Law Firm Investigates Harvest’s CYES Options Trading Strategy; HFTers Back Exchanges Against SEC Rebate Plan

Jun 14, 2019

Lead Stories

Kirby McInerney Investigates So-Called “Collateral Yield Enhancement” or “CYES” Options Trading Strategy Which Caused Significant Losses to High Net Worth Clients of Merrill Lynch, Morgan Stanley, and Other Firms
Business Wire via Yahoo Finance
Investor rights attorneys at the law firm of Kirby McInerney LLP are investigating potential securities arbitration claims against Merrill Lynch, Morgan Stanley and other financial advisory firms in connection with a risky options trading strategy – dubbed the Collateral Yield Enhancement Strategy or CYES – which caused substantial losses to numerous high net worth clients.
…The Collateral Yield Enhancement Strategy involved borrowing against or “margining” investors’ conservative stock or bond portfolios to invest in “Iron Condor” options trading structures managed by a third-party investment advisory firm, Harvest Volatility Management. An Iron Condor is a well-known trading strategy that involves a pair of options “spreads.”
/yhoo.it/2XSfPM8

****SD: In the wake of substantial drawdowns at the end of 2018, Victory Capital cancelled its planned purchase of Harvest for $300 million dollars. The deal had a termination clause if revenue declined by 20% or more. The fallout continues…

High-Speed Traders Back Exchanges in Fight With SEC Over Rebates Plan
Alexander Osipovich – WSJ (SUBSCRIPTION)
Three big high-speed trading firms asked a federal court to halt a Securities and Exchange Commission initiative that would limit the rebates that U.S. stock exchanges pay to attract investors’ orders.
Citadel Securities LLC, GTS Securities LLC and the U.S. arm of Amsterdam-based IMC BV said in a joint court filing late on Thursday that the SEC’s plan, called the Transaction Fee Pilot, was an “ill-conceived” program that would harm investors.
/on.wsj.com/2XIoznM

****SD: The ramifications of this pilot will spill over into options markets, though the cross-asset angle isn’t mentioned in this piece.

When commodities get hooked on derivatives
Ruslan Kharlamov and Heiner Flassbeck – Financial Times (SUBSCRIPTION)
Pick up marketing materials of any commodity exchange and it’s all about “risk management”. For many bourses, however, a real business lies elsewhere. It needs no advertising and shuns public scrutiny.
This is the business of making markets: a licence to set prices for raw materials. As these markets went global, so did the function of their pricing and benefits for those controlling this function.
/on.ft.com/2WGYrsa

****SD: Booo! Always hating on the speculators…

CME Disciplinary Notice-14-9725-BC-HOWARD-STARK
CME Group
…On April 4, 2018, a Panel of the Chicago Mercantile Exchange (“CME”) Probable Cause Committee charged Howard Norman Stark with violating CME Rules 534, 536.A., 432.B.1., 539, 521, 576, and 540 based on allegations that on three occasions from September 26, 2013, through April 9, 2014, Stark placed buy and sell orders on behalf of his customer for S&P 500 Options and Flex Options on Futures in the same expiration months, strike prices, and at the same trade prices, while he knew—or reasonably should have known—that the purpose of these orders was to avoid taking a bona fide market position exposed to market risk. It was further alleged that on two occasions Stark knowingly had the sell side of the transactions misallocated to accounts other than the ones in which the trades were ultimately allocated. The purpose of these transactions in this fashion was to avoid maintenance margin requirements.
bit.ly/2XMSRpk

****SD: I didn’t know Iron Man’s dad traded options?!

Wall Street’s Top Pessimist Says VIX May Be Flashing Warning
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
The VIX with a 15-handle might be less benign than it seems.
Wall Street’s “fear gauge,” as the Cboe Volatility Index is sometimes known, has a lifetime average around 19. Given that, Thursday’s close of 15.8 should not ring alarm bells. But Peter Cecchini, the global chief market strategist at Cantor Fitzgerald LP, sees reason for caution.
/bloom.bg/2wUpTrT

****SD: Unpaywalled version available via Gulf News here.

Are markets somehow ‘broken’?
Robin Wigglesworth – Financial Times (SUBSCRIPTION)
Are markets somehow “broken”? That may sound shrill, but some analysts and investors fret that there are some weird sounds coming out from under the hood of the financial system, clanks and whirrs that should worry us all.
Fears over economic growth are spreading, and investors are pricing in the Federal Reserve cutting interest rates three times this year, beginning next month. And yet, various measures of market volatility are surprisingly subdued.
/on.ft.com/2wScSiB

****SD: The chart of BAML’s MOVE Index alongside the VIX and the Economic Policy Uncertainty Index is enlightening. The MOVE and VIX have trended sideways-ish while the Uncertainty Index rose in that time period. More on current market dynamics from MarketWatch – Some measures of market risk getting closer to ‘red’ zone, Wall Street money manager says.

Exchanges and Clearing

Cboe Plans to Introduce New Lead Market Maker Incentive Program for its Cboe Listed ETP Marketplace
Cboe
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today announced it plans to introduce a new Lead Market Maker (LMM) incentive program with enhanced market quality requirements on its Cboe Listed Marketplace for exchange traded products (ETPs).
bit.ly/2XNG4mH

Regulation & Enforcement

SEC official calls for scrutiny of CEOs’ social media use
Robert Armstrong and Robin Wigglesworth – Financial Times (SUBSCRIPTION)
Robert Jackson, one of Securities and Exchange Commission’s four commissioners, said the agency should consider publishing new guidance on chief executives’ use of social media platforms such as Twitter and Facebook, in the wake of controversies involving Tesla founder Elon Musk.
/on.ft.com/2MXCbdM

CFTC’s Berkovitz frustrated by lack of position-limits rule
MLex Market Insight (SUBSCRIPTION)
“In 2010, Congress instructed the commission to establish certain position limits in six to nine months,” Berkovitz, a Democrat, said at an industry conference* this week. “Now almost exactly nine years and three proposals later, the Commission has yet to complete its task.”
bit.ly/2XPKWrE

Technology

From memos to texts, algos fish for signals in-house
Rob Mannix – Risk.net (SUBSCRIPTION)
Fundamental hedge funds are starting to use algorithms to more clearly see sentiment – their own – by hunting for signals in the e-mail, instant messages and memos of their own analysts.
bit.ly/2XPeuFG

Strategy

In Trade War Worst-Case Scenario, These Strategies Can Win
Ruth Carson – Bloomberg (SUBSCRIPTION)
State Street Global Markets likes the dollar. Mizuho Bank Ltd. says buy Treasuries and go short on South Korea and Taiwan. Deutsche Bank AG reckons the yuan may weaken.
These are some of the investment ideas strategists and money managers are favoring in case U.S.-China negotiations break down and the trade war spills over to next year. The odds of a deal have been fading in recent weeks, with President Donald Trump threatening to raise tariffs on $300 billion of Chinese goods, and China’s government saying it will “fight to the end.”
/bloom.bg/2wRX7bo

Options market has given new ‘buy’ signals on U.S. stocks
Lawrence G. McMillan – MarketWatch (SUBSCRIPTION)
What had started out looking like an oversold stock market rally has carried farther than expected.
By doing so, it has caused buy signals to be generated from some of our other indicators — including, most importantly, all of the put-call ratios. The typical oversold rally can normally get back to, and slightly above, the declining 20-day moving average before succumbing once again to selling pressure.
/on.mktw.net/2wTaBUf

Miscellaneous

Thoughts on the Return of Volatility: Markets Live 2019
Bloomberg (AUDIO)
As the year’s midpoint approaches, Markets Live’s Garfield Reynolds revisits his predictions for volatility in 2019, and offers an update on his outlook for the second half.
/bloom.bg/2wXtfdy

The Market’s Inflation Expectations Aren’t Making Sense
Jon Sindreu – WSJ (SUBSCRIPTION)
Inflation expectations implied by the price of financial assets are a key guide for central bankers and investors alike. Seeing how they have behaved of late, their credibility should be questioned.
/on.wsj.com/2MLl0MA

To Avoid Latency Arbitrage, Trade Multilaterally
Don Ross, PDQ Enterprises – TABB Forum
On April 10, XTX Markets’ Matt Clarke published a superb overview and analysis of anti-latency arbitrage (ALA) mechanisms here on TabbFORUM, making a strong case for incorporating them (“Speed Bumps: Anti-Latency Arbitrage Mechanisms Make Markets Better”). I share his view that the high (and rising) cost of shaving nanoseconds in the race to take liquidity before others is a form of rent-seeking and a drag on financial-sector productivity. To me, however, the important question is not whether ALA can help mitigate these costs (it can), but whether we can improve market structure such that liquidity arbitrage is itself a meaningless activity (we can).
bit.ly/2XLBW6N

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