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Is the VIX Being Manipulated?

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A conspicuous rise in the CBOE VIX last Wednesday has reignited a long-standing debate over the soundness of the Wall Street fear index. Now, traders are asking whether the VIX is just plain broken or being gamed by holders of derivatives.

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VIX Spikes

The CBOE Volatility Index measures how much traders are willing to pay for options that are used to hedge against future stock-market declines. The so-called “fear index” normally trades inversely with the S&P 500 Index, which means it rises when stocks fall or vice versa.

On Apr. 18, the VIX spiked 12% in the first 30 minutes of trading, marking the biggest move since 2010, according to data gathered by Macro Risk Advisors and The Wall Street Journal.

The following chart, courtesy of WSJ, illustrates the dramatic surge between 9:00 a.m. and 9:30 a.m. The only comparable move after the opening bell occurred on Feb. 14, when the index dropped nearly 14%.

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Since the VIX cannot be traded outright, investors use VIX-linked products to trade volatility, including options, futures and exchange-traded notes. VIX futures normally trade in a state known as contango, where the futures price is above the cash price and later contracts are incrementally more expensive than earlier ones.

An illustration of the structure of VIX futures contracts is presented below based on Friday’s closing prices. Contango is observed for the first six futures months.

Concerns Over Manipulation

While VIX’s sudden spike was supposedly tied to large orders for S&P 500 put options, concerns over market manipulation have been on the front burner for some time. Since February alone, at least nine lawsuits have been filed by plaintiffs arguing that the VIX is being gamed.

CBOE President Chris Concannon, who recently testified before Congress over cryptocurrency regulation, has said the allegations have impacted the monthly auctions process. He also said that CBOE is boosting its technical infrastructure to resolve these long-standing issues.

Concerns over CBOE’s options settlement process emerged last December after the exchange fined a trading firm over allegations of improper bids related to volatility auctions. The markets in question were tied to both stocks and oil. For its part, CBOE has denied that manipulation exists, with exchange officials arguing that the VIX settlement process offers a transparent auction.

Analysts warn that the VIX, while growing in popularity, is dominated by speculators betting large sums of money on how chaotic stock prices will be 30 days from now.

Volatility returned with a vengeance in early January and hasn’t left the market ever since. The fear index spiked so heavily in February that products shorting volatility were put out of commission. Credit Suisse pulled the plug on XIV,  a popular inverse volatility product, on Feb. 20 after assets under management plunged from nearly $1.9 billion to $110 million in just six days.

Prior to the decline, XIV had performed extremely well during the bull market, with gains accelerating thanks to Donald Trump’s election.

Featured image courtesy of Shutterstock.

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 410 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Market Overview

Satisfaction & Exploitation

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Hi Everybody,

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In the dark hours of the night, the cryptocurrency known as Verge fell victim to another major hack. Shortly after Verge had been assessed by the People’s Bank of China as being on the same level as Bitcoin.

This incident is a perfect example of how even the most gorgeous looking piece of tech can be vulnerable if its assets are underutilized. In other words, the network effect is only useful if the network is popular. If the audience is simply not attracted the network itself becomes vulnerable.

The user that reported the whole affair, apparently the same person who reported it last time Verge was hacked, submitted this image to show what the hacker had done.

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Now, I don’t understand any of this code, but what happened here is quite clear. Basically, this guy just had his way with a network by exploiting the fact that it was going unused and now the evidence is everywhere.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • Unsatisfied President
  • Evasive Founder
  • Some Dry Crypto Updates

Please note: All data, figures & graphs are valid as of May 23rd. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

The whole “trade war is on hold” narrative didn’t seem to last very long at all. Yesterday, President Donald Trump expressed that he is not satisfied with the way things are going there, indicating that this whole saga is far from over.

In addition, Trump cast further doubt that the planned meeting with Kim Jong Un in Singapore June 12th will go forward.

Stocks didn’t like these updates one bit and major indices around the world are in deep red.

What seems to me, the more defiant Trump gets the stronger the Dollar gets. The US Dollar is gaining against most of the major currencies in what we can see as a clear flight to safety in the FX market.

That big 1% green spike in the Japanese Yen is not normal and is a clear indication that Asian investors are searching for a safe haven.

This evening at 19:00 GMT, we’ll receive the minutes from the Fed’s last meeting and crude oil inventories coming out at 15:30 are forecasted to show 2.5 million fewer barrels of oil in the United States.

In Your Facebook

Mark Zuckerberg’s trip to Europe most likely didn’t go as well as he’d hoped. Whether you heard Laurel or Yanni, you can probably tell that the Facebook Founder was dodging questions left and right.

EU lawmakers asked him some very pointed questions but the answers they received were incredibly vague. We can likely expect that privacy-centric Europe will not sit on their hands with this one as the Yanks have done.

If investors are worried, it didn’t show up at all in the stocks price. As we can see, FB stock has already made a full recovery since the Cambridge Analytica revelations and is now holding near all-time highs.

Dry Crypto

It’s hard to be happy when everything is in the red like this but we can probably be comforted by the fact that we’re still off the lows.

As a reminder, here’s the bitcoin chart we’ve been watching. As you can see we’re still a few hundred dollars above the main support level circa $7,100.

Two positive things that happened recently in this space are worth mentioning.

First, the CFTC has gone one step further into their support of cryptocurrencies by releasing an Advisory for exchanges to list cryptocurrency derivatives. In their own words….

The second update is not as clear-cut but could have much larger implications. This article was forwarded to me by a dear friend in India this morning.

As we know, India’s central bank, the RBI, has released a circular ostensibly banning banks from dealing with crypto-affiliated businesses, something that has been choking the market in a key region.

The linked article explains that the Indian government may now be considering to release a full tax regiment for bitcoin and other digital assets, which would tax crypto-transactions as if they are considered actual property.

Now, the key source for the article is still anonymous so we would need to rely on Bloomberg Quint’s assessment of if he/she can be considered a reliable witness or not, but if the government does implement such measures it could be an indication that they feel the RBI’s ban will not last much longer. Otherwise, why waste your time collecting taxes on something that’s not transactable?

For me, I can’t help but get goosebumps every time I think about the possibility of the Bitcoin “digital gold” network being opened up to a country of 1.35 billion people, who are in dire need of a reliable payment network.

Let’s have an awesome day ahead!!

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

Best regards,
Mati Greenspan
Senior Market Analyst

eToro: @MatiGreenspan | Twitter: @MatiGreenspan | LinkedIn: MatiGreenspan | Facebook:MatiGreenspan

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 86 rated postsSenior Market Analyst at Etoro.com.




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Analysis

Pre-Market: Turkish Lira Spooks Markets, as Dollar Still in Focus

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Stock markets are broadly lower today, as yesterday’s risk-off shift continues to dominate trading, with the Turkish currency woes, the Italian political standoff, and the weaker than expected European PMIs providing ample ammunition to bears.

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S&P 500 Futures, 4-Hour Chart Analysis

While the post-crash period since early February had its ups-and-downs, the best way to describe it is still a simple consolidation. In the US, trading has been taking place mostly in the range of only two sessions in early February, and the S&P 500 is still stuck in the middle of that range.

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Forex markets are in turmoil, as Dollar-centered trading continues across the board, and the hunting season for vulnerable emerging market currencies is still on. The recent strength in the reserve currency together with the rising yields sparked an exodus from more risky assets across the globe and with the Euro hitting another 6-month low today, the pressure will likely persist. Investors await tonight’s Fed meeting minutes which could make a huge impact on the Dollar and equities, especially if the central bank cools down rate hike expectations after the strong Dollar rally.

EUR/USD, 4-Hour Chart Analysis

First, it was Argentina, now it’s Turkey that’s in the center of attention, as the country plagued by a huge private Dollar debt load end rampant inflation is highly sensitive to rising rates and a weaker currency.

USD/TRY (Turkish Lira), Daily Chart Analysis

More experienced investors could have a strong feeling of déjà vu, as the Turkish leadership is blaming a concentrated attack against the country, while the market is waiting for the inevitable central bank intervention in the form of an emergency rate hike. For now, there is still hope that the storm will pass, but should an outright currency crisis break-out, rate hikes won’t be enough, and even capital controls will only provide a temporary solution, and a hard landing for the economy will be almost guaranteed.

Europe Also Down as Oil Pulls Back

DAX Index, 4-Hour Chart Analysis

European stocks which have been lifted by the falling Euro in recent weeks fell to two-week lows today, after the bearish PMI releases and the lower than expected British inflation figures. While the string of negative economic surprises continued, emerging market woes were largely ignored by investors so far, and the rising short-term trends are still mostly intact throughout the Old Continent.

Commodities are lower mixed amid the large currency moves, as the Dollar’s strength weighs on the whole asset class. Gold is still stuck below $1300 despite its recent resilience, while Oil is trading just off its highs, even as the OPEC is reportedly contemplating a supply increase following the “normalization” of oil prices. The cartel which, led by Saudi Arabia has openly been seeking higher prices

Featured image from Shutterstock            

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 255 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Market Overview

Huobi Pro Unveils 10-Currency Crypto Index

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Digital currency exchange Huobi Pro is launching a new crypto market index for its customers, the latest in a series of initiatives designed to boost cryptocurrency adoption.

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Huobi Main Force Index

The Singapore-based exchange announced Wednesday it will be launching the Huobi Main Force Index, which is designed to track ten large digital assets pegged to Tether (USDT), a dollar-pegged cryptocurrency. Beginning next month, traders will be able to access the index in real time on the Huobi Pro platform.

According to an official press release, the ten-currency index will “reflect the overall performance of the Huobi Pro market,” providing investors with a single point of reference. The company has not provided any details about which currencies will be included in the index, although names like bitcoin, Ethereum, Litecoin and Ripple XRP are likely to be included.

“Assets will be ranked according to their turnover, and top assets of each category will be selected as index samples,” read the press release. “After samples are selected, the sample weight will be calculated based on the daily average trading volume of the previous quarter.”

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Huobi has also set up a contingency plan for cryptocurrencies that are delisted from the exchange. In this case, the sample will be “temporarily replaced,” while remaining coins “that are ranked first in the candidate list will be selected as the sample coins in turn.”

The exchange plans to offer other market-tracking indices in the future, though it declined to comment on specifics.

Huobi is the world’s third-largest cryptocurrency exchange by volume with daily turnover of more than $1.1 billion.

Crypto Market Innovation on the Rise

Indexing is just one of a series of innovations influencing the cryptocurrency market. It joins derivatives, publicly-traded funds, private funds and hedge funds in ushering a new era of cryptocurrency trading whose influence extends far beyond the retail investor.

Digital currency exchange Coinbase recently announced a new suite of products targeting institutional investors, including custodial services that offer more safeguards for crypto holdings. The San Francisco-based exchange believes it can unlock up to $10 billion in institutional money currently sitting on the sidelines.

Hedge funds are increasingly pivoting toward cryptocurrency, with the number of ‘crypto hedge funds’ surging 64% over the past year. More than 100 hedge funds have been launched to trade cryptocurrency exclusively over the period.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 410 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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