Why even bigger volatility ‘accidents’ are yet to come

Jun 18, 2018

Jeff Bergstrom

Jeff Bergstrom


Observations & Insight

China’s tariffs on U.S. oil would disrupt $1 billion monthly business
Henning Gloystein – Reuters
China’s threat to impose duties on U.S. oil imports will hit a business that has soared in the last two years, and which is now worth almost $1 billion per month.

****SD: It is estimated that the U.S. will dethrone Saudi Arabia as oil production king by 2019. Also in big oil news – OPEC Discusses Output Hike of Up to 600,000 Barrels a Day. In other tariff news – it might be up a smidge today, but check out the July beans chart.

Lead Stories

Why even bigger volatility ‘accidents’ are yet to come; February’s market shock was just the canary in the coal mine
John Plender – FT (SUBSCRIPTION)
“There are few things more insidious in markets than the illusion of permanent calm,” said Claudio Borio, head of the monetary and economic department of the Bank for International Settlements.

Blackrock amends derivatives policy on retail funds
Jessica Tasman-Jones – Portfolio Adviser
Blackrock has written to investors to announce it is expanding the use of derivatives on its Luxembourg and UK domiciled retail fund ranges.

****SD: Pertains to a fund universe at Blackrock of some EUR 144 billion.

Financial Services Committee Unanimously Passes Hultgren’s Options Markets Stability Act
John D’Antona Jr. – Traders Magazine
Last Thursday the House Committee on Financial Services unanimously passed H.R. 5749, the Options Markets Stability Act. The legislation authored by U.S. Rep. Randy Hultgren (IL-14) would facilitate liquidity in options markets by calling on bank regulators to provide targeted capital relief.

***SD: In case you missed the BIG news at the end of last week.

The Bull Market’s Next Test: Slower Earnings Growth
Corporate earnings expanded 25% in the first quarter, a new high and a possible peak for growth
U.S. corporate earnings growth looks poised to slow from a blistering pace, posing a potential new challenge to a long bull market that is already contending with slower global-growth momentum and rising interest rates.

JPMorgan poaches a star equities trader from Goldman Sachs who was part of team that made $200 million in profit in one day
Dakin Campbell and Alex Morrell – Business Insider Prime (SUBSCRIPTION)
JPMorgan has hired Borzu Masoudi from Goldman Sachs for US index flow trading in its equities department.
When he joins in August, Masoudi will replace David Kim, who recently decamped for Bank of America.

Pound Political Trauma May Continue Even With BOE Back in Focus
Charlotte Ryan – Bloomberg (SUBSCRIPTION)
Any sign of leadership challenge to May could hurt sterling; BOE meeting will be eyed for signals on August rate hike odds
The pound began the week on the back foot as it faces political turmoil amid the Conservative Party’s ongoing internal battle over Brexit.

Why the market is so worried
Paul R. La Monica – CNN
Stocks fell again Monday morning. The Dow dropped more than 200 points, putting it on track to extend its losing streak to five days.
Investors are increasingly concerned that trade tension between the United States and China will escalate into tit-for-tat retaliation, with the two nations imposing one tariff after another on imports.

Hedge funds continue gently selling oil while watching OPEC and tariffs
John Kemp – Reuters
Investors continued to reduce their overall bullish position in petroleum, but profit-taking concentrated on fuels while signs of stabilisation emerged in crude.

Exchanges and Clearing

Leverage ratio has “disincentivising effect” on client clearing – BoE
Louisa Chender – Global Investor Group (SUBSCRIPTION)
UK clearing member banks have taken on fewer clients and the number of transactions has dropped, according to the Bank of England

New Developments MSCI EAFE and EM Options at Cboe — Tools for Global Portfolio Management
Matt Moran – Cboe Blog
Investors who want large-sized cash-settled index tools that can help manage global equity risk are exploring use of listed options on the MSCI EAFE Index (ticker MXEA) and on the MSCI Emerging Markets Index (ticker MXEF).

SGX Nifty trade extended beyond August, says SGX
ET Bureau
A court-appointed arbitrator has allowed the Singapore Exchange to continue the listing and trading of SGX Nifty contracts beyond the current deadline of August.

****Reuters – Singapore Exchange to continue SGX Nifty trade despite India dispute


Xavier Rolet ‘approached’ for top Thomson Reuters job; Former LSE boss turned down chance to lead financial and risk division, according to a person close to the matter
Samuel Agini – Financial News (SUBSCRIPTION)
Xavier Rolet, the former chief executive of the London Stock Exchange Group, turned down an approach to lead Thomson Reuters’ giant trading division, according to people familiar with the situation.

Career profile: from engineer to trader to entrepreneur; A masters in management helped take Karen Farzam in an unexpected direction
Ian Wylie – Financial Times (SUBSCRIPTION)
The global financial crisis ended many reputations and careers. But for Karen Farzam, it provided the impetus to start her own business, while her MSc in international finance from HEC Paris gave her the knowledge she needed. “I never saw myself as an entrepreneur. Building my own company was never a dream for me. I always thought I would devote my whole career to a bank,” says Ms Farzam, who walked away from a role as a trader in complex exotic equity derivatives for JPMorgan in Tokyo in 2009.

Two top Deutsche Bank equity derivatives MDs quit for Morgan Stanley
Sarah Butcher – eFinancialCareers
The exits at Deutsche Bank continue. Insiders say some of the German bank’s most senior equity derivatives professionals in Europe have left today, seemingly for Morgan Stanley.

Regulation & Enforcement

Report: Weakened Volcker Rule Will Be More Enforceable Than Current Regime
Alicia McElhaney – Institutional Investor
Looser banking regulations would better align with existing banking practices, while offering banks more flexibility in hedging and potentially improving liquidity, consultants say.

Mifid II leads to more OTC trading in Nordics – Nasdaq
Louisa Chender – Global Investor Group (SUBSCRIPTION)
Nasdaq Nordic’s president says there are more unintended consequences of Mifid II than intended ones


Statement on Unauthorized Access to Instinet Systems
On June 4, 2018 (EST), Instinet Europe Limited experienced the impact of a spear-phishing incident that resulted in unauthorized access to the firm’s desktop network.


What Is VIX Telling Investors?
Gaurav Sinha, Asset Allocation Strategist – WisdomTree
I have written on the jump in the VIX that occurred in February, taking investors by surprise. While there was a precursor to this unprecedented surge in the VIX (a compression of spreads between implied minus realized volatility), it was subtle and the move was very sudden. VIX moves are important due to their strong negative correlation to equities.

Consumer Discretionary Vol Looks A Bit Underdone
The Balance of Trade – Seeking Alpha
XLY makes all-time highs, while recent measures of vol are in their bottom decile.
Amazon alone makes up 22% of the ETF’s holdings – it’s not hard to see that creating problems.
The split between monthly and quarterly realized vol percentiles shows how quick the transition was: I see the divergence narrowing from both sides.


Bill Gross got revenge on ex-wife with fart spray – court papers
Carleton English – NY Post
The bitter divorce battle between billionaire bond king Bill Gross and his ex-wife is beginning to stink – like vomit, flatulence and dead fish. The California moneyman, who lost his beloved 13,819-square-foot Laguna Beach home to his ex-wife in the breakup, used foul-smelling sprays to leave the place a stinking mess – and placed dead fish in the air vents, a “disgusted” Sue Gross claimed in court papers last week.

***SD: They also have “his and hers restraining orders.” Pleasant.

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Past Newsletters

OIC 2021: What’s Next for the Options Industry? ‘Not Going to Put the Genie Back in the Bottle’

OIC 2021: What’s Next for the Options Industry? ‘Not Going to Put the Genie Back in the Bottle’

Retail participation, education of new investors, seen as ongoing industry themes in 2021.
After two days of heralding the record volume that accompanied exceptional periods of volatility in 2020, panelists in the final sessions of the Options Industry Conference generally breathed a collective sigh of relief that the industry had escaped last year’s challenges relatively unscathed. 

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