection against adverse market moves.
Modern Portfolio Theory or Volatility Index (VIX)?
Dan Bosscher – Livewire Markets
Modern portfolio theory, a hypothesis from the 1950’s (Markowitz) has been the traditional strategy for protecting portfolios from drawdown. Investors are increasingly asking whether this is still the best way to build a resilient portfolio. The traditional view is that diversification should be enough to protect us from volatility. But does it really work?
Inverse Volatility Traders Are Cashing Out
Bernie Schaeffer – Schaeffer’s Investment Research
One of the notable constants in the stock market’s post-election march to new highs has been the prolonged hibernation of the CBOE Volatility Index (VIX), with scores of seasoned volatility pros having prematurely called for an end to the “low VIX regime” over this period. But as the VIX stubbornly refuses, for now, to revert to anything resembling its historical mean, 2017 has continued to be a banner year for inverse volatility trackers, including the ProShares Short VIX Short-Term Futures ETF (SVXY).
How to protect against a vulnerable stock market’s ‘fragility event’
Joe Ciolli – Business Insider
At this point, anyone following the stock market knows that price swings are non-existent.
The CBOE Volatility Index (VIX) is locked near record low levels. The benchmark S&P 500 hasn’t seen a 3% pullback in 242 days and counting, the longest such streak in history.
So what should investors do? Bank of America Merrill Lynch thinks it’s time to prepare for an inevitable shock — or as it describes it, an “overdue fragility event.”
Market Volatility Bulletin: VIX Joins The S&P In A Push Higher
Spot VIX had the chance to fall on what was a decent day for stocks, and passed on the opporunity: what gives?
With So Few Doing So Much for Dow, Breadth Is a Bust
Helene Meisler – TheStreet
CNBC’s anchors and guests are not known for uttering a bearish word unless the market is actually collapsing, but they commented several times on Tuesday that the move in the Dow Jones Industrial Average was mostly “just two stocks.”
The Bond Market’s Moment of Truth Is Now
Brian Chappatta – Bloomberg
Ten-year yield closes above key mark for first time since May; Breakthrough has traders eyeing 2.5% and 2.6% levels
European Central Bank divided over wisdom of declaring end to QE
Claire Jones – Financial Times
The European Central Bank is gearing up for its most important meeting of the year, as senior officials gather to decide the fate of the EUR2.1tn asset purchase scheme that many credit with breathing life into the eurozone recovery.
At issue is whether the ECB will declare this week that the economy has recovered sufficiently for quantitative easing to end next year — a pronouncement that would reverberate in foreign exchange markets and could shape interest rate expectations.