VIX Quirk Caused by Liquidity Shortage, Not Rigging, Cboe Says

May 4, 2018

Observations & Insight

SIX Turns 10: SIX’s Urs Rüegsegger Says the Vertical Model and Interoperability Works

Ten years ago, SIX Group was formed in a merger between SWX Group, Telekurs Group and SIS Group, creating a new vertical business model. Urs Rüegsegger, chairman of SIX Swiss Exchange, helped lead that transition and growth as CEO of the exchange for nine years before stepping down last December. JLN’s Jim Kharouf sat down with Rüegsegger at the WFE’s IOMA Conference in Chicago to talk about how SIX and its clearing business has grown over the past decade.

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Lead Stories

VIX Quirk Caused by Liquidity Shortage, Not Rigging, Cboe Says
Brian Louis – Bloomberg
Cboe Global Markets Inc. says not enough traders participated in the eye-catching April 18 VIX futures auction, meaning an innocent explanation — not manipulation — explains the events of that day.
“We want to be clear that we were disappointed with the 18th, and we saw it as a liquidity challenge and nothing more,” Cboe President Chris Concannon said during an earnings call on Friday.

VIX Faces Probes With Controversial Auction at Issue
Matt Robinson and Nick Baker – Bloomberg
Allegations that Cboe Global Markets Inc.’s widely used VIX benchmark is being manipulated have drawn attention from regulators.
The nation’s top two markets watchdogs — the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission — opened investigations into the gauge of stock market volatility, according to people familiar with the matter.

Cboe tweaks VIX auction process as profit exceeds estimates
John McCrank and Nikhil Subba – Reuters
Cboe Global Markets Inc said on Friday it was making changes to the auction process for its Volatility Index (VIX), known as Wall Street’s fear gauge, which helped drive the exchange operator to record earnings in the latest quarter.
Billions of dollars in derivatives products are tied to the Cboe’s VIX, which measures the expected 30-day volatility conveyed by benchmark S&P 500 options prices at a monthly auction. But some in the market say a flaw in the calculation of the VIX allows trading firms to manipulate the index by posting quotes for S&P 500 options without actually trading, leading to imbalances and oversized moves right at settlement.

VIX Probes Are Latest Gut Check for Volatility Traders
Elena Popina, Nick Baker, and Matt Robinson – Bloomberg
The world got a stomach-churning lesson in the risks of trading volatility after the VIX swung wildly in February.
Now, traders are experiencing another gut check as market regulators look into allegations that the index is being rigged.

Exchanges and Clearing

Cboe’s ‘Best Quarter Ever’ Doesn’t Impress Investors
Chelsey Dulaney – WSJ
Cboe Global Markets shares slipped on Friday after the exchange operator reported that first-quarter revenue and profit surged but failed to satisfy investors.
The stock fell 1.8% to $103.58 in mid-morning trading, bringing the decline for the year to 17%.

Cboe Global Markets Reports Record Results for First Quarter 2018 and Raises Run-rate Expense Synergy Target to $85 Million
First Quarter Highlights
– First Quarter Diluted EPS of $1.04
– Adjusted Diluted EPS of $1.381, up 47 Percent
– Net Revenue of $328.5 Million, up 70 Percent, Reflects the Bats Acquisition
– Net Revenue increased 24 Percent for First Quarter Compared to Adjusted Combined Net Revenue for Prior – Year Period1
– Organic Net Revenue Increased 28 Percent for the Quarter 1,2
– Set New Quarterly Highs for Total Options, Futures and FX Volume
– Established New Quarterly Volume Highs in VIX Futures, VIX Options and SPX Options
– Run – rate Expense Synergy Target Increased to $85 Million, up $20 Million; Expect to Reach a Year Ahead of Initial Plan

Regulation & Enforcement

India’s market regulator allows extension of equity derivatives trading hours
India’s market regulator on Friday widened the window for trading equity derivatives in a move that will allow stock exchanges to offer Indian equity derivatives for nearly 14 hours a day.
The Securities and Exchange Board of India (SEBI) said it had decided to permit stock exchanges to set their trading hours for equity derivatives from 9 am (0330 GMT) to 11:55 pm.
Currently, SEBI allows trading in equity derivatives between 9 am (0330 GMT) and 5 pm. Exchanges, however, trade only till 3:30 pm.


Volatility Strikes Back
Seeking Alpha
The bouts of volatility in early February and late March that spooked investors were confined to equity markets. Nevertheless, they illustrate the potential for sudden market moves to expose fragilities in the financial system more broadly.
With central banks in advanced economies set to normalize their monetary policies just as trade and geopolitical tensions flare up, economic and policy uncertainty may rise and financial conditions may tighten abruptly.
All this could lead to a period of renewed volatility.

I SPY a Triangle in the S&P 500, or Do I?
Helene Meisler – TheStreet
That was one heckuva reversal Thursday, wasn’t it? There was a time when such a reversal would have taken all the major indices to green and stayed there. Now all the oversold condition manages to do is keep us from breaking down.
In case you’re wondering, that is the reason I believe this market isn’t breaking down just yet: the oversold condition. Yes, I thought we would rally but so far that has been elusive.


Volatility Investing—Not for the Faint of Heart
The investor on the other end of the line was distraught. He put virtually all of his family’s assets into an exchange-traded product (ETP) that tracked the inverse of the performance of futures on the Cboe Volatility Index or VIX.
The investment, which he purchased on margin, crashed. He got a margin call from his brokerage firm that confirmed his worst nightmare: his money was gone-and he might have to mortgage his house to pay off the margin debt. Today the product he bought no longer trades.

Federal Reserve: What the Fed Means By Symmetric?
Bob Iaccino – Nadex
A couple of takeaways from the Fed’s statement after the close of the 2-day FOMC meeting; They removed any references to the “near-term” risks being roughly balanced as well as removing the verbiage about economic strengthening “in recent months” meaning that these things are no longer new. Risks are roughly balanced, both near-term and longer-term and economic strength is the norm now, not something that is recent. They did the same for their inflation comments. Inflation is expected to run near 2%” not “move up in the coming months” as they previously stated. Most importantly for the markets, however other than the decision to hold rates unchanged was the two mentions of the “symmetric” nature of their inflation target.

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