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How a volatility virus infected Wall Street


Lead Stories

How a volatility virus infected Wall Street; The collapse of a few small funds in February helped fuel a terrifying stock-market slide. Why?
Robin Wigglesworth – Financial Times
Music teacher Chris Pomrink was driving between two lessons outside Philadelphia, when a friend called with some distressing news: “Hey Chris, XIV is in trouble.” Pomrink, 30, checked his trading account. It was February 2 and XIV — an arcane, fiendishly complex financial security that he had sunk $2,500 into earlier that week — had indeed taken a beating. The “exchange-traded note”, or ETN, which allowed traders to bet on the US stock market remaining tranquil, had made Pomrink a bundle of money after he stumbled across it on a site for traders back in 2015, so he decided to keep the faith. But worse was to come after the weekend.

****SD: If you have to read only one story today, read this one – pretty all encompassing.

How SGX just outwitted NSE with new products to replace SGX Nifty
Economic Times
The move by the Indian exchanges to stop providing licences and data to foreign bourses had not gone down well with foreign investors. Even as the National Stock Exchange (NSE) weighed its options to protect its turf after Singapore Exchange (SGX) pulled one off on it by launching a series of independent India-based equity derivative contracts, market veterans marvelled at the product innovation SGX appears to have accomplished.

The World Federation Of Exchanges and Oliver Wyman Joint Report Examines The Pivotal Role Of Market Infrastructures In Ensuring Market Integrity Date
The World Federation of Exchanges (“The WFE”), the global industry group for exchanges and central counterparties (CCPs), today published a joint report with global management consultancy Oliver Wyman on the pivotal role of exchanges and CCPs in supporting market integrity.

Can Market Makers Catch the Cryptocurrency Bus?
Fraser Bell, BSO – Tabb Forum
With cryptocurrencies fluctuating in value across multiple markets, there is no shortage of opportunity for computer savvy firms to profit quickly from price differences. But when it comes to making money from volatility, speed is still king, and the crypto market is, of course, no different. If anything, the sheer scale of crypto activity makes the need for speed even more significant.

Adversity and the Variance Premium
Euan Sinclair – Highly Evolved Vol
Recently I’ve come to believe that we don’t know nearly as much as we think we do. Specifically the history of markets is nowhere near as big as we often assume. For example, equity options have only been traded in liquid, transparent markets since the CBOE opened in 1973. S&P 500 futures and options have only been traded since 1982. The VIX didn’t exist until 1990 and wasn’t tradable until 2004. And the average lifetime of a S&P 500 company is only about 20 years.

Horizons ETFs closes two volatility-focused exchange-traded funds
Insurance and Investment Journal
Horizons ETFs Management (Canada) Inc. announced April 10 that it will be terminating the BetaPro S&P 500 VIX Short-Term Futures 2X Daily Bull ETF (HVU) and the BetaPro S&P 500 VIX Short-Term Futures Daily Inverse ETF (HVI) effective June 11, 2018.

****SD: Each of the funds were minnows in the VIX fund pool at $20 million-ish each, but check out the company’s reasoning: “the pricing in S&P 500 VIX futures has been very irrational and erratic. This volatility, in the case of HVI and HVU, has, in the Manager’s view, significantly changed the risk profile of these two ETFs to be far too high for Canadian investors.”

Exchanges and Clearing

CME Group Discloses MoM Drop in March FX Options
Finance Magnates
During March 2018, total FX options averaged 72,781 contracts per day.

Euronext raises EUR500m with first-ever bond issue
Samuel Agini – Financial News
Euronext has raised EUR500m from investors by selling bonds for the first time in its history, marking another key development since its initial public offering in 2014.

Regulation & Enforcement

Enforcement actions by Wall Street’s sheriff lag in Trump’s deregulatory regime
Declan Harty and David Hood – S&P
Fines issued by Wall Street’s chief regulator have slowed significantly over the past six months, underpinning a push in the nation’s capital for looser oversight of the financial sector. Penalties issued over the six-month period were at their lowest in the first half of a fiscal year in more than a decade, according to a review of enforcement actions.

Bari Havlik Joins FINRA as Executive Vice President, Member Supervision
The Financial Industry Regulatory Authority (FINRA) announced today that it has named Bari Havlik as Executive Vice President for Member Supervision. In that capacity, Havlik will be responsible principally for leading FINRA’s Member Regulation program, which includes surveillance and examination programs for member firms. She will replace Susan Axelrod, who is leaving FINRA after 28 years of service, and will report directly to FINRA CEO Robert Cook. Havlik will start on April 30.

Is SEBI being a nanny to investors?
Aarati Krishnan – Hindu Business Line
If the equity market is to mature, SEBI should stop shielding retail investors from risks by curbing their choices India’s financial market regulators are often accused of focussing too much on the industries they regulate, while turning a blind eye to the plight of consumers.


Temenos wins regulatory approval for Fidessa takeover
Hayley McDowell – The Trade
Temenos has gained approval of its GBP1.4 billion bid to acquire technology vendor Fidessa from regulatory authorities in the UK and the US.

Machine learning: Unlocking the power of unstructured data
Bruno Dupire – Bloomberg Professional Services
Establishing a link between current observables — structured and unstructured data — and future behavior is a major undertaking in finance, and naturally the field is embracing machine learning to tackle this typical learning task. This requires broadening the range of data and methods, and shaking some old habits.


Volatility to stay, long term strategies out – experts
Louisa Chender – Global Investor Group (SUBSCRIPTION)
Volatility has returned and is here to stay and uncertainties in the markets have made short-term strategies more favourable, according to experts. Speaking at the FOW Derivatives Asia event in Hong Kong on Wednesday, Jeff Cheong, director of Fortune Asia Long Short Fund, said futures are harder to manage in an uncertain environment, so short term strategies are the most sensible approach. “We are becoming even more short-term for VIX, or any products we get into, as the only thing we can control is the time period,” he said.

****SD: It’s been interesting watching the VIX term structure these past weeks.

Volatility ETPs Are Enjoying the Limelight
Todd Shriber – Investopedia
Through much of the current bull market in U.S. stocks, one of the easiest trades was being short volatility. Said another way, being long volatility, a trade made available via dozens of exchange-traded products (ETPs), was a losing strategy.
Performances of many long volatility strategies, many of which are made accessible via exchange-traded notes (ETNs), have been dreadful. In fact, it is not a stretch to say that some of the worst performing ETPs over the course of the current bull market are long volatility products. That changed this year, thanks to a spike in the Cboe Volatility Index (VIX), also known as the “fear index.”

Risk? No, Thank You
Brad Zigler – Wealth Management
This has been a good year for volatility. If you like that kind of stuff, that is. It’s not that volatility has reached stratospheric levels; it’s just that it’s returned to a normal level. It wasn’t too long ago—think November—that the Cboe Volatility Index (CBOE: VIX) scraped a historic bottom at 9.14 percent.

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About Author

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