| October 23, 2017 | | | | | Jeff Bergstrom
Editor
John Lothian News | |
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| | | | Observations & Insight | | | VIX Bits
Spencer Doar - JLN
On the 30th anniversary of the '87 market crash last week, Cboe, in collaboration with ProShares, hosted a panel discussion "Current Dynamics of the VIX Market." There was a lot to glean - from the applications of VIX ETPs to unique characteristics of VIX futures to general perceptions of volatility.
Dominic Salvino, Group One's VIX options specialist, had one of the best analogies for the current low levels of VIX, comparing it to high February temperatures in Chicago. On February 18, the thermometer reached 70 degrees Fahrenheit, only the fourth time that's happened since 1971. Is that weird? Yes. Is it worth noting? Yes. Does that mean that the thermometer is broken? No. The thermometer is simply reading the conditions in the same way it always has.
On the topic of ETPs, there were a couple of notable points. Rich Ledee, ProShares' head of capital markets, was quick to compliment the success of Barclays' volatility ETNs, specifically VXX, the bank's short term VIX futures note, but also brought up a couple of idiosyncrasies of the product. First, VXX has a maturity date at the end of January 2019. (You read that right - prospectus here.) There is a lack of clarity on the Street around what will happen at that juncture regarding the note. There will likely be a creation of a new product and some sort of transfer but the prospect is a can of worms worth keeping an eye on. Second, by nature of being an ETN issued by a bank, there is counterparty credit risk and less transparency to consider which is different from ETFs (which is also why some folks are more leery about trading ETNs).
Second, there is a perception that VIX-linked ETPs are the dominion of the day-trading retail crowd. However, panelists were quick to turn that notion on its head stating that there are large institutional players (and plenty of prop shops) using these and, moreover, buying and holding these products despite the cost of carry. The Ontario Teachers' Pension and the University of Chicago's endowment were two such players mentioned.
There has been much ado about the effects of a unwind of all the short vol positions, but the sentiment of the panel was those fears are overblown.
This was not the first time someone has brought it to light, but Anand Omprakash, director, equity derivatives strategy and structure for BNP Paribas, had a great chart overlaying the VIX with varying QE implementation periods. It's hard to look at that chart and then try to argue that central bank actions have not had a dampening effect on market volatility.
The VIX is calculated off of calendar days rather than trading days, so there is an impact when a month has more holidays (this is priced in and not a trading opportunity).
VIX may be low, but SKEW is elevated.
| | | | | | Lead Stories | | | Whoah, That was Fast
LedgerX
'll get it out of the way: Yes, LedgerX is live.
Institutions who have gone through our rigorous on boarding process over the last few months have had the opportunity to trade this week in what we called internally, a "soft launch."
As a new exchange and clearinghouse with technology built entirely from scratch, we were hoping for a quiet first week with minimal volumes to test the pipes. No press, no fanfare, just a laser sharp focus on our customers, regulators and maybe we'd see a handful of small trades.
bit.ly/2yIX2Zj
****SD: What we called internally a "soft launch"? Everybody in the service industry uses the term... Anyway, congrats, and yes, as the Bloomberg story lays out below, this might be the week remembered "as the turning point" for cryptocurrency legitimacy.
Cryptocurrencies Move a Step Closer to the Mainstream
Aaron Brown - Bloomberg
Last week may be remembered as the turning point when cryptocurrencies joined the mainstream financial system, as the clearing and trading platform LedgerX 1 opened for business. About 20 institutional investors -- including investment banks, asset managers, hedge funds and proprietary-trading shops -- executed bitcoin forward and option trades at narrow spreads and without difficulty. This creates the possibility of large-scale trading among traditional financial institutions supporting both the vastly increased use of the currencies in business and their inclusion as an asset class in investment products from pension funds to hedge funds.
/bloom.bg/2yJ6j3L
****SD: Coindesk here. On thing hampering growth currently is laid out in the Reuters story Big money stays away from booming bitcoin. And from Pension Partners When Does a Bubble Become a Bubble?
DRW leads high frequency trading charge into cryptocurrencies
Gregory Meyer and Joe Rennison - Financial Times
Intense price swings in cryptocurrencies are luring the highest-volume traders on Wall Street as they search for relief from the low volatility blanketing financial markets.
Proprietary trading firms, which bet their own capital in markets from stocks to futures, are wading into bitcoin, ethereum and other cryptocurrencies better known as a playground for small speculators and a haven for money-laundering.
on.ft.com/2yJe2yH
No future(s): Asian financial coal trading dries up as Noble declines, Glencore rules
Henning Gloystein and Vera Eckert - Reuters
Financial trading of thermal coal has virtually ceased in Asia as a result of the woes at one major trading house and the growing dominance of another, despite the region being by far the world's biggest consumer of the fuel.
reut.rs/2yIASGF
****SD: From the story - "'All coal derivatives markets have shrunken this year... as a result of lower options trading, and due to some counter parties that have become less active,' said Joachim Hall, cross commodity trader at RWE Supply & Trading, the trading arm of Germany's biggest power supplier." On the other hand, coking coal is doing great for SGX but that is part of the steel story, and not a power commodity.
Volatility: VIX Shows As Much Greed as it Does Fear
Bob Lang - CBOE
Many call the VIX (volatility index) the 'fear gauge', but it is just as good at measuring greed. For years the VIX has been in a solid downtrend, this can be tracked from the peak in 2008 when the fear gauge reached the 90's. This indicator, created by Bob Whaley in the early 1990's had never reached that level, but some back-testing probably put the VIX at 150 during the crash in 1987 (this past week was the 30th anniversary of this 'momentous' event).
bit.ly/2y0v0VC
Weekend Review of Volatility Indexes and ETPs - 10/16/2017
Russell Rhoads - CBOE
The short term volatility indexes (VXST and VIX) were up a bit last week as the S&P 500 set multiple all-time closing record highs last week. VIX3M (formerly VXV) and VXMT were both up slightly resulting the rare 'term-structure twist'. It's really not that rare, I just had a nature documentary voice in my head as I typed that.
bit.ly/2y0nE4F
Weekend Review of Russell 2000 Options and Volatility - 10/16/2017
Russell Rhoads - CBOE
Small caps continue to lag as the Russell 2000 (RUT) was up 0.46% last week while the Russell 1000 (RUI) gained 0.87%. The RUT was making quite a run in the end of the third quarter, but that move has come to an abrupt halt with RUI up about 1% more than RUT in October.
bit.ly/2y0nGtj
Weekend Review of VIX Futures and Options - 10/16/2017
Russell Rhoads - CBOE
VIX was higher last week, despite the S&P 500 hitting a record high for five days in a row. At low levels this sort of divergence between VIX and the S&P 500 isn't usually much of a big deal. But I wonder if there may be more significance since VIX under 10 has become a bit more of a norm.
bit.ly/2y0vsmM
| | | | | | Exchanges and Clearing | | | Intercontinental Exchange Completes Acquisition of Bank of America Merrill Lynch's Global Research Index Platform
Intercontinental Exchange
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, announced it has completed its acquisition of the Bank of America Merrill Lynch Global Research division's fixed income index platform, which will become part of ICE Data Services. Terms of the agreement were not disclosed and the financial impact of the transaction will be immaterial to ICE in 2017.
bit.ly/2y0iZPW
****SD: The derivatives exchange that continues to expand its presence as a data firm.
Q3 trading dominated by rates, index and equity contracts
Julie Aelbrecht - Global Investor Group
Trading in interest rates, index and equity index contracts saw significant growth in the third quarter of this year, as currency contracts and commodity trading lagged behind.
Total derivatives trading in the third quarter of 2017 was just under 5.7 billion lots, according to Euromoney TradeData, a 2% increase on the same period last year.
bit.ly/2yIZ1go
| | | | | | Regulation & Enforcement | | | Washington insiders say tax reform likely to pass, see 'rebalancing' of derivatives regulation
Lene Powell - Jim Hamilton's World of Securities Regulation
Despite a chaotic legislative environment, tax reform has a good chance of passing, said a panel of government affairs experts at a derivatives industry conference sponsored by FIA. Regarding derivatives in particular, the panelists see a "rosy picture" in revisiting regulation, including possible revisions to the Supplemental Leverage Ratio in bank capital requirements and CFTC proposed rules on position limits and automated trading.
/goo.gl/iauRSJ
Merrill Lynch Fined $45 Million by U.K. for Failing to Report Transactions
Kaye Wiggins - Bloomberg
Bank didn't report 68.5 million transactions in 2-year period; Fine is the first of its kind under EU transparency rules
Bank of America Corp.'s Merrill Lynch was fined 34.5 million pounds ($45.5 million) for failing to report two years' worth of exchange traded derivatives transactions, making the bank the first in the U.K. to pay a penalty on that type of trades under the European Markets Infrastructure Regulation.
/bloom.bg/2yJ5KqA
****SD: Looked through a few other stories and the FCA's documentation - for the life of me can't determine what flavor of exchange traded derivatives Merrill failed to report. Regardless, another reminder of why there is so much opportunity and innovation happening in the regtech space...
Regulators Can't Keep Up With Wall Street's Robot Invasion
Benjamin Bain - Bloomberg
The technologies revolutionizing Wall Street have left Washington regulators playing a perpetual game of catch up.
Traders used to leave paper trails when they broke the law -- emails revealing that they had inside information about a company's earnings, instant messages laying out a conspiracy to manipulate prices or phone recordings discussing an illegal hot tip.
/bloom.bg/2yJ4OlQ
Christmas Plans Face Ruin for Finance Industry as MiFID II Looms
Stefania Spezzati and Sarah Ponczek - Bloomberg
The head of currency trading at Deutsche Asset Management AG warns it could ruin some people's Christmas. Lawyer Neil Robson says he's working as many as 16 hours a day to help get clients up to speed.
/bloom.bg/2yIWlza
| | | | | | Strategy | | | FX Options Market Update: October 20, 2017
TradingFloor
Please click on the attached PDF for the latest FX options market update, including developments in volatilities, an interesting market case, and a look at relatively strong and weak volatility markets.
bit.ly/2yJCP5L
Equity CEFs: When Option Funds Act Like Leveraged Funds
Douglas Albo - Seeking Alpha
There are two main income strategies equity CEFs use to generate enhanced income. One is using a covered-call option strategy and the other is using leverage.
A leveraged strategy is, by far, more effective in a ramp up bull market like we are in, whereas the option strategy is most effective in flat to up-and-down market.
As a result, the vast majority of option CEFs' NAVs are not keeping up with their benchmarks, so why are investors rushing to buy them at premium valuations?
bit.ly/2yIOSQS
What The CAPE/VIX Ratio Tells Us Is Likely Looming Ahead!
Gordon Long - Seeking Alpha
We were in the process of writing about the technical pattern in the VIX when we came across some research by Peter Schiff of Euro Pacific Capital illustrating the historical correlation of the CAPE/VIX Ratio to US Recessions go back to 1990. We have been warning about a unexpected US Recession scare coming in 2018.
bit.ly/2y0vf2X
SPY Is Overbought Again, But With One Key Difference
Todd Salamone - Schaeffer's Investment Research
Two weeks ago, with standard October options expiration around the corner, I put the heavy call open interest at the SPDR S&P 500 ETF Trust (SPY - 257.11) 255 strike on your radar. Data we receive from the major options exchanges suggested that many of these calls were sold to open, implying option sellers had sold away any upside above the $255 level.
bit.ly/2y0228v
| | | | | | Miscellaneous | | | TD Has Quickly Become a Top 10 U.S. Bank and It's Not Done Yet
Doug Alexander - Bloomberg
Toronto-Dominion Bank's new U.S. head isn't being critical when he describes the lender as "sub-scale" in small business and corporate lending, and "underweight" in wealth management. He just thinks there's market share to be had.
/bloom.bg/2yJ3aRl
Americans Are Retiring Later, Dying Sooner and Sicker In-Between
Ben Steverman - Bloomberg
The U.S. retirement age is rising, as the government pushes it higher and workers stay in careers longer.
/bloom.bg/2yIEUPb
The Art of Giveaway Marketing in the Forex Industry
Finance Magnates
The more inventive and useful a giveaway is, the more likely it will differentiate a brand from the competition.
bit.ly/2yILe9B
****SD: Particularly relevant after FIA Expo. I would say that Vela's augmented reality, FIA Tech's dart shooting, and NetXpress's cigar rolling table on Day 1 were some standouts as far as giveaways/marketing goes. But there's plenty of subjectivity in that evaluation of course.
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| | | | John Lothian News (JLN) is the news division of John J. Lothian & Company, Inc. (JJLCO). The online media and financial services firm is staffed by derivatives industry, journalism and technology professionals. | | | | | | | John Lothian News Editorial Staff: | | | John Lothian
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