Lead Stories

Wall Street Is Making Peace With the New Era of Stock Volatility
Yakob Peterseil and Dani Burger – BloombergQuint
VIX futures, VVIX and skew showing ‘acceptance’ of higher vol; Traders shunning tail risk hedges in favor of bullish calls
Wall Street is making peace with the new normal of higher volatility as stocks careen between agonizing sell-offs and sudden rallies. After the gut-wrenching $2.5 trillion wipeout in the S&P 500 since early October, traders are resting at relative ease as they prep for market bumps down the road.

****SD: “Making peace”? Shouldn’t Wall Street be embracing the new era?

Market Volatility Leads to Fresh Focus on Machinery Beneath; Trading Investors struggle to pivot from calm, rising markets to a period of lurches in asset prices
Gunjan Banerji and Telis Demos – WSJ (SUBSCRIPTION)
Wild trading is straining the plumbing that powers global markets. In November, natural-gas futures surged 18% in one day, the biggest jump in more than a decade, only to plunge nearly 17% the following day. That caused some contracts tied to the fuel to breach central clearinghouse margin limits.
And that was just one instance in one market of such breaches. At least 49 times this year, major derivatives contracts globally—including on U.S. Treasurys and the S&P 500—have seen price moves that exceeded margin limits, according to figures compiled by JPMorgan Chase & Co.

****SD: This covers changes at CME, OCC, Nasdaq and ICE. Cboe Chairman and CEO in the piece – “Central clearing works. I don’t want to lose sight of that.”

Fear Gauge Warns That This Selloff Is Different; Wall Street’s fear gauge settled lower Monday after erasing earlier gains—a sign investors are closely monitoring market signals on future volatility and adjusting options positions accordingly
Gunjan Banerji – WSJ (SUBSCRIPTION)
Wall Street’s fear gauge settled lower Monday after erasing earlier gains—a sign investors are closely monitoring market signals on future volatility and adjusting options positions accordingly. The Cboe Volatility Index, known as VIX, fell to 22.64, snapping a three-session streak of gains. The measure earlier climbed as high as 25.94, putting it on track to surpass a closing high reached in October. The VIX also closed above the level of 15 for the 44th day in a row, continuing its longest such stretch since March 2016. The streak indicates investors are increasingly preoccupied with broader risks in the equity market and less inclined to use selloffs as opportunities to load up on more shares.

****SD: As of this writing, front month VIX futures are trading nearly two points higher than July VIX futures.

Extending Brexit Uncertainty Brings Bearish GBP Rates Asymmetry
Tanvir Sandhu – BloombergQuint
The clock’s ticking, and Theresa May is staring into the abyss. That leaves U.K. interest-rate and debt markets looking at an asymmetric payoff, assuming that Britain leaves the European Union with a divorce deal or no Brexit ensues.

****SD: Can this just go away already so we can focus on the potential for an Italexit? Also see Bloomberg’s Chaos and Comedy: What Investors Think of the Pound Right Now

Brexit Jitters Hit Markets as U.K. Prepares for ‘No Deal’; The British pound hit an 18-month low against the dollar and European stocks fell as the U.K. parliament delayed a key Brexit vote
Avantika Chilkoti – WSJ (SUBSCRIPTION)
Brexit tremors intensified in financial markets as the possibility increased that the U.K. could leave the European Union without a transition agreement in place. Many investors already wary of the political risks appear to be standing aside from the action. The pound on Monday slid more than 1.5% to as low as $1.25, hitting its lowest levels against the dollar in 18 months, after the U.K. Parliament delayed a vote on a deal to leave the European Union in an orderly fashion. The pound also fell against the euro.

****SD: I like the following story from The Guardian – ‘Chaos is complete’: what the European papers say about Brexit

Urjit Patel Took Derivative Traders By Surprise In Parting Gift
Sajeet Manghat – BloombergQuint
Urjit Patel sprung a surprise on derivative traders, who had taken positions to trade on the state election results on Tuesday. Going into the verdict, the market had already discounted a Congress revival in the heartland after having been wiped out in the 2013-14 general election. The traders took short positions as the Nifty ended at 10,488, down 205 points or 1.9 percent, on Monday. The implied volatility rose to close to its highest in a month, jumping 7.3 percent. In the options market, the maximum put contracts were for 10,000 and most call contracts for 11,000—suggesting traders expected the index to stay within that range.

Exchanges and Clearing

Cboe Global Markets Announces Appointments of Three Executives to its Markets Division
– Arianne Criqui joins Cboe as Senior Vice President, Head of Options and Business Development
– Robert Hocking joins Cboe as Senior Vice President, Head of Derivatives Strategy
– Matthew McFarland promoted to Vice President, Head of Futures, Cboe Futures Exchange

****SD: Some shifts were due after Kapil Rathi left for a blockchain company in November.

ICE Pursues Keeping Post-Brexit Oil Trading in London
Mathew Carr and Will Hadfield – BloombergQuint
Rivals have set up European units for equity, bond, ETF venues; ICE, LME are only big markets seeking recognition in EU states
Intercontinental Exchange Inc. is betting it can keep its futures and options markets — home to half of the world’s crude oil trading — in London in the event of a no-deal Brexit, a strategy at odds with the plans of almost every other major U.K.-based trading venue.

Equity Index Highlights – December 2018 edition
Market briefing – Volatility was this month’s theme, as November took us on a roller coaster ride leaving us right back where we started. It seems that investors remain uncertain if the most recent wave of selling pressure is the last in a row of short-term buying opportunities. The rotation between momentum, low volatility and value stocks has been evident and is reflected by increased volumes across our suite of STOXX sector futures and options. Heightened activity was visible in Oil & Gas, Basic Resources, Telecommunications, Utilities and Autos.

Clearing house of the year: CME Clearing
“It’s quiet – too quiet,” goes the line in every Spaghetti Western, when the protagonist rocks up in what looks like a deserted town. Of course, the savvy viewer knows there are bandits holed up behind every window and wagon; by the end of the scene, the set will inevitably have been blown to pieces in a hail of gunfire, with the plucky enforcer, attacked on all sides, needing all his cunning to emerge unscathed.

Regulation & Enforcement

White House to name senior Treasury official as CFTC head
Michelle Price – Reuters
The White House plans to nominate Heath Tarbert, a senior Treasury official, as chairman of the U.S. Commodity Futures Trading Commission next year, according to a source familiar with the matter.


The integration of high and low touch capabilities in automated trading
Richard Bentley, Chief Product Officer – Itiviti
Change is nothing new in trading. Since the millennium, sell-side brokers have had to ride waves of transformation in regulation, market structure, technology and economic fundamentals. Survival and success have depended on adaptability and timely adjustment to these increasingly complex market circumstances in terms of organization, business models and technology.


Goldman Says Selling Volatility Is More Attractive as the Year Ends
Gregory Calderone – BloombergQuint
The recent surge in U.S. equity volatility has created an opportunity for options investors to profit by selling into what historically has been a period when price swings tend to stabilize, Goldman derivative strategists John Marshall and Katherine Fogertey wrote in a note. Implied volatility in individual stocks jumped more than 20 percent in the past week, driven by global trade and OPEC concerns, according to the strategists. With limited catalysts likely over the next two weeks, options selling is an increasingly attractive strategy for the near term, they wrote. “Equity volatility typically declines in December with low volumes and low new flow,” they wrote. “While we continue to believe there are reasons to expect volatility to increase in 2019, we see greater potential for relief over the next three weeks.”

Investors Bet $10 Billion Against Popular Bond ETFs
Warning lights are flashing in a corner of U.S. debt markets. Bond investors scrambling to protect themselves from losses are increasingly using bets against the largest junk-bond exchange-traded funds and derivatives that rise in value when corporate bonds lose ground.

****SD: Tangentially related blog from AlphaArchitect yesterday – ETFs Have NOT Screwed Up Correlations, Liquidity, and Alpha Opportunities

Option Pit’s Sebastian Sees Volatility as Opportunity to Make Longer-Term Trades
Bloomberg (VIDEO)
On this edition of “Options Insight,” Option Pit founder Mark Sebastian discusses the recent volatility in U.S. equities and his options strategy with Bloomberg’s Abigail Doolittle on “Bloomberg Markets: The Close.”


Fourth Annual Cboe Risk Management Conference – RMC Asia – Features Expert Presentations and Great Networking
Matt Moran – Cboe Blog
More than 140 financial professionals, including top traders, strategists and researchers attended the fourth Annual Cboe Risk Management Conference (RMC) Asia on December 3 and 4 in Hong Kong. Topics related to the management of risk and return in investment portfolios were discussed by 12 speakers at RMC Asia, including Tim Edwards, Tim Weithers and Cboe Chairman and CEO Ed Tilly.

Yellen warns of another potential financial crisis
Steve Liesman – CNBC
Former Federal Reserve Chair Janet Yellen told a New York audience she fears there could be another financial crisis because banking regulators have seen reductions in their authority to address panics and because of the current push to deregulate.

Long-term Rates, Not the Fed, Influence Stocks
Bob Iaccino – CME Group OpenMarkets
The Fed finds itself in an unusual position when it comes to managing inflation. The stock market selloff that began in October looked like it may have been over once the market heard from Jerome Powell. On November 28, the Fed Chair revealed enough to indicate to the market that the Fed was going to pause in its interest rate hike cycle.

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