Wild, But Not Crazy; Peter Thiel’s Volatility Bet; Decca’s big short vol losses

Feb 16, 2018

Observations & Insight

Another Nation to Start Hedging its Oil Production
Spencer Doar – JLN

Last Friday, Colombia’s finance minister said the country was planning an oil hedging program along the same lines as Mexico’s annual derivatives play. (Apologies the story wasn’t in the newsletter earlier – sometimes late Friday articles get lost over the weekend.)

This has potentially huge repercussions for oil derivatives markets. As a point of comparison, the Mexican “Hacienda hedge” is the biggest annual oil deal, according to Bloomberg. (That linked story is a great longform on how the Hacienda hedge comes together.) From 2007 to 2017, it was estimated the notional value of Mexican oil derivatives activity was $163 billion.

There must be a number of commodity desks salivating at the prospect of another sovereign oil player.

Keep in mind this news comes after it was reported in May 2017 that Iraq was pondering an oil hedging program. If Iraq does execute its plan to hedge some 25 percent of its production, that would become the biggest sovereign oil hedging operation.

Lead Stories

Wild, But Not Crazy
Cliff Asness – AQR
You don’t need me to tell you that markets have been pretty wild lately. But, perhaps I can help with a little perspective versus history, and try to home in on what was merely big about these past few days versus what was really really big. Warning, this one gets a bit wonky with some number overload.

****SD: I would pay to see Cliff Asness dress up as one of the Festrunk brothers (Steve Martin and Dan Aykroyd’s nutty Czech SNL characters).

Peter Thiel Had $244 Million Bet on Volatility Jump at Year-End
Miles Weiss – Bloomberg
Peter Thiel is known for venture investments like those in Facebook Inc. and PayPal Holdings Inc. But it was a macro strategy that positioned him to make a killing on last week’s spike in market volatility.

****SD: But did he hold on to that position?

Hedge Fund Decca Lost 25% of Its Value in Rout
Nishant Kumar and Alastair Marsh – Bloomberg
A hedge fund managed by former Hutchin Hill Capital trader Shahraab Ahmad lost a quarter of its value last week after its bets against volatile markets backfired, according to people with knowledge of the matter.

Now casting: options traders needed for disaster movie
Duncan Wood – Risk.net
A cast of thousands will be required if someone makes a film of the February 5 surge in US equity market volatility.
There would be roles for central bankers who inadvertently encouraged investors to build short volatility positions; for structurers who created exchange-traded products (ETPs) to track the same bet, and retail investors who bought them; for workers whose rising wages first jolted stock markets on February 2; for asset managers who were shocked to see stocks falling at the same time bond yields were climbing; for commodity trading advisers, variable annuity insurers, and risk-parity funds that all had some exposure to a jump in volatility.

****SD: This doesn’t appear to be paywalled.

Can the Vix index really be tampered with?
Joe Rennison – Financial Times
Never in its 25-year history has the Vix volatility index been in the spotlight the way it has been during recent market turmoil, when wild swings in the S&P 500 frightened investors.
It was not just that the sudden return of volatility sent the Vix soaring. The index itself was implicated in the tumult, and the collapse of two exchange-traded products tied to the index was blamed by many traders for exacerbating a sharp drop in share prices.

Flashback Friday: Becoming a Superpower-GETCO’s Looks to Knight’s Wholesale and Retail Businesses as Keys to Growth
Traders News
Back in 2013 market maker GETCO was looking to drive it business forward in a stagnant commission rate and highly competitive market making environment. In exploring its limited options, GETCO opted to purchase Knight. Knight had a profitable business model as a market maker and a very profitable wholesaling and retail facing business. Seemed a like a good match – but was it?

Volatility Wave Washed Over Credit Markets—Now Another Test
Cecile Gutscher and Cormac Mullen – Bloomberg
Corporate bond funds succumbed to rate fears that have gripped stocks to Treasuries.
Investors pulled $14.1 billion from debt funds, the fifth-largest stretch of redemptions in the week through Feb. 14, according to a Bank of America Merrill Lynch report, citing EPFR data. High-yield bonds lost $10.9 billion alone, the second highest outflow on record. As benchmark Treasury yields traded at a four-year high, it shook the foundations of a key support for risk assets — low rates.

Short-Sale Death Threats Are a Bad Idea
Matt Levine – Bloomberg
Can you send death threats over the internet if you’re only threatening metaphorical death via activist short-selling?

Exchanges and Clearing

Cboe Global Markets Declares First-Quarter 2018 Dividend
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today announced its Board of Directors has declared a quarterly cash dividend of $0.27 per share of common stock for the first quarter of 2018. The first-quarter 2018 dividend is payable on March 16, 2018, to stockholders of record as of March 2, 2018.

MSCI calls exchange data restriction anti-competitive, says could impact India weightage
Jayshree P. Upadhyay – LiveMint
Global index provider MSCI, in a press statement issued late on Thursday night, said that it considers the move by Indian stock exchanges to restrict data feeds as anti-competitive and it could impact India weightage and India asset classification in its indices.
“The breadth of the restrictions imposed by Indian exchanges is unprecedented in any equity market in the MSCI Emerging Market Series,” said the index provider in the press statement.

Cutting off overseas trading may not bring liquidity back to Indian bourses
Jayshree P. Upadhyay – LiveMint
Ending overseas derivatives trading in India’s benchmark equity indices will not automatically bring back liquidity to the local exchanges, traders, investors and economists said.

February 16, 2018 Implementation Of MIAX Options Single Side Protection Risk Protection
The Single Side Protection (“SSP”) Risk Protection feature will be implemented today, Friday, February 16, 2018.

Regulation & Enforcement

Ex-SEC chairman says ‘it’s quite clear’ Wall Street’s ‘fear gauge’ can be manipulated
Mark DeCambre – MarketWatch
The volatility we have is troubling. And a product like VIX could be valuable to institutional investors who want to hedge against a precipitous drop in the market. But it’s quite clear that these indexes’ options can be manipulated. And when there were complaints about possible manipulation, the Cboe, as the marketplace, should have sprung in to action.

GOP Senators Pan Trump Plan to Make Futures Industry Pay User Fees
Gabriel T. Rubin – WSJ
Senate Republicans on Thursday criticized the Trump administration’s proposal to impose fees on the futures industry to fund the top U.S. derivatives regulator, which has requested a bigger budget.

U.S. charges Chicago trader with stealing bitcoin
Jonathan Stempel – Reuters
Federal prosecutors on Thursday charged a Chicago trader with wire fraud for allegedly stealing $2.06 million of bitcoin and litecoin from his employer.

Rescheduled TAC meeting worth waiting for
Brad Rosen – Jim Hamilton’s World of Securities Regulation
Commissioner Brian Quintenz led off the first meeting of the CFTC’s Technology Advisory Committee (TAC) in 22 months, noting the rapid evolution of technological developments in the derivative markets even since the committee’s last gathering in 2016. The TAC meeting, which was rescheduled due to the brief government shutdown in January, consisted of comprehensive and engaging discussions exploring five key areas impacting the global markets including digital ledger technology, virtual currencies, artificial intelligence, automatic trading, and cybersecurity.


At Thomson Reuters, Tensions Between Family and Board Ratchet Up With Blackstone Deal
Jacquie McNish and David Wighton – WSJ
The board of Thomson Reuters Corp. recently pressed ahead with plans to sell a piece of its business to Blackstone Group LP for $17 billion despite its chairman’s concerns that directors had failed to seek a higher price or consider other potential buyers, people close to the deal said.

Algos Under the Microscope
George Bollenbacher – TABB Forum
With the sudden return of volatility, algorithmic trading is under everyone’s microscope. But before we get too carried away with the threat algos may present, we need to look at them in the context of all the forces at work on the markets, or we risk prescribing the wrong medicine.


The Vix horror show will not deter future suckers
John Dizard – Financial Times
“There’s one born every minute.”
PT Barnum, American carnival promoter who may have foreseen the Vix contract
Over the years, Vix products — which track stock market volatility — have proven similar to the Trump White House. For both there is no such thing as bad publicity. I have been denouncing the Vix index and all its works since 2005, with every bit of reason and bile I can muster. Yet even though you would have lost almost all your money “investing” in a Vix ETF, or, on the other side, betting against the Vix with an inverse ETF, people still watch the thing like a presidential press conference.

****SD: His idea – forget volatility, buy muni bonds. I think this wins the award for best volatility tangent.

Volatility Spreads to Energy Sector
Sage Anderson – tastytrade blog
The last few months have certainly been interesting in the oil patch.
Although OPEC first signed their pact with Russia to shrink worldwide oil production at the end of 2016, it wasn’t until the middle of 2017 that global inventories started to see significant declines.

Extremely Rare: Traders Are Net Long VIX Futures
Seeking Alpha
This article outlines how traders are positioned and how that positioning has recently changed. I break down the updates by asset class, so let’s get started.

Which VIX Spikes May Kill SVXY And ZIV?
Fred Piard – Seeking Alpha
ProShares Short VIX Short-Term Futures (SVXY) and VelocityShares Daily Inverse VIX Short-Term ETN (XIV) are inverse trackers of the S&P 500 VIX Short-Term Futures Index. They were supposed to have similar behaviors, with 3 major differences: SVXY is an ETF whereas XIV was an ETN, their prospectuses don’t describe termination events the same way, and they have different sponsors.


HNA Plans to Keep Deutsche Bank Stake at 8.8% After Cuts
Michael J Moore and Steven Arons – Bloomberg
Struggling Chinese conglomerate used to own 9.9% in lender; Group took out new collar options, more financing from UBS

London May Lose to New York After Brexit, Bundesbank Warns
Piotr Skolimowski and Carolynn Look – Bloomberg
The U.K.’s exit from the European Union will be a watershed moment for the City of London and weaken its role as one of the world’s leading financial centers, Bundesbank Executive Board member Joachim Wuermeling said on Thursday.

Number of crypto hedge funds surges amid bitcoin volatility
Maiya Keidan and Jemima Kelly – Reuters
Hedge funds focused on trading cryptocurrencies have struggled to eke out returns this year amid a sharp sell-off in the highly volatile market, in spite of a flood of new funds setting up to deploy investor cash.

The Great Momentum Crash
Vineer Bhansali – Barron’s
All good things might not come to an end, but they certainly attract attention and ultimately create the potential for excess, as witnessed in the stock-market crash of the past few weeks. Nowhere in the investment world has this been more visible than in the quantitative investment strategy known as trend following.

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