| June 24, 2016 | | | | | Jeff Bergstrom
Editor
John Lothian News | |
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| | | | Observations & Insight | | | Not-So-Slow News Day
JLN Staff
The world just took a step toward hell in a handbasket.
Britain voted to leave the European Union, its Prime Minister, David Cameron, announced he will resign, and the markets everywhere are plunging, as is the British pound. "Leave" won 52 percent to 48 percent. Scotland, which voted overwhelmingly to stay in the EU, is talking about a referendum on independence from Britain.
While we at JLN generally stick to market structure, technology, regulation and the "non-price-oriented" risks to one's business, sometimes prices are the story, and the culmination of these other risks. So let's first run down a few prices, then look at what the historic vote may mean for the market structure.
After a decent rally yesterday, where the British pound touched 1.50 to the dollar for the first time in a while, it fell at one point about 18 big figures lower. Those of us who were on the trading floor when the pound dropped out of the ERM in 1992 know how big a move this was. Equity markets are down across the board today, but hardest hit in the UK and Asia. Japan was down about 8 percent. The FTSE was down about 7 percent at one point, but recovered a bit. Banks, naturally, are getting creamed. The opening print on Barclays, for example, saw the stock down about 30 percent.
Atop everyone's mind is this question - "How did the market get this so wrong?" The predictive power of markets is dubious at best. Markets are a snapshot, an equilibrium value of assets, and the amalgamation of the views of all market participants, given what information is known and what is expected down the road. But amid this information are the market prices themselves. So in the case of Brexit, some see stability in the currency and equity markets as a sign that all is well, and buy into and reinforce the stability. It is easy to see why a surprise can rattle the market and unravel this stability, as it was held together by circular logic.
Prices will (or may already have) reached a new equilibrium, and market participants will move on. But what about the market structure? Though the phrase "game changer" is now cliche, this vote truly is one. Today marks a new market paradigm, with many more questions than answers.
What is the future of London as a financial center? Does this vote shift power to the continent? Or to New York? What about the impending merger between the London Stock Exchange and Deutsche Boerse Group? They said going into the vote that it changes nothing, but can that actually be true?
Now it appears imminent that Scotland will hold its own referendum to rejoin. Does this mean Scotland will abandon the pound and join the eurozone?
The developed nations, led by the US and EU, have just spent the last six years overhauling financial market regulations. Though many of the rules are similar, and conform to the G-20 agreement forged in Pittsburgh in 2009, there have been hundreds if not thousands of meetings, calls, roundtables and such, to harmonize rules across jurisdictions. For example, the US and the EU have been battling for several years on central counterparty equivalence, and are only now making true progress. Does Britain need to start from scratch? If so, this is a huge and costly undertaking.
In other words, the market structure effects of the historic vote are and will be taking shape over the coming weeks and months.
There are hundreds of stories on Brexit today. We've culled the list to a handful which we found valuable.
****SD: As the news filtered in last night and the YouGov poll proved incorrect  it had "Remain" winning 52 percent to 48 percent  I realized how assumptive my comments were in yesterday's newsletter.
Like many out of touch with blue-collar Brits outside of city centres, I figured the populace would say "let's stick around" and this news cycle would die. I guess I paid too much heed to John Oliver's bit about the referendum.
With more in doubt now than ever, it is not a time to Brejoice and this weekend will not be filled with sighs of relief.
I am reminded of a line from Tennyson's "Charge of the Light Brigade," despite it having a different meaning in the original poem: "When can their glory fade? / O the wild charge they made! / All the world wondered."
Adding fuel to the fire is the rebalancing of the Russell family of indexes.
Crazy.
Now, into the valley of volatility rode the market.
| | | | | | Lead Stories | | | Nightmare Coming True for Stock Bulls Blindsided in Brexit Shock
Bloomberg
Global equities plunge as Britain votes to secede from EU
Shades of Lehman as shares plunge from Tokyo to London
Global investors better pray their hedges prove more reliable than the bookmakers did. In a rout worsened by the mistimed bout of optimism that preceded it, equities plunged around the world Friday in waves of selling that grew as the prospect of U.K. secession became reality. In the U.S., futures on the S&P 500 Index tumbled 5 percent, triggering trading curbs, while equities from Tokyo to Paris and Rome sank more than 7 percent.
goo.gl/zxTSmd
****JB: Several days ago I noted that the bookies in the UK had the odds of a "Remain" win at somewhere near 70%. Considering what happened last night and the bookies pegging Leicester City Football Club at 5000:1 to win (which they did) one has to wonder how they keep getting these big ones so wrong.
****SD: For more on the inaccuracy of bookies, see our "Miscellaneous" section.
14 Volatility Indexes (including VXEFA, JYVIX & VIX) Rise by More Than 10% Friday Morning
CBOE Options Hub
After the news of the results on the Brexit referendum were disclosed, implied volatility for many key securities worldwide rose, and the values of 14 volatility indexes at CBOE - (tickers: VXEFA, JYVIX, EVZ, VXO, VIX, VXN, VXGS, VXXLE, VXD, EUVIX, VXIBM, VXST, VXGOG, and RVX) - rose by more than 10% by 9 am CT on Friday, June 23.
goo.gl/qgXbol
Traders With $59 Billion in Put Options May Profit on Brexit
Bloomberg
Pound traders who wagered on the U.K. currency falling toward its worst level in decades may be among the first to profit from Britain's decision to leave the European Union. About 43 billion pounds ($59 billion) notional of options to sell the pound against the dollar at $1.40 or below was registered with the Depository Trust & Clearing Corp. since Feb. 20, when the date of the referendum was officially announced. Those trades, which expire beginning June 24, would make money based on the current exchange rate after the pound tumbled following the vote to quit the 28-nation bloc.
goo.gl/PntC90
****SD: No kidding.
UBS Analyst Sees $150 Billion of Quant Selling by End of June
Bloomberg
Selling in the U.S. stock market in the wake of the U.K.'s decision to secede from the European Union is just getting started for quantitative traders who make buy or sell decisions based on price trends, according to UBS Group AG.
goo.gl/PuJS15
Key VIX Futures Prices Jump More Than 60% By Early Friday Morning
Matt Moran - VIX Views
Prices for certain futures contracts on the CBOE Volatility Index (VIX) rose more than 60% during the early part of the June 24 trading day, as more updates about the anticipated results of the Brexit referendum were divulged.
goo.gl/Clkm3b
****SD: Bloomberg has the chart of early VIX action. Also, A Quick Look at Overnight VIX Price Action from Russell Rhoads.
Why 'Brexit' Is No Lehman
WSJ
This is the big one! Or is it? Massive market dislocations such as the immediate aftermath of the shock British vote to exit the European Union on Friday invite superlatives. The pound fell to its lowest level since 1985, a year when a baby named Wayne Rooney was born in Liverpool and a show called "EastEnders" made its debut on British television. A large percentage of the shocked traders manning foreign-exchange desks weren't even born.
goo.gl/ZFpCoH
Alert: FIA's response to the UK's exit from the EU
FIA
In response to the UK's vote in favour of leaving the European Union, and in view of the considerable uncertainty about how this decision will impact financial markets broadly and our industry specifically, FIA will support our members during what will undoubtedly be a protracted period of transition.
/goo.gl/W7gyRZ
Five Charts to Watch in the Aftermath of the Brexit Vote
Luke Kawa - Bloomberg
Britain's historic decision to leave the European Union has provoked a sharp reaction in markets. While the pound plunged to its lowest in more than 30 years and FTSE 100 futures suggest a sharply lower opening for U.K. stocks on Friday morning, the impact of the vote is being felt across global markets. Here are five charts to keep an eye on as the trading day unfolds.
goo.gl/rRY6xa
| | | | | | Exchanges | | | Exchanges hold fire on extra trading curbs
FOW
Exchanges said they have no plan to extend measures in light of Brexit vote Some of the world's top exchanges have said they have no plans to extend the trading curbs they put in place to counter extreme volatility around Britain's vote to leave the European Union despite the UK's shock decision to quit Europe on Friday. The Chicago Mercantile Exchange, the Intercontinental Exchange and Euronext told FOW on Friday they do not currently plan to extend the special measures they put in place ahead of the referendum.
goo.gl/lQZ3ZQ
VIX Futures Volume In Non-U.S. Trading Hours Sets New Daily Record
CBOE
The CBOE Futures Exchange, LLC (CFE) today announced record volume was set in VIX Futures traded in non-U.S. trading hours with an estimated 235,000 contracts changing hands. Today's record surpasses the previous single-day record of 140,811 contracts set during the overnight session on August 24, 2015.
goo.gl/Xab2Mc
Market Wide Circuit Breakers
Nasdaq
There are three levels to the NMS (National Market System) Market Wide Circuit Breakers. Level 1 requires a (S&P 500) 7% decline. That level today is 1965.39. When a Market Wide Circuit Breaker occurs the SIP (Securities Information Processor) sends a formatted message to the Primary Markets to HALT all equity securities for 15 minutes. Please note the time is based off the message from the SIP. After the 15 minute halt the Primary Markets have 15 minutes to resume trading.
goo.gl/uXNy9T
****SD: Having to remind people what happens after a 7, 13 or 20 percent drop in the S&P 500 is such a great sign...
Bats sees half-day's volume in first hour
The Trade
Bats Global Markets has reported that over 25 billion worth of stock has been traded in the first hour of opening, compared to the past five day's average of 50 billion.
goo.gl/zsoLs8
LSE, DB pledge to pursue merger despite Brexit
Luke Jeffs - FOW
The exchanges made a statement on Friday morning after the shock Brexit vote The London Stock Exchange and Deutsche Boerse have pledged to forge ahead with their planned merger and said a specialist committee "will meet as frequently as necessary to consider" the implications of the UK decision to quit the European Union. The exchanges, who announced their plan to merger in March, said in a statement early Friday that they were still going ahead with the merger after the UK's shock decision to leave the European Union.
goo.gl/5Rtfdn
****SD: Finance Magnates' take here
| | | | | | Strategy | | | Skew Charts Show Higher Implied Volatility for O-T-M Puts on SPX, RUT, EFA and FXB
CBOE Options Hub
After the results of the Brexit referendum were announced , the values of several volatility indexes at CBOE shot up, indicating that overall implied volatility had increased for many securities worldwide. A key issue for some cautious investors who want to hedge is - what are the implied volatilities for various out-of-the-money (O-T-M) put options that can be used to hedge my portfolio?
goo.gl/yRvREc
Top Volatility Hedge Fund Sees 'No Model' for Trading Rout
Investor's Business Daily
Rune Madsen is having a pretty good week. His Runestone Capital Fund has managed to avoid losses even as global markets slipped into spasm after U.K. voters opted out of the European Union. The $10 million volatility hedge fund wagered on U.S. equity swings via instruments such a futures, S&P 500 Index options and exchange-traded products.
goo.gl/k7zJEP
It's all about the volatility: How one trader saw Brexit coming
CNBC
One CNBC "Halftime Report" trader correctly predicted that Britons would ultimately vote to leave the European Union by watching indicators others were not giving as much weight to. Even as U.S. markets rallied into the Thursday close, with the Dow seeing its best daily performance in four months, Jon Najarian was watching the CBOE volatility index (VIX), which had been hitting new highs ahead of the vote.
goo.gl/5xgjup
Sell the Market on Brexit and You're a Loser
TheStreet.com
The wanton selling in stocks that is going on right now is insane. Totally psychotic. Brexit will have zero effect on the U.S. economy. It will probably have zero effect on the British economy, too. In fact, it could even have a positive effect over time.
goo.gl/zihZzS
****SD: Tell us how you really feel.
| | | | | | Miscellaneous | | | How Did the Bookies Get It So Wrong: Ladbrokes Tries to Explain
Bloomberg
The result of the U.K.'s Brexit referendum defied gambling firms, which placed a 90 percent chance on the nation remaining in the European Union as the campaign drew to a close. It might just be one of the occasions where an outsider wins, Ladbrokes Plc said.
goo.gl/hAa0Ky
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