Nasdaq Sues MIAX Parent Co.; VIX ETP Liquidation Scenario?; ETF volatility effects

Sep 5, 2017

Observations & Insight

August 2017 Options Exchange Marketshare via OCC
Options Exchange Marketshare, August 2017


OCC Cleared Contract Volume Up 19 Percent in August
OCC, the world’s largest equity derivatives clearing organization, announced today that total cleared contract volume in August was 395,912,022 contracts, up 19 percent from August 2016 volume of 331,447,840 contracts. Cleared futures reached a record volume with 14,923,607 contracts in August. OCC’s year-to-date average daily cleared contract volume is up four percent from 2016 with 17,068,192 contracts in 2017.


The Patent World
Jim Kharouf – JLN

We’re back in court today.

On Friday, Nasdaq filed suit against Miami International Holdings, the parent company of MIAX, the youngest of the U.S. options exchange groups. Nasdaq announced it had filed suit for patent infringement and theft of secret information by MIAX, which has hired a number of former Nasdaq and International Securities Exchange professionals.

According to Bloomberg, the Nasdaq suit claims that “MIAX instead relied on or piggybacked off of the Nasdaq trade secrets and other technical know-how acquired by former Nasdaq employees during their tenure at Nasdaq.” Nasdaq is asking the court to force MIAX to stop infringing and pay damages.

In an interview with MIAX executives, they vigorously deny they’ve copied or stolen anything from Nasdaq. The company has scrapped and clawed its way into the US equity options space with its technology platform. MIAX executives say they’ve done it by the book and have been careful to file their own patents for technology developed in-house.

MIAX hired 12 employees from Nasdaq/ISE out of the 110 it currently employs. The company also has a number of former PHLX employees. Such is the nature of the options industry.
It appears the crux of the case dates back to August 2010 to January 2011, when Nasdaq alleges that a senior technology person, who then worked for ISE, forwarded technical documents to his personal email. Interestingly, MIAX was founded in 2012, although Nasdaq says the information in question was allegedly used later on the MIAX technology.

Thomas P. Gallagher, chairman and CEO of MIH told JLN that the suit is a bullying tactic used by Nasdaq. And in MIAX’s official response, he stated, “We believe that NASDAQ’s complaint is nothing more than a feeble attempt to stifle innovation by a smaller company that has had tremendous success over the past five years.”

Gallagher also wonders why Nasdaq actually tried to recruit the same employees in recent years.

Right now, that is what is on the docket. It is impossible to tell at this stage who is right. So it’ll go to court.

Lead Stories

Nasdaq Sues Rival Exchange, Alleging Stolen Tech Secrets
Brian Louis and David Voreacos – Bloomberg
Nasdaq Inc. sued a rival exchange operator, accusing Miami International Holdings Inc. of infringing patents and stealing trade secrets with help from former Nasdaq employees.
Nasdaq claims Miami International copied its core trading technology. Miami International operates two options exchanges, MIAX Options and MIAX Pearl, that handle about 6 percent of the U.S. equity options market. Nasdaq says at least 15 of its former employees joined MIAX. Nasdaq alleges that three of them forwarded technical documents to their personal emails before leaving, while another employee improperly retained some.

****SD: Miami International Holdings has a press release response – Miami International Holdings, Inc. to Vigorously Defend Frivolous Claims by Competitor

Could Some VIX-Related Funds Go ‘Poof’ in a Day?
Simon Constable – WSJ
Some exchange-traded funds related to the CBOE Volatility Index, or VIX, could vanish just when traders might want them most.
The VIX, also known as the fear gauge, measures the cost of buying insurance against a drop in the broad market. At issue are funds that seek to profit when short-term VIX futures contracts fall in value. The VIX itself isn’t an investible product and the VIX futures don’t exactly track the VIX, but they are closely correlated.

****SD: I doubt very many buyers of ETPs (VIX linked or not) read the prospectuses. Apropos timing on the article as we’re in the middle of one of those VIX pops that makes you think about this sort of thing – was up at the 14 handle for a moment there.

Academics, quants don’t agree on volatility claims
Ari I. Weinberg – Pensions and Investments
Divining the relationship between exchange-traded funds and volatility has been a pastime of academics and quants around the world for more than two decades. Yet, as the U.S. market’s preferred measure of volatility — the Chicago Board Options Exchange Volatility index, or VIX — hovered near all-time lows in July, few asked to what extent the relentless flow of money into indexed equity strategies and exchange-traded funds could actually be limiting volatility. That calculus was supposed to head the other way.
In the working paper “Do ETFs Increase Volatility,” Ohio State University’s Professor Itzhak Ben-David analyzes the impact that ETFs might have on the underlying securities in ETF baskets.

****SD: In this particular instance, the academic is quoted as saying “seems to lead to higher perceived risk and higher risk premiums” while the market participant is quoted as saying “the data just doesn’t support the view that indexing is pushing around prices.” From the Financial Times – Vanguard: ‘I don’t see the passive bubble issue’

Hong Kong, Singapore in talks to grab bigger share of derivatives business
Michelle Price – Reuters
Hong Kong and Singapore are seeking to snare a bigger share of the $540 trillion global derivatives business, taking advantage of tough new UK and European banking rules and uncertainty created by Britain’s plans to leave the European Union.

A Decade After Crisis, Investors Have Stopped Hunting for Black Swans
Jon Sindreu and Laurence Fletcher, WSJ via Fox Business
In the wake of the global financial crisis, fear of such “black swan” events drove some investors into hedge funds that offered extreme insurance policies. But the swans have yet to return, and such strategies have fallen out of favor.
The patience of many investors has run out after losing money during the intervening years of mainly benign market conditions. According to data by CBOE Eurekahedge, those who invested in tail-risk funds when their performance peaked in September 2011 would have by now lost 55% of their money.

****SD: Roll cost! (Link to the WSJ version of the story here.

September’s Bringing Tons of Catalysts to Shatter Market Calm
Luke Kawa – Bloomberg
Welcome to the cruelest month for U.S. equities.
The S&P 500 Index limps into September after stalling amid heightened tensions on the Korean peninsula and historic flooding in Texas. Those broke a stretch of calm that’ll be hard to replicate in a month loaded with major events that could set the tone on financial markets the rest of the year — from a dozen G-20 central bank decisions to a deadline on the U.S.’s ability to pay its bills and elections in Europe and Oceania.
Here’s what’s coming.

A Stock ‘Permabear’ Won’t Give In
Daisy Maxey – WSJ
How perma can a permabear be?
Just ask John Hussman, manager of Hussman Strategic Growth Fund (HSGFX); he has been bearish on the S&P 500 during the market advance of recent years.
The market-neutral fund, which seeks to outperform the broad stock market over complete market cycles, invests in favorably valued companies of all sizes, but seeks to limit its downside risk using derivatives, such as options on broad market indexes.

Volatility pioneer Dan Galai: shorting VIX is like betting on roulette
Joe Ciolli – Business Insider
One of the market’s hottest trades this year has involved betting on stocks to sit still.
The wager in question is shorting the CBOE Volatility Index, or VIX, and many investors are big fans. Following a recent short-term increase in the VIX, traders added almost $400 million of exposure to the trade. One guy — a former manager at Target — says he’s made millions betting against the VIX.

Exchanges and Clearing

Taiwan Futures Exchange to end futures, options trading on Eurex in November -sources
The Taiwan Futures Exchange will terminate trading of Taiwan stock futures and Taiwan stock index options on the Eurex exchange in November, two people familiar with the matter told Reuters.
The trading for Eurex Taiwan future contracts and Taiwan stock index options on the Eurex exchange will terminate on Nov. 15, because the Taiwan exchange’s provision of after-hours trading has replaced the function of trading on Eurex, the people said.

Nasdaq to pay $705 million to acquire eVestment
Tomi Kilgore – MarketWatch
Nasdaq Inc. said Tuesday it will buy content and analytics company eVestment for $705 million. Nasdaq said it will fund the deal, which is expected to close in the fourth quarter, through a mix of cash on hand and debt.

Monthly Report – MiFID II: Eurex prepares for the home stretch
The clock is ticking: Only four more months until the biggest market reform of the last decade kicks off. The Markets in Financial Instruments Directive (short: MiFID) II will fundamentally re-design Europe’s derivatives markets and provides strategic opportunities for Eurex, one of the leading derivatives exchanges and part of Group Deutsche Börse.
Eurex is about to conclude its own preparations and has scheduled the technical implementation of the new requirements for December. Already this month, market participants will gain access to a simulation trading environment so that they have sufficient time to adapt to the new reality.

Global uncertainty spurs ASX volumes
The Australian
Ongoing global market volatility continued to drive turnover on the ASX, triggering a 12 per cent jump in the average number of August daily trades.

****SD: Equity options volumes up 17 percent and futures up 16 percent, but options on futures down 25 percent.

Rupee options, euro futures lift DGCX volumes
Khaleej Times
The Dubai Gold and Commodities Exchange (DGCX) witnessed an uptick in trading volumes in key products for the month of August, driven by increased investor interest in Euro Futures, Indian rupee Options and Indian Single Stock Futures.

SGX to launch coking coal options on September 18
Platts News
The Singapore Exchange will launch its first coking coal options contracts on September 18 on the back of customer demand, Cheong Jin Yu, Director, Commodities, said Tuesday.

Regulation & Enforcement

Fed Demands Wall Street Protections Against Lehman-Like Runs
Jesse Hamilton – Bloomberg
The Federal Reserve has approved a rule that will keep derivatives contracts from being canceled immediately when financial firms fail — a move considered crucial to keeping a future calamity at one Wall Street bank from spreading.

Sebi to bourses: Use dynamic price band for currency options
PTI – Times of India
Regulator Sebi today asked stock exchanges to put in place a dynamic price band for cross- currency option contracts, while ensuring that any relaxation in these bands takes into account likely impact of all rate-influencing developments.

Convicted Libor trader: scandals will happen “again and again”
Lucy Burton – The Telegraph
A former Barclays trader jailed for attempting to manipulate the interest rate benchmark Libor last year has warned such scandals will happen “again and again” unless rules over bad behaviour are made clearer.


E-Trade, OptionsHouse Merge Platforms
Theresa Carey – Barron’s
After E*Trade acquired Aperture New Holdings, the parent of OptionsHouse, last summer, the firms spent a year working through the integration. Much of the conversion was completed early last month, with OptionsHouse customers logging into E*Trade on Aug. 7.

Nasdaq’s Latest Deal Shows That Data Reigns Supreme
Annie Massa – Bloomberg
Nasdaq Inc.’s takeover of data provider eVestment Inc. spotlights the exchange industry’s seemingly bottomless appetite for data and its emerging focus on cultivating a closer relationship with money managers.

“There’s a lot of hand waving with machine learning in Trade Surveillance”
David Beach – Bobsguide
bobsguide spoke to Dermot Harriss, Senior Vice President of Regulatory Solutions at OneMarketData, about how machine learning and new regulations are changing the landscape of trade surveillance, and how a balanced mix of data management via machine learning can reduce false positives and minimise costs for firms.


Funds heading for record-long bets in CBOT oilshare
Karen Braun – Reuters
Speculators’ bullish position in the CBOT oilshare, measuring soyoil’s share of value in soy products, soared to a 10-month high in the week ended Aug. 29 and it may be approaching record levels in the coming days and weeks.
At the same time, money managers have extended their bearish bets in Chicago-traded corn, wheat, and soybean futures, but this trend has likely eased into the start of September.

Volatility Rise Is on the Horizon for the SPY, TLT ETFs
Serge Berger – InvestorPlace
U.S. stocks sprinted higher last week to close the month of August on a strong note. Fund manager performance chasing or not, last week’s price action has left behind on the weekly charts yet another string of long tails as the bulls simply played better offense than the bears played defense. As such and in my eye, this remains a market that does not favor the bears, yet the seasonal increase in volatility in the months of September and October also remains a very real risk for traders and investors alike.

Golden Brackets: Strangles Provide Sizable Yield
James Cordier – Futures Magazine
You may have seen the television commercials where movie and television actor William Devane drives home the point of spiraling national debt, framing it as an alarming reason to buy gold now. If so, you’ll more or less understand the biggest reason the majority of the U.S. public buys gold: security.

VXX Not Likely To Stay Down For Long
Victor Dergunov – Seeking Alpha
After an explosive mid-August spike in the VIX, the iPath S&P 500 VIX ST Futures ETN is down near all-time lows once again. The ETN has drifted lower by approximately 20% since reaching recent highs in the past weeks. Over the same time period, the VIX (fear index) itself has crashed by over 40% and is once again trading around the 10 level, signaling that extreme complacency is back.


A key Fed official just admitted they whiffed on inflation forecast
The Federal Reserve appears ready to accept that its inflation assessments have been wrong, indicating an important shift in how it will approach rate hikes ahead.

****SD: The Federal Reserve has finally reached the final stage of grief – acceptance. (What they’ve been grieving over is arguable.)

Where Corn Pollutes America Most, and Who’s Responsible
Eric Roston – Bloomberg
Not every day does an obscure scientific report directly help massive U.S. companies looking to cut costs, use natural resources more efficiently, and make sure their customers know about it. And yet Labor Day saw the quiet unveiling of a project that provides minute detail—down to individual factories—of the movement of corn along America’s sprawling meat and ethanol supply chains.

****SD: A look at the labyrinthine effects of maize’s supply chains.

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