Observations & Insight
Chinese Day Traders Manipulating US Markets
Jim Kharouf – JLN
Chinese-based day traders are taking increasingly sophisticated steps to manipulate stocks traded on US markets, according to a surveillance firm executive.
Research and analysis conducted by Eventus Systems, a compliance, surveillance, and risk management firm, has detected regular instances of manipulation by Chinese-based traders trading predominantly Chinese companies listed on US stock exchanges.
Travis Schwab, co-founder and CEO of Eventus Systems, said traders use a complex scheme involving multiple brokers to execute buys and sells of various stocks on multiple exchanges to avoid detection. Eventus is developing a tool called Relationship Finder, to filter and decipher trading patterns and activities, using a diverse set of data.
“We see manipulation every day, spoofing and layering activities,” said Schwab, in an interview at the FIA Boca conference. “But with the cross-firm, cross technology platform, cross market, we’ve seen up to 12 different parties involved in market manipulation schemes. That’s 12 different accounts doing the manipulation.”
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Boca Bits: FIA Boca Day One
Chuck Mackie – Medium
Over 1,100 market professionals and regulators descended on southern Florida for the first of three days as the 44th annual FIA Boca conference kicked off on Tuesday. The day followed the typical FIA script with a series of individual presentations from derivatives exchanges followed by an introduction from FIA CEO Walt Lukken and a final panel on the health of the industry. Of note, the lineup of exchange presentations consisted of three usual suspects and one intriguing rookie, while the name change for the afternoon panel implied a trace of negativity. In other words, with no big announcements or fireworks to speak of, it wound up being necessary to note the little things in order to derive some takeaways from the goings on. In any case, the first day was a little light on revelations, just as the first day of FIA Boca generally is.
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Oil Options Trading Jumps as Large Producer Is Said to Hedge
Catherine Ngai, Sabrina Valle and Alex Longley – Bloomberg (SUBSCRIPTION)
Global oil options markets this week were the busiest since November after a flurry of buying from what appeared to be a large producer protecting against a drop in prices.
Trading on Monday was dominated by $60 puts — which give the owner the right to sell oil contracts for the rest of 2019, with a total of 16 million barrels changing hands in June, August and September, ICE Futures Europe exchange data show. More than 8 million barrels of similar contracts traded in the over-the-counter market, said people familiar with the matter.
Japan Top Life Insurer Taps Derivatives to Fight Low Yields
Chikako Mogi and Komaki Ito – Bloomberg (SUBSCRIPTION)
In a world of falling bond yields and rising hedging costs, Japan’s leading life insurer is increasingly turning to derivatives in a bid to bolster returns.
Nippon Life Insurance Co. has expanded its use of currency swaps, dollar-yen options, equity and interest rate derivatives in particular since October to boost income and offset the impact of hedging costs, said Toshinori Kurisu, deputy general manager at the firm’s finance and investment planning department.
Hedge Fund Warns Markets Too Complacent of Hard Brexit Risk
Ruth Carson and Chikafumi Hodo – Bloomberg (SUBSCRIPTION)
Investors continue to underestimate the risk of a hard Brexit that could push the pound even lower, according to an artificial intelligence-driven hedge fund run by two former JPMorgan Chase & Co. derivatives traders.
“I think a no deal Brexit is more likely — but not my base case — than is priced into the market,” said Damien Loh, Singapore-based chief investment officer at Ensemble Capital Pte Ltd. “The base case for me is the pound gets weaker before it gets stronger.”
The Death of Bond Volatility
Euro-area industrial production numbers will provide clues as to how the region is faring after a dire end to 2018. Prior weak readings have kept European bond yields perpetually depressed. Now, fears of so-called “Japanification” are gripping investors.
China Data Dump to Show Investment Recovery Continuing in 2019
China’s first batch of major official indicators this year are forecast to show that an investment recovery that began in mid-2018 is set to continue, but the economic slowdown and trade war are still undermining factory output and consumption.
Sterling turnover surges in big week for British politics
Saikat Chatterjee – Reuters
Trading volumes in sterling futures and options markets surged on Tuesday after Prime Minister Theresa May suffered a heavy defeat in a vote on her Brexit withdrawal agreement, CME said on Wednesday.
In an exceptionally volatile day for the British currency, pound futures and options turnover on the CME – one of the world’s biggest exchanges – surged to more than 375,000 contracts, the largest day in 2019 and the fifth biggest since the Brexit referendum vote in June 2016.
Exchanges and Clearing
Cboe’s CEO says regulators need to scrutinize dark pools
Dan DeFrancesco – Business Insider
The Securities and Exchange Commission has increasingly shown an interest in how stock exchanges operate recently, but Cboe Global Market’s CEO Edward Tilly thinks it’s time to spread the scrutiny.
Cboe, Nasdaq and NYSE have all nabbed the regulator’s attention in recent months for their market data and exchange fees. Tilly thinks a growing segment of the market structure deserve the SEC’s time, too.
Cboe sees benefit in use of cloud for data storage
Dan DeFrancesco – Business Insider
Exchanges, like banks and hedge funds, are among those on Wall Street starting to see the benefit of moving part of their operations to the public cloud. But venues migrating their entire infrastructure to the technology still seems like a pipe dream to some.
Edward Tilly, Cboe Global Markets CEO, told Business Insider in an interview that while he sees the benefit of moving his exchange group’s data into the cloud, shifting other parts of the trading venue off premise could be a tough sell.
Eurex to launch suite of derivatives using MSCI Dividend Point Indexes
Eurex, one of the largest derivatives exchanges, has selected MSCI Inc. (NYSE: MSCI), a leading provider of indexes, critical decision support tools and services, to provide the indexes for a new range of dividend futures contracts.
Based on three new MSCI Dividend Point Indexes – the MSCI EM Dividend Point Index, the MSCI EAFE Dividend Point Index and the MSCI World Dividend Point Index – , Eurex will launch derivatives that enable market participants to hedge their dividend exposure around the globe. As a first step, Eurex will introduce futures contracts in the second quarter of 2019.
JPMorgan promotes Rachid Alaoui to head of global volatility
Helen Reid – Reuters
U.S. bank JPMorgan Chase & Co has promoted Rachid Alaoui to head of global volatility, the bank’s head of global equities Jason Sippel said in a memo to staff on Tuesday reviewed by Reuters.
Should stock-market investors watch out for a volatility pickup?
William Watts – MarketWatch
A strong stock-market bounce from the Christmas Eve lows was accompanied by a fall in volatility. One analyst says investors would be well served to look at buying protection against a return to choppier waters.
While implied volatility, as measured by the Cboe Volatility Index VIX, -1.96% picked up last week as major stock indexes suffered a five-day losing streak, the trend has been solidly lower. The gauge, which uses options to measure expected volatility in the S&P 500 SPX, +0.92% over the coming 30-day period, remained below 14 Wednesday after having closed Dec. 24 at 30.11. The long-term average for the index stands near 19.
Why March’s ‘quadruple witching’ puts stock markets in danger of a late-month swoon
Chris Matthews – MarketWatch
Stock market investors are looking forward to a “quadruple witching” Friday, as contracts for stock-index futures, stock-index options, individual stock options and individual stock futures all expire.
According to Charlie McElligott, managing director for cross-asset macro strategy at Nomura, the impending expiration of these options and futures contracts have been a boon for stocks in recent days, but he also warns upward momentum this week could turn into weeks of poor performance as March comes to a close.
UBS to SocGen Strategists See Global Markets at Crossroads
Joanna Ossinger – BloombergQuint
Strategists are telling investors to prepare for both the best and the worst outcomes as risk assets around the world reach a crossroads.
Global markets are facing a number of positive catalysts in 2019. The Federal Reserve’s in a wait-and-see mode, and the European Central Bank has begun upping its stimulus. Economies around the world are growing and the U.S. is looking relatively healthy. China is using both monetary and fiscal policy to spur its economy.
The last time the Dow underperformed the S&P 500 by this great a margin was 2009
Mark DeCambre – MarketWatch
The stock market is enjoying a solid week so far, but investors might not know it by gauging the performance of the Dow Jones Industrial Average, which by a few measures is registering its widest divergence with its U.S. peers over a two-day stretch in years.
The ‘Calm Premium’
Russ Koesterich – Seeking Alpha
While the equity rally seems to have at least temporarily stalled, stocks remain near three-month highs. The rebound in equity prices has been driven by a sharp and relentless bout of multiple expansion. In other words, investors are willing to pay more for each dollar of earnings. In the 45 days between the market’s low on Christmas Eve and March 1st, the S&P 500’s price-to-earnings ratio (P/E) expanded by just under 20%.
U.S. Exceptionalism Begins to Wane in Markets
Robert Burgess – Bloomberg (SUBSCRIPTION)
Equity markets in the U.S. soundly outperformed the rest of the world last year, and that trend carried over into 2019. But lately, they’ve ceded ground. If it continues, the implications may be significant.
Barclays Got Amber Alert After Failing to Predict Trading Losses
Harry Wilson and Stefania Spezzati – Bloomberg (SUBSCRIPTION)
As an activist investor targets Barclays Plc for taking on too much risk, the London-based lender has disclosed how its internal models failed to predict a series of trading losses at its investment bank.
Monetary ‘glue’ bonds China and the US
Dr. Elliot Hentov – Financial Times (SUBSCRIPTION)
Gideon Rachman warns that US-China tensions could escalate beyond trade and split the world into two geopolitical blocs, akin to a technological-economic cold war 2.0 (“The return of a two-bloc world”, March 12). This view ignores a fundamental glue, namely the monetary interdependence of the US and China.
Why the News About Europe’s Banks Is Never, Ever Good: QuickTake
Yalman Onaran and Donal Griffin – Bloomberg (SUBSCRIPTION)
The news about Europe’s banks never seems to be any good. Long before the latest scandals over money laundering, the continent’s biggest lenders have been caroming from crisis to crisis, with a revolving-door roster of chief executives and seemingly endless resets of strategy. The flailing is particularly dramatic when compared with American rivals: The top five U.S. banks raked in almost $100 billion in profit in 2018. The top five European banks? About a third of that amount.