Observations & Insight
Learning to live with low vol
Jean Boivin and Ed Fishwick – BlackRock Investment Institute
Digging into U.S. equity volatility patterns dating back more than a century, we find low market vol can last for years and tends to overlap with subdued macroeconomic vol. Combined with our view that the U.S. economic cycle has room to turn, we believe this environment helps foster risk-taking.
****SD: I missed this when it came out at the end of July. Here is a link to the full PDF – the above is a synopsis. From the report: “Running a regime-switching analysis on data since 1985, we find a 90% chance that any low-vol regime will persist from the current month over the next 12 months.” I like the 2011-2017 VIX vs SKEW tail risk hedging chart.
ESMA Updates Its MiFID II Guidelines On Transaction Reporting, Order Record Keeping And Clock Synchronisation
****SD: From the press release: “The updates corrects [sic] some unintended factual mistakes, typos and inconsistencies in the technical part of the Guidelines.” So not only did the first releases get just about everything wrong you can with a written document (the only saving grace being the errors weren’t intentional), the press release says “the updates corrects.” I’m usually not one to overly fret about the occasional grammatical error in a doc I’m reading, but this sure doesn’t instill much faith in a regulatory body tasked with a huge lift… No wonder people are scrambling to get ready — regulators lack clarity in their messaging. Also, when you say “corrects some unintended factual mistakes” in this context, I assume you mean that there are some other mistakes which were not corrected.
Will Options Trading Bring Institutional Investors to Bitcoin?
Robert Stowe England – Institutional Investor
far, hedge funds are virtually the only institutional investors to put funds at risk in digital currency assets.
Pension funds and other traditional institutions have continued to avoid the asset class, even as they watch returns soar from the sidelines. The total value of cryptocurrencies has more than doubled in value this year, reaching a market cap of $118 billion as of Monday – including $54.9 billion in Bitcoin and $25.1 billion in its upstart rival Ethereum, according to cryptocurrency tracker CoinMarketCap.
****SD: More on bitcoin developments below and some further context on the crypto developments of late from JLN.
Nevermind the VIX: Stock Volatility Is Rising in Subtle Ways
Chris Dieterich – WSJ
Uncommonly low volatility has been a hallmark of financial markets all year. Look beneath the surface, however, and volatility is picking up across the stock market, though not in ways registered by the closely followed Volatility Index, or VIX. As the Journal’s Morning MoneyBeat newsletter noted Tuesday, herky-jerky price movements are cropping up in sectors and individual stocks as investors rotate from one to the next, and sometimes back again. Price swings among sectors cancel each other out at the index level, meaning the S&P 500’s daily moves remain historically muted.
****SD: Take for instance the reaction of tobacco stocks to the FDA announcement targeting nicotine at the end of July.
Volatility Gauges Tumble to New Lows Amid Complacency Fears
Sid Verma – Bloomberg
The markets are alive with the sound of ‘zzzzzz’ as the latest trading session marks yet another another record low for volatility gauges.
Bank of America’s MOVE Index, which gauges volatility in the U.S. Treasury market, has tumbled to an unprecedented 46.9 at the close of Monday’s trading session. The move means investors in the world’s largest bond market are shrugging off the potential for price swings, even as two titans of the industry up their bets on an uptick in U.S. inflation.
VIX shorts hit new record
Helen Bartholomew – Reuters
Net short positioning in the CBOE’s VIX volatility index futures has hit record highs as investors continue to position for a further decline in the index, despite it trading at historic lows.
****SD: Schaeffer’s Research with more on this development.
Bitcoin Soars to Record High: Fork, Futures and ETFs Explained
Neena Mishra – Nasdaq
Bitcoin soared to a new high above $3,400 today, more than tripling in value from around $997 at the start of the year. The digital currency now has a market value exceeding $55 billion. Total value of all cryptocurrencies is more than $116 billion now, per coinmarketcap.com.
Bitcoin is up more than 22% over the past week, thanks mainly to a smooth split in the cryptocurrency into bitcoin and bitcoin cash. Other cryptocurrencies have also surged of late.
****JB: Yesterday we had a story about a mysterious trader with the nickname “Spoofy” supposedly manipulating the Bitcoin market.
The Fed’s Balance Sheet Reduction Could Be A Lot More Dangerous Than People Think
Jared Dillian – Forbes
The Federal Reserve announced that it would pursue a program of quantitative easing in November 2008, which is widely credited with stopping the Great Recession in its tracks. It is also credited with: Inflating the values of financial assets; Suppressing financial market volatility; Exacerbating inequality.
Exchanges and Clearing
Euronext renews deal with LSE business in clearing u-turn
Huw Jones – Reuters
Pan-European exchange Euronext has extended its contract with Britain’s LCH in a surprise move that could help defuse tension over where euro-denominated trades are cleared after Brexit.
****SD: Press release https://goo.gl/WVCy3R
Currency volumes on TR platforms jump as derivatives shine
Average daily volumes on currency trading platforms run by Thomson Reuters jumped to the highest in more than a year as a spike in turnover in swaps and other derivatives more than offset a decline in spot trading activity.
TP ICAP considers more deals after ‘mixed’ first half
Philip Stafford – Financial Times
TP ICAP said it was looking at further acquisitions this year after the world’s largest interdealer broker said it had cut 175 jobs in the first steps towards integrating the ICAP broking business it bought for GBP1.3bn.
In its interim results to June 30, the London broker said it had had a “mixed” year to date, and had focused largely on cost-cutting after the ICAP deal.
****SD: They’re considering buying Trayport apparently.
Sebi may extend trading hours for derivatives market
Samie Modak – Business Standard News
In a bid to bring back some of the lost zing, the markets regulator, the Securities and Exchange Board of India (Sebi), is looking to extend the trading hours for the derivatives market. Sources said Sebi was considering if trading in index futures could be kept open even after the cash market closed. The move will provide investors the tool to price in news flow that comes after market hours.
SGX reports market statistics for July 2017
Total Derivatives volume was 14.2 million, down 9% month-on-month (m-o-m) and up 10% year-on-year (y-o-y).
Regulation & Enforcement
U.S. appeals court upholds trader’s spoofing conviction
A U.S. appeals court on Monday upheld the conviction of a former New Jersey-based high-speed trader who was found guilty in the first U.S. criminal trial involving the manipulative trading practice known as spoofing.
****SD: Well worth your time to track these spoofing cases — a new frontier in trading prosecutions — even though the multiple stories today regard futures. Options spoofing is a thing, as this SEC enforcement from the end of 2015 shows.
Japanese Bank Fined $600,000 for ‘Spoofing’ U.S. Futures Markets
Alexander Osipovich – WSJ
Japan’s largest bank agreed to pay $600,000 to settle civil charges by the Commodity Futures Trading Commission that one of its traders repeatedly disrupted trading in futures markets for more than five years.
Statement Of SEC Chairman Jay Clayton And Commissioners Kara M. Stein And Michael S. Piwowar On Passing Of former SEC Chairman Harold M. Williams
Harold Williams, SEC Chairman from 1977 to 1981, was a remarkable person and leader whose legacy continues to provide a model for effective regulatory oversight.
Python for analysing financial markets
Saeed Amen – Automated Trader
Python is increasingly popular and is used in front-office systems at some of the largest investment banks and hedge funds. We provide an introduction to the language and its extensive range of libraries, and show how to speed up execution.
JPMorgan backing technology to transform trading desks
Laura He, Josh Ye and Alun John – South China Morning Post
As trading revenues plunge at bulge bracket investment banks, JPMorgan Chase & Co. is putting its faith in technology to drive growth.
Jeff Gundlach says his ‘highest-conviction trade’ is a bet against the S&P 500: Report
Liz Moyer – CNBC
Gundlach is moving to higher-quality debt, with lower returns but greater safety, according to Bloomberg News.
A bet on volatility’s upswing is his “highest conviction” trade, the report says
****SD: References the Bloomberg story – Gundlach, Wary of Pricey Market, Sets Cap on DoubleLine’s Growth
Currency Bets Getting Crowded, Raising Prospect of Violent Reversal
Chelsey Dulaney – WSJ
Investors have amassed the biggest bets on the U.S. dollar, Japanese yen and euro in years, raising the specter of volatile moves across currency markets if they move suddenly to exit those positions. Hedge funds and other speculative investors were holding a net $7.87 billion in bets against the U.S. dollar as of Aug. 1, according to Commodity Futures Trading Commission data. That’s the largest net bearish position in the U.S. currency since early 2013.
****SD: Call the fire marshal – we’re over capacity.
Shepherdson Nervous About Everything, Sees Market Tipping Point
Natasha Rausch – Bloomberg
Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said investors have become too complacent as markets rallied and need to be prepared for the possibility that the Federal Reserve will follow through on its plans to raise interest rates.
****SD: “Nervous about everything” sounds like a good excuse never to leave the house.
Funds target ‘unknown’ stocks as Wall Street cuts analyst jobs
David Randall – Reuters
With a nearly 30-percent gain in 2017, shares of industrial products maker Handy & Harman Ltd are outpacing hot stocks like Google-parent Alphabet Inc and Visa Inc. Yet few on Wall Street have ever heard of the $412-million market-cap company, in large part because no sell-side research analysts publish any estimates of its earnings.
****SD: Sometimes I look through listings just to be surprised by companies I had no clue were publicly traded. One of the ones: RICK, as in Rick’s Cabaret, the purveyor of “adult” clubs. In 2017, the stock is up some 33 percent. Wonder what hedgies were in on that one… Another surprise: Nathan’s Famous (like the hotdogs) is listed.
The Case For Long Volatility: Eric Peters ‘Imagines A Historic Reversal’
Eric Peters via The Heisenberg Report
I have an active imagination. A blessing and curse. I’m not alone. Of our many defining features, imagination is the greatest single thing separating us from other creatures. There is no higher power. Our ability to conceive of a tomorrow that is better than today is a precondition to discovery, invention. And these two things quite naturally stack, compound. Their summation has lifted us from the Stone Age to the space station. The journey has only just begun. This should be obvious to everyone but the most hopeless pessimist.
Low volatility weighs on Virtu results
Nicole Bullock – Financial Times
Persistently low volatility weighed on Virtu’s business last quarter amid a cost-cutting effort associated with integrating its $1.4bn purchase of trading rival KCG.
The company said in supplemental materials released with its earnings that it had cut KCG headcount to 610 from 952.
A Tale of Two Metals Rallies
David Fickling – Bloomberg
In a metals market dominated by China’s voracious materials demand, it’s tempting to believe that what’s good for the goose is good for the gander.
***SD: Not options. Just interesting.
The August of our Discontent: Once More Unto the Breach?
This month is the ten-year anniversary of the “quant crisis” or “quant quake” – that one week period in August 2007 when quantitative equity strategies like factor investing and statistical arbitrage suffered very large losses and then, in the next few weeks, made an almost full recovery. Given the current popularity of factor investing it seems a good time to review what happened that summer and discuss its relevance for today.