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Living in a trader's paradise. What you need to know about financial markets today

Living in a trader's paradise. What you need to know about financial markets today
The suddenly volatile financial markets are giving traders, like this guy at the Chicago Mercantile Exchange, a reason to celebrate. (M. Spencer Green / Associated Press)

It's a "risk off" day, with stocks falling and "safe" assets such as bonds, gold and the Japanese yen rising as the market prepares for the most anticipated inflation report in years.

Up, down, wherever the markets go, they're doing it with a lot more drama these days. That volatility is freaking out some investors, but for traders who live for short-term bets it's wonderful. Prominent trader Marc Fisher calls the current environment "a trader's paradise." He told CNBC: "It sort of reminds me of the days of being back on the floor when everyone was rocking and rolling."

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Trading volumes were already elevated in commodities, foreign exchange and other areas. Now volatility is energizing stock traders as well. "Volatility is like oxygen, encouraging clients to place bets and protect their positions," Bloomberg says.

Corporate America is its own best customer

One source of demand for stocks that has been on auto-pilot is corporate stock buybacks. Companies are the biggest purchasers of their own shares, having bought $3.8 trillion worth of them since the financial crisis, Bloomberg points out. But for five weeks before they report earnings, companies are restricted from buying their shares. That blackout period coincided with the latest market plunge, and some market watchers think the resumption of buybacks will provide short-term support for prices.

Buybacks actually have been off in recent years. But that's expected to change — one estimate has them rising 70% this year as companies use a large portion of their tax cuts for share repurchases.

You can go home again, but probably won’t

Companies that moved their headquarters overseas to avoid taxes are finding out the new tax law may cost them. Companies like Eaton Corp. and Valeant Pharmaceuticals International Inc. that bought foreign companies to relocate their headquarters are reporting they expect to pay more taxes because the new law restricts deductions such as interest payments that American subsidiaries pay on loans from overseas parents, the Wall Street Journal reports (subscription required).

Not all inverted companies will pay more — in fact, many with heavy U.S.-based income will get a break. Either way, don't expect those expat companies to pack up and move home.

These two disrupted a scheme to corner the orange juice market in "Trading Places." Is the fix in for the VIX, too?
These two disrupted a scheme to corner the orange juice market in "Trading Places." Is the fix in for the VIX, too? (Paramount Pictures)
Is someone fixing the VIX?

Wall Street loves a good conspiracy theory, especially when it might explain why the market just turned unexpectedly. Sure enough, an unnamed whistleblower alleges that the VIX, the volatility index that starred in last week's stock plunge, is being manipulated by traders.

A letter to the Securities and Exchange Commission and Commodity Futures Trading Commission filed by a lawyer for the whistleblower — who is identified only as someone who has held "senior positions at some of the largest investment firms in the world" — claims the VIX can be moved up or down "by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital."

Cboe, the outfit that manages the VIX, is not impressed. "This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility" exchange-traded products, Cboe said in a statement.

It's not the first time, though, that the VIX has been deemed hinky. Back on Dec. 20, the index suddenly plunged mid-morning, resulting in a settlement price that bailed out some traders who had bet against volatility-based futures. And an academic paper published last spring pointed to suspicious volume spikes.

Can we blame bitcoin?

Big banks famously aren't fans of cryptocurrencies. Now one bank analyst has blamed them for sinking stocks. This week, Michael Wilson, Morgan Stanley's chief U.S. equities strategist, wrote in a note to clients: "We think the passage of tax cuts coincided with peak excitement, at least in terms of price/valuation and 'speculation' as represented by things like bitcoin. Bitcoin, which we believe started the entire risk asset correction back in December, bottomed on Tuesday right at its 200-day moving average — a good sign."

Wilson's advice, not surprisingly: Buy on the dip.

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