OCC’s New COO and CEO; Robinhood’s Options Problems; Disappearing VXX

Dec 14, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

A Look at China’s Nascent Commodity Options
Spencer Doar – John Lothian News

It’s already a record year for U.S. listed options volumes and there are still two weeks of trading left to go. The OCC isn’t the only clearing house with volumes surging – China’s nascent options on futures products are doing well, too.

Over the past two years, three options on futures contracts have debuted as China’s exchanges continue to push their listed-derivatives frontiers.

Dalian Commodity Exchange (DCE) was first to the options on futures party with soybean meal options launching in spring 2017. Second into the fray in spring 2017 was the Zhengzhou Commodity Exchange (ZCE) with its white sugar options. The most recent options entrant was the the Shanghai Futures Exchange (SFE), which launched copper options in September.

To read the rest of this story, go here.

****SD: This is expanded commentary and context based on my note in yesterday’s JLN Options Newsletter – it also corrects yesterday’s erroneous mention of the “Shanghai Commodities Exchange.” The commodity exchange in Shanghai I was referring to was the Shanghai Futures Exchange.

+++++

Milestone!
Unless something very strange happens in the last few weeks of the year, there will be a five billionth option contract traded sometime this month. Trade Alert President Henry Schwartz forecasts (LinkedIn) total volume for 2018 to be 5.08 billion contracts. Trade Alert estimates lucky number five billion will be traded sometime on the 20th or 21st of December.

Lead Stories

OCC Promotes Davidson to Chief Executive Officer; Warren to Chief Operating Officer; Donohue to remain as Executive Chairman
OCC
OCC, the world’s largest equity derivatives clearing organization, today announced changes to its leadership structure. John Davidson, currently President and Chief Operating Officer, has been promoted to Chief Executive Officer. Scot Warren, currently Executive Vice President and Chief Administrative Officer, has been promoted to Executive Vice President and Chief Operating Officer. Craig Donohue, currently Executive Chairman and Chief Executive Officer, will remain at OCC as Executive Chairman. These changes will become effective upon receipt of regulatory approval of by-law and rule changes necessary to effectuate this structure.
/goo.gl/MeMALK

****SD: Congratulations to John Davidson and Scot Warren on the deserved new titles. Also, as the above release lays out, it was at the behest of the board that Craig Donohue assumed the CEO title in addition to that of chairman. It was only a matter of time before he took a step back after getting all the right people in place. Other sources: the WSJ; Pensions & Investments and Crain’s.

Robinhood’s options trading stopped working, and customers are furious over the money they say they lost
Dan DeFrancesco – Business Insider
Robinhood faced significant outages with its options trading services Wednesday. Some Robinhood customers attempting to access options trading Wednesday morning received a message stating “Account Deactivated” and were directed to the company’s support email address without given further explanation of the issue. Users turned to social media to voice their anger. “The majority of affected accounts have had their trading ability restored, and we’re working to restore access for the other subset,” a spokesperson said.
/goo.gl/Fuyq28

****SD: In other bad news for the company this week – Robinhood didn’t give key industry watchdog a heads-up about the launch of its free checking account. Also, you might recognize the byline – according to LinkedIn, DeFrancesco left Risk.net one month ago.

Your Favorite Way to Play Volatility Will Be Gone Next Month
Rachel Evans – Bloomberg
The largest trading vehicle tracking the VIX is disappearing at the end of January. Were you aware?
VXX, which sees an average $1.5 billion of activity every day, will mature on Jan. 30, 2019, in accordance with its rules. As an exchange-traded note — its full name is the iPath S&P 500 VIX Short-Term Futures ETN — VXX is a debt obligation with a fixed lifespan, unlike an exchange-traded fund, which is a portfolio of assets that behaves like an ordinary stock. Anyone who holds the ETN to maturity will receive a cash payout equal to its value.
/bloom.bg/2Gk5Ydt

****SD: Does this mean that right now there is some variance swap trader out there going, “Whaddya mean MY favorite way to play volatility?!?” Earlier in the week ZeroHedge had a big breakdown of VXX’s termination based upon a Goldman analyst’s note.

U.S. Stock Market Exodus Is Second-Biggest Ever, BofA Says
Ksenia Galouchko – BloombergQuint
Investors rushed out of U.S. equity funds in the second-biggest weekly exit on record, according to Bank of America Merrill Lynch, as the market sell-off pushed traders to seek safe havens.
U.S. stock funds bled $27.6 billion in the days through Dec. 12, which includes last Friday’s plunge in the S&P 500 Index that capped the worst week for the gauge since March, according to BofA’s note, which cited EPFR Global data. This is the second-biggest redemption since February’s spike in the VIX volatility measure, according to Jefferies Financial Group Inc.
/goo.gl/2BaJWV

Bank risk manager of the year: UBS – Bank heeds lessons of past structured products routs to navigate February volatility
Risk.net
Like other big structured products issuers, UBS had concerns about the state of the equity markets coming into 2018. An 18-month bull run in stocks had given rise to concerns over toppy valuations, and a house view that investors were being lulled by abnormally low volatility. Unlike other houses, UBS also had a clear view of where its exposures lay should the rally hit the skids – and a plan to respond when it did.
/goo.gl/b4jKn3

****SD: This gets into the technical angles of February’s nutty action – lots of gamma-related debriefing to cover. These Risk.net “award” recaps are great bios of a division’s/unit’s/desk’s key moments and takeaways from 2018 – the opposite of most puffy award recaps.

Surveillance: Long Term, Cash Is Trash, Sowerby Says (Podcast)
Bloomberg (AUDIO)
Kate Moore, BlackRock Investment Institute Chief Equity Strategist, discusses the implications of a slower growth rate next year. David Sowerby, Ancora Managing Director & Portfolio Manager, says in the long term, cash is trash. Dean Curnutt, Macro Risk Advisors CEO & Founder, talks the financialization of the VIX from an index to a trading instrument. Gabriela Santos, JPMorgan Asset Management Global Market Strategist, thinks consumer data do not support the general view of a recession in 2019 or 2020.
/bloom.bg/2Exnvxl

****SD: Curnutt’s VIX-related commentary starts around the 21:15 timestamp of the podcast.

Andy Hall Says Shale Confounds Forecasts of Global Oil Supplies
Javier Blas and Tina Davis – Bloomberg
Andy Hall, the oil trader nicknamed “God” for his lucrative calls on crude, says the U.S. shale boom has made it far harder to predict global supplies.
/bloom.bg/2RZu1jl

****SD: Well, he should know all about being confounded – Hall closed his hedge fund last year after losing nearly a third of his AUM due to wrong way positioning.

Exchanges and Clearing

Nasdaq “unlikely” to hit takeover threshold – Cinnober CEO
Pablo Mayo Cerqueiro – Global Investor Group (SUBSCRIPTION)
December 14 is the deadline for Cinnober’s shareholders to accept the offer from the US exchange group
/goo.gl/i1bnLZ

Regulation & Enforcement

Basel proposes crack down on banks inflating capital measure
Huw Jones – Reuters
Large banks should make more detailed calculations for their leverage ratio from January 2022 to avoid giving investors misleading impressions about their core health, global regulators proposed on Thursday.
/goo.gl/mHfU7o

Technology

Technancial and Options Announce TTC’S Janus Suite Availability Within Options’ Facilities
Options Technology
JANUS Risk Manager (JRM), will now be available in Options’ datacentres and accessible to institutional clients across its global platform. The Technancial Company (TTC) and Options entered into the agreement in order to facilitate cutting edge outsourced solutions, including JANUS, in all geographic regions.
Options’ partnership with TTC will make JANUS Risk Manager, JANUS Margin Engine, and JANUS Trade Surveillance readily available for clients seeking an overall reduction in operational costs by using a SaaS deployment model.
bit.ly/2EyK98m

****SD: Not to be confused with the general term “options technology” or the financial recruitment company “Options Group.”

Strategy

Goldman Sachs scoured 3,500 company updates and formulated a stock trading strategy that can help you crush the market in early 2019
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
Goldman Sachs finds that January has historically been filled with stock price-moving events, and recommends investors position accordingly.
The firm outlines a handful of option trading strategies that can help investors take advantage of heightened volatility in early 2019.
/goo.gl/j2vFjc

****SD: The strategy has to do with the fact that 26 percent of non-earnings corporate announcements come during January and “Goldman says three sectors — healthcare, consumer discretionary, and tech/media/telecom (TMT) — have accounted for a whopping 80% of total January preannouncements over time.” The strategists thus recommend buying straddles using weeklys to capture potential outsize moves (specifically weeklys so investors and traders can be more precise with their timing around January events like the GS Healthcare CEO Unscripted Conference on January 3, 2019).

U.S. Stocks Won’t Touch 2018 Highs Next Year, Cantor Says
Joanna Ossinger – BloombergQuint
Weakness in credit markets means the S&P 500 Index won’t revisit this year’s highs during 2019, Cantor Fitzgerald says.
The behavior of markets in the waning weeks of 2018 is leading to a much more bearish view for next year, Cantor’s Peter Cecchini wrote in a note Thursday, citing tighter monetary-policy conditions as a key reason. The European Central Bank’s announcement that it’s ending quantitative easing adds to his conviction in the call, and “despite the dovishness accompanying the move, we feel that this continues to erode support for risk assets.”
/goo.gl/jBju6i

****SD: Cantor’s Peter Cecchini’s call is buying Dec VIX puts.

Miscellaneous

Volatility is a ‘present danger’, warns Investec manager
Ellie Duncan – FT Adviser
The possibility for higher volatility is a “present danger” and one that investors need to think about in terms of their portfolios’ exposure, Jason Borbora, assistant portfolio manager of the Investec Diversified Income fund has warned.
Asked whether advisers’ clients should expect more market volatility in 2019, or whether volatility worries were overblown, Mr Borbora said: “The reality is I think volatility is here at the moment and people have to deal with that now, particularly if you look at downside risks, which we ultimately concentrate on more than the simple volatility number.”
bit.ly/2Gh3xs2

Data Check: Weak Numbers Abroad Press Market Despite Decent U.S. Retail Sales
J.J. Kinahan – The Ticker Tape
This time it’s not trade.
Instead, weak overseas data helped set the negative tone early Friday, with U.S. markets again coming under pressure in pre-market trading after numbers from China and Europe overnight looked less than ideal. A decent U.S. retail sales data number didn’t initially appear to be enough to offset the sluggishness abroad.
bit.ly/2S1g98i

Soy Spreads Reverse and Corn Catches a Bid as Trade War Thaws
Jen Skerritt and Shruti Singh – BloombergQuint
As China steps back into the U.S. crop markets, American prices for corn and soybeans are on the mend amid optimism over demand. At the same time, rival producers like Brazil and Canada may start to lose out if the U.S. and China are able to strike a long-term trade deal.
/goo.gl/GTmKVb

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Observations & Insight

A Look at China’s Nascent Commodity Options
Spencer Doar – John Lothian News

It’s already a record year for U.S. listed options volumes and there are still two weeks of trading left to go. The OCC isn’t the only clearing house with volumes surging – China’s nascent options on futures products are doing well, too.

Over the past two years, three options on futures contracts have debuted as China’s exchanges continue to push their listed-derivatives frontiers.

Dalian Commodity Exchange (DCE) was first to the options on futures party with soybean meal options launching in spring 2017. Second into the fray in spring 2017 was the Zhengzhou Commodity Exchange (ZCE) with its white sugar options. The most recent options entrant was the the Shanghai Futures Exchange (SFE), which launched copper options in September.

To read the rest of this story, go here.

****SD: This is expanded commentary and context based on my note in yesterday’s JLN Options Newsletter – it also corrects yesterday’s erroneous mention of the “Shanghai Commodities Exchange.” The commodity exchange in Shanghai I was referring to was the Shanghai Futures Exchange.

+++++

Milestone!
Unless something very strange happens in the last few weeks of the year, there will be a five billionth option contract traded sometime this month. Trade Alert President Henry Schwartz forecasts (LinkedIn) total volume for 2018 to be 5.08 billion contracts. Trade Alert estimates lucky number five billion will be traded sometime on the 20th or 21st of December.

Lead Stories

OCC Promotes Davidson to Chief Executive Officer; Warren to Chief Operating Officer; Donohue to remain as Executive Chairman
OCC
OCC, the world’s largest equity derivatives clearing organization, today announced changes to its leadership structure. John Davidson, currently President and Chief Operating Officer, has been promoted to Chief Executive Officer. Scot Warren, currently Executive Vice President and Chief Administrative Officer, has been promoted to Executive Vice President and Chief Operating Officer. Craig Donohue, currently Executive Chairman and Chief Executive Officer, will remain at OCC as Executive Chairman. These changes will become effective upon receipt of regulatory approval of by-law and rule changes necessary to effectuate this structure.
/goo.gl/MeMALK

****SD: Congratulations to John Davidson and Scot Warren on the deserved new titles. Also, as the above release lays out, it was at the behest of the board that Craig Donohue assumed the CEO title in addition to that of chairman. It was only a matter of time before he took a step back after getting all the right people in place. Other sources: the WSJ; Pensions & Investments and Crain’s.

Robinhood’s options trading stopped working, and customers are furious over the money they say they lost
Dan DeFrancesco – Business Insider
Robinhood faced significant outages with its options trading services Wednesday. Some Robinhood customers attempting to access options trading Wednesday morning received a message stating “Account Deactivated” and were directed to the company’s support email address without given further explanation of the issue. Users turned to social media to voice their anger. “The majority of affected accounts have had their trading ability restored, and we’re working to restore access for the other subset,” a spokesperson said.
/goo.gl/Fuyq28

****SD: In other bad news for the company this week – Robinhood didn’t give key industry watchdog a heads-up about the launch of its free checking account. Also, you might recognize the byline – according to LinkedIn, DeFrancesco left Risk.net one month ago.

Your Favorite Way to Play Volatility Will Be Gone Next Month
Rachel Evans – Bloomberg
The largest trading vehicle tracking the VIX is disappearing at the end of January. Were you aware?
VXX, which sees an average $1.5 billion of activity every day, will mature on Jan. 30, 2019, in accordance with its rules. As an exchange-traded note — its full name is the iPath S&P 500 VIX Short-Term Futures ETN — VXX is a debt obligation with a fixed lifespan, unlike an exchange-traded fund, which is a portfolio of assets that behaves like an ordinary stock. Anyone who holds the ETN to maturity will receive a cash payout equal to its value.
/bloom.bg/2Gk5Ydt

****SD: Does this mean that right now there is some variance swap trader out there going, “Whaddya mean MY favorite way to play volatility?!?” Earlier in the week ZeroHedge had a big breakdown of VXX’s termination based upon a Goldman analyst’s note.

U.S. Stock Market Exodus Is Second-Biggest Ever, BofA Says
Ksenia Galouchko – BloombergQuint
Investors rushed out of U.S. equity funds in the second-biggest weekly exit on record, according to Bank of America Merrill Lynch, as the market sell-off pushed traders to seek safe havens.
U.S. stock funds bled $27.6 billion in the days through Dec. 12, which includes last Friday’s plunge in the S&P 500 Index that capped the worst week for the gauge since March, according to BofA’s note, which cited EPFR Global data. This is the second-biggest redemption since February’s spike in the VIX volatility measure, according to Jefferies Financial Group Inc.
/goo.gl/2BaJWV

Bank risk manager of the year: UBS – Bank heeds lessons of past structured products routs to navigate February volatility
Risk.net
Like other big structured products issuers, UBS had concerns about the state of the equity markets coming into 2018. An 18-month bull run in stocks had given rise to concerns over toppy valuations, and a house view that investors were being lulled by abnormally low volatility. Unlike other houses, UBS also had a clear view of where its exposures lay should the rally hit the skids – and a plan to respond when it did.
/goo.gl/b4jKn3

****SD: This gets into the technical angles of February’s nutty action – lots of gamma-related debriefing to cover. These Risk.net “award” recaps are great bios of a division’s/unit’s/desk’s key moments and takeaways from 2018 – the opposite of most puffy award recaps.

Surveillance: Long Term, Cash Is Trash, Sowerby Says (Podcast)
Bloomberg (AUDIO)
Kate Moore, BlackRock Investment Institute Chief Equity Strategist, discusses the implications of a slower growth rate next year. David Sowerby, Ancora Managing Director & Portfolio Manager, says in the long term, cash is trash. Dean Curnutt, Macro Risk Advisors CEO & Founder, talks the financialization of the VIX from an index to a trading instrument. Gabriela Santos, JPMorgan Asset Management Global Market Strategist, thinks consumer data do not support the general view of a recession in 2019 or 2020.
/bloom.bg/2Exnvxl

****SD: Curnutt’s VIX-related commentary starts around the 21:15 timestamp of the podcast.

Andy Hall Says Shale Confounds Forecasts of Global Oil Supplies
Javier Blas and Tina Davis – Bloomberg
Andy Hall, the oil trader nicknamed “God” for his lucrative calls on crude, says the U.S. shale boom has made it far harder to predict global supplies.
/bloom.bg/2RZu1jl

****SD: Well, he should know all about being confounded – Hall closed his hedge fund last year after losing nearly a third of his AUM due to wrong way positioning.

Exchanges and Clearing

Nasdaq “unlikely” to hit takeover threshold – Cinnober CEO
Pablo Mayo Cerqueiro – Global Investor Group (SUBSCRIPTION)
December 14 is the deadline for Cinnober’s shareholders to accept the offer from the US exchange group
/goo.gl/i1bnLZ

Regulation & Enforcement

Basel proposes crack down on banks inflating capital measure
Huw Jones – Reuters
Large banks should make more detailed calculations for their leverage ratio from January 2022 to avoid giving investors misleading impressions about their core health, global regulators proposed on Thursday.
/goo.gl/mHfU7o

Technology

Technancial and Options Announce TTC’S Janus Suite Availability Within Options’ Facilities
Options Technology
JANUS Risk Manager (JRM), will now be available in Options’ datacentres and accessible to institutional clients across its global platform. The Technancial Company (TTC) and Options entered into the agreement in order to facilitate cutting edge outsourced solutions, including JANUS, in all geographic regions.
Options’ partnership with TTC will make JANUS Risk Manager, JANUS Margin Engine, and JANUS Trade Surveillance readily available for clients seeking an overall reduction in operational costs by using a SaaS deployment model.
bit.ly/2EyK98m

****SD: Not to be confused with the general term “options technology” or the financial recruitment company “Options Group.”

Strategy

Goldman Sachs scoured 3,500 company updates and formulated a stock trading strategy that can help you crush the market in early 2019
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
Goldman Sachs finds that January has historically been filled with stock price-moving events, and recommends investors position accordingly.
The firm outlines a handful of option trading strategies that can help investors take advantage of heightened volatility in early 2019.
/goo.gl/j2vFjc

****SD: The strategy has to do with the fact that 26 percent of non-earnings corporate announcements come during January and “Goldman says three sectors — healthcare, consumer discretionary, and tech/media/telecom (TMT) — have accounted for a whopping 80% of total January preannouncements over time.” The strategists thus recommend buying straddles using weeklys to capture potential outsize moves (specifically weeklys so investors and traders can be more precise with their timing around January events like the GS Healthcare CEO Unscripted Conference on January 3, 2019).

U.S. Stocks Won’t Touch 2018 Highs Next Year, Cantor Says
Joanna Ossinger – BloombergQuint
Weakness in credit markets means the S&P 500 Index won’t revisit this year’s highs during 2019, Cantor Fitzgerald says.
The behavior of markets in the waning weeks of 2018 is leading to a much more bearish view for next year, Cantor’s Peter Cecchini wrote in a note Thursday, citing tighter monetary-policy conditions as a key reason. The European Central Bank’s announcement that it’s ending quantitative easing adds to his conviction in the call, and “despite the dovishness accompanying the move, we feel that this continues to erode support for risk assets.”
/goo.gl/jBju6i

****SD: Cantor’s Peter Cecchini’s call is buying Dec VIX puts.

Miscellaneous

Volatility is a ‘present danger’, warns Investec manager
Ellie Duncan – FT Adviser
The possibility for higher volatility is a “present danger” and one that investors need to think about in terms of their portfolios’ exposure, Jason Borbora, assistant portfolio manager of the Investec Diversified Income fund has warned.
Asked whether advisers’ clients should expect more market volatility in 2019, or whether volatility worries were overblown, Mr Borbora said: “The reality is I think volatility is here at the moment and people have to deal with that now, particularly if you look at downside risks, which we ultimately concentrate on more than the simple volatility number.”
bit.ly/2Gh3xs2

Data Check: Weak Numbers Abroad Press Market Despite Decent U.S. Retail Sales
J.J. Kinahan – The Ticker Tape
This time it’s not trade.
Instead, weak overseas data helped set the negative tone early Friday, with U.S. markets again coming under pressure in pre-market trading after numbers from China and Europe overnight looked less than ideal. A decent U.S. retail sales data number didn’t initially appear to be enough to offset the sluggishness abroad.
bit.ly/2S1g98i

Soy Spreads Reverse and Corn Catches a Bid as Trade War Thaws
Jen Skerritt and Shruti Singh – BloombergQuint
As China steps back into the U.S. crop markets, American prices for corn and soybeans are on the mend amid optimism over demand. At the same time, rival producers like Brazil and Canada may start to lose out if the U.S. and China are able to strike a long-term trade deal.
/goo.gl/GTmKVb

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