Breaking News

OCC Re-Elects Craig Donohue as Executive Chairman

Observations & Insight

The Future of Exchanges Will Feature More Collaboration, WFE Report Says
Jim Kharouf – JLN
Exchanges will have to spend more, share more and collaborate more in the coming years, according to a published report from the World Federation of Exchanges (WFE) and Oliver Wyman. The report, issued on Thursday at the 35th IOMA: The WFE’s Clearing & Derivatives Conference in Chicago focused on the recent trends for the exchange, CCP and market infrastructure providers since the 2008 financial crisis.


Editor’s Notes

Our next episode of The Spread will be posted Monday.

According to FIA stats, the total worldwide volume of exchange traded derivatives in March was 2.56 billion contracts – up 4.6 percent from February and up 10.7 percent year-over-year.

Worldwide options volume was down six percent month-over-month and up 17.2 percent year-over-year.

Also, SPIKES, an alternative volatility index using SPY options and a “price dragging” technique, is back! Will concerns about VIX manipulation give it a better chance of succeeding than when it was rolled out in 2016? See press release below for more on SPIKES.

Lead Stories

OCC Re-Elects Craig Donohue as Executive Chairman, Elects Member and Public Directors at 2018 Stockholder Meeting
OCC, the world’s largest equity derivatives clearing organization, today announced the election of three Class II Member Directors and two Class III Public Directors to its Board of Directors. In addition, Mr. Craig S. Donohue was re-elected as Executive Chairman of the Board. The vote took place during OCC’s annual stockholder meeting on April 11.

MIAX Options and T3 Index to Launch SPIKES Volatility Index; Proprietary Products to Follow on MIAX Exchanges
PR Newswire
MIAX Options and T3 Index today announced that the SPIKES index (Ticker: SPIKE) will be launched on MIAX Options in April 2018. SPIKES measures the expected 30-day volatility in the SPDR S&P 500 ETF (SPY), one of the most actively traded securities in the world. Additionally, SPIKES is equipped with proprietary design features such as “price-dragging” to help stabilize the index during times of market stress.

****SD: This is the reincarnation of the same product Bats tried to get off the ground in March 2016. Obviously upon the acquisition, there was no need to keep it so it ended up back in the hands of T3. Also, Nasdaq’s proposed volatility index is also based upon SPY rather than SPX.

Fears persist about forced unwind from ‘implicit’ short vol funds
Faye Kilburn – (SUBSCRIPTION)
Short volatility products dominated the headlines after the Vix index spiked in February and the VelocityShares Daily Inverse VIX Short-Term ETN (XIV), the most prominent bank-backed exchange-traded note that bet on implied volatility staying low was wiped out.

Is Bond Volatility a Better Bet Than Stock Volatility?
Gunjan Banerji – Barron’s
Two measures of market volatility are sending very different signals.
Tranquility has returned to Treasuries after fears of inflation rattled markets in early February, according to the Merrill Lynch Option Volatility Estimate Index, which uses options prices on government bonds to gauge expected turbulence. This measure spiked to about a 10-month high on Feb. 12 and has slowly slid since then. (Inflation chips away at the purchasing power of government bonds’ fixed payments.)

The volatility that rocked stocks was just the beginning — and 2 markets are at the epicenter of impending chaos, SocGen says
Akin Oyedele – Business Insider Prime (SUBSCRIPTION)
Spikes in volatility, such as the one that occurred in February, are typically accompanied by aftershocks, according to Societe Generale’s strategists. They are forecasting a “hot summer” for the markets, with two assets most at risk.

Options markets still flashing red for Russia’s battered rouble
Saikat Chatterjee, Sujata Rao – Reuters
Russia’s rouble has endured its worst week in more than 2-1/2 years but foreign exchange derivatives predict more pain ahead as bond and equity investors continue slashing exposure to the market after tough new sanctions from the United States.

****SD: From Bloomberg – Ruble Options Volumes Surge 900% as FX Traders Wager on Rebound

No, Washington Is Not To Blame For The Volatility
Russ Koesterich – Investopedia
After more than a year of metronomic, almost tedious gains, volatility is back. Since the start of February equity volatility, as measured by the VIX Index, has averaged nearly 21. While still barely above the long-term average, the new regime represents a significant departure from 2017, when the VIX averaged barely 11.

Making Sense of Messy Funds
John Rekenthaler – Morningstar
The mutual fund industry hasn’t led investment innovation, but it hasn’t boycotted modernity, either. Standard futures and options contracts, once rare among mutual funds, have become commonplace. In recent years, they increasingly have been joined by custom contracts–exotica such as total-return and credit-default swaps.

Exchanges and Clearing

CCPs hike spending on cyber defences; Banks fear the impact of a disabling cyber attack on a CCP
Dan DeFrancesco – (SUBSCRIPTION)
“The thing OCC spent the most incremental funding on in 2017 was improving cyber security,” says COO
The operators of the US’s largest clearing houses say they have ramped up spending on cyber security in the past 12 months, citing the ongoing threat malicious actors pose to their organisations.

****SD: For more on cyber security at the OCC, see the piece I wrote a ways back after speaking with Mark Morrison, OCC’s chief security officer.

Goldman Sachs banker appointed LSEG chief; David Schwimmer named as new chief of London Stock Exchange Group after controversial departure of Xavier Rolet.
Hayley McDowell – The Trade
A twenty-year Goldman Sachs veteran banker has been appointed chief executive officer at London Stock Exchange Group (LSEG) following the controversial departure of Xavier Rolet earlier this year.

****SD: Bloomberg here and the FT here.

Equity Index Highlights – April 2018 edition
The market briefing, given by Markus-Alexander Flesch, Global Head Sales Equity & Index Derivatives, is packed with news and highlights ranging from Q1 trends and volumes to global macro-economic effects on volatility and what it all means for the Eurex product suite. Besides, he gives in-depth insights into Eurex core products.

SGX welcomes Rifa Futures Limited as Derivatives Trading Member

Regulation & Enforcement

FINRA, BOX, Cboe, IEX, NASDAQ and NYSE Fine Instinet, LLC for Market Access Rule Violations
Instinet, LLC has been censured and fined a total of $1.575 million for violations of various provisions of Rule 15c3-5 of the Securities Exchange Act of 1934 (known as the Market Access Rule) and related exchange supervisory rules. The action was taken by the Financial Industry Regulatory Authority (FINRA), along with BOX Options Exchange LLC (BOX); the Cboe BZX Exchange, Inc.; Investors Exchange LLC (IEX); The NASDAQ Stock Market LLC; the New York Stock Exchange; and certain of their affiliated Exchanges (collectively, “Exchanges”). The fine was apportioned among FINRA and the Exchanges.

Home Economy & Politics DOJ, CFTC charge Kane Capital Investment Group and Amrit Chahal with Ponzi scheme
Francine McKenna – MarketWatch
The Department of Justice charged Amrit Jaswant Singh Chahal on Wednesday in a nine-count criminal indictment, including four counts of commodities fraud.

***SD: Includes VIX futures.


Calypso names Didier Bouillard CEO
Calypso Technology, Inc., an industry leading provider of cloud-enabled capital markets and investment management software and services, today announced that Didier Bouillard has joined as Chief Executive Officer and a member of the Board of Directors.


Cboe DataShop Offers Market Data, Analytics Through New API Suite
Cboe Global Markets, Inc. (Cboe: CBOE | Nasdaq: CBOE), one of the world’s largest exchange holding companies, today announced that Cboe DataShop is offering customers access to its market data and trade analytics through a suite of four application programming interfaces. The APIs allow easy interaction with other websites or programs, facilitating customization of access for trading firms’ specific needs and budgets.

Artificial Intelligence: The Lynchpin of FinTech
Terry Roche – Tabb Forum
The greater insight and, eventually, automation that artificial intelligence enables already is changing how participants interact with the markets and how the markets function. AI is nothing less than the lynchpin of the FinTech strategies of many firms within capital markets.


Adversity and the Variance Premium Part 2
Euan Sinclair – Highly Evolved Vol
Following on from the last post we will now look at how the concept of adversity can lead to the variance premium. Let’s think about a $100 stock and the $100 strike call and put. Assuming no interest rates or dividends, and a volatility of 30%, both the one-year call and put will each be worth $9.92. One trader sells the put, and another buys the call. Now let’s look at two price paths for the stock.

Hypervolatility in stocks suggests the market has bottomed
Simon Maierhofer – MarketWatch
In all of 2017, the S&P 500 Index moved more than 1% on only 10 days.
So far in 2018, the S&P 500 had already 41 daily swings of more than 1% (four of which were 4%-plus). Intra-day moves of 100 points in the S&P 500 SPX, -0.02% or 1,000 in Dow Jones Industrial Average DJIA, -0.14% points are now not a shock.
Within a month (February to be exact), the S&P 500 went from the lowest volatility in recorded history to the highest in years. Is this extreme uptick in volatility bullish or bearish for stocks?


Trade Tensions Have Hit Stocks Hard—Why Is the Rest of the Market So Calm?
Stability in other markets suggest there is more to the decline in equities than uncertainty over trade

JPMorgan And Citi Are Just Fine With This Whole Higher Volatility Thing
The persistent lack of cross-asset volatility was the gift that kept on giving for the legions of traders both large and small who in 2017 conspired to make the entire market one giant, global bet on suppressed vol. As Citi put it late last year, “trades and strategies which explicitly or implicitly rely on the low-vol environment continuing, are becoming more and more ubiquitous.”

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About Author

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