Negative Gamma and Oil; CAT Concerns; Brexit Volatility

Nov 15, 2018

Observations & Insight

Natural Gas ETN Volume Tops S&P 500, Nasdaq ETFs on Blowup Fears
Luke Kawa and Rachel Evans – Bloomberg
DGAZ bets against natural gas as prices soar on cold forecast; Note tumbled more than 50 percent but appears to have survived
Cold weather in the U.S. is sending an extra shiver down the spines of investors who hold an exchange-traded note that bets against natural gas and just had its worst-ever day.
/bloom.bg/2DFML3M

****SD: Ahhh, the infamous “acceleration event.” Now where has this come up before…? It’s also perfect timing for this to happen to DGAZ, as we ran a story in JLN Options from Tuesday SEC Official Warns Leveraged Funds Could Hurt Reputation of ETFs. If I had a nickel for every time I said, “retail folks should read the prospectus of exotic ETPs,” well, I’d have a few dimes to rub together. More on nat gas from RCM Alternatives’ Blog Natural Gas Back to Widowmaking?

Lead Stories

Two Words that Sent the Oil Market Plunging: Negative Gamma
Alex Longley – BloombergQuint
Price slump was exacerbated as options traders sold futures; Wall Street banks do deals locking in oil prices for producers
As oil suffered its biggest one-day slump in three years, it wasn’t OPEC or President Donald Trump that was shaking the market. Instead, trading desks were abuzz with chatter of “negative gamma.”
/goo.gl/oRVdN6

****SD: If I didn’t cover options, I don’t think this piece would leave me with any better understanding of gamma. The gist of the explanation is “it’s called a ‘negative gamma’ effect because options traders use Greek letters to describe how options react to changes in price and volatility.” Okay, so what’s negative gamma? Then again, it describes how gamma impacted traders, so maybe that understanding isn’t really needed? It’s really tough to try to describe these topics to a general audience.

Wall Street still worries SEC’s massive trading database could be hacked
Declan Harty – S&P Global Market Intelligence
Wall Street is not yet satisfied with the security of a massive SEC trading database set to begin collecting investor data in the coming days.
On Nov. 15, U.S. stock and option exchanges such as those owned by Intercontinental Exchange Inc., Nasdaq Inc. and Cboe Global Markets Inc., as well as the Financial Industry Regulatory Authority, will start reporting data into the SEC’s Consolidated Audit Trail, or CAT. Those institutions, as well as system developer Thesys CAT LLC, are building the CAT at the SEC’s request. The Nov. 15 launch is the first stage in a four-year rollout of the CAT, a database expected to receive more than 58 billion records daily that will give regulators an unprecedented view into U.S. markets.
/goo.gl/XvwbAa

****SD: This is the bit I love, “Around that time, the exchanges requested a 12-month delay in the CAT’s launch, an inquiry the SEC eventually rejected. Still, the upcoming reporting stage will take place exactly one year after the original target date.”

Pound Is ‘Untradeable’ as Brexit Drama Fuels Volatility Spikes
Katherine Greifeld – BloombergQuint
Wall Street is finding it harder to trade sterling as the drama surrounding Brexit roils the British currency.
bit.ly/2DHHFnP

****SD: I’m no trading strategist, but since when does volatility make for a bad trading environment? More on Brexit in general in another Bloomberg story below.

Supercomputer to Launch With Glitches; Giant stock orders database conceived after 2010 ‘flash crash’ to have limited functionality
Dave Michaels – WSJ (SUBSCRIPTION)
A data warehouse created to track all U.S. stock and options orders is expected to launch on Thursday with less functionality than previously anticipated including limits on how many users can search it, according to people familiar with the matter.
/goo.gl/6RFdV1

****SD: “The problem partly stems from certain options trades that can’t always be tied to the underlying orders that make up the transaction, one of the people said. Mr. Beller has told the exchanges that the flaw would be fixed by March 2019, the person added.” It will be impossible to address cross-product manipulation – namely mini-manipulation (aggressively trading stock to get a better option price) and anticipatory hedging – when you can’t connect the dots. The link included is to a July note from the Security Traders Association penned by Trillium’s Michael Friedman. Factoid of the day – mini-manipulation, while not an enforcement priority in the past, was mentioned as far back as 1978 in the SEC’s Special Study of Options Markets.

Trader Virtu Seeks to Erase Its ‘Bogeyman’ Image in ITG Takeover
Nick Baker – BloombergQuint
Virtu is pushing back against idea speedy traders are bad; It wants to transform into a firm that serves customers
High-speed trader Virtu Financial Inc. wants Wall Street to know it’s no fox poised to attack the $1 billion henhouse it’s acquiring.
/goo.gl/2NF1gB

****SD: Business Insider has a Q&A with Virtu CEO Doug Cifu – Wall Street is worried that a $1 billion acquisition will allow Virtu to spy on clients, but the firm has a big plan to quell those anxieties

Crude options: Implied volatility signals downside crude risk remains
Author James Bambino and Chris van Moessner – S&P Global Platt
Implied volatility for NYMEX crude options across the front three months was trading above 40% Wednesday, CQG data showed, signaling downside risk has not abated despite the rebound in prompt crude prices.
/goo.gl/2sA5Xp

****SD: CME set an overall record for total energy futures and options yesterday with 5,103,881 contracts beating the previous record from 2016 of 5,067,833 contracts. CME also announced record trading of WTI options on Tuesday – 693,975 contracts handily beat the previous record of 579,935 contracts set on November 30, 2016.

Brexit’s Only Sure Bet is Higher Pound Volatility
John Authers – Bloomberg
It’s not always easy being an Englishman in New York. Lots happened on Wall Street Wednesday: Stocks sold off again, led by one-time market darling Apple Inc., and the price of oil managed a very slight rise, snapping a losing streak that lasted for more than two weeks. But for sheer drama, the latest soap opera that played out in Westminster, this time over Brexit, couldn’t be beat. Westminster gave the world the first “House of Cards” (it was far better than the U.S. version, but I am biased), and the Brexit intrigue has been on a par with anything served up by Robin Wright and Kevin Spacey.
/goo.gl/Mqv68n

****SD: If there’s one thing in this piece I wholeheartedly agree with, it’s that the original, British version of “House of Cards” is indeed better than the Hollywood version. For more on the sensitive pound, see Reuters’ Sterling tumbles as May races to salvage Brexit deal and live updates from The Guardian. Bloomberg’s Editorial Board has Theresa May’s Brexit Deal Is Not the Answer

Goldman Says Investor Bearishness Concentrated in a Few Sectors
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Goldman analysis shows market worries not evenly distributed; Holiday seasonality is being underpriced in retail stocks
Investors are pricing a lot more fear into individual stock options than they are into the S&P 500 Index, showing concern is concentrated in a few industries including health care and materials.
/goo.gl/onQhFy

Markets danger zone: 5 things investors need to watch
Robin Wigglesworth and Joe Rennison – Financial Times (SUBSCRIPTION)
As financial markets enter a more challenging phase, investors and analysts are looking for signs that can indicate financial stress. Here are some of the main contenders.
/goo.gl/VFxvR9

Traders haven’t been this freaked out about tech stocks for 14 years – and their worry could be signaling disaster for the market
Joe Ciolli – Business Insider (SUBSCRIPTION)
Tech stocks have had a rough go of it lately.
After a prolonged stretch in which they were majorly responsible for pushing major indexes to record highs, they’ve become a huge drag on the market.
Since the start of September, the tech sector has declined more than 11%, nearly double the benchmark S&P 500, which hasn’t exactly been a beacon of strength itself. And as if that underperformance hadn’t been bad enough, traders appear to be braced for even more turmoil.
/read.bi/2zcgiy5

Exchanges and Clearing

Despite Low Volatility, Options-On-Futures on Track for Record Year
Russell Rhoads – TABB Forum
The third quarter of 2018 took on the look of 2017, with volatility across most markets returning to lower levels. The average VIX close in the third quarter was 12.85, down from 17.35 in the first quarter and 15.34 in the second. Despite the slowing growth, options-on-futures volume in the US remains on track to top 1 billion contract changing hands in 2018, up about 8% from 2017’s record volumes.
bit.ly/2QS0l6Y

****SD: It looks like 2018 will be the first year ever that options-on-futures break 1 billion contracts.

CME Group Energy Futures and Options Volume Reaches Record 5.1 Million Contracts
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced its suite of energy futures and options reached a daily trading volume record of 5,103,881 contracts on Wednesday, Nov. 14, 2018, surpassing the previous record of 5,067,833 contracts set on Dec. 1, 2016.
/goo.gl/nHmakR

Deutsche Bank and Nomura execute first swaption trades with LCH SwapAgent; LCH SwapAgent processed the first swaption trades with Deutsche Bank and Nomura.
Hayley McDowell – The Trade
UK clearinghouse LCH has processed its first swaption trades executed by Deutsche Bank and Nomura via its non-cleared derivatives clearing service SwapAgent.
bit.ly/2FxnA54

****SD: LCH’s press release here.

Moves

Sun Trading chief leaves in wake of Hudson River takeover
Samuel Agini – Financial News
The chief executive of Sun Trading has left the market-maker following its takeover by Hudson River Trading, the high-frequency trader, earlier this year.
Kevin Cuttica is leaving, having helped the two groups to integrate their businesses, according to people familiar with the matter. Cuttica became head of Sun in 2015, having joined in 2003.
bit.ly/2Fnpqp7

Regulation & Enforcement

Maxine Waters: Days of easing bank regulations ‘will come to an end’
Jeff Cox – CNBC
Rep. Maxine Waters, poised to take over the powerful House Financial Services Committee when the new Congress convenes in January, laid down the law Wednesday about the future of banking regulation.
/cnb.cx/2DFl8b1

MiFID II Best Execution Reports Unused
Shanny Basar – MarketsMedia
The majority of firms do not plan to use their MiFID II best execution reports internally according to a survey.
bit.ly/2DGnOp2

****SD: “The survey said almost 60% of respondents have no plans to use their best execution reports internally, even though the data would improve their execution quality, client offering and ability to make better informed business decisions.” Huh?

Speech Of CFTC Enforcement Director James M. McDonald Regarding Enforcement Trends At The CFTC, NYU School Of Law: Program On Corporate Compliance & Enforcement
CFTC
Thank you for that introduction. I’m happy to be back here at NYU as part of the Program on Corporate Compliance & Enforcement (PCCE). Over the years, the PCCE has brought together some of the best thinking in the enforcement, business, and academic community to develop a richer and deeper understanding of the causes of corporate misconduct, and how enforcement and compliance programs can most effectively deter it. The result is that the work here at the PCCE has been a driver of some of the most significant developments in Enforcement and Compliance.

Miscellaneous

Top equities headhunter throws cold water on huge bonus increases in 2018
Alex Morrell – Business Insider
Wall Street stock traders got some welcome news Monday.
A closely watched industry compensation report from consultant Johnson Associates said bonuses were expected to rise across finance, with equities professionals set to reap the largest increases – up 15% to 20% from 2017.
That would be a breath of fresh air for a business that has been steadily contracting in recent years, including an especially dismal run in 2017 when clients sat on their hands and volatility laid dormant. Not so fast, says a top equities headhunter.
/read.bi/2zcC3hw

Powell Says Solid Economy Faces Headwinds as Fed Mulls Rates
Jeanna Smialek, Craig Torres and Rich Miller – Bloomberg (SUBSCRIPTION)
Federal Reserve Chairman Jerome Powell said the U.S. economy is strong but could face headwinds next year as policy makers weigh how far and fast to raise interest rates.
“We have to be thinking about how much further to raise rates, and the pace at which we will raise rates,” Powell said during a question and answers session Wednesday in Dallas moderated by Dallas Fed chief Robert Kaplan. The goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low.”
/bloom.bg/2DIwsU7

Greenspan On Trump Tariffs: Greenspan Calls Trump Tariff Policies ‘Insane’
Ivan Levingston – BloombergQuint
Former Federal Reserve Chairman Alan Greenspan called President Donald Trump’s tariff policies “insane” and said “why we’re doing it probably is very deep in the psyche of somebody.”
bit.ly/2QJG0AR

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