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Author: Tracy Alloway

It’s not just about the VIX

It’s not just about the VIX

There’s so much talk about volatility right now — and specifically the stubbornly low behaviour of the VIX  — that I thought I’d do a round-up of some of my previous pieces on it.

Please note, I’m in an anti-paragraph, anti-proofreading kind of mood today. So typos and big blocks of text are ahead.

1. On the VIX 

Let’s start with this one, from September 2013, about a new index trying to challenge the VIX, the index that most people associate with ‘volatility.’ For more than two decades, the VIX index run by the Chicago Board Options Exchange has been the financial industry’s go-to method for measuring expectations of volatility in the wider marketplace, with the CBOE turning the index into something of a cash cow thanks to the launch of futures tied to the gauge. VIX-related futures have in turn allowed a plethora of VIX-based exchange-traded products (ETPs) to also launch. With all that money benchmarked to the VIX, it’s no surprise that we have occasionally seen upstarts attempt to challenge it.

2. Selling volatility

Now let’s go here to this story from December 2014. About six years on from the financial crisis and deep in the era of monetary stimulus, investors are struggling to make returns and seize upon the realisation that selling volatility — whether that be through shorting the VIX or some other derivative-based method — can be a lucrative (if risky) strategy. This was the big shift in the volatility market. Instead of having a bunch of banks or hedge funds (or de facto, GSEs) sell volatility, you suddenly have a bunch of buy-side funds and retail investors who are interested and able to do so, the latter largely thanks to the explosion in VIX-related products. The big question, per the piece, is whether these new sellers of volatility are more likely to behave differently than traditional vol-sellers. Are they more or less likely to react to abrupt shifts in volatility?

3. Self-reflexive VIX

By September 2015, the VIX is again in the headlines after the unexpected devaluation of the Chinese yuan spooked markets. While the VIX did jump on this news, it was the VVIX (in effect, volatility of volatility) that reached an all-time record. Here’s my article about that: “When there’s a sudden spike in volatility, as occurred last month, the price of near-term VIX futures rises. Meanwhile, volatility players — notably hedge funds and CTAs — scramble to buy protection as they seek either to hedge or cover short positions, causing a feedback loop that encourages near-term futures to rise even further.” CFTC positioning data at the time did suggest a classic short squeeze as investors closed out their short vol positions post the spike. In effect there were said to be two major forces impacting the VIX, systematic volatility sellers as well as VIX-related ETPs that have to buy or sell futures to rebalance. This rebalancing act makes the VIX curve important, a point picked up on by Chris Cole of Artemis Capital in a story I wrote about a month later: “VIX term structure inverted at the greatest degree in history in August, so much so and so fast that many structured products that use simple historical relationships to gauge term structure switching and hedging ratios just couldn’t handle it,” he said. The concern is that the explosion in volatility-trading means more demand to buy or sell futures to rebalance, which could impact the shape of the curve itself.

4. VIX and beyond!

The proliferation of ETPs tied to the VIX is a concern insofar as it affects the volatility landscape, but it’s not the whole story. To explain, let’s go to Bill Gross, who became the poster child for volatility-sellers after publicly saying in June 2014 — while still at Pimco — that the company was selling “insurance, basically, against price movements” to juice returns in an era of low interest rates. Not once did he mention the VIX. It wasn’t until October 2014, after Gross’s abrupt departure from Pimco, that we got a better sense of what that insurance-selling strategy might mean when the U.S. Treasury market experienced a sudden melt-up, of sorts. At the time, there was plenty of talk that Pimco was liquidating some derivatives positions, which ended up having an outsized effect on the underlying cash market. The U.S. government’s report on the episode later mentioned that: “In particular, anecdotal commentary suggested that some dealers had absorbed a portion of the sizable ‘short volatility’ position believed to have been previously maintained by large asset managers. As volatility spiked on October 15, those positions would have prompted some dealers to dynamically hedge this exposure, exacerbating the downward move in yields.” Then, in August of last year, the BIS published a paper on asset managers dabbling in eurodollars including the example of Pimco in 2014, which I wrote up in a piece called “This is where leverage lives in the system.” That article contained a laundry list of potentially risky strategies across rates (viz eurodollars, futures, forwards), credit (using swaptions and swaps) as well as equities (options, VIX ETPs, etc.). What’s my point? I don’t mean to underplay what’s happening with the VIX, but my concern is that if we’re looking for potential flash points in the financial system then we may want to broaden our horizons.

An experiment

An experiment

I said earlier that I have a theory that you can replace the term “distributed ledgers” with “shared Excel sheets” in about 90 percent of talk about blockchain and finance. I wasn’t joking.

“A shared Excel spreadsheet is a record of transactions or other data which exists across multiple distinct entities in a network. The spreadsheet can be wholly replicated across participants, or segments can be partially replicated across a subset of participants. In either case, the integrity of the data is ensured in order to allow each entity to rely on its veracity and to know that data they are entitled to view is consistent with that viewed by others entitled to view the same data. This makes the shared Excel spreadsheet a common, authoritative prime record — a single source of truth — to which multiple entities can refer and with which they can securely interact.”

That’s from a certain blockchain paper. You could tweak the language to make it a little more accurate – “password-protected Excel spreadsheets whose earlier entries cannot be edited” or some such, but the point stands. The reason it stands is because it highlights a major issue with blockchain technologies when it comes to finance — what problem are you trying to solve here?

Centralized databases have existed for decades. Blockchain might be modestly more efficient, but the notion that it’s completely immutable and can never be abused seems open to questioning.

Here’s Christopher Natoli and Vincent Gramoli as written up by The Register:

“The problem: if everyone in a consortium trusts each other, they don’t need blockchains to protect themselves; if they don’t, current blockchain protocols have a flaw that allows a bad actor to game the system.”



Midnight Madness, revisited

Midnight Madness, revisited

Elisha Wiesel, the son of Holocaust survivor and author Elie Wiesel, is replacing Marty Chavez as Chief Information Officer at Goldman Sachs.

It’s an interesting bit of Goldman kremlinology given his history at J Aron. It’s also an excuse to revisit some of my old work on Midnight Madness – the epic all-night Wall Street scavenger hunt/first-person puzzle/charity fundraiser that Wiesel is credited with inventing and which I wrote about for the Financial Times.

So here’s a fun throwback to 2013, when Midnight Madness was first expanded to include non-Goldman firms:

Wall St lines up for ‘Midnight Madness’

Some time next week Dan Keegan, Citigroup’s head of US equities, will be asked to sing a ballad over the speakers on the bank’s New York trading floors.

The unusual request is part of Citi’s efforts to raise at least $250,000 to enter five teams into a fundraising competition known as “Midnight Madness”.

Traditionally the purview of Goldman Sachs bankers, this year the all-night competition has expanded to include other financial groups. Goldman will now compete in the lavish scavenger hunt and puzzle-solving game against Citi, Credit Suisse, the hedge fund BlueMountain and Secor Asset Management.

The competition takes place on October 5 and has already kicked off a flurry of activity across a competitive Wall Street. The prospect of earning bragging rights in a battle of wits against rivals while raising money for charity is set to lure about 250 traders, quantitative analysts and bankers to this year’s event.

“This type of mental Olympics, combined with adventure, is something that I think might have a broad appeal on Wall Street, and when it’s all for a good cause it’s an attractive combination,” said Michael Liberman, managing partner at BlueMountain.

Goldman has asked participants to stump up at least $50,000 per team. Proceeds go to Good Shepherd Services, a New York City-based charity which offers education and support services for poor or at-risk children and teenagers.

A pamphlet used to pitch Midnight Madness to potential participants describes the games as “a series of cleverly camouflaged, incredibly ingenious and devilishly difficult puzzles – the answers to which indicate the location of the next puzzle . . .”

Last year’s competition saw teams play with lasers in an abandoned building, use circuit boards to reveal locations on a map, and work to change the colour of the lights at the top of a New York skyscraper.

The geekiness of the Manhattan-based event has earned it a reputation for attracting the cadre of “quant” maths experts who have increasingly come to dominate Wall Street institutions and their trading strategies.

This year’s event will include 25 teams of 10 people each, organisers said. Goldman is fielding 16 teams, down from the 20 it sent last year.

From next week, Citi will hold a series of silent auctions and challenge senior staff to “dares” in order to raise the $250,000 in funds it needs to compete. One executive plans to pay $5,000 to challenge Mr Keegan to croon “Danny Boy”.

Citi staff can also pay $20 to wear jeans (usually a no-no on the trading floor), proffer cash to throw pies at their superiors, or enter a hot dog-eating competition. The bank chose team members in a random draw after receiving more than 100 volunteers.

At Credit Suisse, convincing staff to participate in the elaborate competition was relatively more challenging. “It had this reputation of an event that’s very complicated and extreme,” said Dan Miller, head of strategic risk management for the investment bank.

The bank is entering one team into the event and raising cash the old-fashioned way – through solicitation. Division heads were asked to pay $5,000 each to nominate one of their brightest underlings to the Swiss bank’s team.

The Credit Suisse team has also been given a $3,000 budget to buy supplies such as cellphone chargers and copious amounts of Red Bull, the energy drink.

Elisha Wiesel, a partner at Goldman and a member of Good Shepherd’s board, said it is not unknown for contestants to fall asleep on the sidewalk while competing in Midnight Madness, which was started in the 1990s but went on hiatus in 2007 until it was revived last year by Mr Wiesel and other organisers.

“This is really like a marathon. It’s a sporting event,” Mr Wiesel said. “You have to survive a very, very challenging evening, morning and potentially afternoon.”

Last year’s “Madness” raised $1.4m, after about $270,000 of expenses. This year’s budget is “going up a little bit” because the event is “aiming to be more ambitious and make more money for the charity,” Mr Wiesel said.

The hefty budget for last year’s event drew some scepticism, including from Reuters columnist Felix Salmon, who wrote that “at some point you do have to wonder whether they really needed to spend that much money on the game design”.

When asked whether the competition could become an annual Wall Street event, Mr Wiesel said that it would depend on organisers’ ability to commit their time.

But he added: “This is just too cool and too fun not to do.”

Those looking to get on the new CIO’s good side can go here, to an old FT Alphaville post, to try out some Midnight Madness puzzles and practice lateral thinking for themselves.

Read the world

Read the world

I love to travel and I love to read.

I read some great books on my most recent trip to Nepal, which led me to list some other memorable reading recommendations from some other recent-ish travels.


Massacre at the Palace – I was surprised to see that the paperback version of this book isn’t available on Amazon given that it seems to be in every bookstore in Kathmandu. Regardless, this is a compelling account of the 2001 massacre of Nepal’s royal family. It’s packed full of history but reads like a thriller. Interestingly, a big chunk of the Nepalese population doesn’t seem to buy that Crown Prince Dipendra murdered his family and then committed suicide – one reason the book gets mediocre reviews on Amazon. If you visit Narayanhiti Palace in Kathmandu, you’ll also notice no mention of Dipendra’s role in the massacre or his suicide.

Into Thin Air: A Personal Account of the Mt. Everest Disaster – Compulsory reading for trekkers in Nepal I guess. I read this book and then dreamed of Everest for the next week (not in a good way). Make sure to read the end bit in which Jon Krakauer deals with a rival account of the 1996 Everest Disaster by Anatoli Boukreev.

From Goddess to Mortal: The True Life Story of Kumari – This is the photo you’ll see on every travel brochure for Nepal – the Kumari is a young girl believed to be the physical manifestation of the Goddess Taleju. There are at least three in the Kathmandu Valley and this is an account written by a former Royal Kumari of Kathmandu in the early 1980s. Perhaps the most interesting thing in this is getting first-person perspective of her life (including her thoughts on tourists!) and her opinion on the role of Kumari in Nepalese society. While some have criticised it as a form of child labour, this ex-Kumari believes the position can help unite religions since the tradition sees girls from a Buddhist Newari caste become the embodiment of a Hindu goddess. If you don’t want to read, this documentary on the Bhaktapur kumari is also excellent, free to watch, and occurs against the backdrop of Nepal’s Civil War.

Pakistan, India and the Middle East

The Dancing Girls of Lahore: Selling Love and Saving Dreams in Pakistan’s Pleasure District – Sociologist Louise Brown spent a long time living with and shadowing a family of dancing girls in Heera Mandi, the Lahore’s ancient red-light district. There’s obviously a firm-focus on sex work in this but Brown’s account also contains much detail about the daily life of the poor in Pakistan, including food, religion, cleanliness and the stubbornness of the caste system.

The Taliban Shuffle: Strange Days in Afghanistan and Pakistan – Journalist Kim Barker gives her account of war reporting from Afghanistan and Pakistan.

Inside the Kingdom: Kings, Clerics, Modernists, Terrorists, and the Struggle for Saudi Arabia – Seems to be standard recommended reading on Saudi Arabia.

City of Gold: Dubai and the Dream of Capitalism – A highly-readable one-stop shop account of Dubai (and to some extent, the entire UAE’s) transformation from desert outpost to modern metropolis. The first section is history, followed by some contemporary issues divided by topic – including labour rights, environmental degradation and social problems caused by a huge influx of immigrants. Worth reading as more and more Gulf states attempt to wean themselves off oil.

The Media Relations Department of Hizbollah Wishes You a Happy Birthday: Unexpected Encounters in the Changing Middle East – Neil MacFarquhar is a well-traveled reporter who gives a great cultural and political tour of the Middle East, organised by country. This is the book that taught me about ‘Bebsi‘ and Fairuz.

Behind the Beautiful Forevers: Life, Death, and Hope in a Mumbai Undercity – A true-life account of a family living in a Mumbai slum that reads like a Charles Dickens novel. The human impact of India’s convoluted courts system is one thing that really struck me from this Pulitzer Prize-winning book.

Guatemala, Mozambique, Various

The World Until Yesterday: What Can We Learn from Traditional Societies? – There’s a tendency to write off traditional societies as primitive or old-fashioned but Jared Diamond makes the case that many of their customs and practices persist for a reason. This book has stuck with me for a long time – and the lesson he learns about “constructive paranoia” in the aftermath of a boat accident somewhere off the coast of New Guinea is one I tend to bear in mind whenever I travel.

China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa – One of the things that surprised me in Mozambique was the pervasive presence of the Chinese. From Maputo to Maxixe, Beijing’s influence is behind everything from football stadiums to newly-constructed roads and the trucks and cars on them. Howard French’s book tackles this issue and includes some memorable anecdotes – including a Chinese immigrant attempting to repopulate the continent in his image.

The Art of Political Murder: Who Killed the Bishop? – Riveting and informative tale of Bishop Juan Gerardi’s 1998 death in Guatemala City. A good introduction to some of the horrific history of Guatemala’s long civil war as well as its continued troubles with gangs and general political corruption.

Banana: The Fate of the Fruit That Changed the World – I never thought I’d enjoy reading a book about the history of a fruit (although, that said, I did read this book exploring every ingredient contained in Twinkies and it was pretty great) but I picked this up before heading to Guatemala in an effort to get a grip on the United Fruit Company and its role in the country. What I got was much more – including, eventually, an Odd Lots podcast with the author Dan Koeppel.

Previous Convictions: Assignments from Here and There – A travelogue by the late, great AA Gill.

The End

The End

Is this the end? Are you my friend?
It seems to me, you ought to be free.
You used to be mine when the chips were down.
You used to be mine when I weren’t around…
The Doors.

Those immortal lyrics spring to mind courtesy of this Citi survey of investors:

I’ve been surprised by the suddenness with which markets appear to have shifted gears from an apparent six-year reliance on easy monetary policy to pinning their hopes on the expectation of fiscal stimulus that is still far from materializing. We’ve touched on it in our various coverage at Bloomberg but it seems this will be the theme to watch in 2017. How rapid is the tightening? How pervasive? And, crucially, can the market remain relatively resilient in the face of rising rates and investors who still have a massive long position on credit?

Speaking of which, as is becoming tradition around here, here’s this year’s list of credit coverage. You’ll notice it peters out as the year goes by. That’s because I got busy with a new home and some new work. See you in the new year and here’s hoping your 2017 be filled with all the right kind of surprises.

Read More Read More

Round Lots?

Round Lots?

About a year ago, Joe Weisenthal and I started a podcast called Odd Lots, a reference to atypical trade sizes and also an indication of what we hoped would be a whole bunch of unusual subject matter. This week we published our 50th episode and I believe we’ve kept our promise.

We’ve covered everything from the evolution of bananas, to psychoanalytic philosophy, Seinfeld economics, and pirate insurance, to a Middle East highway and country music – all with a markets angle of course! Along the way, we’ve also discussed more traditional financial topics such as the 2008 crisis, ponzi schemes, oodles on market structure, central bank stimulus, exchange-traded funds, bubbles and shadow banks.

Despite this  grab bag of subjects and a sometimes esoteric bent, we’ve consistently made it into the top 10 ‘Business News’ podcasts on iTunes – not least thanks to our amazing producers, Magnus Henrikkson, Sara Patterson and Alec McCabe. Here’s to another 50 episodes.

Subscribe to Bloomberg Odd Lots on iTunes Podcasts

Subscribe to Bloomberg Odd Lots on Pocket Casts


Low-hanging fruit in the oil patch…

Low-hanging fruit in the oil patch…

This story is about oil drilling components.

More than that, however, it’s about how energy companies are trimming the fat in some of the most basic ways possible – by standardising subsea drilling components, engineering contracts, even light bulbs. It’s at once an indictment of the oil industry, and the amount of fat that still has left to be trimmed after a period of excess, and an illustration of the degree to which technological revolution beyond shale drilling is now bringing down costs – in some cases by as much as two thirds.

… While the specs for Norwegian Sea drilling might provoke reactions akin to the oil field’s name—the Snorre—such standardized pipes and casings could hold the key to a pervasive mystery about today’s energy market: Why is everyone still drilling when prices are in the basement?

Even as oil producers have planned $1 trillion worth of spending reductions between 2015-to-2020—cutting staff, delaying projects, and squeezing contractors—they’ve continued to green-light new wells from the Norwegian Sea to Brazil, and from Uganda to the Gulf of Mexico. Those initiatives mean oil production will continue to grow, adding to the supply glut and putting downward pressure on prices.

It’s a development that has both baffled and frustrated the world’s biggest producers of crude, who have been waiting for lower prices to force a rollback of global production. They have largely blamed the resilience of the world’s oil drilling on U.S. shale producers, as well as efforts to maintain market share, but the Snorre and other projects like it suggest there may be another–much more boring–culprit at fault …
Read the rest of ‘How Actual Nuts and Bolts Are Bringing Down Oil Prices’ over here.
The AAA bubble, deflated

The AAA bubble, deflated

Half a decade ago, I wrote a post with a rather eye-catching lede. “This, we think, could well be the most important chart in the world right now,” it said.

It went on to discuss the disappearance of triple-A rated securities in the aftermath of the U.S. housing bubble and trillions of dollars worth of downgraded mortgage-backed securities. The disappearance was short-lived, however. By 2009, highly-rated government debt had more than filled the hole left by increasingly scarce AAA-rated securitizations.

“The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply,” said the 2011 post, written when worries over the eurozone debt crisis were in full swing. “It’s one reason why the sovereign crisis is well and truly painful.”

Frances Coppola has a much more recent post that reminded me of this.

It features a chart from the rating agency Standard & Poor’s, which forecasts that triple-A rated sovereign debt will essentially become an endangered species by 2050 thanks to a rise in government borrowing.


Coppola makes a good point here. “It’s a great chart. But what it is really telling us is that S&P’s way of assessing the creditworthiness of sovereigns belongs to a bygone age. In the new world, junk is safe, debt is an asset and investors fear governments. So ratings will be meaningless in future, and ratings agencies, redundant,” she concludes.

That said, I do wonder about the need and ability of the financial industry to re-engineer ‘safe’ securities with top-tier credit ratings, given the degree to which such ratings are still (incredibly!) embedded in our financial system – from liquidity buffers to central bank asset purchase programmes. For this reason, I would dearly love to see an updated chart encompassing all fixed income.

Update: A few days after this post, Gary Gorton and Tyler Muir published a related BIS paper on collateral shortages. Check out the write-up here.



In January of this year I resurfaced some of my older reporting on the peer-to-peer, or marketplace, lending industry and wrote this line in the first article about Lending Club raising interest rates for the riskiest borrowers on its platform:

It’s worth recalling the words of some investors at the time who criticized LendingClub’s lofty $8.9 billion valuation—reached partly because of overwhelming enthusiasm for all things tech-related.  “These companies are really specialty finance companies, but look at where specialty finance companies trade in the public markets,” said one major marketplace lending investor at the time [of LendingClub’s late 2014 IPO].

It’s a point that, like much of my coverage, has been oft-repeated since – especially in the wake of recent news that Renaud Laplanche, LendingClub’s CEO, resigned following allegations of internal control issues and a rather sloppy ABS deal with Jefferies. My interest in marketplace lending has always been its overlap with traditional finance and the degree to which – as I’ve often written – the disruptive sector has been  co-opted by the very thing it sought to disrupt. In fact, one of the earliest enterprise pieces I wrote on the nascent industry, from January 2013, included the following gems:

“The one thing about peer-to-peer lending is it’s still a relatively manual process. This business needs a lot of scale to be profitable,” said a P2P analyst.

“In order to grow this business one must really have made relationships on the institutional side,” said a P2P CEO.

“On the surface it really almost comes across as too good to be true,” said a P2P institutional investor.

More than three years later and the pressures of scaling a ‘technology’ business that still relies on direct mail for advertising, and which derives much of its value from avoiding the legacy costs (including regulation) of traditional banks, seems to have come to a head viz LendingClub’s apparently lax internal controls, funding and securitization processes.

For those interested, here’s my more recent coverage of the industry’s travails.

When credit market concerns arrive at the marketplace lenders, January 2016 – Recall that the bear case for marketplace lenders was always a turning of the credit cycle that would either produce a rise in borrower defaults or result in a dearth of funding as skittish investors cut their lending on the platform. At the beginning of this year, credit markets spasmed,and LendingClub raised rates on lower-quality loans on its platform by about 67bps as it sought to better compensate nervous investors.

More trouble in bonds backed by peer-to-peer loans, March 2016 – A rating agency slapping a credit rating on a securitization only to downgrade it eight weeks later because of faster-than-expected-delinquencies seems … reminiscent of something.

A new class action suit wants to treat peer-to-peer lenders like mobsters, April 2016 – A scoop about a class action suit that strikes at the heart of the marketplace lending model and came on top of the already troublesome Madden vs Midland Funding decision, completed the ‘doomsday duo’ of funding concerns and regulatory scrutiny for the industry.

LendingClub is turning out to be anything but a direct lender, May 2016 – The resignation of Laplanche sent LendingClub shares plunging and, more significantly, exposed one of the biggest oddities at the center of the company’s business model. While promising to democratize finance by using new technology to directly match borrowers with lenders, LendingClub has turned to a complicated network of middlemen and professional investors to fund its rapid expansion and disintermediate traditional banks.

And the latest edition of our Odd Lots podcast, which sums up some of my thoughts on the matter: