UPDATE: 23 minutes later - Self-Help is revoked...
Well that didn't take long...
- *BATS OPTIONS DECLARES SELF-HELP AGAINST CBOE
- *CBOE: CT BC85 HAS BEEN SWITCHED TO ITS BACK-UP
But, as CNBC previously noted, we are getting used to these "broken markets" by now so it doesn't matter...
The recent strong rise in the so-called CBOE SKEW index is yet another among the various divergences that make the stock market's current advance suspect. Skew measures the perceived tail risk of the market via the pricing of out-of-the-money options. Generally, a rise in skew indicates that 'crash protection' is in demand among institutional investors. An unusual move in the skew index (which historically oscillates approximately between a value of 100 and 150) is especially interesting when it diverges strongly from the VIX, which measures at the money and close to the money front month SPX option premiums. Basically what a 'low VIX/high skew' combination is saying is: 'the market overall is complacent, but big investors perceive far more tail risk than usual' (it is exactly the other way around when the VIX is high and SKEW is low). In other words, a surprising increase in realized volatility may not be too far away.
- Republican Civil War Erupts: Business Groups v. Tea Party (BBG)
- Budget fight leaves Boehner 'damaged' but still standing (Reuters)
- Madoff Was Like a God, Wizard of Oz, Lawyers Tell Jury (BBG) - just like Bernanke
- Republicans press U.S. officials over Obamacare snags (Reuters)
- Brilliant: Fed Unlikely to Trim Bond Buying in October (Hilsenrath)
- More brilliant: Fed could taper as early as December (FT)
- Russia Roofing Billionaires Seen Among Country’s Youngest (BBG)
- Ford's Mulally won't dismiss Boeing, Microsoft speculation (Reuters)
- China reverses first-half slowdown (FT)
- NY Fed’s Fired Goldman Examiner Makes Weird Case (BBG)
As markets twiddle their thumbs waiting on Washington to come up with a political solution to the Federal Debt Limit/budget debate, ConvergEx's Nick Colas decided it would be a good time to review the academic literature on how markets discount expectations in the first place. Behavioral finance posits that human nature skews perceptions of risk and return, causing everything from irrational risk aversion to asset price bubbles. Against this current backdrop of theoretical uncertainty, measures like the VIX are currently somnambulant. So, using the modern vernacular, WTF? The bottom line, Colas explains, is that Wall Street thinks it has the current "Crisis" all figured out: a last minute deal with no Treasury default. And just as we haven’t sold off materially during this drama, don’t expect a huge (+5%) lift afterwards.
UPDATE: *CBOE: CFE WILL OPEN THE VX FUTURE PRODUCT AT 8:10 AM CT
It would appear that the overnight melt-up exuberance of an optimistic investing public has been stymied as the exchanges break once again. Following record volume levels on VIX options this week, we are told this morning by CBOE:
- *CBOE: CFE EXPERIENCING TECHNICAL ISSUES
- *CBOE: CFE EXPECTING DELAYED OPENING FOR THE VX
- *CBOE:CFE WILL BUST ERRANT VX, VXT TRADES FROM 7:00-7:12:01 CT
SSDD... Let's hope Jack Lew has something positive to say and doesn't "surprise" an unhedged market.
Stocks have fallen for 9 of the last 11 days since the Un-Taper and the S&P has falen 3.7% from its highs. Volume today was above average (as we note CBOE SPY options volume set an all-time record yesterday) and thanks to a 1% or so rally off the lows on the back of a restatement that Speaker Boehner doesn't want to see carnage, the S&P managed to scramble back above the 50DMA. A late-day collapse (what no VIX pumpathon today?) closed us below that crucial level for the first time in a month. VIX rose 1 vol to 17.6% by the close (off its highs). Treasuries rallied in general (but the 30Y ended the day unch as the curve steepened notably). The USD fell some more (-0.65% on the week) as JPY and EUR strength didn't help but gold and silver closed unch, oil and copper down 1%.
On a day when the CBOE was struggling to disseminate data, exchanges proclaiming self-help against one another, weekly expirations and an AAPL share price well below early week pin-risk levels, it makes perfect sense that it would be a VIX-sparked momentum ignition algo that would lift a super-low-volume day in US stocks from perfectly at VWAP to close at their highs (banging them 0.25% higher in the last 3 minutes of the day)... all we can say is WTF...
Anyone else get a sense of deja vu? Following CBOE's fail this morning, now BATS and NASDAQ have declared self-help against the CBOE...
- *CBOE HAS NO FURTHER COMMENTS REGARDING ITS COMPUTER SYSTEMS
- *CBOE INVESTING CURRENT DIFFICULTIES, SPOKESPERSON SAYS
As of 10:02AM CT, *CBOE’S C2 AND CBSX HAS HALTED TRADING
The last time CBOE suffered an outage similar to this, it led to the NASDARK debacle and 3 hours of radio silence from the largest (and most liquid) exchange in the world:
Equity markets have to explaining to do, regardless of where you think they are heading. As ConvesrgEx's Nick Colas notes, if bullish, riddle me this: are stocks just going to hop-skip-jump over Fed tapering, U.S. budget battles, a new Federal Reserve Chair, Syria, Greek bailout 3.0, German Elections, and other near term speedbumps? Last time we checked "hope" still isn’t a strategy. And for the bears: Colas asks, how has that been working out for you over the last week of boa constrictor-like squeezes higher? Not so good. In the following note, Colas takes an out-of-the-box approach to explaining the recent rally by looking at some new academic work on the subject of stress. As it turns out, stress is only harmful if you believe it is. Maybe markets have 'learned' that lesson and view all these potential stomach-churning headlines as annoyances, rather than existential crises-in-waiting.
First it was BATS self-helping against NYSE Arca, now it's Nasdaq's turn to break. Joking aside, AAPL dipped below $500 literally minutes before the NASDAQ broke. We joked earlier when we said any selling is enough to break the market. Now, we are not so sure...
- SURPRISE - Goldman Sachs won a preliminary victory to limit losses from a wave of erroneous trades that roiled U.S. options markets (WSJ)
- HP’s Whitman abandons 2014 revenue growth target (FT) - just keep doing those buybacks and ignore CapEx: revenue growth estimated in 2022
- Republicans in Echo Before Big Burn Defy Affordable Care (BBG)
- China's banks to take next step in rate reform push (Reuters)
- Berlin’s Consistency on Greece’s Rescue (FT) and lack thereof
- Summers as Obama Voice of Authority Rides Car Rescue in Fed Race (BBG)
- Cuomo in Manure Fight as New York Promotes Yogurt (BBG)
- Yellen’s Ties From London to Shanghai Bypass White House (BBG)
- Sanctions Gap Allows China to Import Iranian Oil (WSJ)
This morning's debacle in the options pit appears - just as we noted - to be due to Goldman Sachs 'erroneous' trades:
- *GOLDMAN MAY LOSE AS MUCH AS $100M ON ERRONEOUS TRADES: FT
But, as we also noted earlier, unlike Knight (which was wiped out when its market-making algos went rogue), in Goldman's case:
- *GOLDMAN SAYS 'WORKING WITH EXCHANGES' TO RESOLVE OPTIONS ISSUE
They get everything DK'ed...