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Pound volatility; The professor behind the VIX manipulation paper; VIX action

Observations & Insight

A Volatile Week: Having Fun?
Spencer Doar – JLN

First, a correction (not in the market sense): as many of you probably realized, the cybersecurity blog we had in yesterday’s newsletter – The Complex Realities of a Cybersecurity Program – was not from the Cboe, but from the OCC. Apologies for any confusion.

Second, the correction (now about markets). An implicit short vol unwind? The choppy end of a bull cycle? Bond yields? Trade war? A combo? Who’s to say. A brief recap: VIX contango was/is back and spot VIX momentarily hit 28 this week. Gold caught a bid. The President called the Fed “loco.” Yesterday’s cleared volume at the OCC was 37,989,245 contracts – the fourth best day ever. Wednesday’s cleared volume was the eleventh best. Then there is today’s activity – I won’t try to summarize it as it is again all over the board.

But it’s October, so what’d you expect?

Meanwhile, some big banks reported earnings. Wells Fargo’s profit rose on cost cutting. JPMorgan profits rose despite a trading slump. Citi had a successful quarter in fixed income.

By all accounts yesterday’s Rocktoberfest charitable event put on by ALTSO was a success. Many thanks to all the sponsors, the people who came out for a night of fun and all the volunteers who make it happen every year. The New York Rocktoberfest is October 25.

We released a couple of videos today – a preview of FIA Expo with FIA President and CEO Walt Lukken and an interview with John Omahen of FIS.

Have a great weekend everybody.

Lead Stories

Traders Brace for Volatile Pound as Brexit Moment of Truth Nears
Vassilis Karamanis, Charlotte Ryan and John Ainger – Bloomberg (SUBSCRIPTION)
Sterling at $1.10 or $1.60 not ‘far fetched’ – Mizuho’s Jones; Investors stay bearish the U.K. currency as skepticism remains
Options traders are bracing for bigger swings in the pound as the U.K.’s exit talks from the European Union approach the finishing line.
/bloom.bg/2yAuVKI

This Texas Finance Professor Sifts Data for Signs of Rigged Markets; John Griffin, who discovered the Bitcoin-Tether connection, seeks to expose “the fruitless deeds of darkness.”
Matt Robinson and Nick Baker – Bloomberg (SUBSCRIPTION)
At the height of Bitcoin mania in December, when the price of the digital currency was climbing toward $20,000, finance professor John Griffin started digging into 2 terabytes of trading data—equal to a tenth of all the text housed by the Library of Congress.
/jlne.ws/2pRr0oQ

****SD: He’s into crypto now, but this is the same fellow who co-authored the VIX manipulation paper last spring. The piece has this regarding the VIX manipulation lawsuits – “A long list of plaintiffs have sued Cboe over the alleged manipulation. Griffin says he currently doesn’t plan to work with any of them, despite requests to do so.”

Machines take the blame as U.S. stock market sells off
Trevor Hunnicutt – Reuters
Investors searching for perpetrators and victims in this week’s U.S. stock market selloff pointed to a familiar source: number-crunching fund managers and machines.
/reut.rs/2yvwFEW

****JB: Who is running the machines?

World markets stress indicators still relatively calm
Ritvik Carvalho – Reuters
World stock markets suffered their worst tumble this week since February’s violent shakeout with some $2.6 trillion of investor wealth lost, but there was no clear trigger apart from long-brewing worries on U.S. interest rates, trade wars, China and emerging markets.
/reut.rs/2yzZVdJ

Hedge Funds Hold Up in Rout as Defensive Stance Finally Pays Off
Lu Wang – Bloomberg (SUBSCRIPTION)
Throughout the bull market, through years of subpar returns, the hedge fund refrain has been the same: wait till the market turns. Now it’s turning and at least some of the claims are bearing out.
While a week and a half doesn’t prove much, thanks to defensive positioning and increased bearish bets against stocks, long-short hedge funds tracked by Credit Suisse declined about 3 percent in October through midday Thursday. While some clients would probably prefer no loss at all, that’s only half the retreat in the S&P 500.
/bloom.bg/2yB6mx5

Breaking Down Volatility
Fei Mei Chan – S&P Dow Jones Indices Blog
Despite yesterday’s hand wringing loss for equity markets— the S&P 500 dropped 3.3%—the index is still up 5.8% year to date 2018. Nevertheless, losing in one day a third of what the equity market achieved in 9 months can, justifiably, cause alarm. In the not too distant past, the market experienced a similar trauma. Then, as now, volatility ticked up. But we also pointed out that in the broader context, the volatility jump in February 2018 was not too significant. Yesterday’s increase was even less so.
bit.ly/2yxPxDp

They’re baaacckkk – VIX pops eight months after Feb 5th
RCM Alternatives Blog
Maybe it was the Cat 4 hurricane barreling down on the Florida panhandle which had everyone’s attention, but yesterday’s VIX spike sure didn’t feel like the one that brought people out in body bags back in February. February 5th saw the Dow fall about 1,200 points, it’s worth point loss in history; while yesterday saw a decline of about 850 points, its third worst decline in history. Feb represented about a -10% loss from the highs. October here has seen a drop of about 6% from the highs (about -9% in the Nasdaq). Here’s both spikes in VIX futures via finviz.
bit.ly/2yCRNsL

Podcast: CFTC Talks EP067: FIA CEO Walt Lukken
CFTC (AUDIO)
This week on CFTC Talks podcast, we review the state of the futures and options industry with FIA CEO Walt Lukken.
jlne.ws/2IRyNvj

Exchanges and Clearing

Most Active Stocks: Volatility a Boon for Exchange that Owns VIX
Luke Kawa – Bloomberg
Markets in turmoil are once again good for Cboe Global Markets Inc.
The stock is the third-best-performing component of the S&P 500 Index this month, up more than 5 percent as investors bet that increased trading will boost revenue and profit at the bourse. Shares are beating the equity benchmark by more than 11 percentage points, their largest monthly outperformance in more than five years.
/bloom.bg/2yzedLI

Sep thermal coal derivatives down 21% on year to 115 mil mt: ICE
Piers De Wilde – S&P Global Platts
…Options made up 17% of the total volume at 19.65 million mt – a decrease of 12% on month and down 37.5% on year – with futures making up the rest.
bit.ly/2CHlMnZ

Moves

Young Google, Facebook alums flocking to this high-paying trading firm
Beecher Tuttle – eFinancialCareers
An internship or a few years of work experience at Google and Facebook can open plenty of doors. But many fresh-faced alums have recently decided against launching a startup or heading to Wall Street and are instead leveraging their experience to move to the Midwest to join a low-profile high-frequency trading firm.
Chicago-based Jump Trading was founded in 1999, though its name first came to national prominence 15 years later following the publication of Michael Lewis’s Flash Boys, which scrutinized the world of high-frequency trading. While Jump Trading still minimizes its public visibility, the firm seems to have a sterling reputation 3,000 miles away in California, where many blue-chip recruits from Google and Facebook leap at the chance to join the Chicago firm.
bit.ly/2pKP24S

Regulation & Enforcement

Federal Court in Chicago Enters $14 Million Judgment against Options Trader for Fraudulent Options Scheme
CFTC
The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge John Robert Blakey of the U.S. District Court for the Northern District of Illinois entered a Consent Order for Permanent Injunction (Consent Order), which resolves charges against Defendant Thomas C. Lindstrom, of Winnetka, Illinois, for engaging in fraud in connection with his trading of options on 10-year U.S. Treasury note futures (T-Note Options).
bit.ly/2yvxvl4

Supreme Court denies exchanges’ request to take up high-frequency trading case
Declan Harty – S&P Global Market Intelligence
The U.S. Supreme Court has rejected a request from the largest U.S. stock exchanges to hear a case over whether they systematically favor high-frequency traders.
Brought in 2014 by a group of pension and retirement funds along with the city of Providence, R.I., the case has raised questions over whether exchanges owned by Intercontinental Exchange Inc., Nasdaq Inc. and Cboe Global Markets Inc. sell and offer products that illegally favor Wall Street’s fastest traders over larger, slower-moving institutional investors.
/goo.gl/fbhzmx

****SD: Missed this yesterday.

Searching for the end of Giancarlo’s white-paper trail; CFTC chairman faces key test to turn thought leadership into real reform
Joanna Wright – Risk.net
A tough-talking former interdealer broker executive who complained about regulatory overreach during his time as a commissioner after 2014, Christopher Giancarlo seemed a natural choice as chair of the Commodity Futures Trading Commission (CFTC). He was the man to fulfil president Donald Trump’s pledge to “do a number” on Dodd-Frank.
And yet, so far, his main output has consisted of white papers – more commonly used as a marketing tool by private companies than as a policy-making tool by regulators.
bit.ly/2CG8JDw

****SD: TL;DR – Talking the talk is one thing, walking the walk is another. (This piece is not paywalled.)

Technology

Now is the Time for Real-Time Risk Analytics
Hanweck Blog
With the 3.1% decline in the DJIA and 44% spike in the VIX yesterday, we wanted to dust off our bullhorn and re-emphasize why real-time risk analytics are critical in successfully managing trading risk in a volatile market.
bit.ly/2Ohq0ca

Latest version of TD Ameritrade Mobile app enhances alerts
Maria Nikolova – FinanceFeeds
Users of the solution for iOS devices can set up alerts like “close price”, or “% change since previous close”.
bit.ly/2yyFOwt

Strategy

The Allure of Fear & Disconnects
Steve Sears – OCCAM
Is it over? Probably not.
That’s the consensus of some sophisticated institutional investors after Wednesday’s sharp stock market decline and dramatic increase in options volatility. By various measures, these investors are continuing to reduce risk and leverage in anticipation that more tumultuous times will occur. This stands in sharp contrast with the enthusiasm of many individual investors who have been conditioned over the past decade to view every decline as an opportunity to buy the dip.
bit.ly/2yAv3df

Time To Reduce Equity Risk
Marc Gerstein – Forbes
Academicians and investment practitioners have long been well versed in notions of risk and how interacts with return. But even now, decades after we nailed all this down from a theoretical standpoint, it can still be hard to truly understand what it means in human terms. I still recall the Herculean but ultimately unsuccessful effort I made back in my Reuters days to try to explain to an editor who reported to the news organization what the CBOE Volatility Index (VIX) was all about; I ultimately gave up trying to explain that neither a rising VIX nor a falling VIX was bullish or bearish for the stock market.
bit.ly/2yyMjiJ

Barclays Sees Signs of Capitulation, But More Selling to Come
Joanna Ossinger – BloombergQuint
Volatility-control funds may offload $130 billion of stocks; Watching ETFs, options for indicators of further turbulence
The VIX spike this week has implications across markets, one of which is that volatility-control funds may have to engage in systematic selling. A lot of it.
Volatility-control funds, which attempt to maintain fixed portfolio volatility, will need to sell about $130 billion of equities to cut their exposure over the next couple of days, Barclays Capital strategist Maneesh Deshpande wrote in a note. Exchange-traded fund investors may sell around $40 billion over the next few days, he added.
/goo.gl/WxmDgZ

Stocks May Rally Before 2019, Morgan Stanley Says
Justina Lee – Bloomberg (SUBSCRIPTION)
The winter holidays might not be so miserable after all for stock investors.
So say Morgan Stanley strategists, whose warning about a “rolling bear market” seemed to pay off this week after growth stocks led a slide in equities. While underperformance in growth shares will likely persist, stocks may rally before year-end amid cheaper valuations, a supportive earnings season and more favorable seasonality, analysts led by Andrew Sheets wrote in a note.
/bloom.bg/2yxL57F

Pot Stocks Find a Bear as Veritas Eyes `End of Cannabis Rainbow’
Kriti Gupta – Bloomberg (SUBSCRIPTION)
Canada’s legalization of marijuana rolls out next week, yet one analyst is warning that the “tail end of the cannabis rainbow may be approaching much faster than investors realize”.
/bloom.bg/2CJ8DL2

****SD: An odd turn of phrase as we are all raised knowing there is indeed pot at the end of a rainbow.

Miscellaneous

Jamie Dimon sounds warning: ‘Geopolitical issues bursting all over the place’
Hugh Son – CNBC
J.P. Morgan Chase CEO Jamie Dimon raised concerns Friday that rising interest rates and geopolitical flareups could derail U.S. economic growth.
“The economy is still very strong, and that’s across wages, job creation, capital expenditure, consumer credit; it’s pretty broad-based and it’s not going to be diminished immediately,” Dimon said in a media conference call following his bank’s earnings report. “I was pointing out the probabilities that I thought were higher that rates would go up. I still believe that. I do think you’re going to see higher rates.”
/cnb.cx/2yAj27z

What’s the Stress Test for NFL Cleats?
Jo Craven McGinty – WSJ
Months before the NFL season begins, every style of cleat has been pounded, torqued and tested to see what will happen when a player rushes forward, leaps over a would-be tackler or makes a hard cut.
/on.wsj.com/2yCTo1J

****SD: Sometimes when you search for options-related content on the web, you get entirely unrelated results due to the ambiguity of the word “options.” But never before has a story about football cleat options come up.

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Graduate of University of Minnesota School of Journalism and Mass Communication