VIX Isn’t Broke; CAT Privacy Bill; WMDs for next crash

May 9, 2018

VIX Isn’t Broke; CAT Privacy Bill; WMDs for next crash

May 9, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

The State of Options Market Making in One Image; Happy 45th Anniversary of the Black Scholes Formula
(Click for larger image)

At the Options Industry Conference in Amelia Island, Fla., Trade Alert President Henry Schwartz gave his annual “State of the Industry” presentation. The presentation is always chock full of great graphs and information – the word cloud image above is always a favorite.

In the picture, liquidity providers are sized according to their industry presence – the bigger the firm’s book, the bigger its name appears. Schwartz said Susquehanna is not sized to the same scale as the rest because if it were, it would take up too much of the image’s space.

We’ll be including some of his other slides in the days to come.

Also, on this day in history, the Black-Scholes options pricing formula was published (trivia courtesy of John Nelson, president and founder of The Applied Research Company).

Interesting phenomenon pointed out on social media – the four Cboe Eurekahedge volatility hedge fund indexes are all down year-to-date. Relative value volatility is down 1.57 percent YTD; long volatility is down 2.78 percent YTD; short volatility is down 5.40 percent; and tail risk is down 2 percent YTD.

Last but not least, the VIX fell into the 13 handle today.

Lead Stories

The VIX is Not Broken
Euan Sinclair – Highly Evolved Vol
On April the 24th, the Wall Street Journal ran a story detailing the huge move of the VIX index in the opening 30 minutes of trading on the previous Wednesday. The VIX spiked up 12% in 30 minutes despite the underlying S&P 500 index not moving much at all. To put this 12% move into perspective, the current expected move in a 30-minute period is less than 2%. In addition to being a large move, the timing was suspicious. It was during this period that the settlement price for the April VIX futures was calculated. Anyone holding a long futures position would have benefited greatly, at the expense of the shorts.

House Advances CAT Privacy Bill
Rob Daly – MarketsMedia
On Monday the Financial Services Committee of the US House of Representatives made HR 4785: The American Customer Information Protection Act available for consideration on the House floor.

WMD Old and New Primed for Next Financial Crisis
Satyajit Das – Bloomberg View
Innovative financial instruments contribute to every financial crisis.
Portfolio insurance, the practice of using dynamic hedging to limit losses, played a big part in the 1987 crash. High-yield and emerging-market debt, leveraged private-equity transactions, and hedge funds have all had central roles in upheavals, as have securitization, including CDOs, and various derivatives.

The Most Valuable Formula Ever Created
Motley Fool
The Black-Scholes option-pricing model, first published in 1973 in a paper titled “The Pricing of Options and Corporate Liabilities,” was delivered in complete form for publication to The Journal of Political Economy on May 9, 1972.

****SD: Other “on this day” facts mentioned in the article – the rebranding of Pacific Aero Products as Boeing Airplane Company and Eisenhower signing the Bank Holding Company Act into law.

US Futures and Options-on-Futures Markets Kick Off 2018 With a Bang
Tom Lehrkinder – TABB Forum
With volatility returning to the marketplace and investors looking to manage their risk, US futures and options-on-futures volumes got off to a torrid start in 2018. Futures volume surged to record levels in Q1 2018, projecting to easily surpass 4 billion contracts for the full year. Meanwhile, the number of FCMs fell to 62 at the end of February, due to consolidation rather than contraction.

****SD: Missed this when we were down at OIC.

World Federation of Exchanges Responds to IOSCO’s Consultation on Volatility Control Mechanisms
The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has responded to IOSCO’s Consultation Report on ‘Mechanisms used by trading venues to manage extreme volatility and preserve orderly trading’.

Emerging-Market Currencies Say Goodbye to 2018 Gain
Yumi Teso – Bloomberg
On the day that a key gauge of currencies in developing economies erased its gains for the year, the voices saying it may be the start of a deeper selloff are growing louder.

Exchanges and Clearing

SGX reports market statistics for April 2018
Market turnover value of structured warrants and DLCs rise 44% year-on-year
Securities – Total Securities market turnover value was at S$26.7 billion, down 4% month-on-month (m-o-m) and up 24% year-on-year
Derivatives – Total Derivatives volume was 15.25 million, down 12% month-on-month (m-o-m) and up 13% year-on-year (y-o-y).

Regulation & Enforcement

Piwowar departure will complicate action on SEC advice rule
Mark Schoeff Jr. – InvestmentNews
When Securities and Exchange Commission member Michael Piwowar departs July 7, it will make the agency’s already heavy lift to promulgate an investment advice reform package even more of a backbreaker.


WH Trading opts for QuantHouse solutions
WH Trading, the Chicago-based firm, trading the futures and options market across the US, Europe and Asian markets, is using QuantLINK, QuantHouse’s ultra-low latency, fully redundant 40G network to enable market access and delivery of market data at low latency speeds.


Bloomberg chooses Amsterdam as EU trading hub
Philip Stafford – FT
Bloomberg has chosen Amsterdam as the base for its trading operations in the European Union, to give it access to EU markets after Britain leaves the 27-country bloc next year.

Impatient Investors Get Caught in the ‘Return Gap’
Derek Horstmeyer – WSJ
Most investors think of themselves as rational and immune from the behavioral elements that periodically roil markets. Human factors, however, do continue to affect our personal portfolio decisions—usually to the detriment of our long-run returns.

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