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Interview with OCC’s Donohue; Boom in VIX trading; Industry bits

Observations & Insight

Bits and Pieces

While the war of words over Cboe’s end-of-day trading proposition regards equities, we’re going to keep you updated, since the players involved are options exchange groups, too. Today’s news pertains to Cboe and Nasdaq – the two biggest options exchange groups by market share in the U.S. Plus, there are thoughts that, if implemented, the new closing process could affect volatility around the close, which is an options angle.

Anyway, Nasdaq CEO Adena Friedman called the proposal “irresponsible” and “really bad for investors” and urged regulators to give it a harder look. Cboe Head of U.S. Markets and Global Foreign Exchange Bryan Harkins called attempts to block the proposal “disingenuous.”

Gary Katz will be the next winner of the Joseph W. Sullivan Award at OIC this year. See the press release in the body of the newsletter.

Via REX Shares – VIX futures with 30 days to expiration have an average beta of .5. (The chart from the link includes far more DTEs.)

Nasdaq PHLX will expand “the Short Term Option Series Program to list for trading options series on the SPDR S&P 500 ETF Trust (SPY) which expire on Mondays.” On the 26th Cboe announced it would list Mini-SPX Wednesday Weeklys.

Renaissance Technologies warned of a market correction yesterday. Did you know founder Jim Simons has an aversion to socks? And that his favorite brand of coffin nail is Merit?

VIX back under 14 today.

Bitcoin is still trading in the four digits as of this writing. Digital assets were a big focus at the CFTC’s Market Risk Advisory Committee Meeting.

Lead Stories

CEO CHAT: Craig Donohue, OCC
John D’Antona – MarketsMedia
Technology. Cybersecurity.
Two buzzwords that are firmly entrenched in the financial lexicon – certainly in equities and options markets, among others.

VIX Securities Get Traded Like Crazy After Volatility Picks Up
Dani Burger – Bloomberg
Volatility is finally starting to rear its head, fueling intense trading on VIX exchange-traded products as buyers try to keep pace.
As investors reassess the record bullishness in risky assets, the Cboe Volatility Index is rising for a second straight day, touching the highest level in more than five months. That result: ETPs that tie their fortunes to the VIX — either by tracking or shorting futures on the gauge — have begun to furiously change hands.

US Options Volume Ends 2017 on a High Note
Tom Lehrkinder – TABB Forum
US listed options volume in full-year 2017 posted a 3.1% increase over 2016, aided by a strong 4Q-2017, in which volumes rose 7.2% compared to the previous quarter, despite continuing low volatility and the holiday season. TABB’s exclusive Quarterly Options Market Review breaks down all of the market volume trends.

Start of 5% Pullback? VIX Curve Signals Stocks May Recover Soon
Lu Wang – Bloomberg
Panic selling may be creeping up in the stock market, so much so that an options-based indicator is flashing a buy signal.
The Cboe Volatility Index, a gauge of S&P 500 Index options costs, has surged more than 30 percent over two days, pushing its spot price above that of its two-month futures for the first time since August. Such an inverted curve has occurred four times in the past year and all coincided with market bottoms.

Vol 411 Follow Up More on the VIX3M / VIX Ratio (VIDEO)
Russell Rhoads – Cboe Blog
Yesterday on Volatility 411 I spoke about the VIX3M / VIX ratio. For old school volatility traders VIX3M is the relatively new ticker for VXV and this is a 3-month volatility index based on S&P 500 Index Option pricing.

Brent crude oil volatility 2017 review: In like a lion, out like a lamb
Vito Turitto – Platts
The volatility in the first two quarters of 2017 was, on average, 14% higher than in the second half. Dated Brent’s volatility reached its peak at 40% implying that price drops in the physical market have been far more aggressive than in any Brent paper market while the Brent average price option market experienced the highest average volatility among all other derivatives.

Hedging gets pricey for sky-high Indian stocks before Budget 2018
Santanu Chakraborty – Bloomberg
Investors in Indian shares are growing increasingly anxious after a stellar rally.
The India VIX Index, which measures the cost of NSE Nifty 50 Index options, has risen the most since September 2016 in January, climbing in tandem with the equity gauge. While the trend has been similar in the US and other Asian markets, it’s especially pronounced in India, where five straight weeks of simultaneous gains marked a record.

The Pound’s Record New-Year Rally Veils Brexit Concerns
Charlotte Ryan – Bloomberg
The pound’s strongest start to a year on record has the bears running for cover.
Algebris Investments money manager Alberto Gallo abandoned his negative outlook on sterling to go long the U.K. currency versus the dollar in the fourth quarter of last year. BlueBay Asset Management LLP dropped this month its own pessimistic call to turn neutral. The pound surged 5 percent versus the dollar in January, its best run in the first month of a year in Bloomberg data going back to 1971, and 1.1 percent versus Europe’s shared currency.

Global stocks eye second best start to a year on record
Marc Jones – Reuters
World stocks pulled out of a two-day dive and were eyeing their second best start to a year ever on Wednesday, while the dollar came under renewed pressure ahead of the Federal Reserve’s first meeting of the year.

Exchanges and Clearing

Gary Katz to Receive Joseph W. Sullivan Award at 2018 Options Industry Conference
The Options Industry Council (OIC), an industry resource funded by OCC, the world’s largest equity derivatives clearing organization, today announced that Gary Katz, former President and Chief Executive Officer of the International Securities Exchange (ISE), will receive the 2018 Joseph W. Sullivan Options Industry Achievement Award.
This award is given to individuals in recognition of outstanding contributions to the U.S. options industry. The award will be presented at the 36th Annual Options Industry Conference on May 2 in Amelia Island, Florida.

Eurex Exchange – Fixed Income Highlights
First of all, I’d like to take the opportunity to say a huge thank you to our members and clients who continued to show Eurex strong support throughout 2017, despite grappling with the implementation of MiFID II.
Looking back on 2017, I’d say that global markets continued to hold up well. In Europe, Fixed Income markets were driven by geopolitical risk, with volumes across the board at Eurex robust. Whilst implied volatility remained range bound for much of the year, volumes across our products increased year-on-year. Periphery European futures and options contracts continued to benefit from regional geopolitical and event risks, together with short-term spikes in volatility.

****SD: Futures show consistent upward growth in open interest and volume; options are more all over the place. One other point: Eurex launched options on iShares fixed income ETFs recently.

Market services business boosts Nasdaq’s quarterly profit
Exchange operator Nasdaq Inc (NDAQ.O) posted a fourth-quarter profit, helped by higher revenue at its market services and non-trading related businesses.

MIAX Options – February 1, 2018 Fee Changes
Press Release
Effective February 1, 2018, pending SEC approval, the MIAX Options Fee Schedule will be amended.

Regulation & Enforcement

Sergeant Spoof’s Time Has Passed
Matt Levine – Bloomberg
…If you bought short-dated out-of-the-money call options on Bioverativ, Inc. stock, just before its January 22 announcement that it will be acquired for $105 per share (a 63.8 percent premium) by Sanofi, then you did pretty well. According to the Securities and Exchange Commission, someone did:

Brussels standoff over markets regulator; France backs upgrading the role of Paris-based ESMA, but others aren’t keen.
Fiona Maxwell – Politico
Some people are out to clip the wings of Europe’s Paris-based markets watchdog.
The campaign against the European Securities and Markets Authority — led by the European Parliament and a group of countries — is intended to stop the apolitical, technocratic body from expanding its mandate.

Let Fintechs Play in the ‘Regulatory Sandbox’
Sandbox could allow companies to ‘try new things out with the understanding that customers must be protected,’ said Georgetown’s Levitin


Goldman’s Options Advice Is to Expect a Volatile Earnings Season
Joanna Ossinger – Bloomberg
Buying calls has worked well amid big post-reporting moves; Big earnings moves, S&P 500’s gains fuel strategies’ success
Here’s how to navigate the rest of the U.S. earnings season, according to Goldman Sachs Group Inc.: buy straddles.

Stock market hedges are still shockingly cheap, even after selloff
Joe Ciolli – Business Insider
The stock market’s two-day selloff was scary, but apparently not worrisome enough to force traders to pay up for hedges.
So says data compiled by Goldman Sachs, which shows that while the Cboe Volatility Index — or VIX — spiked to a five-month high amid growing worry, it’s still on the low extreme when compared to similarly turbulent periods. That means the so-called “fear gauge” could have further to run.

If the market’s drop turns into a correction, history says hide out in gold, bonds
Thomas Franck – CNBC
When the market falls and volatility rises, investors should hide in bonds and gold, according to CNBC analysis using hedge fund analytics tool Kensho.

Why Market Volatility Is a Good Thing
Helene Meisler – TheStreet
Let’s step back for a minute and discuss why volatility is actually a good thing. For almost exactly a month now I have been calling for a market with higher or more volatility. While the stock market has only responded to the higher level of volatility in the past two days, the VIX has gone from 9 to 15 which is quite a move.

Where ETF Assets Will Flow In A Market Downturn
David Fabian – Nasdaq
The last several years of the bull market have seen tremendous expansion in assets under management in exchange-traded funds. Hundreds of billions of dollars have migrated to passive, index-based strategies with transparent holdings and low-costs. This has been a windfall for the two largest firms in the game: Vanguard and Blackrock, both of which have sterling reputations for creating vehicles with minimal expenses, excellent tracking, and deep liquidity.


TAIFEX to propose changes for derivatives clearing
Ted Chen – Taipei Times
The Taiwan Futures Exchange (TAIFEX) yesterday outlined its goals to expand its product offerings and work toward legal amendments that would help it establish a derivatives clearing business to help reduce costs for local financial institutions.

China FX regulator says no FX derivatives short position at end-Dec, unchanged from Nov
China’s foreign exchange regulator said on Wednesday that it had no holdings of short foreign currency positions in forwards and futures versus the yuan at the end of December, in line with its November position.

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Graduate of University of Minnesota School of Journalism and Mass Communication