Breaking News

Vol products in the spotlight; Cboe’s pain; New VIX ETP Danger

Lead Stories

Wall Street’s volatility products in the spotlight; Market retains potential for upsets after February’s ‘Vix-mageddon’
Christian Pfrang and Robin Wigglesworth – Financial Times (SUBSCRIPTION)
A month ago global markets were thrown into a tailspin, with US equities suffering one of their fastest 10 per cent corrections in history. The mayhem raised questions about a small but complex corner of markets where investors trade volatility itself.
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****SD: I still like vol-cano over Vix-mageddon. Armageddon is a one-off affair while volcanos light up with frequency. One line from the article that I’d say requires a lot more stipulations is: “A New York-based equity derivatives portfolio manager says that ‘there is an ecosystem of traders that profits from trading in anticipation of ETP flows ahead of the settlement’.” That makes it sound like, “Oh, gold miner ETF XYZ needs to buy XYZ gold miner at the close?” “I’ll buy that gold miner earlier and sell it at the end of the day when the ETP buyers come in.” Not that simple anymore.

When VIX Aftershocks End, So Will Cboe Global’s Pain
Crystal Kim – Barron’s (SUBSCRIPTION)
The volatility blowup of Feb. 5 continues to reverberate through the exchange-traded fund industry, the subject of Barron’s “Volatility ETF Aftershocks.” And few companies have been impacted more than Cboe Global Markets (CBOE), which has declined 13% since early February to around $113.
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****SD: The ultimate irony is the industry was anxiously awaiting volatility’s return. Instead of the big banks and hedge funds rejoicing, it didn’t necessarily help in the aggregate. Looks like they need a different scapegoat for average/poor performance. Same goes for Cboe. It ought to be good for business (it was – just look at volumes below), but now it has this reputational risk issue floating around.

The Newest Danger for Volatility ETFs
Dan Caplinger – The Motley Fool
One of the most successful ways to invest in 2017 was to buy inverse volatility ETFs. The market’s calm move upward throughout the year helped these investment vehicles, which thrive on a lack of choppy moves in stocks, produce incredibly strong returns. Yet when volatility levels spiked higher in early February, the resulting collapse caused massive losses that led one inverse volatility ETF to shut its doors.
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U.S. considering ‘material changes’ to ‘Volcker Rule’: Fed’s Quarles
Pete Schroeder – Reuters
The chief regulator for the U.S. Federal Reserve said Monday the nation’s regulators are actively considering a significant rewrite of the “Volcker Rule.”
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****SD: Quarles’ speech here

The Day Liquidity Died
Doug Kass – Real Investment Advice
There has been far too little discussion of the issue of the recent loss of liquidity in market commentary.
In large measure, reduced liquidity is the reason I see more volatility and a wider trading range (vis a vis prior years) in 2018.
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****SD: There are way too many places to take his Don McLean reference – lots of symbolic lyrics in that song to play around with. I’ll leave it up to each individual reader.

U.S. Libor exposures larger than thought at $200 trillion: ARRC
Karen Brettell – Reuters
A committee of large banks tasked with helping U.S. derivatives markets move away from reliance on the London interbank offered rate (Libor) said on Monday that the benchmark rate underpins more derivatives and loans than previously thought, adding to the need to reduce its influence.
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****SD: That number is 25 percent more than previously thought.

Month of higher vol spurs equity derivatives trading
Helen Bartholomew – Risk.net (SUBSCRIPTION)
Turmoil benefits total return futures, cross-asset arbitrage and dispersion
The first sustained bout of equity volatility in more than two years is raising investors’ hopes of a better trading environment – even though thin liquidity made some early dislocations all but untradeable.
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Mid-Vol Regime Leads To VIX, VSTOXX Opportunities
Georgia Reynolds, EQDerivatives – Eurex Group
Strategists at JPMorgan say a ‘three regime approach’ is the best way to view the market environment right now as the EuroSTOXX 50 Volatility Index and the Cboe Volatility Index are trading in the middle-to-low range of the volatility regime, presenting opportunities in both the VIX and the VSTOXX.
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Exchanges and Clearing

Cboe Global Markets Reports February 2018 Trading Volume
Cboe
VIX futures, VIX options and SPX options set new ADV records in February 2018; Record month of trading across Cboe Options Exchange, Cboe Futures Exchange, Cboe Periodic Auctions Book and Cboe FX
/goo.gl/yxmoVH

BRIEF-Nasdaq February 2018 Volumes
Reuters
Nasdaq Inc – Feb U.S. equity options volume 155 million contracts versus 120 million contracts in Feb 2017
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****SD: Full spreadsheet of volumes here

CME seeks to intervene in Bitcoin scam case, insists that virtual currencies are commodities
Maria Nikolova – FinanceFeeds
A court ruling that Bitcoin is not a commodity would substantially disrupt the settled expectations of CME and numerous market participants who are trading bitcoin futures, CME warns.
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TMX Group Consolidated Trading Statistics – February 2018
Mondovisione
TMX Group Limited today announced February 2018 trading statistics for its marketplaces – Toronto Stock Exchange, TSX Venture Exchange, TSX Alpha Exchange (Alpha) and Montréal Exchange (MX).
/goo.gl/bBFAj3

****SD: Both derivatives volume (9,703,208 contracts) and open interest (6,902,931 contracts) are up YoY and MoM – volume by much larger margins.

HKEX Monthly Market Highlights
Mondovisione
…The average daily turnover of futures and options for the first two months of 2018 was 1,419,983 contracts, an increase of 88 per cent when compared with the 755,215 contracts for the same period last year.
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Euronext Announces Volumes For February 2018
Euronext
…In February 2018, the overall average daily volume on derivatives reached 638,880 contracts, up +11.4% compared to February 2017 and up +13.8% compared to the previous month. In detail,
/goo.gl/ZYx1VL

Rewiring today’s exchanges and post trade to forge tomorrow’s market success – Part 1
Hirander Misra, GMEX Group – TABB Forum
The pressure is on for market operators to meet the widening expectations of customers as technology presents new efficiencies and opportunities.
Market participants are seeking exchanges that can provide the latest in electronic trading and post-trade infrastructure. Not only that, they’re looking for operators that are future-proofing those services with platforms that can adapt to, and incorporate, new innovations such as Blockchain as well as connect with a broad range of external technologies.
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Polish confirms bid for Tel Aviv stock exchange
Reuters
Poland’s state-run stock exchange GPW, along with state fund PFR, has submitted a non-binding offer to buy a 71.7-percent stake in Tel Aviv Stock Exchange TASE, GPW said on Tuesday.
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Regulation & Enforcement

Regulators may start cracking down on ‘Flash Boy’ traders
Kevin Dugan – New York Post
Federal regulators could gain more power to crack down on highly-secretive “Flash Boy” traders that use complex — and secretive — algorithms to buy and sell securities, according to a little-noticed provision in an otherwise deregulatory banking bill that could go to a vote on Tuesday.
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Strategy

PUTR PutWrite Index Generated Strong Risk-Adjusted Returns & Less Severe Drawdowns
Matt Moran – Cboe
This year we received new questions regarding the performance and downside risk of cash-secured put-writing strategies, and WisdomTree launched an ETF designed to track the Cboe Russell 2000 PutWrite Index (PUTR). In particular, questions have been raised as to what types of returns and drawdowns have been experienced by cash-secured putwrites over the past decade and in February 2018.
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****SD: Every time I see the “PUTR” ticker it makes me want to futz around the house.

Options as stop orders
Dan Keegan – Futures Magazine
On the evening of Nov. 8, 2016, most people thought that Hillary Clinton would win the presidential election. While not especially beloved by the voting public, Clinton was a familiar face. American voters tend to feel comfortable with familiar faces. Clinton’s opponent was the mercurial Donald Trump. While Trump was no doubt a familiar face, he certainly was not considered to be presidential timbre.
/goo.gl/gP3k3p

How I Learned To Stop Worrying And Love The Vol
Joseph Tenaglia – Seeking Alpha
Following one of the most tranquil years in stock market history, volatility came roaring back in late January and early February.
Many investors were calling for the inevitable return of volatility in 2018, ourselves included. That said, few foresaw how quickly and how violently that prediction would come to fruition. While there was some debate as to what exactly prompted the pickup in volatility (with everything from inflation to inverse volatility exchange-traded products to the all-encompassing “quants” being blamed), the bottom line is that the spike in the Volatility Index (VIX) left equity investors running for cover.
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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?
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Signs That Traders Are Coming to Terms With Rand’s New Normal
Robert Brand – Bloomberg
After years of being a one-way bet, South Africa’s rand seems to have turned a corner. The currency gained in 2017 after five straight years of losses, and extended the advance since January, riding a wave of optimism following the election of Cyril Ramaphosa as president.
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Events

Cboe Risk Management Conference U.S. Begins Wednesday
Cboe
Cboe Global Markets will host the 34th annual Cboe Risk Management Conference (RMC) U.S. this week at the Hyatt Regency Coconut Point Resort in Bonita Springs, Florida.
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The Volatility Environment Registration
Cboe
Join Russell Rhoads, CFA from Cboe Global Markets at 3:30 p.m. CT, for a 30-minute webcast highlighting the first half of the 34th Annual Cboe Risk Management Conference. Cboe RMC is the foremost financial industry conference for users of equity derivatives and volatility markets. Russell will discuss key VIX Index takeaways from the early sessions at RMC, and will interview Bill Speth and Matt Moran for their take on conference highlights and the current environment for volatility and equity derivative strategies.
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Miscellaneous

Don’t Fret the Volatility, These Charts Signal Rally Can Go On
Adam Haigh and Lu Wang – Bloomberg
Technology leadership remains supportive for stock gains; High-yield market seen key indicator to test recent pullback
After the surge in U.S. stock volatility in recent weeks, bull-market believers can take heart from a number of technical signals embedded deep in the market.
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Fed Study Finds Inverted Yield Curve Still Good Recession Alert
Alister Bull – Bloomberg
An inverted yield curve remains a powerful signal of a looming recession and that is still the case even if the current ultra-low level of U.S. interest rates are taken into account, according to fresh research by the Federal Reserve Bank of San Francisco.
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Producer sentiment higher; NAFTA uncertainty looms
CME Group
Producer sentiment increased for the second straight month in February, but producers continued to indicate uncertainty surrounding a possible U.S. withdrawal from the North American Free Trade Agreement (NAFTA), according to the Purdue University/CME Group Ag Economy Barometer.
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FX Option Market Update: March 6, 2018
Dan Larsen – TradingFloor.com
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Graduate of University of Minnesota School of Journalism and Mass Communication