Shorting the VIX Could Be Terrible; Financials Bulls Tested; LCH plans G10 NDFs, options

Sep 6, 2017

Lead Stories

Why Shorting the VIX Could Be a Terrible Idea
Jared Dillian –
The New York Times’ DealBook had a great piece of journalism a couple of days ago about short VIX carry monkeys. Well, that is what I call them.
The article features a former Target logistics manager who has goosed his net worth up to $12 million by betting that the VIX will go down. He is in the process of raising $100 million for a VIX-smashing hedge fund.

****SD: Dillian – “If this really does blow up, there is going to be some soul-searching at the SEC. If you securitize something really complicated and then apply leverage to it, of course people are going to trade it!”

Financials Bulls Tested as Market Rotation Spurs Rush for Exits
Elena Popina – Bloomberg
To see just how painful the start to the month has been for financial stocks, look at the widening gap between them and everything else.
The S&P 500 Financial Index fell 2.2 percent on Tuesday, the most since May, compared with a 0.8 percent decline in the full index. That gap was the widest in more than five months, data compiled by Bloomberg show. Skepticism seeped into options, with put volume on the largest exchange-traded fund tracking the sector reaching 1.5 times the 20-day average.

****SD: Yesterday’s XLF options action – 169k puts vs 103k calls traded.

LCH plans G10 NDFs, options in phases this year
Global Investor Group
Clearing house LCH has pledged to significantly expand its coverage of foreign exchange products, promising non-deliverable forwards and options on the world’s top currency pairs in two phases before the end of the year.

****SD: On FX options side they will launch “Euro-Dollar, Cable, Aussie Dollar, Dollar-Swiss and Dollar-Yen as well as Euro-Yen, Euro-Sterling and Euro-Swiss shortly after the G10 NDFs clearing launch, and before the end of the year.”

Goldman Sachs, Wall Street Firms Battle Lingering Trading Malaise
Bradley Keoun – The Street
This year’s unusually low volatility — and pace of trading — has persisted into the third quarter, threatening to extend a slump for Wall Street firms like Goldman Sachs that depend on transaction fees.

****SD: A spoonful of sugar, an apple a day, some dark chocolate and a glass of red wine in the evening ought to do it. (At a certain point, big banks et al. won’t skate by with the “it’s macro issues – summer doldrums, low vol, interest rates – at play” excuse for poor results.)

This Gauge of Political Turmoil Stays Near Record High
Brandon Kochkodin – Bloomberg
Political turmoil in Washington has produced a reaction on Wall Street: yawns.
The Partisan Conflict Index, calculated by the Federal Reserve Bank of Philadelphia, stayed near record highs in August, while the VIX, a measure of expected stock volatility also known as the fear index, continued on its merry, upbeat way despite congressional battles over health care, taxes and a federal debt limit.

****SD: Really? I hadn’t noticed anything.

Debt ceiling, government shutdown anxiety in Treasury and stock market
Akin Oyedele – Business Insider
Bond and stock traders are showing different levels of anxiety about the US government’s ability to keep itself funded.
Congress is expected to pass a bill by the end of September to keep the government funded, or it risks a shutdown of nonessential functions. It also needs to raise the debt ceiling by early October to prevent a potential default.

****SD: The point: bond markets concerned about the debt ceiling but SPX term structure shows no kink around the end of September/early October. Related – Goldman lowers chances of U.S. government shutdown to 15 percent

Exchanges and Clearing

CBOE Holdings Volume Report August 2017
CBOE Holdings, Inc. today reported August monthly trading volume and average revenue per contract (RPC)/net revenue capture data at

****SD: Above is a link to the PDF with the relevant charts.

CME Group Reached Average Daily Volume of 16 Million Contracts in August 2017, up 16 Percent from August 2016
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that August 2017 average daily volume (ADV) reached 16 million contracts, up 16 percent compared with August 2016. CME Group August 2017 options volume averaged 3.1 million contracts per day, up 30 percent versus August 2016, with electronic options averaging 2.2 million contracts per day, up 51 percent over the same period last year. Open interest at the end of August was 119 million contracts, up 13 percent from the end of August 2016.

BOX Files for Floor Fee
Rob Daly – Traders News
The BOX Options Exchange has filed a request with the US Securities and Exchange Commission to establish a $1,500 per month booth fee for its recently open-outcry trading floor.

****SD: More details about the announcement from last week.

Nasdaq says August U.S equity options volume were 134 million contracts
Nasdaq Inc says august 2017 U.S. equity options volume were 134 million contracts versus 114 million contracts last year??

Intercontinental Exchange Reports August Statistics: ICE ADV up 12% y/y Driven by Energy ADV up 17% y/y and Interest Rates ADV up 14% y/y; Open Interest up 13% y/y
Intercontinental Exchange
Intercontinental Exchange, Inc., a leading operator of global exchanges and clearing houses and provider of data and listings services, today reported August 2017 trading volume and related revenue statistics, which can be viewed on the company’s investor relations website at in the Monthly Statistics Tracking spreadsheet.

Gold options trading to kick off before Diwali; technical glitch sorted: MCX
Economic Times
MCX on Wednesday said it would launch trading in gold options between October 5 and October 15 (before Diwali).


Fischer to Step Down in Mid-October as Fed Vacancies Mount
Christopher Condon and Craig Torres – Bloomberg
Federal Reserve Vice Chairman Stanley Fischer has resigned effective in mid-October, giving President Donald Trump scope to start reshaping the leadership of the U.S. central bank sooner than expected and clouding the longer-term outlook for monetary policy.

Intercontinental Exchange Announces Stuart Williams to become President of ICE Futures Europe; Finbarr Hutcheson Named President of ICE Clear Europe and Timothy J. Bowler President of ICE Benchmark Administration
Intercontinental Exchange
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced that Stuart Williams has been appointed as President of ICE Futures Europe and Timothy J. Bowler has been appointed President of ICE Benchmark Administration (IBA), both effective October 2017. Williams will assume the role following David Peniket’s retirement, and Bowler will succeed Finbarr Hutcheson, who will succeed Paul Swann following his retirement.

Citi taps Morgan Stanley for futures clearing and collateral sales head; Jason Massey worked as an executive director for listed derivatives sales at Morgan Stanley for more than seven years.
Hayley McDowell – The Trade
One of Morgan Stanley’s senior European listed derivatives salespeople has departed for a role at Citigroup, according to an internal memo seen by The TRADE.

Regulation & Enforcement

SEC chief says cyber crime risks are substantial, systemic
John McCrank – Reuters
Regulators must do more to help mom-and-pop investors better understand the potential risks posed by cyber crime and new technologies used to commit fraud, U.S. Securities and Exchange Commission Chairman Jay Clayton said on Tuesday.

Ex-Morgan Stanley Broker Pleads Not Guilty to Insider Trades
Erik Larson – Bloomberg
Michael Siva is one of seven charged in wide-ranging scheme; Details of pending deals were passed in notes and phone calls
A longtime Morgan Stanley broker and financial adviser pleaded not guilty to trading on secret tips about pending mergers and acquisitions leaked by a Bank of America Corp. consultant.


Sterling Trading Tech Successfully Deploys New Real-Time Risk Solution For Portfolio Margin And Volatility Shocks
terling Trading Tech (STT) announced today the first deployment of its new real-time risk solution, the Sterling Risk Engine, to Prophecy Asset Management.

Redline Trading gets ASX approval for order execution gateway
Redline Trading Solutions, the premier provider of high-performance market data and order execution systems for automated trading, today announced certification of its Order Execution Gateway solution by the Australian exchange, ASX.

MexDer Launches New Alternative Order Routing in Equinix NY Data Center
Finance Magnates
The Mexican Derivatives Exchange (MexDer), a subsidiary of the Mexican Stock Exchange (BMV Group), today deployed the second stage of its Point-of-Presence (POP) in the Equinix NY5 data center, which offers the possibility of sending orders directly via a dedicated link from New Jersey to MexDer.


When the hedge is worse than the thing being hedged
The Reformed Broker
Any additional comment here might be superfluous because the stories I’m about to share speak for themselves.
Convincing yourself that you need a perfect answer for market outcomes with a probability of under 5% of occurring is a recipe for sloppy portfolios and big losses. Take a look for yourself…

****SD: Brown’s response to the WSJ story we had yesterday – A Decade After Crisis, Investors Have Stopped Hunting for Black Swans. He did get a laugh out of me when I read this line – “Permabear funds and Black Swan funds have their place in a portfolio, as long as that portfolio isn’t mine or anyone’s I care about.”

Scared of Kim? China’s Yuan May Be Investors’ Unlikely New Haven
Enda Curran and Justina Lee – Bloomberg
Two years after Chinese policy makers devalued the yuan, an act that torpedoed global markets, traders are starting to view the currency as a sure bet.

ETF Topper: The VIX Gets a Bump
Crystal Kim – Barron’s
The Dow Jones Industrial Average and the S&P 500 settled lower on Tuesday. Meanwhile, the CBOE Volatility Index or the VIX got a little bump to above 12.

The Bearish Implications Of Implied Correlations
Topdown Charts – Seeking Alpha
The implied correlation index by CBOE shares some similarities with the VIX and other S&P500 derivative indexes (VVIX, SKEW).
But the main similarity is its use as a market timing indicator.
At present implied correlations are low, and that can be a bearish warning sign of a short-term peak.

What are surging industrial metal prices telling us?
Andy Home – Reuters
Copper hit a three-year high of $6,970 per tonne on the London Metal Exchange (LME) on Tuesday morning.
Aluminium is faring even better, trading above $2,100 per tonne for the first time since 2013.

****SD: “Simple market mechanics, the forced covering of short positions on both futures and options, explain some of the ferocity of the recent moves… But this largely unexpected metals rally is also pointing to a shift in market narrative from the specific to the general in terms of demand and supply.”


Lots of Liquidity Isn’t Always Better
Noah Smith – Bloomberg
When you ask someone in the financial industry how his job creates value, he’ll often answer that it enhances liquidity. Why are high-frequency trading and other forms of algorithmic trading good for markets? Liquidity, we’re told. What’s the potential harm from the Volcker Rule, which prohibits banks from engaging in proprietary trading? It could decrease liquidity. There are endless academic finance papers discussing policies to improve liquidity.

****SD: The venerable establishment that is Ceres Cafe disagrees.


Hurricane Irma: The orange juice market is going crazy ahead of the storm
Leslie Shaffer – CNBC
Frozen concentrated orange juice futures, the contract made famous in the 1983 Eddie Murphy movie “Trading Places,” spiked higher on Tuesday as Hurricane Irma bore down on Florida.

****SD: Keep in mind that FCOJ market is still nowhere near its highs from November 2016 when Brazilian and US production concerns combined with disease – citrus greening – propelled the breakfast staple to some $2.20 a pound.

Equity derivatives house of the year: Societe Generale
When it comes to equity derivatives in Asia, content is king. Societe Generale (SG) stood out from the crowd this year by developing unique twists on popular products that both delighted investors and helped the issuer diversify its own risk profile.

****SD: Risk has all of its Structured Products Asia Awards stories out today — look at the rest here.

VM Big Bang – Impact on FX Markets
Clarus Financial Technology
We last looked at the impact of the VM Big Bang at the beginning of March. Despite all the doom-mongers predicting a sudden cessation of activity in bilateral derivatives, Tod found no real change in activity.
As the WSJ report, the period of forbearance issued by the CFTC (No-Action Letter 17-11) has now expired as of 1st September. But it is also worth bearing in mind that counterparties who did not manage to renegotiate CSAs did not necessarily have the CFTC/Fed as their lead regulator. Instead, they had to rely on the (somewhat wooly) leniency offered to them by European regulators. Not a great position to be in.

****SD: Swaptions make an appearance.

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Seeing red: tricky times in the markets

Seeing red: tricky times in the markets

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