Why has Equity Index-Treasury Options Volatility Diverged?; SVXY Class Action Against ProShares

Jan 30, 2019

Observations & Insight

SR-CBOE-2019-004 – Proposal to amend its Fees Schedule relating to the Options Regulatory Fee.
Cboe Filing
The Exchange proposes to increase the Options Regulatory Fee (“ORF”) from $0.0028 per contract to $0.0045 per contract in order to help ensure that revenue collected from the ORF, in combination with other regulatory fees and fines, meets the Exchange’s total regulatory costs.

****SD: Near doubling of the ORF, eh? I’m sure every single market participant is pleased peachy upon hearing the news.


SR-CBOE-2019-003 – Proposal to amend its fees schedule.
Cboe Filing
The Exchange proposes to amend its Fees Schedule, effective February 1, 2019 to amend its fee incentive program for Lead Market-Makers (“LMM”) in SPX during Global Trading Hours (“GTH”).

****SD: Lead market makers in SPX can qualify for rebates if their average quote width for OTM options is $.90 or less. It used to be $.75 or less. Cboe “proposes to widen the average quote width required as the current market has made it more difficult for a GTH LMM in SPX to maintain the same quality of markets as compared to previous market conditions that were less volatile.”

Lead Stories

Why has Equity Index-Treasury Options Volatility Diverged?
Erik Norland – CME Group
After many years of exceptionally placid markets, equity volatility began to rise in 2018, spiking in both the first and fourth quarters in response to sharp selloffs. While bond prices rose during both these episodes, benefitting from a flight-to-quality response, implied volatility on U.S. Treasury options barely moved. In sharp contrast to the implied volatility on equity index options, the implied volatility on 10-Year and 30-Year bond options began 2019 close to where it finished in 2018 (Figures 1 and 2).

Robbins Geller Rudman & Dowd LLP Files Class Action Suit against ProShares Trust II
Robbins Geller Rudman & Dowd LLP (http://www.rgrdlaw.com/cases/proshares/) today announced that a class action has been commenced on behalf of purchasers of ProShares Short VIX Short-Term Futures ETF (“SVXY” or the “Fund”) (NASDAQ:SVXY) pursuant to the May 15, 2017 Registration Statement and/or between May 15, 2017 and February 5, 2018 (the “Class Period”). This action was filed in the Southern District of New York and is captioned Ford v. ProShares Trust II, et al., No. 19-cv-00886.

****SD: More February 2018 fallout.

6 Reasons Why Goldman Sachs Believes the Volatility Index (VIX) Will Surge
ETF Daily News
…In an overnight note from Goldman’s derivatives team, John Marshall and Rocky Fishman tell the bank’s clients that they “recommend buying short-term options to benefit from an increase in equity volatility this week.”

****SD: “Earnings day moves have been a bigger source of volatility than normal this quarter as the average S&P 500 stock has moved 4.6% on its earnings day vs its historical average of 3.1%.”

Rising volatility may boost yen but hit dollar; Greenback’s role as a haven is threatened by US debt load and cyclical shortcomings
James McAlevey – Financial Times (SUBSCRIPTION)
Much of the sentiment around the recent path of the US dollar has been justifiably bullish. Sweeping corporate tax cuts, the US Federal Reserve’s diverging monetary policy against the rest of the developed world and positive economic fundamentals helped power its rise in 2018.

Japan’s 10-day holiday stirs concern in traders and investors
Hideyuki Sano, Tomo Uetake – Reuters
To mark the ascension of Japan’s new emperor, the government has declared an unprecedented 10-day holiday from late April to early May, worrying investors, who say a market shutdown could cause disruption and unsettle the yen.

Goodbye VXX, Hello VXXB
Vance Harwood – Six Figure Investing
[Yesterday was] the last day of trading for Barclays’ VXX and at the beginning of the day, its assets were at $488 million ó surprisingly high. Barclays’ replacement product, VXXB, is revving up nicely with rapidly rising volumes and assets.

Exchanges and Clearing

Nasdaq bids $771 million for Oslo Bors in Euronext challenge
Terje Solsvik, Gwladys Fouche – Reuters
Nasdaq Inc on Wednesday made a rival bid for Oslo Bors VPS, setting up a takeover battle with Euronext for the 200-year-old Norwegian stock market operator.

Accusations of ‘Overcharging,’ ‘Dubious Accounting’ Fly in Exchange Spat; First IEX took on the flash boys, now it’s going after Nasdaq and others.
Julie Segal – Institutional Investor
IEX ó the exchange made famous by Michael Lewis’s book Flash Boys ó claims its competitors NYSE, Nasdaq, and Cboe are overcharging for data and connectivity, and has published its own previously unseen cost data to support the allegation.

****SD: WSJ has the story here. (Recall that Boris Ilyevsky joined IEX last year.)

Nasdaq Reports Fourth Quarter and Full Year 2018 Results; Delivers Strong Revenue Growth in 2018
2018 net revenues were $2,526 million, an increase of $115 million, or 5%, from $2,411 million in the prior year period.
…Equity Derivatives Trading and Clearing (13% of total net revenues) – Net equity derivative trading and clearing revenues were $82 million in the fourth quarter of 2018, up $19 million compared to the fourth quarter of 2017. The increase primarily reflects higher U.S. options industry trading volumes and net capture rate, partially offset by lower U.S. market share.


Goldman Sachs securities division engineering co-head to retire: memo
Goldman Sachs Group Inc said on Tuesday that Konstantin Shakhnovich, co-head of engineering for the U.S. bank’s securities division, is retiring, according to a memo seen by Reuters.

Regulation & Enforcement

US SEC rushes back to work as another shutdown looms on the horizon
Declan Harty – S&P Global Market Intelligence
Wall Street’s chief securities regulator is racing to address a backlog of submissions ahead of a February deadline that could once again partially close the agency’s doors. With the U.S. federal government reopened after the longest shutdown in its history, the SEC resumed normal operations Jan. 28. Now, the agency’s staffers will have to sift through the hundreds of largely untouched registration statements, whistleblower tips and other filings that were submitted while most of the SEC’s roughly 4,400 employees were furloughed.

BSE stock options: Sebi fines 4 entities Rs 64 lakh
PTI via Economic Times
Markets regulator Sebi Tuesday imposed a penalty totalling Rs 64 lakh on four entities for engaging in ‘non-genuine’ transactions, which created misleading impression of trading in the BSE’s stock options segment.


An Upstart FX Market Maker Is Looking to Ramp Up in U.S. Equities and Treasuries XTX wants to increase its footprint and change the rules of the game.
Lananh Nguyen – Bloomberg (SUBSCRIPTION)
The biggest traders in foreign exchange gathered last May in a converted Victorian bathhouse in London. They drank Champagne amid ornate tile mosaics, stained glass, and Oriental rugs. The results of the 2018 Foreign-Exchange Survey by Euromoney Institutional Investor Plc were being announced. A gasp and clapping echoed through the room.

What’s Quickly Fading From Asia Is Volatility: Taking Stock
Eric Lam – Bloomberg
An air of relative calm has descended on Asian equities. And that’s no wonder: with a number of potential market catalysts to come, investors are in wait-and-see mode.
Another round of trade talks between Chinese and U.S. officials is set to begin in Washington on Wednesday, aimed at finding a solution to the months-long standoff. Meanwhile, the Federal Reserve is set to announce its next rate decision, and investors will be looking for clues on the future path for hikes.

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