Investors Are More Optimistic on Trade Deal Than It Might Seem

May 9, 2019

Observations & Insight

FIA Law & Compliance Conference Kicks Off
Thom Thompson – John Lothian News
The 41st annual derivatives industry regulatory confabulation was called to order on Wednesday afternoon in Washington, DC, by Law & Compliance Division President Tammy Botsford.
Botsford’s daytime job is executive director and assistant general counsel at J.P. Morgan. Botsford called on attendees to make new working connections at this year’s conference so that, in a Ghostbusters meme, they have an answer to “Who you gonna call?” (Somebody you got to know at L&C.) Botsford said that this year’s panels are challenged to address the practicalities of responding to issues. “What you gonna do?” (Something you learned about at Law & Compliance.)
bit.ly/2Haik6z

***SD: If you’re in D.C. for the conference, drop Thom a line at thomthompson@johnlothian.com

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Bridging the Gap Between OTC and Exchange-Traded – Brad Levy, IHS Markit

JohnLothianNews.com

There still exists some polarization between listed derivatives markets and OTC markets. In this video, Global Head of Loans at IHS Markit and CEO of MarkitSERV Brad Levy talks about why the gap between the two is slowly closing and the generational shift it is going to take to fully transition financial markets to a digitally-enabled world.

Watch the video »

****SD: Brad and I had a chance to talk about quite a bit of neat stuff regarding how technology disrupts our everyday lives. Having spent ~25 years in this industry and also having teenage kids gives him a great perspective into how this next wave of market professionals is going to really change things up. Just one tidbit: did you know that studies have shown that while the average human has way more connections/acquaintances now than ever before, people consider themselves to have fewer close personal relationships over a lifetime than decades prior? Makes sense, unfortunately.

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Bcause in Talks With Bitmain, Others To Climb Out of Debt
Matt Raebel – John Lothian News
Bcause, the cryptocurrency mining company whose name is most likely to be autocorrected by one’s phone, is attempting to fight its way out of bankruptcy. Its battle plan? Raise some capital and start new businesses. The company’s bankruptcy was filed last month, less than two weeks after it lost a lawsuit to Wesco Distribution, which allowed Wesco to garnish the Chicago bank account of Bcause LLC and Bcause Mining LLC. On May 8th, 2019, Bcause’s bankruptcy hearing took place in downtown Chicago. Thomas Flake, the founder of Bcause, was in attendance, along with his legal representatives, Scott R. Clar and Jeffrey C. Dan of Crane, Simon, Clar & Dan; so were almost a dozen lawyers representing Bcause’s creditors.
bit.ly/2WtTmnS

****SD: Given that there is supposed to be (eventually…) a derivatives angle with this exchange, and that it is such an oddball case, I think it’s worth our options audience taking a look. (Also, CEO Fred Grede is a longtime futures exec with the CBOT who also had a stint at HKEX.)

Lead Stories

Investors Are More Optimistic on Trade Deal Than It Might Seem
Randall Jensen and Luke Kawa – Bloomberg (SUBSCRIPTION)
Volatility hasn’t spiked to levels seen during big risk events; Stocks, bonds and currencies mostly see accord getting done
For all the carnage in U.S. stocks over the past few days, a look at the options markets show investors are still wagering that a trade deal will eventually get done.
/bloom.bg/2V7ujoZ

****SD: Betting on bluster.

Eerie Calm in FX Leaves Market Vulnerable in More Volatile World
Liz McCormick – Bloomberg (SUBSCRIPTION)
Foreign-exchange options traders may seem out of step, given that the outlook for currency swings has barely moved despite fears of a breakdown in U.S.-China trade talks sending global shares spiraling and volatility in other assets surging.
/bloom.bg/2HbOpL5

****SD: More context from Reuters – FX trading volumes slide in April as calmer markets deter investors.

Virtu Financial: When Life Imitates Art
Paul Rowady – Alphacution Blog
…Though it’s disclosures about key attributes of their business are quite good relative to others, Virtu – like any other public company – is under no obligation to provide a view on matters that is beyond what the disclosure rules require, which is often a 2-3 year window of financials (and sometimes 5 years). All public companies are given a chance to put a favorable spin on the numbers, in part, by limiting the perspective to a reasonably short window of time – which means, in the case of companies that have been highly acquisitive, no one is going to go back and piece together the history of the various companies before they were acquired and then back through to the present beyond a minimally-required point.
bit.ly/2V9TtTT

****SD: More good stuff from Paul.

Why Markets Aren’t Sweating the U.S.-China Trade War Much: The ‘Trump Put’
Neil Irwin – NY Times
The real question is not why the stock market is down this week. It is why it is down so little.
After all, the world’s two largest economies have seemed to be hurtling toward a major escalation of their trade war. American officials have complained that Chinese negotiators have been playing a bait-and-switch, backing away from concessions they had agreed to.
/nyti.ms/2Vs5toP

****SD: Explanation of a put coming in 3, 2, 1… (It actually takes 8 grafs to get to the explanation.)

Volatility Views 351: Live From OIC 2019 (AUDIO)
Options Insider
Host: Mark Longo, The Options Insider Media Group
Co-Host: John Smollen, EVP, Head of Exchange Traded Products and Strategic Relations, MIAX
Co-Host: Simon Ho, CEO, T3 Index
bit.ly/2V7HnuJ

****SD: Had a chance to talk more with Simon and his business partner John Zhu at OIC – good guys. They’re accessible, so if you have questions about their volatility product, SPIKES, definitely hit them up.

Stock-market volatility? Gyrations in 2019 pale compared with past years
Mark DeCambre – MarketWatch
Powerful tariff-induced price swings in global stock markets have made an unwelcome return for bullish investors, lately.
On Tuesday, the Dow Jones Industrial Average tumbled 473.39 points, or 1.8%, to 25,965.09, suffering its largest percentage decline since Jan 3. Meanwhile, the S&P 500 index dropped 48.42 points, or 1.7%, to 2,884.05, and the Nasdaq Composite Index fell 159.53 points, or 2%, to 7,963.76, marking the worst daily declines for those benchmarks since March 22.
/on.mktw.net/2HapbN1

****SD: Also from DeCambre – ‘Policy decisions’ are ‘creating havoc’ in global stock markets, says Goldman luminary

Testimony of Chairman J. Christopher Giancarlo Before the Senate Committee on Appropriations Subcommittee on Financial Services and General Government, Washington, DC May 8, 2019
CFTC
Thank you, Chairman Kennedy, Ranking Member Coons, and Members of the subcommittee. I appreciate the opportunity to appear before you today, along with my fellow colleague from the Securities Exchange Commission (SEC), Chairman Jay Clayton.
bit.ly/2V880j6

****SD: TL;DR – Giancarlo asked for a $315 million for 2020, a 12% increase from fiscal 2019.

Mystery trader makes nearly $2 million bet against financials
Tyler Bailey – CNBC
The wave of volatility that washed over the markets this week sent the financials falling. The XLF, the ETF that tracks the sector, is down 2% as worries about global growth and the U.S.-China trade war remain center stage. Despite the losses, the XLF is still up more than 15% this year and outpacing the S&P 500, but that isn’t stopping one options trader from making a big-time bet against the group.
/cnb.cx/2Vc4vbp

When you have options, volatility is your friend; The jumpier prices are, the more valuable is a right to buy or sell
The Economist
Imagine that, by some twist of fate, you become the ruler of an oil-rich state. A crash in the oil price has left a hole in its budget. You are forced to consider selling the kingdom’s assets. Among them is a mothballed oilfield in a remote part of the country—so remote that it costs $90 to retrieve each barrel of oil. That is above the prevailing price of $70 a barrel. Even so, you are advised to try to sell a licence to operate the field.
/econ.st/307tJeL

Exchanges and Clearing

Traiana provides connectivity to Eurex central clearing
Hayley McDowell – The Trade
CME Group’s risk management services provider Traiana is to provide direct central clearing connectivity to Eurex in a bid to streamline clearing processes for clients.
bit.ly/2V8kQhj

****SD: The obvious part of CME buying NEX is having spot in the same silo as futures on the Treasurys side of things. But an angle that hasn’t gotten as much attention is all “the Ts” (as I call them) that came with NEX – Triana and TriOptima. TriOptima has a ton of potential on the derivatives compression side of things.

CME Group Inc. Announces Preliminary Results from its 2019 Annual Meeting of Shareholders
CME Group
CME Group Inc. today announced the preliminary shareholder voting results from its 2019 annual meeting. At the meeting, shareholders elected Terrence A. Duffy, Timothy S. Bitsberger, Charles P. Carey, Dennis H. Chookaszian, Ana Dutra, Martin J. Gepsman, Larry G. Gerdes, Daniel R. Glickman, Daniel G. Kaye, Phyllis M. Lockett, Deborah J. Lucas, Alex J. Pollock, Terry L. Savage, William R. Shepard, Howard J. Siegel, Michael A. Spencer and Dennis A. Suskind, each for a one-year term expiring in 2020; ratified the appointment of Ernst & Young LLP as the company’s independent registered public accounting firm for 2019; and approved, on an advisory basis, the compensation of named executive officers. In addition, the company’s Class B-1 shareholders elected Gedon Hertshten, William W. Hobert and Robert J. Tierney Jr. and the Class B-2 shareholders elected Ronald A. Pankau and David J. Wescott, each for a one-year term expiring in 2020.
bit.ly/2Hdlkxs

Micro E-mini Futures Surpass 1 Million Contracts Traded
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that Micro E-mini equity index futures volume has surpassed 1 million contracts in less than three full days of trading. This total cumulative volume represents trading across all four indexes – S&P 500, Nasdaq-100, Russell 2000 and Dow Jones Industrial Average – making Micro E-mini futures the most successful product launch ever at CME Group.
bit.ly/2VoOnbn

****SD: Not options, obviously, but focus on that last line – “the most successful product launch ever at CME Group.” Crazy.

SGX reports market statistics for April 2019
SGX
Singapore Exchange (SGX) today released its market statistics for April 2019. Total derivatives traded volume rose 37% year-on-year (y-o-y) to 20.8 million contracts, as global demand for risk management across asset classes continued. Total securities market turnover by volume was up 7% month-on-month (m-o-m) to 22.9 billion shares, driven largely by real estate and consumer sectors.
bit.ly/2H8SZbL

Technology

Quants, Algos, and AI
RCM Alternatives
A recent graphic by Tractica shows that over $7.5 Billion dollars is forecasted to be spent on Algorithmic trading strategy improvement via AI in the next 10 years. Wow! That’s a lot of quants in the world’s payroll. What exactly is a quant? How do algorithms (algos) fit in? And what does Artificial Intelligence have to do with all of it?
bit.ly/2JbgG6I

Strategy

Stock Option Plays for the Latest Trade Turmoil
Steven M. Sears – Barron’s
With two tweets, and some tongue wagging from his staff, President Donald Trump threw a hatchet in the stock rally this week, triggering fears that the trade war with China may not be resolved as expected. Complicating matters are Iranian threats to alter a nuclear treaty that limited its weapon-grade uranium enrichment production unless some trade restrictions are eased. The Dow Jones Industrial Average is off 2% and counting this week.
bit.ly/2H98eTk

Miscellaneous

Captains of Iron Ore
Michael Syn – The Business Times
It was supposed to be fair winds and following seas. For much of 2018, the good ship “Iron Ore” drifted along with breezy supply and a steady tug of demand through a narrow channel of US$64-US$74 a metric tonne. Market lookouts in the crow’s nest declared not a cloud of price shock on the macro horizon: an economic slowdown was depressing downstream demand in China, where most of the world’s iron ore goes into steelmaking for infrastructure, cars and machinery. Interminable US tariff talks splashed cold water over animal spirits, leaving Chinese consumer and business confidence at 30-year lows.
bit.ly/2VrDEgz

****SD: Michael Syn, SGX’s head of derivatives, is as well-written as he is well-spoken. If you didn’t see JLN’s recent video with him, check it out: FX Futures, Japanese Equity Repo and Marine Fuel.

Beyond Meat’s Valuation Is ‘Absurd,’ Says Stock’s First Short
Tatiana Darie – Bloomberg (SUBSCRIPTION)
Now that Beyond Meat Inc. has soared about 225 percent since going public last week — and saw the strongest first day of trading for an IPO since the 2008 financial crisis — the first skeptics on Wall Street are coming out with guns blazing.
/bloom.bg/2HcbltQ

****SD: Absurd or not, at least 2019 has a nice pipeline of IPOs.

Quant Safety Trade Under Fire Just as Stock Volatility Hits
Ksenia Galouchko – Bloomberg (SUBSCRIPTION)
As the cross-asset calm snaps, one breed of investor is paying through the nose for stocks that hedge doomsday.
Dubbed low-volatility investing, the style beloved by quants has ridden a wave of inflows for 10 straight months as demand for safety booms. That has sent premiums for U.S. companies soaring, just as fears grow that the cohort suffers from overexposure to sector bets like bond proxies.
/bloom.bg/2HatgkD

John Lothian Newsletter

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We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

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CEO, Trading Technologies

Past Newsletters

Investors Are More Optimistic on Trade Deal Than It Might Seem

May 9, 2019

Observations & Insight

Wednesday’s Miscellany

JLN Staff

MLex has a (paywalled) story titled CFTC’s Giancarlo cites threat from China futures markets in bid for more money. Obviously it is a futures story, but I see it as indicative of the overall “threat” posed by the ongoing development of Chinese derivatives markets.

Check out this Bloomberg/Saxo Bank chart of yuan denominated oil futures trading and you’ll see why Giancarlo said what he did. (Besides, the usual rhetoric about needing money to protect investors hasn’t worked for the CFTC’s budget so maybe some fear-mongering will.) Also see this Reuters story from May – China’s crude oil futures boom amid looming Iran sanctions. ~SD

The newest CFTC Talks podcast is out. It’s a shorter, “FlashCast” episode focused on a single subject and features John Coughlan of the CFTC’s Market Intelligence Branch.

FIA updated its FCM tracker tool. Check it out here.

According to CLS data, currency trading volumes rose 2.6 percent in July on last year, although July volumes were 13.7 percent lower than the previous month of June. CLS said the average daily traded volume of currencies submitted to it reached $1.638 trillion in July, up from $1.596 trillion in the same month in 2017, Reuters reported.~SR

 

Lead Stories

Traders Pile Into Bets That Stock Rally Will Continue; Tax cuts and a robust U.S. economy boosted corporate profits in the three months through June

Gunjan Banerji – WSJ (SUBSCRIPTION)

With U.S. stock benchmarks mere points away from fresh records, some traders are piling into bets that share prices will rally higher and volatility will remain muted. The S&P 500 and the technology-heavy Nasdaq Composite hit their second-highest close in history on Tuesday. Options investors and traders are wagering the gains will continue. They have been scooping up bullish call options on the S&P 500, contracts that would pay out if the stock index took another leg higher, according to Credit Suisse . Call options give the right to buy shares at a later time if they hit a designated price.

/goo.gl/J3N5BG

****SD: Initially heralded as a year that would be “different,” 2018 seems more and more like 2017, with long equity, short vol being the strategy du jour (tous les jours).

Tesla options bulls reap windfall on Musk’s going private tweet

Saqib Iqbal Ahmed – Reuters

Tesla Inc’s options activity surged on Tuesday after Chief Executive Elon Musk tweeted he was considering taking the company private and some quickly executed trades netted massive paper profits as shares in the electric car maker rallied as much as 9 percent.

/jlne.ws/2vpWB4d

****SD: The role Elon Musk’s twitter feed plays continues to strike me as remarkable. I don’t believe Donald Trump’s tweets – price action-related as they occasionally are – have ever caused a trading halt in a listed name/ETP. At the time of the breaking news, IHS Markit analyst Sam Pierson commented: “[Tesla’s] short interest equates to 20.7% of outstanding shares, down from a YTD peak of 23% observed in June. The short value is higher than any S&P 500 stock, only Under Armor has a higher percentage of outstanding shares short with 24%.”

Volatility slump stokes flames for post-summer blow up

Jamie McGeever – Reuters

Financial market volatility is slumping across the board to historically – or, dangerously – low levels, potentially fanning the flames for a repeat of February’s “volmageddon” explosion that sparked a 10-per-cent correction in U.S. and world stocks.

/goo.gl/Ev6WdG

New Chinese forex crackdown to hit corporate hedging; Despite new reserve requirement, dealers say ‘maturity’ in risk management is here to stay

Blake Evans-Pritchard – Risk.net (SUBSCRIPTION)

Dealers fear a move by the Chinese authorities to reinstate a deposit requirement on foreign currency derivatives could slow a recent pick-up in hedging from local corporates, despite warnings from regulators that firms need to do more to brace for future market volatility.

/goo.gl/a5jAoP

Sterling/dollar risk reversals at 17-month low, signal more weakness

Reuters

Nine-month and one-year sterling/dollar risk-reversals fell on Wednesday to the lowest since early-March 2017, as investors rushed to protect themselves from further weakness in the British currency.

/jlne.ws/2OTyRxi

Exchanges and Clearing

NSE says working on a structure to address SGX issue

Livemint

New Delhi: Locked in arbitration proceedings with SGX, the National Stock Exchange on Wednesday said it is working on a “structure” to address the issues and more clarity is likely to emerge in the next two-three weeks.

/jlne.ws/2vtvqVV

SGX reports market statistics for July 2018

SGX

…Total Derivatives volume was 16.9 million, down 5% month-on-month (m-o-m) and up 19% year-on-year (y-o-y).

/jlne.ws/2vtyeT1

Presentation By HKEX Chief Executive Charles Li And Group Chief Financial Officer John Killian On 2018 Interim Results Announcement

Mondovisione

…Strong growth in trading volumes: Cash Market headline ADT +67% YoY, Futures and Options ADV +58% YoY, LME chargeable ADV +11% YoY

/jlne.ws/2OQUvm5

Dalian Commodity Exchange Holds Training For Corn Options Instructors

Mondovisione

To strengthen the corn options training on member units, promote teaching staff construction and guarantee the steady listing and operation of corn options, Dalian Commodity Exchange (DCE) held the training on corn options instructions lately. A total of 100 trainees from 100 units attended the training, including futures companies, risk management subsidiaries of futures companies, spot companies and other financial institutions.

/jlne.ws/2ORJsZN

Technology

Tradeweb On Track For Record Year Of Trading Activity

Mondovisione

…Credit and Equities Derivatives Volumes Climb: Global equity derivatives ADV is up 351.55% and global credit derivatives volume is also up 80.16% year-over-year on the Tradeweb platform.

/jlne.ws/2vvSYtj

Redline Trading Solutions Breaks 180 Nanosecond Tick-to-Trade Barrier

Redline Trading Solutions

Redline Trading Solutions, the premier provider of high-performance market data and order execution solutions, today announced the production deployment of its hybrid software and FPGA-based market data and order execution gateway solution.

/jlne.ws/2OUwtGQ

The art of designing markets. Part III

Eurex Exchange

This is the third article in a series of topics related to the market design of electronic marketplaces. The first article discussed the most common execution models in electronic derivatives markets, while the second covered the various components of an order-generating process that define its arrival time. It thus gave an overview of the three steps market participants need to generate and submit an order to an exchange whereby connectivity drives the third step. We explained that for all participants timing matters but that ‘timing’ means different things to different market participants. Today, we are looking at the electronic connectivity of market participants who are not members of an exchange (i.e. indirect participants), typically institutional investors, but also retail investors.

/jlne.ws/2B142UO

Strategy

Morgan Stanley sees two ‘broken legs’ for stocks, heralding ‘significant market correction’

Ryan Vlastelica – MarketWatch

For years, one of the primary factors lifting the U.S. stock market has been the fact that some of the economy’s biggest, fastest-growing names just kept rising.

The strength of growth stocks, in particular some large technology and internet plays, has been a boon for momentum investors, who bet that recent outperformers will continue to do better than the overall market over the medium term. This trade has been one of the easiest ways for investors to make money, but analysts are increasingly concerned that its era may be drawing to a close.

/jlne.ws/2MuW4Et

A big shift to the S&P 500 may change the way you invest in tech

Stephanie Landsman – CNBC

The S&P 500 is about to undergo a major structural change that may alter which technology stocks you own.

Facebook and Google’s parent Alphabet will move out of the index’s technology sector and to a newly formed communication services sector in about six weeks. The goal is to make tech appear less dominant in the S&P 500.

/jlne.ws/2vwpTxU

Miscellaneous

Crypto pukes, again; Somebody pass the mop.

Jamie Powell – FT Alphaville

Ah, the crypto.

After the gyrations of early June, it all went pretty quiet recently as bitcoin, and its fellow tokens, began to recover from their lows.

/goo.gl/oCmMCt

****SD: First, great title. Second, with all these gyrations you’d think there would have been more activity on LedgerX. After all, the exchange did have a “record” July. While open interest seems to be building (4,000+ contracts) and Monday had 400+ trades, yesterday saw only 21 swaps trade. Oh, and the reason attributed to the puking? See Bloomberg’s SEC Postpones Decision on Bitcoin ETF Listing to September

Private Banks Are the New Hedge Funds

Yakob Peterseil – Bloomberg

Who needs hedge funds when a $2.4 trillion private bank is offering global macro trades to navigate late-cycle markets — mimicking fast-money strategies with leverage to boot.

UBS Group AG’s wealth management arm, the world’s largest, is pitching just that to billionaire clients.

/jlne.ws/2MtWeMx

John Lothian Newsletter

So you want to know what’s happening in the financial markets?

We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Newsletters

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