Breaking News

February’s “volmageddon” good for banks, brutal for hedge funds


Observations & Insight

Tangents of the day
Spencer Doar – JLN

The Wall Street Journal story Your Location Data Is Being Sold—Often Without Your Knowledge is an alt data industry story with tentacles reaching everywhere (we all use some apps right?). According to a cited research firm, 40 percent, or $16 billion, of all mobile ad spending was location targeted. Knowing where and when people are various places is big business and definitely tradeable information.

It reminded me of a related recent story about the fitness app Strava that had a global heat map of activity. The problem? The heat map revealed the activities of military and intelligence personnel (via WIRED)

In a bit of novel news, the Financial Times story Mercer says managers should pay to run clients’ money is something to mull over lunch. It’s not as outlandish an idea as it might first seem.

Also, Nassim Taleb is still concerned that people aren’t understanding the key point of his recent book, Skin in the Game. His blog today is titled What do I mean by Skin in the Game? My Own Version. The blog is aggressive clarity about the points of Skin in the Game.

For more ornery Taleb, check out The Controversy around Skin in the Game. That is his rebuke of U.K. journalists who he feels misinterpreted his book, the most recent in his collection dubbed “Incerto.” (His blog on Medium shares the same name.)

If you do read those blogs you’ll probably want a Taleb palette cleanser after – check out John Crace in The Guardian on the book. One of the many fake Taleb quotes from Crace in that piece: “Having skin in the game means reading the Code of Hammurabi. And, because I’ve got skin in the game, I didn’t trust other people’s translations. I took time out to learn the ancient Babylonian script myself. Turns out the translations were pretty accurate after all.”

Have a good one!

Lead Stories

February’s “volmageddon” good for banks, brutal for hedge funds
Jamie McGeever – Reuters
The explosion in financial market volatility in February raised the question these episodes always throw up: was it”good” vol or”bad” vol? For the big market-making banks on The Street, it looks like it was good volatility. They raked in higher revenues from the resulting surge in trading and hedging activity from their clients, particularly hedge funds.

From Soybeans to Natural Gas, Investors Eye Threat of U.S. Tariff Retaliation
Amrith Ramkumar – WSJ (SUBSCRIPTION)
The U.S. tariffs on steel and aluminum announced Thursday are reverberating into corners of the commodities market that have nothing to do with metals. Prices of soybeans and natural gas remained on solid footing Friday even as stocks and other commodities slid amid worries that U.S. tariffs could stoke a trade war or inflation. Analysts say those commodities are holding up better than the broader market because investors are assessing the potential for retaliatory policies from China and other trade partners.

****SD: But, but, I thought Wilbur Ross debunked all of these concerns with his Campbell’s Soup demonstration?

A VIX-Related Fund Did Go ‘Poof’
Simon Constable – WSJ (SUBSCRIPTION)
They were warned.
February’s burst of market volatility was the death knell for VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV), designed to make a high-wire bet that markets would stay calm.
The note was structured to profit from declines in the Cboe Volatility Index, or VIX, and it worked spectacularly for a while. But when the volatility index more than doubled on Feb. 5, the price evaporated and the fund was delisted on Feb. 15.

Volatility ETF Aftershocks
Crystal Kim – Barron’s (SUBSCRIPTION)
Volatility exchange-traded products seemed like a much better idea when there was very little volatility. The Great Volatility Spike of Feb. 5 left investors gasping for air and a couple of funds dead when the Cboe Volatility Index, or VIX, jumped more than 100% in a single day. The sharp movements of what’s known as the fear gauge spooked investors and fund providers alike. The result? These risky products are changing in an effort to dial down the risk.

Investors Are Still Buying the Dip
Chelsey Dulaney – WSJ (SUBSCRIPTION)
The threat of a global trade war spooked stocks last week, but a market rebound on Friday illustrates how investors continue to brush off policy uncertainty to send U.S. indexes higher.
Stocks tumbled in early trading Friday as investors digested the Trump administration’s plans to introduce tariffs on foreign steel and aluminum imports. Markets had mostly recovered by the end of the day. The S&P 500 closed up 0.5% and the Dow Jones Industrial Average pared earlier losses to end down 0.3%.

Risk-taking trading firms eye riches in global gas market
Emiko Terazono and Anjli Raval – Financial Times (SUBSCRIPTION)
The world’s biggest independent commodity traders have carved out reputations and built their billion-dollar balance sheets on a willingness to take calculated risks in oil and metals markets that more staid and established rivals shunned.
Now trading houses, including Trafigura, Vitol, Glencore and Gunvor, are focusing on a new arena they see as rich with potential profit: liquefied natural gas, a once-sleepy corner of the energy industry that is rapidly transforming into the next major commodity for swashbuckling trading houses.

****SD: Every time I see “LNG” I feel the not so subtle urge to go long.

Euro bulls suffer as Italy stokes political uncertainty
The euro was flat after initially weakening on Monday as an inconclusive election in Italy pointed to prolonged political uncertainty after a stronger-than-anticipated showing by right-wing eurosceptic parties.
Italy’s election verdict and the subsequent brief sell-off in currency and bond markets showed that political risks remain in the eurozone though recent strength in its economy has made investors more tolerant of related uncertainty than last year.

****SD: Elections cause uncertainty? Whoda thunk…

Hedge funds recover nerve after oil sell-off
John Kemp – Reuters
Hedge funds rediscovered some of their confidence in the oil market in the final week of February, as OPEC reiterated its commitment to output restraint and benchmark prices stabilized above $60 per barrel.
Hedge funds and other money managers boosted their combined net long position in the six most important futures and options contracts linked to petroleum prices by 68 million barrels in the week to Feb. 27.

Weekend Review of Russell 2000 Options and Volatility
Russell Rhoads – Cboe
Small cap stocks are playing catch up by not losing as much as large caps. Last week the Russell 2000 (RUT) was down about 1% while the large cap focused Russell 1000 (RUI) lost just under 2%. RUI’s lead has narrowed to 0.75%. Since RUT stocks are more domestic in nature, I’m going to go out on a limb and say the trade war rumblings put more pressure on RUI that RUT last week.

****SD: Also from Cboe, Weekend Review of VIX Futures and Options

Checking in on the Bitcoin Commitment of Traders Report
Russell Rhoads – Cboe
The Cboe Futures Exchange was the first exchange in the world to list bitcoin futures. One of the great things about a new market is the data that comes along with it, at least for quant geeks like me. The CFTC collects information about trader’s positions in a wide variety of markets. This report is titled the Commitment of Traders Report (COT Report). The COT reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Exchanges and Clearing

London Stock Exchange Group sees profit rise as search for new CEO continues
Noor Zainab Hussain – The Independent
London Stock Exchange Group has reported rising profits and said it is making good progress in its search for a new chief executive. The firm posted a pre-tax profit of GBP564m, up from GBP364m in 2016, while revenue jumped 17 per cent to GBP1.77bn, helped by a strong performance in derivatives clearing.

Crypto Investing Comes With a Big Risk: The Exchanges
Cryptocurrency traders are learning that where they buy and sell digital tokens can be just as risky as choosing a coin or picking a price.

Intercontinental Exchange Reports Weak FX Volumes for February 2018?
Finance Magnates
Intercontinental Exchange (NYSE:ICE), a global network of exchanges and clearing houses, has reported its latest aggregated volumes for the month ending February 2018, which were characterized by mixed results across its FX business, according to an ICE statement.
During the reported month, ICE’s February average daily volume (ADV) for futures and options business was reported at 6.7 million contracts per day, which corresponded to a growth of 7.6 percent month-over-month from 6.2 million per day in January 2018. In addition, this latest figure marks a 16 percent increase over February 2017 which came at 5.8 million contracts per day.

NASDAQ and IEX – Sue Everybody!
Themis Trading Blog
What is one to do when their monopoly power and cash cows are threatened? Send in the lawyers, that’s what!


The Curious Case of the Trader – Vendor
Emilia David – WatersTechnology (SUBSCRIPTION)
Tradeworx is the latest in a series of firms that has decided to pull back from trading activities and focus on fintech. And it’s unlikely to be the last.

AI and advanced analytics top fintech say global exchange execs
Advanced analytics and artificial intelligence are the top fintech technologies for capital market infrastructures, according to a survey of 46 global exchanges.

We Are Living in the Golden Age of Fintech
Ron Suber, Prosper Marketplace – TABB Forum
While the current golden age of fintech is the product of many forces, Ron Suber highlights the six biggest driving forces today and into the future. Every fintech entrepreneur should be aware of their impact and positioned to benefit from the trends, he says. The golden age will draw to a close in the next few years, and the landscape will change dramatically as the next phase in the innovation cycle begins, triggering a wave of consolidations that will replace today’s crowded and fragmented marketplace.

Regulation & Enforcement

Rare Loss for Wall Street in Senate’s Reboot of Financial Rules
Elizabeth Dexheimer – Bloomberg
The U.S. Senate is expected to approve a sweeping revamp of financial rules this week.

FIA and ISDA submit joint response to ESMA’s consultation paper on Anti-Procyclicality Margin Measures for Central Counterparties
On 28 February, FIA and ISDA (the Associations) submitted a joint response to the European Securities Markets Authorities (ESMA) consultation paper on Draft Guidelines on Anti-Procyclicality Margin Measures for Central Counterparties.


How to play the volatile highs and lows of the VIX
Mark Hulbert – MarketWatch
Think you know the significance of high and low VIX readings, and how best to respond?
Chances are you’re wrong. For example, many financial advisers recommend that clients grin and bear it when the CBOE Volatility Index (VIX) VIX, -0.46% spikes, as it did in late January and early February as the market experienced its first 10+% correction in years. Such volatility is the price we must pay to participate in the stock market, they say.

If Market Volatility Is Back, Are You Ready?
Michael A. Pollock – WSJ
As stocks have rebounded from a scary early February slide, the up and down may be foreshadowing a new, more-volatile period for markets.
Is your fund portfolio ready?


Trading firm Virtu distances itself from phony cryptocurrency
John McCrank – Reuters
Virtu Financial Inc (VIRT.O) on Friday distanced itself from a fake cryptocurrency called VirtCoin that falsely claims to be affiliated with the global trading firm, highlighting the potential risks associated with the digital currency craze.

How Trump’s Hudson Tunnel Feud Threatens the National Economy
Elise Young and Demetrios Pogkas – Bloomberg
Economic risks keeping Americans up at night include the hastily rewritten tax code and the possibility of a global trade war set off by U.S. tariffs. Consider another cause for insomnia: President Donald Trump’s opposition to a new rail tunnel linking New York and New Jersey beneath the Hudson River.

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About Author

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