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OCC Volumes; Flash Crashes; Position Limits

Sep 4, 2018

Observations & Insight

Remember, Remember the 15th of September
Spencer Doar – JLN

It’s that time of year again – the annual financial crisis reflection period. This year markets have a nice, round anniversary number to glom onto. I believe 10-year anniversaries traditionally merit gifts of tin or aluminum. I’m unsure who would be best to send those trinkets to…

So there are plenty of stories floating around with plenty more to come. Here is what I expect to be one of many article lists covering issues, lessons and prognostications related to the global financial crisis. (I do hope the use of the phrase “ticking time bomb” decreases this year.)

-Financial Times – Why so little has changed since the financial crash by Martin Wolf
-Financial Times – Have we learnt the lessons of the financial crisis? by Gillian Tett
-NY Times – The Next Financial Crisis Lurks Underground by Bethany McLean
-The Telegraph – The ticking time bomb that could blow up into a financial crisis

++++++

The Spread – This Is How We Do It – 8/24
JohnLothianNews.com

It’s not often that “The Spread” highlights music in the industry (the exception being the DJ activities of Goldman Sachs’ incoming CEO), so today is a treat. Apparently some BNP traders responsible for trying to rig ISDAfix to benefit derivatives positions like to make song references in their messaging.

Watch the video and see the stories referenced here »

Lead Stories

OCC Cleared Contract Volume Up 10 Percent in August
OCC
OCC, the world’s largest equity derivatives clearing organization, announced today that total cleared contract volume in August reached 433,740,316 contracts, up 10 percent compared to August 2017 volume of 395,912,022. OCC’s year-to-date average daily cleared contract volume is up 19 percent with 20,321,325 contracts compared to 17,068,192 contracts in 2017.
/jlne.ws/2oCynzM

****SD: More big numbers from the OCC. However, OCC’s futures volume was down 50 percent and index options volume was down 18 percent. An overall slowing of VIX trading had a lot to do with the futures decline.

JPMorgan says next crisis will feature flash crashes and social unrest
Hugh Son – CNBC
J.P. Morgan’s top quant Marko Kolanovic predicts a “Great Liquidity Crisis” will hit financial markets, marked by flash crashes in stock prices and social unrest.
/jlne.ws/2PDKXdL

****SD: Here is a link to a large abstract/summary of JPM’s letter. The end of the report – “The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968.”

Immediate Effectiveness of a Proposed Rule Change to Amend Rule 2360 (Options) to Increase Position Limits on Options on Certain Exchange-Traded Funds
FINRA
Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to amend FINRA Rule 2360 (Options) to increase the position limit for conventional options on the following exchange-traded funds (“ETF”): Standard and Poor’s Depositary Receipts Trust (“SPY”), iShares Russell 2000 ETF (“IWM”), PowerShares QQQ Trust (“QQQ”), iShares MSCI Emerging Markets ETF (“EEM”), iShares China Large-Cap ETF (“FXI”), iShares MSCI EAFE ETF (“EFA”), iShares MSCI Brazil Capped ETF (“EWZ”), iShares 20+ Year Treasury Bond Fund ETF (“TLT”), and iShares MSCI Japan ETF (“EWJ”).
/jlne.ws/2NdqnmH

****SD: FINRA is staying in step with exchanges. SPY and QQQ limits are doubled from 900k to 1.8m; IWM and EEM are doubled from 500k to 1m; and FXI, EFA, EWZ, TLT and EWJ are all 500k. The only one that stands out to me is EWJ, an ETF tracking the MSCI Japan Index – not much volume on the options side there. Full PDF of the filing here.

U.S. regulators extend comment period for proposed ‘Volcker Rule’ rewrite
Pete Schroeder – Reuters
U.S. regulators said on Tuesday they will giving the public an extra 30 days to comment on a proposed rewrite of the “Volcker Rule” banning proprietary trading by banks.
/jlne.ws/2PwXaRk

When Machines (and Humans) Decide to Sell at Once
Stephanie Yang – WSJ (SUBSCRIPTION)
On Feb. 5, the Dow Jones Industrial Average suffered its worst one-day point-decline in history amid a tumultuous week for global markets. Although the blue-chip index has since erased that loss, some investors are still trying to puzzle out what caused such a drop.
One possible culprit: a cascade of automated stop-loss sell orders by trend-following investment funds that started in London and then fed into the steep rout in U.S. stocks. In the following days, the downward lurch prompted selling to spread to other assets like oil futures.
/jlne.ws/2Nhlh8Y

BOJ’s Kuroda warns of risk from high-frequency trading
Reuters
Bank of Japan Governor Haruhiko Kuroda on Monday warned that the growing presence of high-frequency trading (HFT) could exasperate price moves and hurt financial market stability.
/jlne.ws/2oBYCGG

The last time Wall Street’s ‘fear index’ and stocks traded this closely it didn’t end well
Mark DeCambre – MarketWatch
U.S. stocks and one popular measure of volatility on Wall Street have been moving in lockstep lately, and some market experts think that is an ominous sign.
Indeed, the Dow Jones Industrial Average DJIA, -0.23% and the S&P 500 index SPX, -0.22% are on pace to close out August higher, booking their third weekly gains in a row and the best August return in four years, while the Nasdaq Composite Index COMP, -0.24% was on track for its second weekly advance and its best month in 18 years, according to FactSet data.
/jlne.ws/2NdgRA2

September is usually the toughest month for stocks
Kate Rooney – CNBC
The market’s so-called fear index is ticking up as we enter what’s historically been the rockiest month of the year for stocks.
The CBOE Volatility Index, known as the VIX, rose 9.5 percent on Tuesday near a session high of 14.35. The index, which is used to measure expected volatility in the stock market over the next 30 days, was close to its highest level since August 16. A low reading means relative calm in the markets while a higher number shows more uncertainty.
/jlne.ws/2NhmFsn

****SD: From the WSJ – Stocks’ Return to Records Paves Way for Volatile Autumn

The emerging market crisis is back. And this time it’s serious
Spriha Srivastava – CNBC
Markets have a very short attention span. Like babies, they move on quickly from one toy, or in this case an event, to another.
/jlne.ws/2PyU0MM

****SD: Look! A new car! From the WSJ – Buy Turkey and Argentina? Emerging Markets Aren’t Bargains They Seem

Exchanges and Clearing

Strong month for European equity derivatives
Eurex Exchange
In August, Eurex, Europe’s largest derivatives exchange and part of Deutsche Börse Group, has seen strong demand for its products. Traded European interest rate contracts increased by 27 percent to 46.6 million, from 36.7 million in August 2017. Demand was particularly high for European equity derivatives (+56 percent) with 21.9 million traded contracts (14 million in August 2017).
/jlne.ws/2Nhn0Lq

NSE, BSE to Levy ASM on Equity Derivatives
Economic Times
The two leading exchanges NSE and BSE have announced that additional surveillance margin (ASM) will be levied on all gross open positions on futures contracts and on short positions in options contracts. This was decided at the meeting between Sebi,
/jlne.ws/2NbwbgH

MCX launches first commodity derivs clearing firm in India
Louisa Chender – Global Investor Group (SUBSCRIPTION)
India’s Multi Commodity Exchange Clearing Corporation Ltd opened for business on September 3
/jlne.ws/2NfpH0h

BSE: No transaction fee on cross currency derivatives trade till August 2019: BSE
PTI via Economic Times
Leading stock exchange BSE has extended the time period for not levying any transaction fee on the trades done in cross currency derivatives for one year till August 2019, in order to encourage active participation in such contracts.
/jlne.ws/2NgYfiv

MGEX Reports August 2018 as the Fourth Best Month of All-Time
MGEX
MGEX, a Designated Contract Market (DCM) and Derivatives Clearing Organization (DCO), welcomes August 2018 into the fourth position on the Total Monthly Exchange Volume record list with 275,743 contracts.
/goo.gl/JkHPwu (PDF)

Moves

Three senior Citi execs are stepping down, including CFO John Gerspach
Alex Morrell – Business Insider
Huge changes are underway at Citigroup as three top Citi execs are leaving the company, including CFO John Gerspach.
/jlne.ws/2Nd0NhO

Regulation & Enforcement

Sebi may allow PMS on commodity exchanges
Economic Times
The Sebi is working on facilitating participation of mutual funds and commencement of portfolio management services (PMS) in the commodity derivatives market.
/jlne.ws/2oGC07X

EU27 to offer Theresa May a ‘carrot and stick’ approach to Brexit
Daniel Boffey and Pippa Crerar – The Guardian
The EU27 are planning a “carrot and stick” approach to Brexit at an upcoming summit, offering Theresa May warm words on the Chequers proposals to take to the Conservative conference alongside a sharp warning that they need a plan for Northern Ireland within weeks.
/jlne.ws/2PB9HmC

Technology

Kotak Institutional Equities strengthens relationship with Itiviti; Firm extends the use of Itiviti’s execution technology to support growth in India.
Itiviti
Itiviti, the leading global provider of multi-asset trading technology and financial infrastructure, today announced that Kotak Institutional Equities (KIE), one of India’s leading brokerages, has extended the use of Itiviti’s connectivity platform and deployed Enhanced Direct Market Access (EDMA) to support the firm’s growing equities and derivatives trading business, and to enhance services to its global clients.
/jlne.ws/2Nhz27C

Caitong Securities goes live with Horizon platform for Options trading on Shanghai Stock Exchange, Business Insider
Business Insider
Horizon Software (Horizon), the leading global technology provider for electronic trading and investment management, announced today that the China-based securities firm Caitong Securities has gone live with its Options Trading platform to trade SSE 50 ETF options on the Shanghai Stock Exchange.
/jlne.ws/2NaHUMv

You want a machine learning job in finance? They might be less exciting than you think
Robert Carver – eFinancialCareers
Machine learning (ML) is probably the hottest thing in quantitative finance right now. But it’s also badly misunderstood.
For starters it isn’t actually clear what machine learning actually is. The term conjures up images of artificially intelligent cyborgs poring over streams of financial data, coming up with novel trading strategies which they then test and modify – all without any human supervision. Some esoteric ML techniques look a little like this; genetic algorithms for example can modify themselves to improve their performance.
/jlne.ws/2NfMlFS

Strategy

GBP/USD dealers favour volatility over direction
Reuters via Kitco
FX option flows have seen some renewed downside buying this week, but most of the demand has been for implied vols with strikes close to current spot, looking to benefit more from spot volatility than any directional moves.
/jlne.ws/2PwYGmu

****SD: Bloomberg has Pound Investors Face Months of Volatility Into Brexit Endgame

Strong Returns Over 32+ Years for BXMD Index That Writes OTM SPX Options
Matt Moran – S&P Dow Jones Indices
In recent years at many investment conferences I heard that many public pension plans face underfunding challenges, and they are very interested in investments with strong returns and moderate risk. While past performance is not a guarantee of future results, the Cboe S&P 500 30-Delta BuyWrite Index (BXMDSM) has shown higher returns and lower volatility than the S&P 500, MSCI EAFE, and S&P GSCI indexes in the period from its inception in mid-1986 through July 2018.
/jlne.ws/2NhVRYM

Miscellaneous

Hehmeyer Blog Post: Three Minutes With Russell Rhoads, Head Of Derivatives Practice At TABB Group
Jessica Darmoni – Hehmeyer Blog
Russell Rhoads recently joined TABB Group in July 2018 as the Head of the Derivatives Practice. Most recently he was the Director of Education at Cboe Global Markets’ Cboe Options Institute where he taught options trading, helped launch bitcoin contracts and was instrumental in rolling out Cboe’s social media efforts. Rhoads has also authored several books on the financial markets such as Trading VIX Derivatives and Trading Weekly Options.
/jlne.ws/2oGPyAl

Typhoon Jebi leaves a trail of death and destruction in Japan
Danny Lee and Shirley Zhao – South China Morning Post
At least seven dead and hundreds injured as strongest typhoon to hit Japan in 25 years wreaks havoc, causes transport chaos and shuts down Kansai Airport
/jlne.ws/2CiO9JJ

***SD: Some really frightening images coming out of this storm. Gordon is set to make landfall in the U.S. soon too.

Farmer sentiment rises, but opinions split over potential impact of aid package
CME Group
Agricultural producer sentiment increased modestly in August after dipping sharply in July according to the latest Purdue University/CME Group Ag Economy Barometer reading. The barometer, which is based on a monthly survey of 400 agricultural producers from across the country, had an August reading of 129, 12 points higher than July but still well below readings from May and June.
/jlne.ws/2oCexoa

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