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JLN Options: VIX Manipulation Debate; XIV Tales; Insurance and volatility

Observations & Insight

What’s the Deal With the VIX Manipulation Letter? Inaccuracy and Misunderstanding
Spencer Doar – JLN

The big options news of the day pertains to a letter alleging VIX manipulation. The letter, written on behalf of an anonymous whistleblower by a Washington D.C. law firm, alleges market makers manipulate the VIX by quoting far out of the money SPX put options so they are included in the VIX calculation at junctures that benefit their trading activities.

It’s understandable financial instruments are subject to concerns about manipulation when their inner workings are complicated and not fully understood by the general public. VIX manipulation has come up before and it will probably come up again unless regulators step in and levy an unbiased verdict, thus quashing this occasional debate. Until that point though, the letter needs a grain of salt.

Cboe said in a statement, “This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility exchange traded products, among other things.”

So, what are these inaccuracies and misconceptions?

For one, the letter confuses the Cboe with the CME multiple times, at one point saying, “Why did the CME Group not implement circuit breakers on the VIX futures just like it exists for S&P futures for example?” [sic] That’s a bothersome error for a letter making such headlines today. (The letter also didn’t get the branding change memo as it still goes for “CBOE” rather than “Cboe” in the instances where it does name the right exchange.)

Read the rest HERE.

Lead Stories

‘Whistleblower’ alleges manipulation of Cboe volatility index
Saqib Iqbal Ahmed, Rama Venkat Raman – Reuters
Wall Street’s most widely followed gauge of future stock market volatility is being manipulated, causing billions of dollars in losses a year to unwary investors, a law firm representing an “anonymous whistleblower” alleged in a letter to U.S. financial regulators and released on Monday.
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****JB: For other stories on this see the Financial Times article Anonymous ‘whistleblower’ claims ‘rampant manipulation’ of Vix index and/or the Bloomberg article VIX Manipulation Costs Investors Billions, Whistle-Blower Says

Wall St blames turmoil on insurers’ volatility strategy
Alistair Gray and Robin Wigglesworth – Financial Times
Wall Street is pointing the finger at insurance companies as an unlikely but pivotal source of the turbulence that wiped trillions of dollars off stock market values in recent days.
While complex volatility-linked funds and algorithmic traders have been widely blamed for the wild price swings, strategists and investors said a significant portion of the selling could be traced to variable annuities, a popular tax-advantaged insurance-company product that offers customers guaranteed returns.
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An Uber Driver’s Investment Tip Confirmed Paul Britton’s Doubts on XIV
Katia Porzecanski – Bloomberg
Paul Britton, founder of the $5.9 billion Capstone Investment Advisors, was on his way to his Manhattan office one day last fall when he received unexpected investment advice from his Uber driver.
It went like this: “‘There’s this unbelievable company, these guys just crushed it — not sure whether it’s in biotech or a technology business, but they’re up 80 percent this year. It’s this company called XIV,'” Britton, 44, remembered the driver saying. Britton said he responded, “I’m like, ‘I’m sorry to have to tell you this, mate. That’s not a company.'”
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****JB: This reminds of the story (probably apocryphal) where in 1928 Joseph Kennedy (John Kennedy’s father) was getting his shoes shined and the shoe shine boy told him to, “Buy Hindenburg.” Kennedy went to his office and sold all his shares saying, “You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.”

Ruffer: fund managers could spark next financial crisis
Citywire
The seeds of the next financial crisis are likely to lie within the fund management industry rather than the banking system, according to the managers of Ruffer Investment Company (RICA).
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****SD: The funny part is that Ruffer is believed to be “50 Cent.”

Bridgewater investment chief sees new era of volatility
Robin Wigglesworth – Financial Times
The world’s biggest hedge fund has warned that global markets are entering a new era of volatility as the world adjusts to higher interest rates after a decade of ultra-loose monetary policy.
Bob Prince, co-chief investment officer at Bridgewater, said last week’s market turbulence, which helped trigger record outflows from global stock funds, was set to continue.
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VIX Traders Flip to Betting on Volatility…and Stocks Rally
Randall Forsyth – Barron’s
Stocks are rallying Monday, extending Friday’s late afternoon reversal, but what’s really changed? It seems the speculators in the VIX once again hold the clue.
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Exchanges and Clearing

Call the Guinness Book – Trading Records at CME Continue
Spencer Doar – JLN
The hit parade continues over at CME Group.
Its markets didn’t need a volatility spike to continue their volume and open interest trends, but CME got one anyway and benefitted, especially in the interest rate options complex. The exchange group already had record electronic daily activity in its interest rate options in January.
/goo.gl/RK4VWi

HKEX To Add Long-Dated HSI And HSCEI Futures And Options From 5 March
Press Release
Hong Kong Exchanges and Clearing (HKEX) announced today (Tuesday) that it will introduce long-dated contract months for its Hang Seng Index (HSI) and Hang Seng China Enterprises Index (HSCEI) Futures and increase the long-dated contract months for its HSI and HSCEI Options, with maturities up to 5.5 years, from Monday, 5 March 2018 to give investors more choices.
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Technology

Taming the CAT: Even With Missing Tech Specs, Broker-Dealers See Opportunity
Monica Summerville – TabbFORUM
The implementation of the Consolidated Audit Trail may kick off one of the largest and most expensive IT rebuilds in the history of capital markets, and the clock is ticking. TABB Group recently conducted industry outreach to understand broker-dealers’ CAT readiness. At this early stage, some strong technology trends already are emerging and, encouragingly, many firms see opportunities to leverage the data set, reports TABB’s Monica Summerville.
jlne.ws/2EZLpif

Moves

CME Group Announces New Heads of Sales for Europe and Asia
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it has expanded its international client development and sales efforts with two senior sales appointments in Europe and Asia.
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****SD: “Tim Smith has been appointed Head of Sales, Asia” and “Michel Everaert has been named Head of Sales, Europe”

Regulation & Enforcement

Euro swaptions market prepares for pricing revamp
Lukas Becker – Risk.net (SUBSCRIPTION)
In July, the $13.8 trillion European swaptions market will wipe away a historic blot, bringing pricing for the products in line with the swaps used to hedge them.
jlne.ws/2EXlTKl

****SD: Thankfully, I have no legacy swaptions on my books to value.

Trump Administration Proposes Fees for Futures Industry
Gabriel T. Rubin – WSJ (SUBSCRIPTION)
The White House on Monday proposed levying fees on derivatives users to bolster the Commodity Futures Trading Commission’s 2019 budget, an idea that may be dead on arrival because of industry opposition.
Moreover, leaders at the CFTC also are opposed to the funding idea.
jlne.ws/2EYCddT

Global regulators propose crackdown on financial spreadbetters
Huw Jones – Reuters
Financial spreadbetters targeting retail customers should be licensed to stop them exploiting gaps in cross-border rules and preying on inexperienced investors, global regulators proposed on Tuesday.
jlne.ws/2F2eWYF

Strategy

Volatility Trading and Risk Management
Highly Evolved Vol
Last week was interesting.
There is actually NOT a Chinese curse that says, “may you live in interesting times”. Apparently, the whole thing was made up by a British diplomat. Nonetheless, a lot of volatility funds were cursed by last week being interesting.
There are many things volatility funds can do, so their returns have a wide range. I’ve seen numbers ranging from up 25% to down 95% (we made a few percent and thank you for your concern). The median was a loss of about 30%. This is because most volatility funds are option sellers trying to collect the volatility premium. I’ve written about this a lot. It is a perfectly viable strategy. So how did a professional fund lose 95%?
jlne.ws/2F2wwvI

Exploit VIX Spike to Buy Emerging-Market Stocks, Ashmore Group Says
Ben Bartenstein – Bloomberg
When the VIX gets going, so do emerging-market stocks.
That’s the message from Ashmore Group, which says the recent global selloff has led to better valuations in an asset class that’s already benefiting from strong inflows and an improving growth outlook.
jlne.ws/2F0FSrP

UBS, JPMorgan Validated as EM Stocks Are Havens Amid Rout
Srinivasan Sivabalan – Bloomberg
Even as global markets suffered the worst bout of turmoil in years, commentators from JPMorgan Chase & Co. to UBS Group AG said developing nations would ride out the storm.
jlne.ws/2EZ33T6

Education

Fear: The Index : Planet Money : NPR
NPR (Audio)
There is this thing called the VIX. Some people call it the fear gauge. It was invented to measure people’s expectations about how much the stock market is going to bounce around.
At some point, the VIX went from measuring expectations about the stock market. To being something people bet on.
Then, last week, when the market plunged, the role of the VIX may have gotten even larger: This thing that was invented to measure the stock market may have started driving the market itself.
On today’s show, Tracy Alloway of Bloomberg News tells us the story of the VIX.
jlne.ws/2F1yBYP

Events

Webinar: Securities Lending Data for Data Geeks and Quants
Finadium
The uses of securities lending market data are evolving. This webinar is intended for a quantitative/technical audience looking to understand differences in data sets and how securities lending data can be used in practice. Join Hanweck, DataLend and State Street Securities Finance for a discussion on current trends and opportunities.
jlne.ws/2F0W6RG

Miscellaneous

Too Clever By Half
W. Ben Hunt – TABB Forum
Like coyotes, financial innovators often are the smartest animals on the farm. Unfortunately, both are too smart for their own good. They’re plenty smart enough to understand and master the reality of their immediate situation, but nowhere near smart enough to understand or withstand the reality of their larger situation. It’s their nature to play the scheming mini-game. They can’t help themselves. And that’s why they always lose. When they push their scheming too far, coyotes end up getting killed by the farmer.
jlne.ws/2ElHefk

Stock market’s wild swings: It’s a ‘trader’s paradise’, says Wall Street legend
Mark DeCambre – MarketWatch
Not everyone is yanking their hair out after a resurgence of once-dormant volatility.
For one traders, whose lifeblood is unearthing profit from the vagaries of asset prices on Wall Street, view the recent shift to a decidedly bumpier ride for stocks as a downright happy-making event.
Prominent trader Mark Fisher told CNBC on Monday that the wild gyrations, which have become the norm represented a “a trader’s paradise,” over the “last couple of days.”
jlne.ws/2F0jcrz

Goldman was caught ‘wrongfooted’ in trading but outlook better: CEO
Catherine Ngai – Reuters
Goldman Sachs Group Inc’s (GS.N) trading division was caught “wrongfooted” last year, bracing for a return of volatility that did not materialize in financial markets, Chief Executive Officer Lloyd Blankfein said on Tuesday.
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Graduate of University of Minnesota School of Journalism and Mass Communication