Observations & Insight
Turn Yourself In, It’ll Be Easier: Bank Cooperation On Spoofing Charges Saves Millions
Jim Kharouf – JLN
Over the past several months, there has been a fair amount of talk about the Commodity Futures Trading Commission’s push on the so-called “self-reporting” initiative launched last September and aimed at taking it easier on firms that come forward with wrongdoing.
Yesterday’s announced spoofing charges and fines include one of the first such self-reporting cases, with HSBC Securities settling for $1.6 million, Deutsche Bank for $30 million and UBS for $15 million.
For the rest of the commentary, click HERE
Cboe’s Crypto Journey Just Getting Started
At STAC’s 92nd Annual Mid-Winter Meeting, JLN spoke with Michael Mollet, Cboe Global Markets’ director of product development, about the exchange group’s outlook on cryptocurrency derivatives and what’s needed for more growth in the space.
It’s been more than a month since the launch of Cboe’s bitcoin futures, but to render a verdict on the success of the product is far too premature, Mollet says. Cboe is priming itself to be a market for cryptocurrency derivatives and its XBT offering is just a start.
Fragmentation and Liquidity Issues Must Be Addressed to Maintain a Resilient Listed Options Market
John D’Antona Jr. – Traders News
In the last decade, following the financial crisis and emerging from a period of extreme volatility, the listed options industry has had its share of challenges. Industry volumes have leveled off, some large liquidity providers have left the space, while others have consolidated – resulting in significant concerns about liquidity and market fragmentation.
****SD: Displayed vs. “hidden liquidity,” auctions, pressures on market makers, fragmentation – what I’d call the “usual suspects.” (No mention of bank capital rules though…) Cool graphic regarding volumes from Trade Alert’s Henry Schwartz. Get this – together, SPY and SPX account for 23 percent of daily contract volume. However, 80 percent of the daily notional traded volume is SPX. The SPY alternative piece below is a good dance partner for that fact.
VIX Hedging Proves Timely as Record Stock Rally Shows Fatigue
Cecile Vannucci – Bloomberg
Volatility gauge has been rising with S&P 500 more often; Simultaneous advances have led to more stock gains in the past
All the hedging that’s pushed up the VIX lately is now proving useful. The S&P 500 Index’s biggest slump since September halted a rally that came in tandem with an advance in the Cboe Volatility Index, a rare occurrence that happened as investors favored VIX options to protect equity gains. The selloff that started in the U.S. triggered declines in Asian and European stock markets on Tuesday as volatility climbed across regions and asset classes.
****SD: We entered the 15 handle earlier today (!) – good for a five-month high. As of this writing, pretty close to 15 still.
There’s Still No SPY “Alternative” for Options Traders
Bernie Schaeffer – Schaeffer’s Investment Research
It was not quite a year ago in this space when we discussed the groundswell of inflows into the iShares Core S&P 500 ETF (IVV), an exchange-traded fund (ETF) that tracks the S&P 500 Index (SPX). At the time, back in February 2017, IVV was on the cusp of achieving the milestone of $100 billion in assets under management (AUM), as cost-conscious investors gravitated toward IVV’s lower expense ratio relative to its S&P-tracking rival, the SPDR S&P 500 ETF Trust (SPY).
****SD: I had no clue IVV was a thing nor that it had so much AUM. If I had to guess based on the ticker I would have posited it was some vol-based ETF.
’50 Cent’ Grabs Even More Protection Against U.S. Stock Selloff
Luke Kawa – Bloomberg
Trading patterns in options markets suggest the volatility trader known as “50 Cent” is back to the grind.
At 10:32 a.m. in New York [on Monday], 50,000 March VIX calls with a strike price of 25 were purchased at 49 cents apiece.
Hedge funds have never been this bullish about oil
Frik Els – MINING.com
Better prospects for crude oil is nowhere more evident than on derivatives markets and the shift in positioning of large-scale derivatives speculators such as hedge funds.
Hedge funds have pushed long positions – bets on higher prices in future – to all-time record levels across five energy markets including US benchmark West Texas Intermediate crude, Brent international oil futures, and US gasoline and diesel fuel.
Exchanges and Clearing
Nasdaq Blames Network Issues for Friday Options Data Outages
Max Bowie – WatersTechnology (SUBSCRIPTION)
Following the days’ outages and failing over its network switch, Nasdaq said its systems were operating normally.
What To Watch For In NASDAQ’s Q4 Earnings
NASDAQ has had a fairly strong 2017, as the exchange managed to grow its revenue by 7% in the first 9 months of the year, and we expect the growth momentum to continue when it announces its Q4 earnings on January 31. The revenues from non-trading segments grew at a rapid pace, aided by the acquisitions of Marketwired and Boardvantage in the previous year, as well as enhanced data and technology offerings. We forecast around 5% growth in NASDAQ’s non-trading revenues for the full year, and believe that the Q4 results will reflect similar growth.
Nasdaq announces changes to the Excessive Messaging Compliance Reports
Effective Tuesday, January 30, 2018, the naming convention and level of delivery of the following INET Compliance Reports, available to Market Maker firms on Nasdaq ISE (ISE), Nasdaq GEMX (GEMX), and Nasdaq MRX (MRX), are changing.
****SD: “The Excessive Order Report identifies when a participant is sending an extremely rapid stream of orders in an option series or group of series, either in a short period of time or over a longer period of time, with the intention of slowing the system to gain an advantage.”
Regulation & Enforcement
US derivatives regulation: a pause in 2017, and a look ahead to 2018
International Law Office
In 2017 there were some moves toward reevaluation of the US regulatory landscape for derivatives under the new administration, but few major changes. The unfinished regulatory priorities from the prior administration were generally not addressed, yet there was no significant rollback of the Dodd-Frank Act regulations on derivatives that had previously been imposed. In part, this reflects the turnover at the relevant financial regulatory agencies, which for large parts of the year were without a full complement of commissioners or relevant senior staff.
****SD: Comprehensive rundown.
European banks pay $46.6 million to settle U.S. ‘spoofing’ charges
Michelle Price – Reuters
Three European banks paid a settlement of $46.6 million, and eight individuals were charged, in a U.S. probe into alleged manipulation of the futures and commodities market.
****SD: Per our comments yesterday, this is futures – primarily gold and silver, some E-Mini stuff – but options spoofing is a thing. Also, the infamous basement trader Navinder Sarao helped with this investigation.
FCMs demand self-certification overhaul after bitcoin debacle
Dan DeFrancesco – Risk.net (SUBSCRIPTION)
The race between two of the US’s largest futures markets to launch bitcoin futures last month has sparked a backlash from clearing banks, which are calling for changes to the self-certification process for listing new derivatives contracts.
Early Word on a Contract May Have Helped Investors Cash In
Shahien Nasiripour – Bloomberg
Sounds dodgy, but there may not be anything illegal about that.
Exclusive: ESMA Faces FCA Resistance to 1:30 Leverage Cap
Victor Golovtchenko – Finance Magnates
With a week left for public comments, the UK regulator is said to be at odds with the pan-European regulator
Exclusive: Blackstone in talks to buy majority stake in key Thomson Reuters unit
Pamela Barbaglia – Reuters
U.S. private equity firm Blackstone Group LP (BX.N) is in advanced talks to buy an approximate 55 percent stake in the Financial and Risk business of Thomson Reuters Corp (TRI.N) (TRI.TO), a deal that would value the unit at about $20 billion including debt, three sources familiar with the matter said on Monday.
****SD: I would sure hope Reuters has the exclusive.
Macquarie: ‘Grotesquely swollen financial markets’ will go haywire
Joe Ciolli – Business Insider
Cross-asset measures of volatility have been at historically low levels for months.
The role of global central banks has been shifted in recent months as they’ve become mostly concerned with keeping this volatility subdued, says Macquarie.
Eventually, price swings will rock the market, and investors would be well-served to buy volatility in preparation for that.
****SD: Another piece based on Macquarie’s outlook – Commodities Dance to Own Beat, Defying Cross-Asset Convergence
Speedy Mean Reversion – The VIX’s Return To Normalcy
Garrett DeSimone – Seeking Alpha
Lately, the investment community’s attention has been focused on at the record low volatility observed in markets. The CBOE Volatility Index (VIX) clocked a 9.22 earlier this month- a level not seen in over a decade. Even though the VIX has remained low for the last year or so, it still has experienced bursts of variation. For example, on August 10th in response to President Donald Trump’s “Fire and Fury” war of words with North Korea, the VIX jumped from a serene 11.11 to above 16.
Buying High And Selling Low: The Counterintuitiveness Of VIX Trading
Berlinda Liu – Seeking Alpha
With 2017 in the rear-view mirror, we can look back and observe that short VIX strategies rank as one of the most profitable strategies of the year. The S&P 500 VIX Short-Term Futures Inverse Daily Index returned 186.39%, and selling VIX futures has become a popular income-generating strategy. 2017 was also a year marked by an extraordinary level of low volatility. VIX has been hovering around 10 and dipped below 10 more than 50 times; on November 3, 2017, VIX posted its all-time low of 9.14.
FX Options Market Update: January 30, 2018
Dan Larsen – TradingFloor.com
****SD: Brexit headlines = increased pound volatility. G10 pairs with highest risk premium – GBP/JPY, GBP/AUD, AUD/JPY, GBP/USD and EUR/GBP.
Amazon, Berkshire, JPMorgan create healthcare company to cut costs
Caroline Humer and Ankur Banerjee – Reuters
Amazon.com Inc, Berkshire Hathaway and JPMorgan Chase & Co will form a healthcare company aimed at cutting costs for their U.S. employees, they said on Tuesday, sending shares in the broad healthcare sector sharply lower.
****SD: I bet the “Prime” version of Amazon’s offering has free delivery – I mean ambulance rides – to the hospital.
JPMorgan promotes Pinto and Smith, fueling race to succeed Dimon
David Henry – Reuters
JPMorgan Chase & Co on Monday promoted Daniel Pinto and Gordon Smith to be co-presidents and co-chief operating officers, a move seen as heightening competition for the job of CEO held by Jamie Dimon.
REX VolMAXX Short Volatility ETF (VMIN) Finished 2017 as Best Performing ETF (Non-levered) in USA
Business Wire via Financial Times
REX Shares, LLC (REX) today announced its short volatility fund, the REX VolMAXX Short VIX Futures Strategy Fund was the best performing ETF in the U.S., excluding leveraged products, for calendar year 2017 according to Bloomberg data. Over the course of the year, VMIN turned in a total return of +190.57%*.