Volatility Hedge Funds Hit by Market Horrors in All Directions

Jan 17, 2019

Observations & Insight

John C. Bogle, Founder of Financial Giant Vanguard, Is Dead at 89; John C. Bogle in 2017. He built the Vanguard Group on the belief that over the long term, most investment managers cannot outperform the broad market averages.
Edward Wyatt – NY Times
John C. Bogle, who founded the Vanguard Group of Investment Companies in 1974 and built it into a giant mutual fund company, with $4.9 trillion in assets under management today, died on Wednesday at his home in Bryn Mawr, Pa. He was 89.

Lead Stories

Volatility Hedge Funds Hit by Market Horrors in All Directions
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Some of the nimblest hedge-funds that trade volatility are hoping history doesn’t repeat after suffering their worst year in over a decade.
Managers famed for posting steady profits from relative-value strategies, which shuffle between long- and short-volatility bets, lost a record 2.5 percent in 2018, according to Cboe Eurekahedge data.

JPMorgan’s Kolanovic Says Volatility-Sensitive Buyers Are Back
Luke Kawa – Bloomberg (SUBSCRIPTION)
The semblance of equity market calm after December’s dramatic swings is turning funds that take their cues from volatility into buyers once again.
JPMorgan Chase & Co. quantitative analyst Marko Kolanovic wrote in a note Wednesday with global quantitative and derivatives strategist Bram Kaplan that volatility-linked strategies are adding $1 billion to stocks each day. That amount will increase if market gyrations stay more placid, according to the analysts.

Better later: FX options signal more pound strength on Brexit delay signs
Richard Pace and Sujata Rao – Reuters
Hard Brexit, soft Brexit, no Brexit – or maybe just later Brexit?
Currency options markets appear to signal an increasing bias towards bets that Britain will extend its deadline to leave the European Union, a move seen as bullish for sterling over the short term at least.

Libor’s Heir Hindered by Repo Volatility in Battle of Benchmarks
Alex Harris – Bloomberg (SUBSCRIPTION)
The benchmark being eyed as a potential replacement for dollar Libor is facing renewed scrutiny after a year-end surge in the market underpinning the new rate. With more volatility possible, Wall Street is increasingly wondering if the nascent Secured Overnight Financing Rate will be up to the task.

U.S. Economic Expectations Drop to Two-Year Low Amid Shutdown
U.S. consumers this month were the most downbeat on the economy since November 2016, a third straight drop after expectations reached a 16-year high just three months earlier, as the partial government shutdown wears on toward a fourth week.

Exchanges and Clearing

SocGen Said to Mull Shutting $4.7 Billion Prop-Trading Unit
Fabio Benedetti Valentini, Donal Griffin and Stefania Spezzati – Bloomberg (SUBSCRIPTION)
Societe Generale SA is considering closing its proprietary-trading unit, people familiar with the matter said, a week after French rival BNP Paribas SA decided to shut its operation.
SocGen executives are reviewing the future of the Descartes Trading division, which makes risky bets with its shareholders’ funds, said the people, who requested anonymity as the details are private. The bank may decide to close the unit as the business has struggled to make profits, the people said.

Eurex Exchange’s Quarterly Equity Derivatives Highlights
Eurex Exchange
In June 2018, Eurex introduced Eurex EnLight, the Request for Quote (“RfQ”) service for the Swiss equity & index options segment. More than 250 requests have since been sent with a conversion rate of 50 percent. Overall, 125 deals have been agreed upon.
Eurex continually seeks to expand and improve its Eurex EnLight offering by introducing services such as the working delta negotiation in the March 2019 release and soon the expansion of further product segments on Eurex EnLight will be communicated.

European energy bourse EEX saw record power futures, CO2 trades in 2018
Vera Eckert – Reuters
Trading of electricity futures and carbon emissions rights on the European energy bourse EEX rose to record levels last year, while the exchange also expanded globally, it said on Thursday. Leipzig-based EEX, part of Deutsche Boerse group, said its flagship power derivatives markets saw volumes rise by 36 percent to 4,385.5 terawatt hours (TWh), within which European futures increased by 19 percent.

Regulation & Enforcement

Shutdown is starting to hurt Trump’s financial deregulation agenda
The U.S. government shutdown over President Donald Trump’s call for Congress to fund a wall he promised to build on the U.S.- Mexican border is threatening another campaign pledge to make rules easier to navigate for banks and corporations.
The partial shutdown, sparked by a standoff between Democrats and Republicans over how to address Trump’s demand, is already the longest ever, entering its 27th day on Thursday with no signs of a resolution.


TriOptima Launches triCalculate IM Analytics Tool for Initial Margin Compliance
CME Group
TriOptima, a leading infrastructure service that lowers costs and mitigates risk in OTC derivatives markets, today announced that it has launched triCalculate IM Analytics which provides crucial insight into the options for initial margin (IM) calculation, helps with the identification and prioritization of in-scope counterparties and aids trading decisions to reduce future IM costs.

Commodity Research Bureau (CRB) is now cmdty by Barchart
Barchart announces the transition of the Commodity Research Bureau (“CRB”) – the world’s leading commodities and futures research, data and analysis firm – to the cmdty by Barchart product line. Since 1934, CRB has been trusted by commodity traders worldwide to provide them with reliable data products, publications, fundamental data services, and rich historical data on commodities. All of this content will now be made available via cmdty and its innovative line of products across Data, Indexes, Trading, and Solutions.


A new fear takes hold in the market — missing out on the gains
Bob Pisani – CNBC
The markets have a new fear: FOMO.
In the past few days, as we have reached the heart of earnings season, the markets have again resumed their upward drift. In discussions with traders, there is a new fear on the Street. It is not fear of the government shutdown. It is not fear of a continuation of the tariff war. It is not fear of a China slowdown getting worse.
None of those concerns have disappeared. But there has been a new one added to the top of the list: Fear of missing out — FOMO — on the rally.

The stockmarket fear index: All noise or a buying opportunity?
Jemma Jackson – Interactive Investor
With plenty of catalysts driving volatility across financial markets, we discuss whether investors should take the ultimate fear index seriously.
19 January will mark the 26th anniversary since the VIX index started publishing live prices. Launched by the Chicago Board of Exchange (CBOE), it is still considered to be the ultimate barometer of global equity market fear, and is designed to reflect investors’ view of stockmarket volatility for 30 days ahead.

The Volatility Crush!
Davin Blythe – Nadex
Yesterday, the S&P 500 futures made its highest close in over a month, and bulls are beginning to show some resiliency while bears seem to have lost some energy.
We had been looking for a modest pullback to buy on the mid-month rebalance just ahead of earnings; however, the pullbacks were much shallower than we anticipated. With the S&P 500 up more than 12% from the low it made the day after Christmas, right now it’s difficult to buy on a frame any longer than a day trade. On the other hand, as firm as equities have been, it’s also difficult to short.


Morgan Stanley Earnings Fall Short As Trading Hampers Results
Morgan Stanley’s fourth-quarter profit fell short of Wall Street expectations, as a rise in corporate deal making failed to compensate for a big trading stumble in a volatile market.

John Lothian Newsletter

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Past Newsletters

Volatility Hedge Funds Hit by Market Horrors in All Directions

Jan 17, 2019

Observations & Insight

Wednesday’s Miscellany

JLN Staff

MLex has a (paywalled) story titled CFTC’s Giancarlo cites threat from China futures markets in bid for more money. Obviously it is a futures story, but I see it as indicative of the overall “threat” posed by the ongoing development of Chinese derivatives markets.

Check out this Bloomberg/Saxo Bank chart of yuan denominated oil futures trading and you’ll see why Giancarlo said what he did. (Besides, the usual rhetoric about needing money to protect investors hasn’t worked for the CFTC’s budget so maybe some fear-mongering will.) Also see this Reuters story from May – China’s crude oil futures boom amid looming Iran sanctions. ~SD

The newest CFTC Talks podcast is out. It’s a shorter, “FlashCast” episode focused on a single subject and features John Coughlan of the CFTC’s Market Intelligence Branch.

FIA updated its FCM tracker tool. Check it out here.

According to CLS data, currency trading volumes rose 2.6 percent in July on last year, although July volumes were 13.7 percent lower than the previous month of June. CLS said the average daily traded volume of currencies submitted to it reached $1.638 trillion in July, up from $1.596 trillion in the same month in 2017, Reuters reported.~SR


Lead Stories

Traders Pile Into Bets That Stock Rally Will Continue; Tax cuts and a robust U.S. economy boosted corporate profits in the three months through June

Gunjan Banerji – WSJ (SUBSCRIPTION)

With U.S. stock benchmarks mere points away from fresh records, some traders are piling into bets that share prices will rally higher and volatility will remain muted. The S&P 500 and the technology-heavy Nasdaq Composite hit their second-highest close in history on Tuesday. Options investors and traders are wagering the gains will continue. They have been scooping up bullish call options on the S&P 500, contracts that would pay out if the stock index took another leg higher, according to Credit Suisse . Call options give the right to buy shares at a later time if they hit a designated price.


****SD: Initially heralded as a year that would be “different,” 2018 seems more and more like 2017, with long equity, short vol being the strategy du jour (tous les jours).

Tesla options bulls reap windfall on Musk’s going private tweet

Saqib Iqbal Ahmed – Reuters

Tesla Inc’s options activity surged on Tuesday after Chief Executive Elon Musk tweeted he was considering taking the company private and some quickly executed trades netted massive paper profits as shares in the electric car maker rallied as much as 9 percent.


****SD: The role Elon Musk’s twitter feed plays continues to strike me as remarkable. I don’t believe Donald Trump’s tweets – price action-related as they occasionally are – have ever caused a trading halt in a listed name/ETP. At the time of the breaking news, IHS Markit analyst Sam Pierson commented: “[Tesla’s] short interest equates to 20.7% of outstanding shares, down from a YTD peak of 23% observed in June. The short value is higher than any S&P 500 stock, only Under Armor has a higher percentage of outstanding shares short with 24%.”

Volatility slump stokes flames for post-summer blow up

Jamie McGeever – Reuters

Financial market volatility is slumping across the board to historically – or, dangerously – low levels, potentially fanning the flames for a repeat of February’s “volmageddon” explosion that sparked a 10-per-cent correction in U.S. and world stocks.


New Chinese forex crackdown to hit corporate hedging; Despite new reserve requirement, dealers say ‘maturity’ in risk management is here to stay

Blake Evans-Pritchard – Risk.net (SUBSCRIPTION)

Dealers fear a move by the Chinese authorities to reinstate a deposit requirement on foreign currency derivatives could slow a recent pick-up in hedging from local corporates, despite warnings from regulators that firms need to do more to brace for future market volatility.


Sterling/dollar risk reversals at 17-month low, signal more weakness


Nine-month and one-year sterling/dollar risk-reversals fell on Wednesday to the lowest since early-March 2017, as investors rushed to protect themselves from further weakness in the British currency.


Exchanges and Clearing

NSE says working on a structure to address SGX issue


New Delhi: Locked in arbitration proceedings with SGX, the National Stock Exchange on Wednesday said it is working on a “structure” to address the issues and more clarity is likely to emerge in the next two-three weeks.


SGX reports market statistics for July 2018


…Total Derivatives volume was 16.9 million, down 5% month-on-month (m-o-m) and up 19% year-on-year (y-o-y).


Presentation By HKEX Chief Executive Charles Li And Group Chief Financial Officer John Killian On 2018 Interim Results Announcement


…Strong growth in trading volumes: Cash Market headline ADT +67% YoY, Futures and Options ADV +58% YoY, LME chargeable ADV +11% YoY


Dalian Commodity Exchange Holds Training For Corn Options Instructors


To strengthen the corn options training on member units, promote teaching staff construction and guarantee the steady listing and operation of corn options, Dalian Commodity Exchange (DCE) held the training on corn options instructions lately. A total of 100 trainees from 100 units attended the training, including futures companies, risk management subsidiaries of futures companies, spot companies and other financial institutions.



Tradeweb On Track For Record Year Of Trading Activity


…Credit and Equities Derivatives Volumes Climb: Global equity derivatives ADV is up 351.55% and global credit derivatives volume is also up 80.16% year-over-year on the Tradeweb platform.


Redline Trading Solutions Breaks 180 Nanosecond Tick-to-Trade Barrier

Redline Trading Solutions

Redline Trading Solutions, the premier provider of high-performance market data and order execution solutions, today announced the production deployment of its hybrid software and FPGA-based market data and order execution gateway solution.


The art of designing markets. Part III

Eurex Exchange

This is the third article in a series of topics related to the market design of electronic marketplaces. The first article discussed the most common execution models in electronic derivatives markets, while the second covered the various components of an order-generating process that define its arrival time. It thus gave an overview of the three steps market participants need to generate and submit an order to an exchange whereby connectivity drives the third step. We explained that for all participants timing matters but that ‘timing’ means different things to different market participants. Today, we are looking at the electronic connectivity of market participants who are not members of an exchange (i.e. indirect participants), typically institutional investors, but also retail investors.



Morgan Stanley sees two ‘broken legs’ for stocks, heralding ‘significant market correction’

Ryan Vlastelica – MarketWatch

For years, one of the primary factors lifting the U.S. stock market has been the fact that some of the economy’s biggest, fastest-growing names just kept rising.

The strength of growth stocks, in particular some large technology and internet plays, has been a boon for momentum investors, who bet that recent outperformers will continue to do better than the overall market over the medium term. This trade has been one of the easiest ways for investors to make money, but analysts are increasingly concerned that its era may be drawing to a close.


A big shift to the S&P 500 may change the way you invest in tech

Stephanie Landsman – CNBC

The S&P 500 is about to undergo a major structural change that may alter which technology stocks you own.

Facebook and Google’s parent Alphabet will move out of the index’s technology sector and to a newly formed communication services sector in about six weeks. The goal is to make tech appear less dominant in the S&P 500.



Crypto pukes, again; Somebody pass the mop.

Jamie Powell – FT Alphaville

Ah, the crypto.

After the gyrations of early June, it all went pretty quiet recently as bitcoin, and its fellow tokens, began to recover from their lows.


****SD: First, great title. Second, with all these gyrations you’d think there would have been more activity on LedgerX. After all, the exchange did have a “record” July. While open interest seems to be building (4,000+ contracts) and Monday had 400+ trades, yesterday saw only 21 swaps trade. Oh, and the reason attributed to the puking? See Bloomberg’s SEC Postpones Decision on Bitcoin ETF Listing to September

Private Banks Are the New Hedge Funds

Yakob Peterseil – Bloomberg

Who needs hedge funds when a $2.4 trillion private bank is offering global macro trades to navigate late-cycle markets — mimicking fast-money strategies with leverage to boot.

UBS Group AG’s wealth management arm, the world’s largest, is pitching just that to billionaire clients.


John Lothian Newsletter

So you want to know what’s happening in the financial markets?

We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Newsletters

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