Mexico hedges 2019 oil at $55 per barrel, spends $1.2 billion on options
Stefanie Eschenbacher – Reuters
Mexico completed its 2019 oil hedge, the world’s largest sovereign derivatives trade, at an average of $55 per barrel, placing the equivalent of $1.23 billion in put options, the finance ministry said on Thursday.
****SD: We’ve covered the sovereign hedging practices before. A quick recap: Mexico is the big player in oil production hedging (its annual efforts are known as the “Hacienda Hedge”); Iraq said it’s considering hedging, too; a number of state airlines hedge fuel exposure. But, like anything in markets, it is far from a guarantee – plenty of folks have been burned by poor execution of hedges. Bloomberg has its take here. For a bigger picture look at Mexico, see the WSJ’s piece today Mexican Finance Officials Seek to Boost Investor Confidence.
Equity derivs healthy, prime brokerage slower in Q4 – analysts
Andrew Neil – Global Investor Group
Investment banks enjoyed healthy equity derivatives trading in the last quarter of 2018, data suggests
****SD: SmartBrief summary – “Equity derivatives trading was ‘likely stronger’ in the fourth quarter compared with Q4 of 2017 because of increased volatility, though it was concentrated mostly in the US, HSBC analysts say. However, prime-brokerage growth decelerated, and structured derivatives in emerging markets, especially Asia, continued to be weak.” But for some context on prime broking, recall yesterday’s Financial Times story, Banks raise bets on prime broking for struggling hedge funds. As for the structured products in Asia comment, remember Natixis’ epic fail as reported in mid-December by Bloomberg – Natixis’s Pursuit of Exotic Trades Falters With $296 Million Hit.
Optiver, IMC, and a Shout Out to AmsterdamTrader
Alphacution Research Conservatory Blog
It has been almost exactly 2 years since “Jack” – the mastermind behind the Amsterdamtrader blog that chronicled a ton of insider’s knowledge about the high-frequency trading and market making world from about 2009 thru 2016 – posted his closing submission. Despite that, I still wanted to pause for a minute to give props where they are due. The contents of the Amsterdamtrader still sit out there in the blogosphere, open for any particular puzzle solver to stumble onto. It was here that I found several missing pieces to Alphacution’s modeling puzzle belonging to Optiver and IMC.
****SD: Amsterdamtrader shutting down was a big loss.
Diesel futures point to economic slowdown in 2019
John Kemp – Reuters
By the end of last year, hedge fund positions in diesel had fallen to a level normally associated with a sharp slowdown in economic growth if not an outright recession. Most middle distillate fuels such as diesel, gasoil and jet fuel are consumed in freight transport (ships, trucks, railroads and air cargo) as well as manufacturing and mining.
****SD: TL;DR – “For the last 25 years, hedge funds and other speculators … have mostly held a net long or bullish position in distillate futures and options” and when they haven’t been long (1995, 1998, 2002, 2010 and 2015) it has portended a slowdown.
U.S. Recession Risk Hits Six-Year High Amid Trade War, Shutdown
Katia Dmitrieva, Chibuike Oguh and Catarina Saraiva – Bloomberg (SUBSCRIPTION)
Economists put the risk of a U.S. recession at the highest in more than six years amid mounting dangers from financial markets, a trade war with China and the federal-government shutdown.
`Extraordinary’ Month Heaps Further Pain on Hedge Funds
Nishant Kumar – BloombergQuint
Volatility surged as stocks crashed, hurting money managers; Lansdowne Partners, Pershing Square and Key Square lose money
A spurt in volatility was supposed to help hedge funds rebound from years of mediocre returns. Instead, it made things worse.
****SD: Who or what is the new scapegoat?
May Denial Can’t End Those Brexit Delay Dreams in U.K. Markets
Justina Lee – BloombergQuint
The government has said it won’t happen, but traders are keeping the dream alive.
U.K. domestic stocks spiked along with the pound shortly before 11 a.m. in London on Friday as the Evening Standard reported that cabinet ministers are expecting Brexit to be delayed. Even the Stoxx Europe 600, usually less sensitive to never-ending Brexit headlines, jumped.
****SD: Also from Bloomberg Pound Traders Show Signs of Bracing for Rally on Brexit Delay and The Wreck of 2018 Shows in Brexit Barometer, and 2019 Looks Worse. (For the subscription Bloomberg version of the “May Denial” story go here.
Exchanges and Clearing
The Essential Components of The Risk Management Framework for CCPs
Dale Michaels – OCC
Central counterparties (CCPs) like OCC have performed extraordinarily well during many stressful periods, including the financial crisis of 2008. This is due to the many clearinghouse innovations that have been put in place, including mark-to-market settlements, initial margin models, and default management processes. As a reminder, CCPs do not take on any market risk. Instead, we manage risk. We add a critical risk management function to the financial system and, when one of our clearing members is in default, we act, as we did in the wake of Lehman, MF Global and others.
Dalian Commodity Exchange Corn Options To Be Listed On January 28
The China Securities Regulatory Commission (CSRC) held a press conference on January 4 to announce its approval of Dalian Commodity Exchange (DCE) carrying out corn options trading as of January 28, 2019. It marks the further enrichment of the Chinese agricultural product options after soybean meal and white sugar.
****SD: Recall yesterday’s news out of China regarding index options via Reuters – China’s ‘flash boys’ hedge funds eye end to hiatus
Euronext faces competition for Oslo Bors as potential buyers emerge
Hayley McDowell – The Trade
Norwegian stock exchange operator Oslo Bors has said that its board of directors has met with potential buyers after inviting bids to compete with Euronext’s EUR625 million offer last week.
Nasdaq wins approval from shareholders for $220 million Cinnober takeover
Hayley McDowell – The Trade
Shareholders in exchange and clearing technology provider Cinnober have accepted a revised $220 million acquisition offer made by Nasdaq late last month.
New Stock Exchange No Immediate Threat to Stock of ICE, Nasdaq, and Cboe
Bill Alpert – Barron’s
This week’s announcement of a new U.S. stock exchange sent investors scrambling to predict its impact on the venerable New York and Nasdaq bourses.
Since the news that nine brokers and market makers were forming an exchange called MEMX, the shares of New York Stock Exchange parent Intercontinental Exchange (ticker: ICE) have slid about 4%, to $72.45, while the stock of Nasdaq (NDAQ) is off some 2.2%, to $79.97. The second-largest operator of U.S. stock exchanges, Cboe Global Markets (CBOE), was off 6%, to $92.80.
****SD: Reasoning for MEMEX from Tabb Forum – Why MEMX? Simple: Market Data – and more from Barron’s – New Stock Exchange Better for Wall Street Than for Small Investors.
Regulation & Enforcement
Prop firms face disproportionate capital rules – FIA EPTA
Louisa Chender – Global Investor Group (SUBSCRIPTION)
The EU Council’s latest revisions to the investment firms regulation fails to address all issues
Stock brokers submit wish list to Centre
Ashish Rukhaiyar – The Hindu
Exemption from long term capital gains tax among the list of demands It may well be only an interim budget this year but the stock broking community is trying hard to get some of its long-standing demands get noticed by the government.
Majority of buy-side firms anticipate increased spend on AI technology
Hayley McDowell – The Trade
Over 60% of asset managers have said they expect their spending on artificial intelligence (AI) technology to increase over the next year, according to research.
****SD: Nice companion blog below. A press release on Tabb Forum’s AI research can be found here.
The market is a bonfire, don’t get burned by AI
RCM Alternatives Blog
We attended a hedge fund luncheon the other day giving a historical overview of artificial intelligence (AI) and machine learning and how that particular hedge fund is implementing it into their processes. They showed the steady progression of artificial intelligence and its most recent application of machine learning whereby a machine (read: computer) can learn on its own without being explicitly programmed, culminating in the ability of Google’s AlphaZero to teach itself the game of chess and beat another AI engine (stockfish). Their clear view is that AI is the future in the investment world, and dutifully go about having their machines try and figure out ways to analyze past price movements and patterns to add some alpha.
Time to Buy Stock-Market Insurance; Options that hedge against stock-market moves are cheap compared to actual volatility
Jon Sindreu – WSJ (SUBSCRIPTION)
In the stock market, it looks like an ideal time to be the insured rather than the insurer. Equities have been extremely volatile since October, as investors have panicked about a potential U.S. recession, trade tensions and a slowing global economy. This has led to a jump in the Cboe Volatility Index or VIX, known as Wall Street’s “fear gauge” because it tracks the expected daily swings in the S&P 500 index over the next 30 days using options contracts.
The Wonky Reason the Bezos Divorce Could Shake Up Stock Indexes
Rachel Evans – Bloomberg (SUBSCRIPTION)
Jeff and MacKenzie Bezos’s split has created a puzzle for index investors: Who gets their stock in Amazon.com Inc.?
Regulatory filings show Jeff Bezos owns almost 79 million shares of the company, worth about $130 billion as of yesterday. If MacKenzie takes a chunk in a settlement — or either party needs to liquidate their assets to meet divorce expenses — those could become part of the company’s freely traded stock. In turn, that could boost the company’s weighting in indexes including the S&P 500 — sending tracker funds on a small Amazon shopping spree.
Why Storytelling Is So Important in Selling Investment Products
Barry Ritholtz – Bloomberg (SUBSCRIPTION)
Once upon a time, portfolios were constructed via storytelling. Once built, they were marketed via data.