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Hawaii, Harvard gambled on calm; Wall Street not quitting vol; More VIX rigging; HFT source code developments

Lead Stories

Harvard, Hawaii Gambled on Market Calm—Then Everything Changed
Gregory Zuckerman, Gunjan Banerji and Heather Gillers – WSJ
A decade of low bond yields pushed some of the most stability-minded investors to dabble in risky investments that depended on markets being orderly. Now, those bets are looking problematic.
In the past, pension funds, endowments and family offices pursued relatively safe investments. After interest rates collapsed on the heels of the financial crisis, they ran into challenges paying pensioners and filling university budgets, and added riskier bets on hedge funds and venture capital in the hopes of winning better returns.

****SD: Does this mean I’ll finally start seeing returns on my short Spam position? Been rolling that one since childhood. Seriously though, fascinating piece. Matt Levine called this “the story of human life on earth.”

Sorry, not sorry: Wall Street not quitting ‘vol’ products
Trevor Hunnicutt – Reuters
One bank has expressed its regrets for the unraveling volatility trade.
But in general Wall Street is offering up apologia – rather than an apology – for the dramatic windup last week of investment products that had profited from calm stock markets.

****SD: Thinking of SNL – “I’d like to take this time to formally aplogize.” “Are you trying to apologize?” “No, I would never do that.” Also see Bloomberg’s Banks Can’t Sell Grenades Without Some Blowback

VIX Rigging Buzz Was Fueled by a Texas Grad Student From Iran
Brian Louis – Bloomberg
Amin Shams, a 34-year-old Ph.D. student at the University of Texas, says things have been interesting lately. That’s an understatement, as research he published last year fuels a renewed debate over whether a famous financial index is rigged.

****SD: It’s like they say, everything is rigged in Texas.

House Votes to Require SEC Subpoena for Traders’ Source Code
Yueqi Yang – Bloomberg
The code is a secret sauce that fuels firms’ profits; Bill also applies to trading algorithms from hedge funds
The House voted Wednesday to ensure the U.S. Securities and Exchange Commission would continue to have to seek a subpoena before accessing proprietary source code from high-frequency traders, the secret sauce that fuels profits.

VIX ETP Investors Quickly Forgive Turmoil and Get Back in the Game
Carolina Wilson – Bloomberg
Exchange-traded products tracking VIX futures are seeing their first signs of life after investors yanked more than $570 million from two ETPs following the spike in market volatility.
The VelocityShares Daily 2x VIX Short Term ETN, known by its ticker TVIX, took in more than $20 million this week, the first time the $300 million ETN has seen inflows this month, according to Bloomberg data. And the $210 million ProShares Ultra VIX Short-Term Futures fund, or UVXY, gathered $13.3 million, the data show. Both funds promise to provide twice the performance of the Cboe SPX Volatility Index.

****SD: “I wish I knew how to quit you.” -Jake Gyllenhaal

Why This Options-Based Fund Imploded During the Sell-Off
Though last week’s market volatility may have come as a surprise to many investors, it registers as only a small blip in the context of a longer-term market cycle. But short-term dislocations like these can be helpful in that they allow investors to get a sense of where a fund’s bets and risk exposures are. Here to discuss one fund in particular that we recently downgraded is Gretchen Rupp

****SD: Some more info on the LJM fund that blew up. Did you know that there are about 75 funds that Morningstar classifies as “options-based” but only five of them have track records pre-dating the financial crisis? I will say I am confused by the comment made in the piece that “there is no interest rate risk” in options. While the impacts are generally smaller than, say, time until expiration, dividends and interest rates do factor into options pricing. And while the LJM fund in question focused on the S&P 500, how about options with fixed income underlyings? Strange.

La Niña: Calm Before the Storm in Ag Markets?
Erik Norland – CME Group
Corn, soybean and wheat markets are witnessing an odd juxtaposition – the onset of a La Niña and exceptionally low options’ implied volatility (Figures 1 & 2). Why this is unusual is that corn, soybeans and wheat often experienced exceptionally high volatility (about 1.3-1.5x normal) during many of the past eight La Niña episodes (Figures 3, 4, 5). As such, one could wonder: are markets being complacent in the face of approaching danger?

Volatility trap: how gamma roused a market monster
Kris Devasabai, Faye Kilburn and Rob Mannix – (SUBSCRIPTION)
If US equity market volatility stirred on February 2 – wiping 2.2% from the value of the S&P 500 in a drowsy, unseeing twitch – it woke after the weekend, with a sore head. As trading drew to a close on Monday, February 5, a garden-variety sell-off quickly became something wilder.

Exchanges and Clearing

Cboe Global Markets to List SPDR S&P 500 ETF Trust (SPY) Monday-Expiring Weekly Options
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today announced that it plans to list SPDR S&P 500 ETF Trust (ticker symbol: SPY) options that expire on Mondays, beginning February 16, 2018, subject to rule filing effectiveness. The new series of SPY options are expected to be listed on Cboe Global Markets’ four options exchanges: Cboe Options, C2 Options, Cboe BZX Options and Cboe EDGX Options.

US Futures, Options-on-Futures Poised to Continue Record Run
Tom Lehrkinder – TABB Forum
US futures and options-on-futures volumes finished 2017 at record levels. Futures were up 2% and options grew 10% compared to 2016 totals, and both are poised to set new records in 2018. Meanwhile, though the number of FCMs ended the year down, due to consolidation rather than contraction, a more favorable interest rate environment coupled with global expansion may lead to FCM growth in 2018. TABB’s Q4 2017 futures market review highlights all the activity.

The World Federation Of Exchanges Publishes 2017 Full Year Market Highlights
The World Federation of Exchanges (“The WFE”), the global industry group for exchanges and CCPs, today published its 2017 Full Year Market Highlights report.

****SD: “Exchange Traded Derivatives (ETD) volumes ended the year up 0.6% on 2016, driven largely by increases in volumes traded of single stock options, stock index options and interest rate futures.”

CME Group Posts Record Options ADV in January
Finance Magnates
The Chicago Mercantile Exchange (CME) has released its January Options Review.
The report discloses that a record of 4.5 million options were traded on a daily basis, up 32% YoY and signaling a promising start to 2018.

****SD: Full CME release here.

Credit Suisse AG Announces that The Nasdaq Stock Market Intends to Suspend Trading of the XIV ETNs
Credit Suisse AG announced today that The Nasdaq Stock Market intends to suspend trading of Velocity Shares Daily Inverse VIX Short Term ETNs (“XIV”) following the market close on February 15, 2018 and institute delisting proceedings.

ICE pushes energy suite with new incentive schemes
Jack Ball – Global Investor Group (SUBSCRIPTION)
The Intercontinental Exchange (ICE) has filed with the US futures regulator to introduce eight new incentive programs across its energy derivatives suite, just over a month after the US exchange giant announced plans to transfer hundreds of energy futures contracts from ICE Futures Europe to ICE Futures US.

India, Singapore Exchanges Eye Trading Link to Modi’s Home State
Santanu Chakraborty and Andrea Tan – Bloomberg
Singapore’s exchange may have a shot at keeping its lucrative India index futures, as long as it can meet the desire of Prime Minister Narendra Modi’s government to keep investor activity within the country’s borders.

Japan Exchange Group switches on Cinnober tech
Japan Exchange Group (JPX) successfully launched its new clearing system for exchange traded derivatives, based on Cinnober’s TRADExpress RealTime Clearing, and a CCP Risk solution.

Regulation & Enforcement

Flash-Boys Regulation Fight Returns to U.S. Derivatives Agency
Benjamin Bain – Bloomberg
CFTC officials debate tighter rules for high-speed traders; Agency punted on an earlier plan to tighten oversight
Two top officials at the main U.S. agency that regulates derivatives are rekindling a fight over how aggressively it should police computer-driven trading strategies that dominate markets.

FIA supports U.S. legislation to recognize client margin offset
In a new letter and testimony submitted to the House Financial Service Committee, FIA continues to advocate for U.S. Congress to address the unintended consequences of post-crisis financial reforms that undermine the incentives and benefits of central clearing for derivatives.

NASDAQ PHLX LCC Notice Of Acceptance of AWC
…In an estimated 10,200 instance from January 1, 2015 through July 15, 2017, [Deutsche Bank Securities] failed to make and keep an accurate record of the time it transmitted options orders to a floor broker for execution.

****SD: “That’ll be $315,000 please.” That’s about $30 an order.

Interactive Brokers fined $4.5 million for algo trading system failures
The Trade
Financial authorities have fined the Hong Kong-based arm of Interactive Brokers $4.5 million due to failures relating to its algorithmic and electronic trading systems.

****SD: I’m not clear on what instruments were involved in the failures, but it’s IB so here’s the story anyway.


Predata Appoints Hazem Dawani as CEO
Predata, a predictive analytics platform that anticipates the risk of future events, today announced the appointment of Hazem Dawani as Chief Executive Officer. Predata also named Joel T. Meyer as Vice President of Government and Corporate Markets.

****SD: A new home for the former OptionsCity CEO.

Citadel Securities recruits former Fidelity International head of systematic trading
Hayley McDowell – The Trade
Citadel Securities has hired the former head of systematic trading at Fidelity International, a spokesperson has confirmed.

Weyland Tech Welcomes Jon ‘Dr. J’ Najarian to Board of Directors
Markets Insider
Weyland Tech, Inc., a provider of mobile business applications, announced today that Mr. Jon Najarian has joined the Company’s Board of Directors.

****SD: Jon’s most recent tweet was a Daily Mail story about yoghurt reducing your chance of a heart attack. FYI.


It’s Getting Harder to Tell Banks From Tech Companies
Matt Levine – Bloomberg
You know, someone invented the XIV ETN. And someone invented the VIX, and VIX futures. And when you read the technical specifications for all of those things, it is clear that they are not trivial feats of engineering. Teams of marketers and traders and quants and technologists and lawyers put many hours into getting them just right, so that they would work as intended. They are technologies, highly engineered tools designed to help customers do things that they couldn’t have done before. They are financial technologies, built not out of screens and circuit boards but out of formulas and hedging strategies and legal documents, but that is what you’d expect: Financial firms ought to innovate in financial technology.

Technology Cycle At ‘Breakpoint’
Shanny Basar – Markets Media
Lars Ottersgård, executive vice president and & head of market technology at Nasdaq, predicted that in five years the majority of clients will have moved from in-house enterprise solutions to managed services.

****SD: Missed this earlier in the week.


Why the Bearish Analyst ‘Hot Takes’ on Cboe Are Wrong
Bernie Schaeffer – Schaeffer’s Investment Research
The accompanying daily chart of Cboe Global Markets (NASDAQ:CBOE) provides a prototype illustration of the most prominent risk of “momentum investing” (even more profoundly highlighted over this past week with the implosion of the inverse volatility exchange-traded funds).

VIX Curve Improves by Most Since 2008 as Volatility Jolt Fades
Luke Kawa – Bloomberg
For the VIX futures curve, time has healed all wounds.
The enormous spread between front and second-month VIX futures contracts, which are tied to the Cboe Volatility Index, was a barometer of just how roiled the market was during the recent downturn. It also caused severe pain (and in one case, death) for some products linked to the VIX.

****SD: Also from Bloomberg The VIX Futures Curve Reverts Back to Normal

Checking in on Oil Volatility
Russell Rhoads – Cboe
The S&P 500 finished the day higher for the fourth day in a row and VIX dipped below 20.00 for the first time since February 5th. The chart below shows that as the S&P 500 moved up over the day as VIX worked lower. What is referred to commonly as the ‘fear index’ is starting to indicate there is less fear in the market than we experienced last week.


U.S. tax cuts bad idea now but will boost growth, say economists: Reuters poll
Indradip Ghost and Shrutee Sarkar – Reuters
The U.S. government was wrong to cut taxes at this stage of the business cycle given the economy is near full employment, but will nonetheless help lift growth this year and give the Federal Reserve more reason to raise rates, a Reuters poll of economists found.

****SD: “Why’d you do that?! (Thanks for doing that.)” What’s the phrase? You can’t gripe about your cake and eat it, too?

Fears of Overheating May Be Overdone
Peter Eavis – NY Times
Wall Street is worried about inflation right now – and a government report on Wednesday likely didn’t quell those concerns.
The consumer price index rose by 2.1 percent rise in January, faster than Wall Street analysts expected. The core index, which excludes food and energy, also came in above forecasts, prompting Michael Feroli, an economist at JPMorgan, to describe it as “hotter than Hades.”

****SD: Regardless, always use mitts when pulling dishes from the oven.

Whether correction turns into regime change is down to the Fed
John Authers – Financial Times
Last week’s volatility crash cannot be consigned to the history books just yet. There are still two narratives attempting to explain it. Either it was an overdue technical correction, rendered more violent by problems for products that sold volatility; or it was the beginning of a regime change for markets, as all asset classes adjust for the likelihood of rising inflation.

Horizons launches actively managed hedged US dividend ETF
ETF Strategy
Horizons ETFs Management US has launched the Horizons Cadence Hedged US Dividend Yield ETF (USDY US) on Cboe ETF Marketplace. Co-managed with Cadence Capital Management, USDY is an actively managed multi-factor ETF that invests in US large-cap dividend payers while offering downside protection through the use of an option overlay strategy.

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Graduate of University of Minnesota School of Journalism and Mass Communication