Volatility fallout in Hawaii; No fear, no greed?; LJM lawsuit

Feb 21, 2018

Observations & Insight

Hawaii Pension Parts Ways With CIO
Amy Whyte – Institutional Investor
Chief investment officer Vijoy Chattergy is no longer employed with Hawaii’s $16 billion state pension fund, where he had served as CIO since 2012, Institutional Investor has learned. An automatic response from Chattergy’s former email account states that he is no longer with the Employees’ Retirement System of the State of Hawaii. The retirement system’s executive director Thomas Williams did not respond to multiple requests for comment by press time.

****SD: Not the only head to roll after the volatility spike. This Hawaii CIO move comes on the heels of WSJ’s story last week Harvard, Hawaii Gambled on Market Calm—Then Everything Changed. The $16.9 billion Hawaiian pension fund’s strategy of selling puts to juice returns started in 2016.

That WSJ article contains a quote from Chattergy – “‘We’ve taken some losses that you’d expect with these sharp moves,’ said Vijoy Chattergy, the fund’s chief investment officer, on Feb. 8. He also said ‘they’re within expectations.'” The parting of ways is also “within expectations.”

At least Hawaii didn’t come back with some statement about being sold a bunch of structured products by a bank whose mechanics weren’t clear and then blew up in the beginning of February. The above comment means they knew what they were getting into (at least).


Lead Stories

Fear’s Gone But Greed Hasn’t Materialized in U.S. Stock Options
Luke Kawa – Bloomberg
Warren Buffett once quipped that aspiring investors “should try to be fearful when others are greedy and greedy only when others are fearful.” Tell that to the options market.

****SD: Sometimes I lose the substance Kawa’s spoken commentary due to his extreme Canadian accent – I focus too much on the “aboots.”

Securities Class Action Filed Against Fund Caught in Market Rout
Samantha Joseph – Law.com
South Miami securities litigator Michael E. Criden filed a class action lawsuit against a Chicago-based commodities trader whose funds reportedly lost 80 percent of their value in three days.

****SD: When I searched for LJM the other day to check on any developments, the first result on Google was a sponsored ad from a law firm seeking info from investors as the firm investigates a potential lawsuit against LJM.

Link between stock market volatility and returns? There is none
Jamie McGeever – Reuters
The recent surge in market volatility, by some measures one of the most dramatic on record, will have zero impact on investor returns beyond a few months. Literally zero.
That’s according to Credit Suisse’s annual Global Investment Returns Outlook, a 250-page tome analyzing world investment trends since 1900, as close to a bible on long-term market patterns as you’re likely to find.

Derivatives clearing providers called out for legacy systems
Hayley McDowell – The Trade
Outdated and legacy systems still in place at firms providing derivatives clearing must be replaced as the industry faces increased pressures, according to a recently published whitepaper.
Co-written by IBM, Minium and Promontory, the whitepaper examined the future for derivatives clearing and prime services, outlining existing problems with the industry and listing technology as one of the most important challenges.

****SD: A number of the issues raised in the white paper were also mentioned in our video with Minium COO Patrick Tessier when the subsidiary was announced.

Judgement Day: algorithmic trading around the Swiss franc cap removal
Francis Breedon, Louisa Chen, Angelo Ranaldo and Nicholas Vause – Bank of England
A key issue raised by the rapid growth of computerised algorithmic trading is how it responds in extreme situations. Using data on foreign exchange orders and transactions that includes identification of algorithmic trading, we find that this type of trading contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015, which was an event that came as a complete surprise to market participants.

****SD: Missed this working paper from Feb 16.

Old dispersion product signals new vol regime
Helen Bartholomew – Risk.net (SUBSCRIPTION)
Return of pre-crisis, ‘theta-flat’ trades an early sign of shifting volatility expectations
A jump in US equity market volatility is sparking interest in pre-crisis dispersion structures that ditch the long-volatility bias found in the trade in recent years.

A $295 Billion Fund Says Central Banks May Top Inflation Targets
Adam Haigh – Bloomberg
Not only will central banks meet their inflation targets, they may even exceed them.
That’s the view of Neuberger Berman Group LLC’s chief investment officer for fixed income, Brad Tank, who says rising inflation and interest rates mean the return of market volatility recently is something investors need to get used to.

Exchanges and Clearing

Bitcoin Futures Contracts Pose Little Credit Risk To Cboe, CME: Moody’s
Michelle Jones – ValueWalk
Bitcoin futures contracts have been available from Cboe Global Markets and CME Group since December, and so far, investors seem to be hesitant to add them to their portfolios. Between the wild swings in the bitcoin price and skepticism about whether cryptocurrencies are here to stay, it only makes sense that investors would hesitate on one of the earliest forms of traditional investment in them.

****SD: As revealed in Jim Kharouf’s Q&A with Wedbush’s Bob Fitzsimmons, people are asking about bitcoin options even though they aren’t offered on the CME and Cboe futures (yet). The mantra has been, give the futures a few smooth settlement cycles and we’ll cross the options bridge.

MSCI overreacting to our commercial decision on SGX Nifty: Ashish Chauhan of BSE
Financial Express
After India’s stock exchanges National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange of India (MSEI) said last week that they will stop the use of local derivative products on overseas bourses inviting critical reaction from MSCI (Morgan Stanley Capital International), Ashish Chauhan, the MD and CEO of BSE said that such overreaction is unwarranted. Notably, NSE and BSE will stop their licensing agreements with Singapore Exchange (SGX), CME Group Inc., Taiwan Futures Exchange and Osaka Securities Exchange, according to the latest decision.

Deutsche Boerse profit lifted by Clearstream
Sonia Amaral – MarketWatch
Deutsche Boerse AG said Tuesday that fourth-quarter net profit increased, which the company attributed in part to a strong performance in the Clearstream segment, helping offset a weaker market environment for the Eurex segment.

****SD: From Reuters – Deutsche Boerse aims for quarter of euro clearing after Brexit

Regulation & Enforcement

Ex-CFTC Counsel Is Likely Pick for Democratic Slot, Sources Say
Benjamin Bain – Bloomberg
President Donald Trump is likely to name a former Commodity Futures Trading Commission official who played a key role in creating post-crisis rules to fill a Democratic slot at the U.S. derivatives regulator, according to people familiar with the matter.

Ex-Cetera advisor suspended for allegedly trading options with customer’s retirement money
Margarida Correia – Bank Investment Consultant
A former Cetera advisor who worked for MidFirst Bank in Tulsa, Oklahoma has agreed to a six-month suspension from the brokerage industry and a $10,000 fine for allegedly persuading a customer to liquidate his IRA and invest the money in a risky and costly options trading strategy he managed, according to the rep’s recent settlement with FINRA.

****SD: The advisor lost so much money the remaining funds weren’t enough to cover the tax penalty incurred by liquidating the IRA early. Yeesh.

Spoofing, Fraud Charges Dropped in Ex-UBS Trader Case?
Finance Magnates
A Connecticut federal judge dropped three spoofing and three commodities fraud counts against former UBS trader Andre Flotron who was accused of trying to manipulate the precious metals futures market through the use of a trading tactic known as “spoofing.”

****SD: Something about the name “Flotron”… was it a ’50s workout machine based on pseudoscience? Like that rubber band thing that shook your gut to lose weight?

Interpretive FAQ – The Consolidated Audit Trail
The following sets forth Frequently Asked Questions regarding the CAT requirements applicable to Industry Members (“CAT Industry Member FAQs”). Questions regarding the FAQs should be directed to the CAT Help Desk. Capitalized terms used here, but not otherwise defined, shall have the meanings ascribed to them in the CAT NMS Plan.

****SD: The FAQs have been updated.


Temenos agrees 1.4 billion pounds deal for Fidessa, activist Elliott enters
John Revill – Reuters
Temenos agreed a 1.4 billion pound ($1.96 billion) takeover of British software peer Fidessa Group on Wednesday, whose shares traded above the offer price after activist investor Elliott Capital Advisors disclosed a stake.

Artificial Intelligence Overtakes Blockchain as Top Capital Markets Tech
Dayle Scher – TABB Forum
The capital markets industry is squarely focused on Artificial Intelligence, both from a technology investment perspective and as a disruptor to the business. TABB Group’s latest research breaks down capital markets firms’ top upcoming technology priorities in 2018, as well as what they see as the major disruptors to their businesses.


Morgan Stanley says stock market selling isn’t over, recommends hedges
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
The US stock market correction earlier this month may have been painful for investors, but it also gave them a dry run to prepare for another major market event.
Morgan Stanley has learned from the experience, and it has provided four hedging recommendations to prepare for another meltdown.

Confluence of trios to propel VIX in 2018
It has taken a monumental VIX shock for the realization to dawn that the low volatility patch of 2017 is now history. Front-end FX vols had been climbing for the better part of the New Year on heavy demand for USD puts and firm realized vol due to swift dollar declines.

Anatomy of a VXX Breakout
Bernie Schaeffer – Schaeffer’s Investment Research
Headlines regarding the recent explosion in equity volatility were somewhat hyper-focused on the pitfalls of trading volatility derivatives, for which the soon-to-be liquidated VelocityShares Daily Inverse VIX Short-Term ETN (XIV) was the unfortunate “poster child.” But while markedly less catastrophic and climactic, the price action of late in the iPath S&P 500 VIX Short-Term Futures ETN (VXX) has been no less remarkable.

This Volatility Signal Has Marked Key S&P Turning Points
Rocky White – Schaeffer’s Investment Research
Stock market volatility had been extremely low for several years, but it has spiked over the past few weeks. The Cboe Volatility Index (VIX), which measures the implied volatility of S&P 500 Index (SPX) options, sits around 20. The last time the VIX averaged 20 for an entire year was 2011. Additionally, the S&P 500 has moved up or down at least 2% the last four weeks in a row. The last time we’ve seen that was, once again, 2011. This week I look at how stocks have behaved after the first sign of volatility.

FX Options Market Update: February 21, 2018
Dan Larsen – TradingFloor.com


From Libor to SOFR
Barry Mills – ABA Banking Journal
There has been a lot in the financial press recently about Libor—the London interbank offered rate—and efforts to identify and implement alternatives to Libor. A measure of the rate at which large banks can borrow from one another on an unsecured basis, Libor is a reference rate underpinning more than $350 trillion in mortgages, commercial loans, bonds and derivatives. Reference rates serve an important purpose in that they reduce search costs and improve the ability of customers to compare pricing. With the publication of a reference rate such as Libor, bank customers are better able to judge whether the rate being charged is competitive.

The House That Dimon Built: JPMorgan Plans Soaring HQ in Midtown
Jennifer Surane and Oshrat Carmiel – Bloomberg
It will be the house that Jamie Dimon built — a soaring monument to JPMorgan Chase & Co. and, in some ways, to its longtime CEO.

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