VIX ETP concerns; Correlation issues; Market catalysts

Sep 27, 2017

Observations & Insight

The FT warns advertisers after discovering high levels of domain spoofing
Jessica Davies – Digiday
The Financial Times has investigated the scale of domain spoofing occurring against its site, and has been shocked by the results.
The publisher has found display ads against inventory masquerading as on 10 separate ad exchanges and video ads on 15 exchanges, even though the FT doesn’t even sell video ads programmatically, with 300 accounts selling inventory purporting to be the FT’s. The scale of the fraud uncovered is vast — the equivalent of one month’s supply of bona fide video inventory was fraudulently appearing in a single day. The FT has estimated the value of the fraudulent inventory to be GBP1 million ($1.3 million) a month.

****SD: Check out this different type of spoofing.

Here was my comment about related webpage shadiness in this morning’s JLN – “It was revealed that someone got under the hood of Showtime’s web properties and inserted some code that used viewers’ browser’s processing power to mine the cryptocurrency Monero. Clever. Sometimes the software used ‘as much as 60 per cent of CPU capacity on computers visiting the sites.’ If web users were notified such code was being deployed to make money for the site, could this be a new way for companies to replace ad revenue from their properties? The Pirate Bay (obviously a less-than legitimate example) already tried it.”

In today’s JLN Options newsletter, there is a funky binary options story in regulation that carries on the shadiness as well as lots of questions raised in a Bloomberg story about cryptocurrency CFDs in our lead section. Readers, insert a shades of grey joke here. It’s a brave new world.

For more on cybersecurity and finance, see this week’s JLN feature – Cybersecurity is very, very tough: How a SIFMU’s cyber chief sees the threat.

Lead Stories

Big Money In Inverse VIX ETFs Is Cause For Concern
ETF Daily News
From Tyler Durden: Last week, ahead of the FOMC, we reported that in the latest striking development involving volatility derivative products, the total outstanding Vega across the entire levered and inverse VIX ETP space had reached $375 million, an all time high.

****SD: This way, you don’t have to go to Zero Hedge to read a pertinent options story from Zero Hedge. (I do like how the article refers to the anonymous “Tyler Durden” byline – as though the crazy alter-ego of Chuck Palahniuk’s timeless creation was super well-versed in high level analysis of options Greeks…)

There Are No Bad Securities, Only Bad Correlations
Dean Curnutt – Bloomberg
Diversification is at the heart of prudent risk management. Since no two securities move perfectly in tandem, an investor can mitigate volatility by gaining exposure to a variety of securities and asset classes. Today’s markets, characterized by pricey assets and extremely low volatility, provide little margin for error and require investors to think carefully about not just security selection but also about how portfolio components interact with one another.

****SD: Soooo, delta hedge?

Buckle up: there are more than 200 stock catalysts left in 2017
Ryan Vlastelica – MarketWatch
The U.S. stock market may have seemed devoid of action lately, with the historically weak month of September instead emerging as one of the quietest periods in history, but don’t worry: there will be plenty of events that could drive markets over the remainder of the year.

****SD: But lots of this year’s catalysts have proven not to matter one bit overall. Three attempts to totally revamp one sixth of the U.S. economy (health care), tax reform, North Korea, Fed balance sheet unwind (or insert another central bank and its corresponding baggage), debt ceiling concerns, etc, etc. And here we are – up, up, up.

Is Equity Market Volatility Due For A Comeback?
John Q. Frank – Invesco Blog
Equity market volatility has been remarkably low in recent years, which has corresponded to strong large-company equity performance — particularly for the Nasdaq-100 Index and the S&P 500 Index. This has led some market observers to wonder whether we’re due for a correction of sorts in volatility, much as stocks might correct after a bull market. Barring major geopolitical disruptions, I don’t see evidence that this will be the case.

Asset manager warns of a ‘devastating’ unwind in market volatility
Ryan Browne – CNBC
A reversal of recent low volatility in markets, paired with a rethink by global investors on the attractiveness of stocks, could have “devastating” effects, according to Gina Sanchez, CEO of Chantico Global.

The best explanation yet for why financial markets are so calm is good news for the global economy
David Scutt – Business Insider
Financial markets are quiet nowadays. Some may even say they’re boring.

****SD: A breakdown of HSBC’s global multi-asset strategy team’s theory.

Trump Tax Cut Odds Start to Make Waves Again in the Stock Market
Amid FANG flu and another trash rally, a trade tied to Donald Trump has come quietly back into vogue with U.S. equity investors.

****SD: For more info on the plan see Bloomberg’s GOP Tax Plan Will Set Up Fight Over Top Earners’ Rate and Axios has a summary PDF of the plan HERE.

This Trader Made 295% on Cryptocurrency Derivatives
Edward Robinson – Bloomberg
Jay Smith has little doubt the cryptocurrency market will crash.
The price of bitcoin has increased sixfold in the past year, despite a 25 percent plunge this month triggered by China’s crackdown on digital tokens. Not a week goes by without startups launching new ones to fund everything from dentistry to Las Vegas strip clubs. Even Paris Hilton is tweeting to her 16 million followers about her cryptocurrency investments. If that isn’t a jump-the-shark-moment, what is?

****SD: A CFD story but worth the read, if only for content like this: “‘I just put in an order for a Tesla, and I don’t even know how to drive,’ said the 29-year-old Briton.” So much weirdness in this tale. My takeaway is pretty much, “what the…?”

Exchanges and Clearing

CBOE’s Catherine Clay Talks Fintech, Bitcoin And Volatility
At CBOE, clients can shop for data much like they’d shop on, Inc.
It’s a revolution in how the options market manages data, and it comes thanks to the fintech platform CBOE LiveVol Data Shop, said Catherine Clay, VP, CBOE’s global head of information solutions.
“Prior to Data Shop, the way people bought data was the fire hose approach,” said Clay, who’s speaking at the Benzinga Fintech Summit Thursday, Sept. 28.

Bitcoin Futures Fail to Get Traction on Biggest Exchange for Now
Brian Louis – Bloomberg
‘Bitcoin is very nascent right now,’ CME president says; CME is ceding territory to crosstown Chicago rival CBOE
When CME Group Inc. introduced a bitcoin price index last year, it looked like the world’s biggest exchange owner was taking an initial step toward creating futures on the digital currency.
It just dashed those hopes.

****SD: Or as El Financiero puts it, “Futuros de bitcoin no convencen al CME.”

Introduction of Flexible Options
Osaka Exchange, Inc. (OSE) will introduce Flexible Contract Months for security options trading and index options trading as a new listed options trading method, which allows flexible setting of exercise dates and strike prices.

BME Creates IBEX 35 Options-Based Strategy And Volatility Index Series
BME has created a series of indices based on IBEX 35 options that complete the IBEX index family. The main objective of these new indices is to measure the implied volatility of the market and offer certain investment strategies based on derivative products.

CME Group Inc. Announces Third-Quarter 2017 Earnings Release, Conference Call
PRNewswire via Markets Insider
CME Group Inc. will announce earnings for the third quarter of 2017 before the markets open on Thursday, October 26, 2017.

SGX Named Derivatives Exchange Of The Year
Singapore Exchange (SGX) has once again been named “Derivatives Exchange of the Year” at this year’s Asia Risk Awards held last night in Singapore. The awards recognise excellence in derivatives trading and risk management in Asia and this is the fourth year that SGX has been awarded this title.

****SD: From the release – “SGX holds a 90% share of the offshore iron ore and a 99% market share of the rapidly growing seaborne coking coal market. SGX recently enhanced its offering with the launch of coking coal options.” Think SGX is p.o.’d about that 1 percent of the market they don’t have in seaborne coking coal? Hah!

New Daily Volume Record of 2.61 Million for VIX Options, as Investors Engage in Hedging and in Short VIX Futures
Matt Moran – VIX Views
On September 25th a new daily volume record of 2.61 million contracts was set for options on the CBOE Volatility Index (VIX), as the VIX Index rose 6.5% to close at 10.21 that day.

****SD: Recap of Monday’s action in case you missed the news. One takeaway not mentioned in some of the other coverage pertains to the volatility of volatility (a chart accompanies): “Over the past decade, the average daily closing values were 87.7 for the VVIX Index and 20.4 for the VIX Index. However, more recently, (as shown in the chart below), from August 25 through September 25, the average daily closing values were 11.3 for the VIX Index and 96.8 for the VVIX Index.”

ICE Futures Europe Announces Record Open Interest in Low Sulphur Gasoil Futures Contract, Surpassing 1 Million Contracts
Intercontinental Exchange
Intercontinental Exchange, a leading operator of global exchanges and clearing houses and provider of data and listing services, today announced that the ICE Low Sulphur Gasoil futures contract achieved a new open interest record of 1,004,645 contracts on 26 September, 2017, surpassing 1 million contracts for the first time. The previous open interest record was 999,264 contracts on 25 September, 2017.

****SD: Lots of different contracts to play with in the ICE gasoil suite, including options.

Hotspot adheres to FX Global Code

Regulation & Enforcement

Defining Systematic Internaliser Under MiFID II
Yaa Asare, JWG – TABB Forum
Even though the EC recently added to the definition of a systematic internaliser to ensure ‘the uniform application of this term and avoid circumvention,’ there is still ambiguity as to how firms will fall into scope under the SI regime. So what defines an SI, and what is an SI obliged to do?

CFTC’s Bowen Concerned U.S. Will Lag EU’s Fast-Trader Rules
Richard Hill – Bloomberg BNA
Outgoing CFTC Commissioner Sharon Bowen said Sept. 25 she is “very concerned” that U.S. rules governing high-frequency derivatives trading will lag behind European regulations.

Regulation has aided not hindered derivatives – report
Jack Ball – Global Investor Group
The international derivatives market is “alive and well because, not in spite, of post-crisis legislation and regulation put in place over the past decade”, according to research by US firm Greenwich Associates.

****SD: The report “accepted the ‘new market structure isn’t perfect.'” Well, I’d sure hope it does! After all, “bank capital requirements … ‘often hurt rather than incentivise more client clearing.'”

U.S., EU fines on banks’ misconduct to top $400 billion by 2020: report
Regulators in the United States and Europe have imposed $342 billion of fines on banks since 2009 for misconduct, including violation of anti-money laundering rules, and that is likely to top $400 billion by 2020, a research report said on Wednesday.

Mifid II is Europe’s chance to recoup ground lost to the US
Anthony Perrotta – FT
An opportunity for Europe to regain ground lost to the US as the gold standard for trading and market oversight is fast approaching.


This pie chart shows how Goldman Sachs is trying to become the Google of Wall Street
Frank Chaparro – Business Insider
It has been well documented that Goldman Sachs is on a mission to become the Google of Wall Street.
And a pie chart in a new report by CB Insights shows the degree to which the bank is trying to become more like a tech company.

****SD: I need to start marketing myself as a tech company. Seems like everybody else is…

Technology development of the year: Fenics
New opportunities are opening up in the foreign exchange options market. Major global banks are pulling back their liquidity provision, leaving space that many local players are eager to occupy. Furthermore, the market is going the way of spot trades and becoming more electronic, enabling those with the technology to offer new and more flexible services. This is where Fenics comes in.

CQG Releases New Functionality And Features, Including Care Orders For Hedge Management
CQG, a leading global provider of high-performance trade routing, market data, and technical analysis tools, announced today a new release of its latest functionality enhancements. This also marks the beginning of a new quarterly release schedule, in addition to CQG’s annual upgrade.


Vol of Vol: Scouting VVIX
tastytrade blog
The current paradigm in volatility trading reads as follows: “Volatility pops slightly, volatility gets hammered. Repeat.”
In the last year, the VIX has risen above its historical average of 19 only once, and that was right around the time of the US Presidential election in 2016. So far in 2017, the VIX hasn’t broken through 19 a single time.

Here’s How to Profit When the Fed Begins to Unwind
Liz McCormick – Bloomberg
Societe Generale SA’s Adam Kurpiel says there is some easy money to be made while the Federal Reserve beings unwinding its balance sheet. Just follow one of the more popular theories in finance, that prices will eventually move back toward the average.

****SD: Yet another appearance of swaptions in the wild!

Impact Of Term Structure On VIX Futures Correlation With Bond Sectors
Berlinda Liu – Seeking Alpha
Recently my colleague wrote about the correlation between VIX (spot and futures) and two credit sectors (high-yield and emerging market bonds). The blog shows that VIX futures exhibit stronger negative correlation than VIX spot and that this stronger negative correlation of bonds to VIX futures than to VIX spot comes mostly from down markets. In this blog, we further explore the asymmetric correlation between VIX futures and those two credit sectors.

Bearish Euro Signals Build as Currency Endures Another Rough Day
Vassilis Karamanis – Bloomberg
The euro’s miserable month may not be over, if trading patterns are anything to go by.
The common currency hit an almost six-week low versus the dollar on Wednesday. While the day’s move may owe more to greenback strength than regional concerns, it follows losses in the wake of the German election and sets the euro up for its first losing month since February.

Traders Run for Cover as Storm Bears Down on South Africa’s Rand
Robert Brand – Bloomberg
Currency’s implied volatility climbs as ANC conference nears; Leadership battle presents two-way risks: Standard Bank
South Africa’s notoriously volatile rand has been sailing into calmer waters in recent months, with price swings narrowing to the lowest level in almost three years. That’s about to change, options pricing suggests.

Risk Aversion Looses Traction with Stubborn SPX and VIX, Dollar Starts Gaining Bite
John Kicklighter – DailyFX
The escalating tension between the US and North Korea poses a serious threat to global stability and financial markets, but it seems traders’ attention is quick to fade unless the fire continues to build. We have not seen any further official remarks from either country or their leaders since North Korea’s Foreign Minister stated that President Trump’s remarks over the weekend (which suggested the Kim Jong-un would not remain leader of his country for much longer) were tantamount to declaring war. The threat of shooting down US bombers straying too close to the belligerent state’s borders still hangs in the air. This is a dangerous situation to grow complacent with, but that is exactly how the markets seem to be positioned – as if nothing could go wrong.


Rise of Crisis Risk Offset Portfolios
RCM Alternatives
There’s a slew of new terminology popping up in papers and on the alternative investment conference circuit of late around portfolios which engage strategy types designed to perform well in a crisis. Of course, this has been the main selling point of managed futures (we cover that in depth on our new website here). But investments are sold, not bought and shoehorning managed futures into the ‘crisis performer’ box hasn’t been selling so well of late. For one, there haven’t been any crisis periods, much less normal volatility levels. And two, many in the managed futures space don’t like to be called crisis performers, feeling that sort of simplifies and belittles the diversified approaches they take.

FANG Sinks Its Teeth Into Main Street; Retirees, Partygoers Latch Onto Internet Stocks
Steven Russolillo and Ben Eisen – WSJ
Finance professor Lily Fang is known in the academic community for her research into the perils of investing in stocks with lots of media hype.
Even so, when she saw a barrage of attention paid to a tech-stock acronym that matched her surname, she couldn’t resist.

****SD: This on the heels of ICE’s announcement of a FANG based futures offering yesterday.

Must be the mountain air: yet again, Swiss have world’s most competitive economy
Tom Miles and Marina Depetris – Reuters
Switzerland is the world’s most competitive economy for a ninth straight year, the Geneva-based World Economic Forum said on Wednesday.

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