Vivendi tussles with Elliott over equity derivatives; Vol markets ignoring recession risk

Feb 21, 2019

Observations & Insight

Finance v physics: even ‘flash boys’ can’t go faster than light
Gillian Tett yesterday – Financial Times (SUBSCRIPTION)
Five years ago, the author Michael Lewis achieved a remarkable feat: his book Flash Boys made the arcane world of high-frequency trading sound thrillingly exciting, as he described finance houses’ efforts to whizz data ever faster between Chicago and New York in a battle to grab a millisecond edge over each other.
It was head-spinning stuff — not least because those millisecond margins were what enabled the traders to make profits.

****SD: I wouldn’t call myself a fan of this piece (and not just because it features yet another Mike Lewis lede…).

Consider the line “…if nothing else, these antics show that we no longer live with a financial system that most of us understand.” Did retail traders in 1985 fully understand what was happening in a pit? Did the peasants of the Greek countryside understand how the philosopher Thales made a fortune during a 6th century B.C. olive harvest? Were Japanese consumers aware of rice futures trading on the Dojima Exchange in the 1700s?

The underlying thread of Tett’s piece implies that all of this is nefarious. True, HFT activities can be opaque and market makers are notoriously secretive, but there is no mention of the other side — doesn’t Joe Mainstreet gets better fills on his 10 shares of Apple than he did 20 years ago? I’d actually recommend reading the comment section – some of that gets discussed.

Anywho, a Meanderful blog last summer, appropriately titled “Negative Latency,” contained a line the FT story brought to mind – “The impossible made other people millions of dollars over the years when my team and I gave them negative latency. But you said [negative latency] was impossible? The fun stuff always is.”

(I will give Tett credit for actually giving a shout out to the Sniper in Mahwah & Friends blog rather than vaguely citing “a ham-radio enthusiast,” unlike a certain publication *cough* Bloomberg *cough* back when the Chicagoland microwave developments came to light.)

Lead Stories

Vivendi locks horns with Elliott over equity derivatives; French group and US hedge fund both built stakes in Telecom Italia through “collars”
Robert Smith – Financial Times (SUBSCRIPTION)
Vivendi used equity derivatives to build its stake in Telecom Italia — even though the French conglomerate has lambasted a US hedge fund for using the same technique to amass a rival position in Italy’s largest telecoms company.
Vivendi and Elliott Management have been locked in a bitter struggle over Telecom Italia, after Elliott built a near 9 per cent stake and wrested control of the board from 24 per cent shareholder Vivendi in May last year.

****SD: Ahh, looks like Vivendi’s glass house has some cracked window panes due to rock throwing. Hard not to find this argument about the intent of a collar strategy amusing. Vivendi takes the stance that to be a shareholder, you must be exposed to a company’s downside so that your interests in the company’s success are not conflicted by the prospect of making money in times of trouble. So Elliott, by virtue of hedging its exposure, does not fit this noble shareholder mold, which kind of makes it seem like Vivendi just said, “hedging is bad.” It’s one thing to go after Elliott for its Argentinian activities, but this?

Shades of 2007 as Volatility Markets Ignore U.S. Recession Risk
Luke Kawa – Bloomberg (SUBSCRIPTION)
Wide gap between 1-year recession risk and implied volatility; Spread between 1-year and 3-month vol to widen: Wells Fargo
The renewed rally in U.S. equities has left volatility markets showing little concern that the good times will end any time soon. Recession models beg to differ.
Wells Fargo’s model — which draws on the spread between three-month and 10-year Treasury yields as well as economic figures — shows chances of a U.S. recession within 12 months jumped in December and climbed to just above 40 percent in January.

****SD: History doesn’t repeat, but it does rhyme, as they say. So, let’s just call our next financial crisis “The Great Purple Orange” and never have to worry about it again.

Going Full Rorschach: Estimating the Short Side of Virtu’s* Book
Paul Rowady – Alphacution Research Conservatory
Apparently, there is this parallel universe wherein traders and asset managers are able to take each subsequent risk with the benefit of perfect information because there seems to be some implication in our feedback loop that relying on partial or even incomplete fragments of information is not worth the effort.

****SD: Also on Alphacution – Millennium Management’s Book: Hiding in Plain Sight (Teaser #1)

SocGen Quant Shows Why You Should Short Vol When Growth Goes Bad
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Betting against market volatility in the grip of an economic slowdown looks like the road to ruin. But as global recession fears break out, here’s a reminder that bullish trades in bearish markets can pay off handsomely.
Selling volatility across stocks, fixed income and currencies has consistently delivered positive returns when the economy goes south, according to Societe Generale SA quant Olivier Daviaud.

Morgan Stanley Wealth Says Markets Too Complacent About Trade
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Markets may be too optimistic about the U.S.-China trade dispute, according to Morgan Stanley Wealth Management.
The implied volatility of some assets that should be highly affected by trade news has been declining even as a further deterioration in the negotiations remains a risk, strategists including Scott Helfstein wrote in a note Tuesday.

Extinction of Bond Vigilantes Spurs Risk Bulls Around the World
Luke Kawa and Justina Lee – Bloomberg (SUBSCRIPTION)
Deep in the underbelly of the nearly $16 trillion Treasury market, you’ll find the secret behind the rally sweeping risk assets across the globe.
It’s opaque, notoriously hard to measure and right now it means everything for markets.
Known as the term premium, the compensation investors demand to hold long-term government bonds over short-term debt has fallen close to levels last seen in the Brexit bloodbath of 2016 — when fierce haven demand sent U.S. Treasury yields to record lows.

****SD: “To cap it off, the implied volatility of U.S. Treasuries, across the curve and at the 10-year tenor in particular, are close to record lows — crimping cross-asset price swings.”

Barclays: Head-Spinning Volatility In Oil Will End
Nick Cunningham –
Two separate reports from major investment banks over the past week put forward this argument. Bank of America Merrill Lynch predicts that medium-term oil prices will be “anchored” around $60 per barrel, explored in an article a few days ago. Barclays added its voice, largely coming to a similar conclusion.
The prediction of lower volatility may come as a surprise since the oil market is still reeling from the wild swings in 2018. As recently as the fourth quarter, Brent jumped to nearly $90 per barrel only to crash to around $50 per barrel in a matter of weeks.

Exchanges and Clearing

SPIKES Options Launched on MIAX; MIAX Options Executes Strategy to Transform Market as First True Competitor in Volatility Space
…Citadel Securities is the specialist in SPIKES, serving as the Primary Lead Market Maker, providing two-sided liquidity in all SPIKES options.

****SD: I saw a contract cross the tape yesterday – doesn’t look like there is any activity yet today though.

The role of CCPs in evolving market structures (part I)
Eurex Exchange
…Post-crisis measures have made banks much safer by stepping up equity capital requirements and introducing new rules on liquidity management, with rather crude backstop measures such as leverage ratio. Even though banks are much more stable today, it is interesting to give some thought to what makes CCPs in particular so attractive as additional risk-mitigating mechanisms.

IEX commercial mocks the high cost of exchange fees
Dan DeFrancesco – Business Insider
Wall Street firms are known for filing detailed comment letters and publishing lengthy white papers when voicing their opinion on complex market issues. But in today’s day and age, sometimes the best way to get your point across is an infomercial.
That’s the latest approach IEX has taken in its ongoing fight over exchange fees. The lone independent stock exchange published a video on its YouTube page mocking the fees some of its competitors charge to access the markets they run.

****SD: Watch the commercial here. It’s no OxiClean, but it’s a pretty good infomercial. “If you call in the next 10 minutes [the cable] can be yours – not for $100, not for $75 – we’re talking recurring monthly payments of $19,999.95 – and that’s before you make a single trade.”


A star trader and US head of equity derivatives just quit Bank of America Merrill Lynch after less than 2 years at the bank
Alex Morrell – Business Insider Prime (SUBSCRIPTION)
A 35-year-old stock-trading star and head of equity derivatives in the Americas has quit Bank of America Merrill Lynch after a year and a half at the firm.
William “Bill” Hillegass ditched Barclays to run equity derivatives in the US for Bank of America in August 2017, but now he’s leaving the bank to join a top buy-side firm, according to people familiar with the matter.

Regulation & Enforcement

EU, Singapore Agree to Mutually Recognise Derivatives Trading Venues
Regulation Asia
The European Commission and the MAS (Monetary Authority of Singapore) have agreed on a common approach for EU and Singapore derivatives trading venues.


Graystone Asset Management Partners with Trading Technologies to Utilize TT’s New Infrastructure-as-a-Service (IaaS) Solution for Low-Latency Connectivity to Global Exchanges
Trading Technologies
Trading Technologies International, Inc. (TT), a global provider of high-performance professional trading software, today announced that Graystone Asset Management Ltd, an investment management and advisory firm, has contracted with Trading Technologies to secure ultra-low-latency connectivity to leading exchanges through TT’s new Infrastructure-as-a-Service (IaaS) solution. With this offering, Graystone Asset Management will leverage TT’s existing colocation facilities and deterministic fiber network to participate in international derivatives and cryptocurrency markets.

Bloomberg is diving in to the booming alternative-data field with a new product that’ll help the market become mainstream
Bradley Saacks and Dan DeFrancesco – Business Insider Prime (SUBSCRIPTION)
Alternative data is about to be normalized.
Bloomberg LP is the latest mainstream financial company to wade in to the once obscure alternative-data field with a new product that will give clients access to data from more than 20 niche firms.
The datasets will be immediately available, according to a release expected later Thursday from Bloomberg, and will include data such as stats on drug approvals, retail foot traffic tracked through cellphones, and construction permits.

****SD: Included is info from Predata, Hazem Dawani’s new firm. We caught up with Hazem at FIA Expo – here’s that video.

Wall Street Horizon, Lucena Research Ink Alt Data Deal
Lucena Research, a leader in predictive analytics for financial markets, and Wall Street Horizon, the leading provider of corporate earnings and events data to institutional investors, announced today that they are bringing to market new combined offerings in the form of actionable signals for investment. Lucena’s Data Analytics Suite hosts a collection of carefully vetted elite data sets ready for consumption by investment professionals. Wall Street Horizon’s signals have been validated by Lucena’s artificial intelligence engine and are now available for assessment and consumption through validation reports, backtest simulations, model portfolios, and smart data feeds.


Options Strategies for an Aging Bull Market
Steven M. Sears – Barron’s (SUBSCRIPTION)
The hand of history rests heavily upon this market. If nothing happens to disrupt recent trends, some significant records will soon be set.
On March 6, this will become the second-longest bull market in history on an intraday basis, and on March 9, on a closing basis, according to Yardeni Research.


Cboe Global Markets to Present at the KBW Symposium on Thursday, February 28
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, announced today that Ed Tilly, Chairman, President and CEO, will present at the KBW Cards, Payments and Financial Technology Symposium on Thursday, February 28, at 1:30 p.m. (Eastern Time).


Fed Prepares to End Balance-Sheet Runoff Later This Year
Nick Timiraos – WSJ (SUBSCRIPTION)
Most Federal Reserve officials last month indicated they were ready to stop shrinking the central bank’s $4 trillion asset portfolio this year and believed an action plan should be released soon.

A $3 trillion tsunami is about to flood the stock market, warns fund manager
Shawn Langlois – MarketWatch
Will Nasgovitz, who oversees about $1.3 billion in assets as the chief executive of Heartland Advisors, isn’t calling for a “full-blown financial crisis,” but, with trillions in corporate debt coming due in the coming years, the industry veteran’s not exactly predicting smooth sailing in the stock market, either.

****SD: TL;DR – 48 percent of all outstanding commercial debt is due by 2023.

Traders Who Bet on the Weather Believe in Climate Change
Matthew C. Klein – Barron’s (SUBSCRIPTION)
Not all readers appreciated last week’s column on the financial and economic implications of climate change, which was based on the National Climate Assessment published in November. Critics disputed the U.S. government’s claim that emissions of carbon dioxide, methane, and other greenhouse gases into the atmosphere are causing the world’s temperatures to increase.
As a consequence, they also disagreed with the conclusion that these emissions would need to drop rapidly within the next few decades to prevent unacceptable risks to the habitability of the earth’s surface by the end of the century.

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