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Don’t Buy the Hype: Heightened Volatility Is Not the New Normal

Lead Stories

Don’t Buy the Hype: Heightened Volatility Is Not the New Normal
Dani Burger – Bloomberg
Investors preparing for an era of higher volatility may want to take a pause: A sustained period of price swings isn’t in the cards quite yet.
Changes in volatility measures may only be short-term reactions rather than a wholesale regime shift, offering a potential tonic to traders who have been on edge since inflation data punched up turbulence in late January. That handed global stocks their worst month since 2016, while U.S. 10-year yields marched to the highest in four years.
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An abridged, illustrated history of volatility
Financial Times
Volatility has evolved from an academic idea into a risk management tool and now something investors can trade, just like a stock or bond. It now even has its own world-famous index, the Vix, which has lent its name to a fictional homicidal supercomputer.
Its winding history features multiple Nobel Prize winners, Mark Cuban, a vineyard owner, a plethora of investment bankers and one Greek snake eating its own tail.
But to understand why and how this evolution happened – and what it might mean — we first need to go back more than six decades, to the intellectual ferment of the University of Chicago’s famous economics department.
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LJM Partners shutting its doors after ‘vol-mageddon’ losses in U.S. stocks
Trevor Hunnicutt – Reuters
A Chicago-based fund manager that took risky bets on stock-market swings is shutting its doors after the strategy failed during the slump in U.S. equity markets in early February, according to a letter sent to investors on Wednesday.
LJM Partners Ltd, run by Anthony Caine, will be the first investment manager to close after complex trades failed spectacularly in the Feb. 5 reversal of fortune in U.S. stocks that some investors called “vol-mageddon.” LJM Partners and an affiliate saw losses of 80 percent or more.
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Stock-market volatility is back, and investors need to get used to it
William Watts – MarketWatch
The stock market can continue to rise, but the ultralow volatility backdrop that accompanied the relentless 2017 rally is gone and investors will need to adjust, said a pair of quantitative analysts at Société Générale.
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Volatility ETFs Adjust Goals Post-Correction
ETF.com
After the February market plunge that sent volatility spiking and precipitated the early demise of the VelocityShares Daily Inverse VIX Short Term ETN (XIV), a few issuers have tinkered with their own VIX-based products.
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FCA’s Baile: The ‘larger’ number of open-ended funds could be a risk to market stability
Mike Sheen – Investment Week
The Chicago Board Options Exchange’s Volatility Index (VIX) experienced its largest ever one-day move on 5 February, reaching its highest level since 2015 amid a steep decline in equity markets.
Reflecting on the volatility, Bailey asked: “Are there features of the structure of the system today, such as the larger number of open-ended investment funds, which mean that there are risks to stability which need to be tackled?”
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The Hawk has Landed
Bob Iaccino – Nadex
We can officially stop calling Jay Powell, the “new” Chair of the U.S. Federal Reserve Bank. His first of 2 testimonies before Congress is in the books, complete with the prerequisite dollar, bond and equity market volatility. the Dow ended the day down 299 points, the S&P down over 35 points and the Nasdaq down over 91 points. Drops of -1.16%, -1.27% and -1.23% respectively. As is the usual procedure, The Fed released his opening remarks ahead of the testimony and there was nothing really surprising in them, but once we got to the question and answer portion, markets got a touch nervous.
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Former Goldman Sachs Banker Brings Cryptocurrency To The Financial Mainstream
Andrew Rossow – Forbes
A former Goldman Sachs banker plans to launch a digital currency platform this year that will make it easier for investors to short cryptocurrencies — possibly moving the crypto market to the financial mainstream.
Alex Grebnev, the former banker who worked at Goldman Sachs for 10 years in a variety of roles in equities and derivatives structuring before he joined Merrill Lynch, has partnered with the founders of Changelly one of the leading instant cryptocurrency exchanges. According to the Wall Street Journal, Mr Grebnev plans to launch a platform for digital currencies later in 2018.
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Exchanges and Clearing

OCC Declares Nearly $80 Million Clearing Member Refund for 2017
OCC
OCC, the world’s largest equity derivatives clearing organization, today announced the declaration of a nearly $80 million refund to clearing members under its approved capital plan. This is the second largest clearing member refund made by OCC since the inception of its capital plan.
The 2017 regular refund is approximately $53.0 million. OCC also announced a special refund of 2017 clearing fees of approximately $25.7 million, which represents the excess of 2017 pre-tax net income over OCC’s target revenue based on achievement of a 25 percent business risk buffer as required under the capital plan. Payment of the total 2017 refund will be made as one payment in the third quarter of 2018.
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CBOE Posts Record ADV in February, Continues Strong Start to 2018
Reshef Mashraky – Finance Magnates
The FX subsidiary of the Chicago Board Options Exchange (CBOE) continued its strong beginning to the new year, reaching a record ADV in February after having reached strong numbers in the preceding month as well.Trading volumes surpassed $884 billion during the month of February, dropping 5.7% from January levels of $937 billion. However, the numbers are still vastly improved relative to February 2017. February’s monthly trading volume was up 63.9% YoY, from last February’s volume of $539.6 billion.
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Cboe to Provide Market and Trade Data to oneZero Financial
Cboe
Cboe Global Markets, Inc. (Cboe: CBOE | Nasdaq: CBOE), one of the world’s largest exchange holding companies, today announced that it is now providing its Cboe Top real-time stock quote and trade information via oneZero Financial Systems, a software and infrastructure provider for institutional and retail brokers.
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Regulation & Enforcement

CFTC Commissioner Questions Effectiveness Of “One-Size-Fits-All” Derivatives Regulations – Finance and Banking
Mondaq
CFTC Commissioner Brian Quintenz expressed concern that post-crisis reforms were not appropriately tailored to address market-specific risks. As a result, he said, regulators are disincentivizing activity that is necessary for healthy, efficient markets.
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FCA’s Bailey urges market to examine a ‘synthetic Libor’
Philip Stafford – Financial Times
The head of the UK markets regulator has called on market participants to look at creating a “synthetic Libor” to resolve a headache created by a potential global market shift away from the key lending benchmark in coming years.
Andrew Bailey, head of the Financial Conduct Authority, told a conference in London on Thursday that the industry should examine whether it was possible to create another Libor to serve derivatives and bond contracts.
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Euronext says commodity data launch to happen in H1, 2018
Reuters
Euronext said it will begin publishing data on investors’ positions in its commodity derivatives in the first half of this year, later than previously indicated by the financial market operator.
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Technology

Matrix Announces the Launch of Matrix Executions Combining Best in Class Assets from Option Technology Solutions and ITG Derivatives
Press Release
Matrix Holding Group, LLC (“Matrix”) announced today the launch of Matrix Executions— a joint venture with Investment Technology Group (ITG), as the minority stakeholder. Matrix is partnering with ITG to create a newly established separate derivatives execution and technology business. ITG has been a leader and innovator in equities execution and technology to the global institutional trading community for over three decades.
Matrix, acting as an agency-broker dealer, with offices in Chicago and New York, will serve the needs of both the buy and sell-side institutional trading communities, retail investors, exchanges and market makers via industry-leading front-end EMS capabilities, advanced algorithms, and low-latency routing technology.
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Devexperts Supporting Crypto Derivatives on dxTrade’s Platform
Finance Magnates
Devexperts, one of the leading platform technology developers in the industry, has embraced the growing industry shift towards cryptocurrencies. This has led to the group to integrate crypto spot and derivatives trading to its multi-asset and multi-market trading platform dxTrade.
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Strategy

VIX Signal Just Flashed for the Third Time Ever
Karee Venema – Schaeffer’s Investment Research
It’s been a wild ride for the U.S. stock market, with the Dow and S&P 500 Index (SPX) set to snap its longest monthly win streaks in decades — and the Cboe Volatility Index (VIX) on track for its best monthly gain since August 2015. Amid this volatile trading environment, the VIX premium moved to a discount for the first time since October 2016 last week, and has since swung to a more extreme reading.
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Whether Vol Is High Or Low, Gamma Trading Can Exploit Opportunity
Jason Hill – Seeking Alpha
In 2018, volatility kicked into high gear. So far, there have been 11 days when the S&P 500 has moved at least 1%. Investors may not like the return of volatility, but it can strengthen the tailwinds for the gamma trading we do in our market neutral income strategy (see our previous blog post for an overview of gamma trading). The more volatility in the market, the more stocks rise and fall – which can give us more opportunities to sell high and buy low.
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Return of Volatility Signals More Turbulence Ahead
Iuri Struta – etfdb.com
Technology stocks have recouped most of the losses from the start of the month, while the signed bill that grants a hike in military spending continued to drive interest towards the aerospace & defense sector. The recent sharp rise in government bond yields also caught attention as well as high-yield bonds, which trended thanks to a growing desire to diversify away from more volatile assets.
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Tips to protect your portfolio from complacency
Hannah Smith – Interactive Investor
Something scary is bubbling under the surface in financial markets and could blow up into a sub-prime style crisis, leading fund managers have warned. The reason? Investors have become too complacent about macro risks and are behaving as if the era of cheap and easy money will never end.
Early February’s market sell-off caused a short-term spike in volatility, triggered by stronger than expected US earnings data which raised concerns about inflation and the timing of interest rate hikes.
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Events

CME Group Global Head of Commodity and Options Products to Present at Citi Conference
CME Group
CME Group announced today that Derek Sammann, Senior Managing Director and Global Head of Commodity and Options Products will present at the Citi 2018 Asset Managers, Broker Dealers and Exchanges Conference in New York on Thursday March 1, at 8:45 a.m. (Eastern Time).
The presentations will be broadcast live over the Internet and can be accessed via the exchange’s web site at http://investor.cmegroup.com. Please allow extra time prior to the presentation to visit the site and download the streaming media software required to listen to the Internet broadcast. An audio Webcast will be available for replay at the same address approximately 24 hours following the conclusion of the conference.
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Miscellaneous

Bitcoin: Cryptocurrency Derivatives Have Slow, Uneventful Launch
Aaron Brown – Bloomberg
Last fall, as cryptocurrencies seemed on the brink of a linkage with the traditional financial system, 1 there were predictions of a price explosion along with institutional, regulatory and mainstream acceptance of the currencies. Others predicted disaster or a collapse to zero value. In the end, despite some dramatic price moves, not much happened.
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About Author

Bergstrom is chief information officer of John J. Lothian & Co. He edits MarketsWiki and JLN Options.