This post was published at George Gammon
Last week, as part of its must read 2018 Outlook piece, Bank of America’s derivatives team pointed out two particularly notable things: the first was BofA’s version of the (central-bank mediated) “feedback loop” diagram that keeps volatility record low and grinding even lower, as selling of vol has become a self-reinforcing dynamic, in which lower VIX begets more vol-selling by “yield-starved investors”, leading to even lower VIX as the shock that can reset the feedback loop is no longer possible, and thus the strike price on the Fed’s put can not be put to a market test, which also results in even greater market fragility and assured central bank interventions…
… and a chart suggesting that the market generally broke some time in 2014, when the “behavior of volatility entirely changed, with volatility shocks retracing at record speed. Investors no longer fear shocks, but love them, as it is an opportunity to predictably generate alpha.”
This post was published at Zero Hedge on Dec 12, 2017.
The ‘VIX Elephant’ has awakened. And ’50 Cent’ is back.
That’s the mysterious-sounding ointroduction to a notable market insight from Bloomberg this mornig as they note the turmoil surrounding Mike Flynn headlines – spiking VIX and slamming stocks – provided two big options market ‘whales’ with some relief and room to move…
First, the trader who’s known as the Elephant for making big moves in the VIX — but who’s been surprisingly quiet in recent weeks — returned with a vengeance to start December, buying and selling more than 2 million contracts Friday to continue betting on a modest rise in the Cboe Volatility Index. That’s three times the average daily volume for all VIX options.
The Elephant caught a major break thanks to the sharp retreat in the S&P 500 Index following reports that former national security adviser Michael Flynn would implicate members of President Donald Trump’s transition team in the probe into Russian meddling in the 2016 election. The VIX spiked to as high as 14.58 as equities tumbled.
Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, said the investor had been poised to lose $20 million to $30 million on the December leg of this trade before Friday, but was able to escape with a loss of less than $2 million in closing up those positions.
‘They got really lucky with the selloff today,’ Chintawongvanich said.
‘They were down a lot on the December position, and this allows them to get out of it without too much of a loss.’
This post was published at Zero Hedge on Dec 1, 2017.
This is a syndicated repost courtesy of Credit Bubble Bulletin . To view original, click here. Reposted with permission.
November 15 – Bloomberg (Nishant Kumar and Suzy Waite): ‘Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved. ‘Have we learned our lesson? It depends what the lesson was…’ Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market ‘could have been dealt with differently.’ And in the ‘so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.’ ‘If you took all of the obvious problems from the financial crisis, we kind of solved none of them,’ Einhorn said… Instead, the world ‘went the bailout route.’ ‘We sweep as much under the rug as we can and move on as quickly as we can,’ he said.’
October 12 – ANSA: ‘European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It’s not clear what that means’.’
Once you provide a benefit it’s just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.
This post was published at Wall Street Examiner on November 18, 2017.
COMEX gold contracts recovered a $5 drop against a weakening US Dollar in London lunchtime trade Tuesday, rising back to last week’s finish at $1275 after what analysts called another “large sell” order on the futures market.
Commodities retreated and bond prices edged higher as world stock markets fell again.
Germany’s Dax dropped for the fourth session running after the 19-nation Eurozone released a raft of stronger economic data, led by 2.5% annual GDP growth across the region for the third quarter of the year.
“Speculative financial investors stopped withdrawing from gold and built up net long positions again in the week to 7 November,” says German financial group Commerzbank in a commodities note today, looking at the latest Comex gold derivatives data from US regulator the CFTC.
This post was published at FinancialSense on 11/14/2017.
The Bank of Italy, when it was headed at the time by Mario Draghi, knew Banca Monte dei Paschi di Siena SpA hid the loss of almost half a billion dollars using derivatives two years before prosecutors were alerted to the complex transactions, according to documents revealed in a Milan court.
Mario Draghi, now president of the European Central Bank, was fully aware of how derivatives were being used to hide losses. Goldman Sachs did that for Greece, which blew up in 2010. It is now showing that Draghi was aware of the problems stemming from a 2008 trade entered into with Deutsche Bank AG which was the mirror image of an earlier deal Monte Paschi had with the same bank. The Italian bank was losing about 370 million euros on the earlier transaction, internally they called ‘Santorini’ named after the island that blew up in a volcano. The new trade posted a gain of roughly the same amount and allowed losses to be spread out over a longer period. We use to call these tax straddles.
This post was published at Armstrong Economics on Nov 13, 2017.
Shifting trillions of euros of derivatives positions could be hugely disruptive.
The growing prospect of a hard or disorderly Brexit is sending jitters through the global financial community. This week the Financial Times reported that a group of ‘large financial institutions with big London operations’ had met with US Commerce Secretary Wilbur Ross to express their dissatisfaction with the lack of progress in Brexit negotiations.
‘The fears over a potential Brexit no-deal are rising, as we move within 16 months of the UK’s exit from the EU,’ said Joshua Mahony, market analyst at IG.
While New York stands to benefit from some of the disruption caused by the UK’s separation from the EU, there is rising concern that Brexit could set off global ripples. That fear was compounded on Friday after Teresa May announced plans to set the UK’s departure date and time (March 29, 2019 at GMT 23:00) from the EU in law, warning she will not ‘tolerate’ any attempt to block Brexit.
‘[The banks] are becoming nervous,’ said City of London Corporation’s policy chief Catherine McGuinness after meeting representatives of US banks earlier this week. ‘It wasn’t just curiosity, it was concern at the lack of progress that we have been making, and nervousness that it had implications beyond Europe’s borders in terms of causing disruption to markets.’
This post was published at Wolf Street by Don Quijones ‘ Nov 11, 2017.
House GOP Readies for Tax-Bill Battle (WSJ) GOP’s United Front on Tax Cuts Masks Divisions (BBG) Republican tax plan a blow to Democratic states, officials say (Reuters) As Trump Embarks on Asia Tour, North Korea Looms Large (WSJ) Apple Store Lines Return as iPhone X Debuts (WSJ) There’s Some Good News About 401(k)s in the Tax Bill (BBG) iPhone Xs Are Already Being Resold in Hong Kong (BBG) CNN to Launch Subscriptions for Digital News (WSJ) Mr. Ordinary: Who Is Jerome Powell, Trump’s Fed Pick? (WSJ) U. S. bomber drills aggravate North Korea ahead of Trump’s Asia visit (Reuters) Bitcoin Is the ‘Very Definition’ of a Bubble, Credit Suisse CEO Says (BBG) Goldman Retreats From Options as Stock Derivatives Trading Struggles (WSJ) Here’s a Juicy Tax Break. Now, How to Keep Everybody From Claiming It? (BBG) Dark Side at Fidelity: Women Describe a Culture of Revenge (BBG) Get Ready for an Appalachian Gas Bonanza (BBG) PDVSA Bonds Slump After Venezuela Calls for Restructuring: Chart (BBG) Drug Deaths Rose More Last Year Than in the Previous Four Combined (BBG) Overnight Media Digest
– Two U. S. B-1B bombers flew near North Korea on Thursday, alongside Japanese and South Korean jet fighters, provoking anger from Pyongyang ahead of President Donald Trump’s closely watched trip to Asia. on.wsj.com/2gZ02qP
– The Justice Department is laying the groundwork for a potential lawsuit challenging AT&T Inc’s planned acquisition of Time Warner Inc if the government and companies can’t agree on a settlement, according to people familiar with the matter. on.wsj.com/2ipyGuh
– T-Mobile US Inc and Sprint Corp are working to salvage their potential blockbuster merger, people familiar with the matter said, days after Sprint Chairman Masayoshi Son appeared to call off the talks. on.wsj.com/2gZNq2Q
This post was published at Zero Hedge on Nov 3, 2017.
The Alternative for Germany party (AfD) in Germany has asked the Federal Government to file a lawsuit against all decisions of European Central Bank (ECB) regarding the purchase of government bonds and corporate bonds as well as derivatives since 2015. They are petitioning to file in the European Court of Justice asserting that the policies of the European Treaties and by the Federal Constitutional Court were being violated.
Effectively, the ECB ‘stimulus’ policy (QE) has completely failed and instead has become a life-support system subsidizing the debt of Eurozone member states. Even reducing the amount bought per month is an attempt to see if the marketplace takes up the debt. But the Eurozone governments never cut back spending or reformed. They never had to. The QE program was merely targeting to support the government – not the average person in the economy.
This post was published at Armstrong Economics on Nov 2, 2017.
The European Union’s executive arm, the European Commission, made a lot of bank executives very happy this Tuesday by abandoning its multi-year pledge to break-up too-big-to-fail lenders. Despite the huge risk they still pose to Europe’s rickety financial system, big European banks like Deutsche Bank, BNP Paribas, ING, and Santander can breathe a large sigh of relief this week in the knowledge that they will not have to split their retail units from their riskier investment banking arms.
Breaking up the banks would remove much of the risk from today’s government-backed banks, such as derivatives and other instruments that were heavily involved in the Financial Crisis. Without these hedge-fund and investment-banking activities, even large banks would be smaller, less interconnected, and could be allowed to fail without jeopardizing the entire global financial system.
According to the Commission, such a drastic measure is no longer necessary since the main rationale behind ring-fencing core banking services from investment banking divisions – i.e. to make Europe’s financial system less disaster prone – has ‘already been addressed by other regulatory measures in the banking sector.’ That’s right: Europe’s banking system is already safe, stable and secure. Bloomberg:
This post was published at Wolf Street on Oct 25, 2017.
I have been meaning to write this post for quite some time. As an ex-ETF trader, I have watched with bemusement as investors have both embraced and shuddered at the wide adoption of ETFs. But most pundits are missing the larger picture. ETFs are just a symptom of the bigger phenomenon. The true battle lies in the passive versus active debate.
Let me get this out of the way right off the bat. I have no dog in this hunt. I see both the benefits and the negatives to each side. Yet as a trader, I definitely have a view on which end of the boat is leaning lopsided right now.
Lessons from triple witching
But first, let me tell you a story. I was lucky enough to have a ringside seat for the coming of age of equity index derivatives. Sure they existed before my time, but the true widespread global adoption occurred in the 1990’s. In Canada, when I first sat down on the institutional desk, clients had little interest in what the young kids with their fancy SUN workstations were doing. Yet as money flowed into the derivatives complex, what had first just been a strange little science experiment, suddenly started moving the underlying market. Our index arbitrage flows became significant, and regular plain vanilla clients began took notice.
Along with the increased index arbitrage flows came this bizarre triple witching expiry. When open interest was small, these expiries were minor. But as the usage of derivatives expanded, one morning we experienced an imbalance that was uncomfortably large. Being index traders, we instantly understood what had happened. Someone was letting a whole bunch of exposure expire into the open, and therefore there was a very large, and very real, index sell basket to execute at the open.
Many institutional clients were not used to trading on the open. Most often, they let retail orders and market makers set the price, and then after it settled down, they would give us their orders.
Given that institutional clients were not interested in trading at the open, there was little liquidity for the large expiring sell basket. Sensing an opportunity, we bid spec for a decent portion of the sell imbalance, hoping to get a good fill which we could then offset in the futures market. The trouble was, not nearly enough market participants joined us, and the market gapped down huge. It was a terrific trade as the opening settlement was many hundreds of basis points below the previous close.
This post was published at Zero Hedge on Oct 24, 2017.
Matthew Garrahan dropped a bigger bombshell in the Financial Times yesterday than even he realizes. Garrahan named the law firm that had crafted a gag order in 1998 to silence two women from ever speaking about their encounters with Harvey Weinstein. One woman, Zelda Perkins, was an assistant to Weinstein in London and charged him with egregious sexual harassment. The other unnamed female colleague charged Weinstein with sexual assault. The two were paid $125,000 each and given an iron-clad gag order. The terms of the gag order were so confidential that the women were not even allowed to have a full copy of what they had agreed to, just a summary of some of its terms.
The law firm representing Weinstein with the settlements and gag orders (officially called non-disclosure agreements) was Allen & Overy – the London derivatives powerhouse that also signed off on the Structured Investment Vehicles (SIVs) that played a significant role in helping to blow up Citigroup in 2008, resulting in the largest taxpayer bailout of a bank in financial history.
In 2007, according to Standard & Poor’s Structured Finance research reports, Citigroup was managing the following Structured Investment Vehicles that were incorporated in the Cayman Islands and not consolidated on Citigroup’s balance sheet: Centauri Corp., Beta Finance Corp., Sedna Finance Corp., Five Finance Corp., and Dorada Corp. In addition, according to press reports, Citigroup had created two more SIVs in 2006: Zela Finance Corp. and Vetra Finance Corp. The SIVs contained approximately $80 billion of mostly toxic debt, much of which ended up back on Citigroup’s balance sheet. Allen & Overy was the London counsel to Citigroup on these SIVs.
You don’t have to take our word for this. One of Allen & Overy’s own lawyers actually bragged on the law firm’s website about the key role it played in the ‘fascinating time’ of the financial crisis – the most devastating economic collapse since the Great Depression that left millions of Americans out of work and foreclosure notices on their front door.
This post was published at Wall Street On Parade on October 24, 2017.