One Year After VIX Blowup; Calm gives vol funds green light to buy

Feb 5, 2019

Observations & Insight

Options Etymology
Spencer Doar – JLN

Do you know the history of the word volatility?

It comes from the French verb “voler,” meaning to fly. By the mid-1700s, “vo’latile” had come to mean winged animal in French, more specifically poultry – pheasants and the like. When first used in English, volatile had a similar avian definition.

Here’s Merriam-Webster Editor-At-Large Peter Sokolowski on the word’s changing meaning: “It went from the concrete to the metaphor. It went from things that fly, to things that change quickly and often without predictability. And I think that’s the interesting, poetic thing to see.”

Research by the Merriam-Webster team traced the use of “volatile” as a descriptor for markets to as early as the 1850s.

Also, happy Chinese New Year everyone – it’s the year of the pig! Perhaps more relevant to our readers, happy one year anniversary of you-know-what. Check out our lead story if you forgot what you-know-what refers to.


Trading Venues and Best Execution – Roman Ginis, Imperative Execution

Roman Ginis, CEO and founder of Imperative Execution, knew from his time as a trader what issues he wanted to address when building a venue: adverse selection and market impact. These implicit costs of trading led to the development of Intelligent Cross, a new mid-point only ATS that uses artificial intelligence to schedule matching at different times for each name.

In this video from STAC’s 93rd Annual Midwinter Meeting, Ginis talks about the equity venue landscape, integrating best execution into a trading venue, and the role of A.I. at Intelligent Cross.

Watch the video »

*****SD: Intelligent Cross is an equities ATS, yes, but the points addressed are salient for all markets.

Lead Stories

One Year After VIX Blowup, Investors Still Feel Sting of Volatility Bets
Amrith Ramkumar – WSJ (SUBSCRIPTION)
U.S. stocks are trading on an upbeat note again, but some analysts caution against betting on prolonged calm in the market.
The S&P 500 has climbed 8.7% this year. The rebound has boosted the appeal of a trade—known in markets as being “short volatility” or “short vol”—that bets swings in stock prices will remain muted, while momentum will continue to drive shares higher.

****SD: Here’s a Six Figure Investing blog on the madness, too: What Caused the Volatility Tsunami on 5-Feb-2018?

Robots Have Not Taken Over Wall Street
Kevin McPartland, Greenwich Associates – Forbes
Technology has fundamentally changed the financial markets over the past two decades. By and large, these changes have been positive – lower trading costs for investors, a reduction in errors, greater transparency and an overall reduction in systemic risk.
But recent volatility has reignited a decade’s old conversation about what impact automated trading has on the market. As a result, talk of robots taking over Wall Street has accelerated – in boardrooms, on trading floors, on Twitter, and in Davos. However, while the impact of technology on Wall Street should not be understated, humans remain firmly in control.

****SD: Robots are an easy scapegoat.

Market calm gives volatility funds a green light to buy
Richard Henderson and Robin Wigglesworth – Financial Times (SUBSCRIPTION)
Computer-driven investment funds whose activity is based on the level of market volatility are forecast to buy tens of billions of dollars of US stocks, according to analysts, as the strong start to the year lures them back into the equity market.

****SD: It’s a fun little contango/backwardation dance we’ve had these past two months.

Lifeless Treasury Market Needs a Jolt From Pile of Parked Cash
Edward Bolingbroke – Bloomberg (SUBSCRIPTION)
Across U.S. interest-rate products — from cash Treasuries to futures to eurodollar options — indications abound that conviction is in short supply. With the Federal Reserve in transition from hiking to pausing and no clear direction in market rates, investors and traders appear to expect narrow ranges to persist.

****SD: What you need to know: “Heavy selling of front-end eurodollar straddles based on a neutral Fed scenario has led to notable cheapening of short-dated volatility structures. Overnight indexed swap rates price in very little policy action from the Fed this year, followed by a shift toward rate cuts in 2020.”

Can Trading’s Playing Field Be Leveled?
Donald MacKenzie, University of Edinburgh – Tabb Forum (Free registration)
The physical limitations of the wireless links among the equities-trading data centers in New Jersey give trading firms that own their own links – or have private bandwidth on providers’ links – a speed advantage. But a new service, using a different part of the frequency spectrum, may eliminate that advantage. With similar issues in the trading of European equities in the triangle of data centers around London, to level the playing field, regulators will need to get into the details.

Goldman Plans Cuts in Commodities Trading as New CEO Digs In
Commodities trading at Goldman Sachs Group Inc., once a huge moneymaker and a central part of the bank’s DNA, is on the chopping block.

Oil is not out of its volatility ‘nightmare’ yet, Citi analyst says
Tom DiChristopher – CNBC
The volatility that rocked oil prices last quarter may have moderated, but Citi’s global head of commodities research says the market’s “nightmare” is not over yet.
The bank expects oil supply to tighten in the first quarter as top exporter Saudi Arabia cuts production, but Citi’s Ed Morse also forecasts a soft spot for demand in the opening months of 2019. Further complicating matters are a series of geopolitical and market dramas that will play out through the beginning of May.

****SD: From Reuters — Oil bears sent back into hibernation by economic optimism, OPEC, Venezuela

Exchanges and Clearing

Cboe Global Markets Reports January 2019 Trading Volume
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today reported January monthly trading volume at

****SD: ADV was down 15.5 percent in options and down 24 percent in futures.

Intercontinental Exchange Reports January Statistics
Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today reported January trading volume and related revenue statistic.

****SD: Access the full monthly stat breakdown here.

SR-NASDAQ-2019-006 – Proposal to revise The Nasdaq Options Market LLC’s Rules at Options 7, Section 5 to amend the Nasdaq Options Regulatory Fee
Currently, Nasdaq assesses an ORF of $0.0008 per contract side. The Exchange proposes to increase this ORF to $0.0020 per contract side as of February 1, 2019. In light of recent market volumes, the Exchange is proposing to increase the amount of ORF that will be collected b y the Exchange. The proposal would allow the Exchange to increase the per contract amount of ORF in order to offset the Exchange anticipated regulatory costs. The Exchange ‘s proposed change to the ORF should balance the Exchange’s regulatory revenue against the anticipated regulatory costs. The Exchange also proposes to delete obsolete language in the rule text as described herein.

Updated Emerald Launch and Final Mock Trading Test Date
The MIAX Emerald (EMLD) Exchange is now targeting a launch date of March 1, 2019, subject to SEC approval and another potential government shutdown. The MIAX Emerald (EMLD) Exchange has moved the final mock trading test from Saturday, February 9, 2019 to Saturday, February 23, 2019. Additional details can be found in the January 23, 2019 Alert


APAC forges ahead in algo trading with rising levels of improvement
John Brazier – The Trade
While Europe has spent much of the past year grappling with the impact of MiFID II and its effect on algorithmic trading, Asia-Pacific (APAC) has instead continued to experience increasing improvements.

Sterling Trading Tech and Eventus Systems Collaborate to Monitor Trade Activity and Risk
Business Wire
Sterling Trading Tech (STT), an innovative trading technology leader in the RaaS (Risk as a Service) space, and Eventus Systems, a leading global trade surveillance and market risk platform provider, announced today that Eventus has integrated the Sterling Cloud-Based Analytics Engine (SRE) into its Validus platform to benefit mutual customers.

****SD: There are too many “aas”es in this business — SaaS, PaaS, IaaS, the Norwegian power trader who blew up and now Raas.

OMS/EMS Vendor Consolidation Raises Questions Among the Buy Side
John D’Antona Jr. – Traders News
While 2018 was a banner year for M&A bankers specializing in the OMS/EMS space, the wave of consolidation has left some concerned, according to several industry executives. After three notable independent OEMS vendors got snapped up by much larger industry players in the second half of the year – State Street acquired Charles River Development, SS&C’s picked up EZE Software and Virtu is in the process of acquiring ITG – many of their buy-side clients have been left with a range of questions and concerns around conflicts of interest, data privacy and the future of these software platforms.

Cloud-Computing Giants Keep Growing Despite Slowdown Fears
Matt Day and Jeran Wittenstein – Bloomberg (SUBSCRIPTION)
Cloud-computing companies have a message for skittish investors: demand is still booming. Earnings reports from the biggest providers of internet-based computing services – Inc., Microsoft Corp., and Alphabet Inc.’s Google – showed that these companies are grabbing a larger share of business technology spending, defying warnings from some of their suppliers that a hot corner of the industry might be cooling off.

Velocimetrics trims trading latency with Napatech partnership
Velocimetrics, in partnership with Napatech (OSLO: NAPA.OL), has been working with a global Tier 1 investment bank in Europe to reduce its tick-to-trade latency.

Regulation & Enforcement

US regulator reports record surge in trade data
Philip Stafford – Financial Times (SUBSCRIPTION)
The US market watchdog chewed through record amounts of data last year, amid a surge in volatility and the steady rise of automated trading.

Barclays Traders Shouted Out Rigging Requests for All to Hear
Will Mathis – Bloomberg (SUBSCRIPTION)
There was nothing secret or subtle about how traders at Barclays Plc tried to move the bank’s submission to an important benchmark interest rate in a way that helped their own positions, a former trader said Tuesday in court.

****SD: Shouting things out, recording activity, email trails… I’ll paraphrase Idris Elba in “The Wire”: “Don’t take notes on a criminal conspiracy.”

The Klein Law Firm Reminds Investors of Class Actions on Behalf of Shareholders of YOGA, XRAY, AGN and SVXY
Globe Newswire
The Klein Law Firm announces that class action complaints have been filed on behalf of shareholders of the following companies. If you suffered a loss you have until the lead plaintiff deadline to request that the court appoint you as lead plaintiff.

****SD: Here’s another one, this time from Abraham, Fruchter & Twersky.

EU moves to make UK charge VAT on commodity trading include ICE Europe
Pratima Desai – Reuters
Moves by the European Commission to make Britain charge value-added tax on commodity derivatives trading will include ICE Futures Europe, the London Platinum and Palladium Market (LPPM) and the London Metal Exchange (LME), trading sources say.

Financial Services bosses banned for trading while insolvent
Four financial services directors got banned for 19 years after causing their company to take money from clients and make self-serving payments while being insolvent.
Paul Rossi, also known as Paolo Rossi, and his wife, Claire Michelle Rossi, were directors of Independent Derivative Traders Ltd. The company traded as ‘Futex’ and provided access to a financial markets trading platform for sub-contracted independent traders. The married couple were joined in the management of the company by Paul’s brother Mark Rossi, also known as Marco Rossi, and Daniel Michael Goldberg.


Trump’s 2019 State of the Union: What Investors Should Watch
Ben Walsh – Barron’s (SUBSCRIPTION)
President Donald Trump will give his 2019 State of the Union address on Tuesday night, finally delivering a speech that was delayed by—and became a negotiating chip in helping resolve—the longest U.S. government shutdown in history.

****SD: TL;DR – The things to look for are hints of another shutdown, an update on any potential infrastructure plan, mentions of drug prices and healthcare, and the tone he uses to address the economy, if he addresses jobs reports and the like at all. A related story from Bloomberg has this to add – “Options markets suggest Trump’s address, coming at a time of thin trading during the Asian day and Lunar New Year holidays, won’t spur a large sudden move in the dollar. One-week butterfly options, which show the perceived possibility of an outsized reaction, are trading at the weakest level since 2013 for the euro and at a one-year low for the yen.”


16 and Sunny: VIX Under Key Mark Amid Cautious Optimism Sparked by Earnings
JJ Kinahan – The Ticker Tape
(Tuesday Market Open) The market is on a roll, driven by earnings-related momentum. Still, geopolitical questions continue to overhang. Meanwhile, volatility is at multi-month lows, as measured by the VIX. That “fear index” receded below 16 early this week from above 30 as recently as late December.

Three Big Equity Event Risks (VIDEO)
Blu Putnam – CME Group
Equities are facing three major event risks that could result in large price gaps, which are more difficult to manage than shifts in volatility.

January’s Stock-Market Rally Revives Appetite for Risky Margin Loans
Michael Wursthorn and Lisa Beilfuss – WSJ (SUBSCRIPTION)
Nick Restaino is bullish on stocks again after January’s dramatic rebound and is using money borrowed against his investments to buy shares of popular technology companies such as Nvidia Corp. and Roku Inc.

Sterling drops towards $1.29 as technical trigger fuels sell-off
Saikat Chatterjee, Sujata Rao – Reuters
The British pound slumped to two-week lows on Tuesday after weak survey data and uncertainty about Brexit talks pushed it below a key market level, forcing some large investors to cut some bets.


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