| February 14, 2018 | | | |  | Spencer Doar
Associate Editor
John Lothian News | |
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| | | | Observations & Insight | | | What's the Deal With the VIX Manipulation Letter? Inaccuracy and Misunderstanding
Spencer Doar - JLN
The big options news pertains to a letter alleging VIX manipulation. The letter, written on behalf of an anonymous whistleblower by a Washington D.C. law firm, alleges market makers manipulate the VIX by quoting far out of the money SPX put options so they are included in the VIX calculation at junctures that benefit their trading activities.
It's understandable financial instruments are subject to concerns about manipulation when their inner workings are complicated and not fully understood by the general public. VIX manipulation has come up before and it will probably come up again unless regulators step in and levy an unbiased verdict, thus quashing this occasional debate. Until that point though, the letter needs a grain of salt.
Cboe said in a statement, "This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility exchange traded products, among other things."
So, what are these inaccuracies and misconceptions?
Read the rest HERE.
****Yesterday's column has been updated with more information about VIX settlement and trading.
| | | | | | Lead Stories | | | Regulator Looks Into Alleged Manipulation of VIX, Wall Street's 'Fear Index'
Gunjan Banerji - WSJ
A U.S. regulator is looking into whether prices linked to the stock market's widely watched "fear index" have been manipulated, according to people with knowledge of the matter.
The Cboe Volatility Index, known as the VIX, is derived from S&P 500 options prices. The Financial Industry Regulatory Authority is scrutinizing whether traders placed bets on S&P 500 options to influence prices for VIX futures, the people said.
jlne.ws/2EmL4ot
****SD: Just figure it out so all the misinformation can stop. Reuters here and the FT here.
China to curb option trades after one bet soared 2,250%
Bloomberg via Gulf Times
China tightened restrictions on equity-linked options trading, people familiar with the matter said, the latest sign that authorities are acting to contain market turbulence after the biggest stock slump in two years.
Active options traders face a volume limit of three times account holdings, along with restrictions on the amount of orders they can cancel, the people said, without specifying over what period the volume and assets will be measured. Failure to comply after oral and written warnings will result in accounts being frozen, said the people, who asked not to be identified discussing private information.
jlne.ws/2EpOy9U
****SD: A bit ahead of time, but Happy Year of the Dog! Lunar New Year celebrations mean the Chinese stock market will be closed from Thursday to next Wednesday.
Worries over exotic exchange traded funds deepen
Robin Wigglesworth - Financial Times
Activist investor Carl Icahn and BlackRock founder Larry Fink have clashed over the merits of exchange traded funds, but they agree on one subject: ETFs that use derivatives to juice up returns for investors are a bane.
jlne.ws/2F2krq6
****SD: Feels like trying to close the barn door after the horses are gone. Consider that after the bloodbath, SVXY took in another $500 million. Say what you will about "Frankenstein's monster(s)," the things keeps lumbering on.
Is VIX Manipulated or Hedged?
Matt Levine - Bloomberg
Credit Suisse AG issued an exchange-traded note called XIV, the VelocityShares Daily Inverse VIX Short-Term ETN, which we have talked about a bunch recently. XIV is a debt of Credit Suisse in an amount that is inversely related to the prices of some futures on the CBOE Volatility Index, the VIX: Each day if the VIX futures go down, Credit Suisse owes XIV holders more money; if the VIX futures go up then it owes them less. In the prospectus for XIV, Credit Suisse tells investors that it plans to hedge XIV. The way the XIV hedging theoretically works is that when the VIX futures go up, Credit Suisse goes into the market and buys futures; when the futures go down, Credit Suisse goes into the market and sells futures.
jlne.ws/2F4k2nf
****SD: Other market commentary from Bloomberg here and MarketWatch here.
Credit Suisse CEO on controversial volatility trades: 'It worked well for a long time until it didn't'
Natasha Turak - CNBC
Credit Suisse is defending a controversial financial product it issued that played a role in the staggering market losses last week.
People shorted volatility at their own risk, Credit Suisse CEO Tidjane Thiam told CNBC on Wednesday, when asked about the losses suffered by investors who held shares of complex volatility trading products, the most popular of which was managed by his bank.
jlne.ws/2EZLwdv
****JB: The surprise here is that people seemed surprised.
****SD: The WSJ's piece on Suisse's earnings was titled Credit Suisse Posts Third-Straight Loss but Says Strategy Is Working. So instead of working well until it didn't, that strategy is not working until it does? Or something?
| | | | | | Exchanges and Clearing | | | Cboe's Vix troubles could have wider impact
Philip Stafford - Financial Times
Exchange-traded products that allow investors to wager on the tranquility of Cboe's Vix index, a measure of stock market volatility, have helped drive Cboe's profits in recent years. The exchange-traded notes relied on Vix futures, which can only be traded at Cboe.
But analysts fear the slide in value of two big notes and funds this week will have a bigger impact. Goldman Sachs estimated Vix futures contributed about 40 per cent of Cboe's earnings growth between 2015 and 2017, excluding its 2016 deal for Bats Global Markets.
jlne.ws/2F1RKK0
ICE launching robusta calendar spread options on Thursday
Reuters
ICE Futures Europe said it will launch calendar spread options for robusta coffee on Thursday following demand for customers who trade a similar arabica coffee product.
jlne.ws/2Epzr0g
****SD: Too bad Chocfinger (who also had a java affinity) left the market. Well, he's still trading his own money, but still...
Cboe Global Markets' Exchanges Trading Schedule for Presidents' Day Holiday
Cboe
Cboe Global Markets, Inc., one of the world's largest exchange holding companies, today announced the following trading schedule for the company's options, futures, equities and FX trading venues in observance of the Presidents' Day holiday.
jlne.ws/2F0QcQp
| | | | | | Regulation & Enforcement | | | Ex-CFTC head Bart Chilton on whistleblower VIX manipulation allegation
Matthew J. Belvedere - CNBC
The allegation by a whistleblower, in a letter to the Securities and Exchange Commission, of potential manipulation of the VIX, a key gauge of market fear and volatility, "rings true," a former market regulator told CNBC on Wednesday.
jlne.ws/2F3ArIr
****SD: Check out Chilton's reasoning - "'I don't have the details like I did back in the day,' he admitted, but said, 'I've had traders contact me and tell me they've lost money. They think prices are being pushed around.'"
New Hedge-Fund Tax Dodge Triggers Wild Rush Back Into Delaware
Miles Weiss - Bloomberg
Firms set up LLCs in plan to avoid carried-interest change; Congress may have stumbled in narrowing loophole for managers
Wall Street's fast-money crowd is returning to well-trodden ground to elude Trump-era tax laws: Delaware.
jlne.ws/2Ep7Ls9
| | | | | | Strategy | | | Volatility spikes present buying opportunities, banks say
Natasha Turak - CNBC
If there's one thing nearly all market players seem to agree on, it's that the era of super-low volatility is over.
But that shouldn't cause concern, according to Credit Suisse and other major banks, who are promoting it as an opportunity to buy.
jlne.ws/2F25zbd
All Low Volatility Trades Will Soon Blow Up
Jared Dillian, Mauldin Economics via Equities.com
Let's talk about the crash, or the mini-crash, or the dislocation, or whatever you want to call it.
Six percent intraday is close to crash territory, especially when you've seen no volatility over the last two years.
jlne.ws/2F2i0nw
S&P 500 Options Actually Look Pretty Cheap From This Perspective
Cecile Vannucci - Bloomberg
In some sense, buying options on the S&P 500 Index has rarely been this cheap.
jlne.ws/2EqLoCX
| | | | | | Miscellaneous | | | Hedge Funds' Biggest Short in Bonds Faces Make-or-Break Moment
Brian Chappatta - Bloomberg
Hedge funds and other large speculators are more convinced than ever that the 2018 bond-market rout will resume in the days ahead.
jlne.ws/2Er9lKr
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