Thursday’s ‘flash crash’; Vol specialists face year reckoning; tastytrade invests in exchange

Jan 3, 2019

Observations & Insight

December 2018 Options Exchange Marketshare via OCC
(Click for larger image)

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Thursday miscellany: That didn’t take long
Spencer Doar – JLN

We’re only three days into the New Year and there has already been a flash crash. It took a mere seven minutes for a number of currency pairs to go haywire last night – namely USD/JPY and AUD/JPY, which moved four percent and eight percent, respectively. It was a liquidity event.

A new Congress was sworn in today – we’re still in the midst of the 21st government shutdown since 1976.

An additional wrinkle, as reported by the WSJ, is that a prolonged shutdown will likely delay any tax refunds.

The S&P 500 moved more than one percent on 64 days this year. The fourth quarter had 28 of those days, per DataTrek Research.

Lead Stories

What drove Thursday’s ‘flash crash’?
Colby Smith – FT Alphaville
Those sleepy Asian investors who are still on holiday must have woke up to quite a shock on Thursday. In just seven minutes, the Japanese yen soared 8 per cent against the Australian dollar, a favourite proxy of the Chinese economy. Versus the Turkish lira, it surged a whopping 10 per cent. The yen also swung against the US dollar, strengthening nearly 4 per cent.
/goo.gl/Pu7b9A

****SD: Matt Levine of Bloomberg has an extended take on flash crashes in his column today. For a more straightforward reported version, see CNBC’s ‘Flash crash’ hits the currency markets as financial volatility intensifies or Bloomberg’s ‘Flash-Crash’ Moves Hit Currency Markets.

Volatility specialists face year of rewards and reckoning; Some funds say markets are not prepared for unwinding of the ‘low vol’ regime
Robin Wigglesworth – Financial Times (SUBSCRIPTION)
Volatility returned with a bang last year, wrongfooting many investors but leaving traders that specialise in surfing the undulations of financial markets eagerly awaiting a new era of turbulence in 2019. January started with a market melt-up that unravelled in dramatic fashion, when ” short-volatility” bets that everything would remain calm came unstuck in spectacular fashion. Two popular short-volatility funds were shredded, exacerbating the stock market turmoil and shaking investors from their torpor.
/goo.gl/LoH8vV

Tastytrade, Peak6 invest $10 million in new exchange
Lynne Marek – Crain’s Chicago Business
Tastytrade and Peak6 are investing $10 million in a new Chicago enterprise called the Small Exchange, which aspires to be a futures and foreign exchange trading platform for retail traders.
/jlne.ws/2COP42T

****SD: The Small Exchange will be, according to Sosnoff, “designed specifically for self-directed individual investors.” The tastytrade video where Sosnoff describes the new venture can be found here. The description of the exchange effort really starts around the eight minute mark. The endeavor is pending regulatory approval, is an entirely separate company run by futures veteran Donnie Roberts, and “seats” for the exchange are going to be sold as a subscription for $100.

Goodbye VXX, Hello VXXB
Six Figure Investing
January 30th, 2019 VXX will be delisted and will no longer trade. It’s highly unusual, if not unprecedented for a product normally in the daily volume top 10 lists to go away. This post will discuss why VXX is disappearing, how Barclays, VXX’s issuer, is handling the transition, and the impacts on shareholders, options traders, and short sellers.
/jlne.ws/2CNLs16

After Japan’s $938 Billion of Losses, Hedging Costs Hit Highs
Cecile Vannucci – Bloomberg (SUBSCRIPTION)
For Japanese investors, skepticism remains high after a year that has seen $938 billion of stock values vanish.
The cost of hedging against declines in the Nikkei 225 Stock Average is near its highest level since February 2016, according to three-month options data. The gauge’s 10 percent slide in December worsened its first annual slump since 2011.
/jlne.ws/2CMskRd

Oil dips in volatile trade; Saudi output cuts limit losses
Stephanie Kelly – Reuters
Oil prices edged lower in choppy trade on Thursday, pressured by concerns about slowing global economic growth that could dent demand for crude but drawing support from signs of output cuts by Saudi Arabia.
/jlne.ws/2CNTvLa

Market volatility has the Fed facing a dilemma of its own making
Joseph LaVorgna – TheHill
The economy has become heavily dependent on financial asset prices. Thus, the recent volatility in the stock and bond markets bear close watching.
These price swings are likely to persist, especially if the Federal Reserve makes a policy mistake. This probability is rising, as Fed members are effectively trying to engineer a soft landing, i.e., a cyclical downturn that avoids a recession, in both the financial markets and the real economy. This is something that has never happened before.
/jlne.ws/2COQxWX

Exchanges and Clearing

CME Group Reached Record Average Daily Volume of 19.2 Million Contracts in 2018, up 18 Percent from 2017
PRNewswire
Record 2018 Interest Rate average daily volume of 9.95 million contracts, up 22 percent compared with 2017
Record annual average daily volume records in Agricultural Commodities, FX, Metals, total options and electronic options
/goo.gl/3PFx5C

OCC Continues to Fulfill its Role as a SIFMU
John Davidson, OCC President and Chief Operating Officer – OCC Blog
Throughout 2018, OCC operated in a robust and resilient manner, clearing over 20 million contracts a day for our highest ever annual cleared volume, while providing the U.S. equity options and futures markets with unparalleled financial integrity.
/goo.gl/koJGGd

Deutsche Boerse’s straight-talking boss; CEO Theodor Weimer has improved Deutsche Boerse’s relations with politicians and investors, but can he make the acquisitions that will take the company into the big league?
Andreas Kroner – Handelsblatt
Theodor Weimer is no diplomat. Since becoming Deutsche Boerse CEO a year ago, the 59-year-old manager has become known for spontaneous straight talk and caustic turns of phrase. For some in the company, owner of the Frankfurt Stock Exchange and other European markets, he is a breath of fresh air. Others have felt bruised and confused.
/jlne.ws/2LLWsz3

Satisfying development in December: Eurex Exchange up 23 percent
Eurex Exchange
December has been a successful month for Eurex, Europe’s largest derivatives exchange and part of Deutsche Börse Group. The number of traded contracts reached 174.6 million traded contracts compared to 142.4 million in 2017. This is an increase of 23 percent in total.
/jlne.ws/2CM7lxI

ROFEX and MATba to Merge into a Single Futures Exchange
Celeste Skinner – Finance Magnates
The Rosario Futures Exchange (ROFEX) and the Mercado a Termino de Buenos Aires (MATba) have received approval from shareholders to merge in a single futures exchange in the Argentine Republic.
With the necessary approval secured, the two exchanges can now complete the merging process, which started two years ago. According to the statement, the two exchanges are expected to be completely merged by May of 2019.
/jlne.ws/2CMmYFn

Moves

Marex chairman Simon Heale departs
Louisa Chender
Marex Spectron chairman Simon Heale has left the firm after three years in the role
/goo.gl/XAEnu6

****SD: Recall that Marex announced it would acquire RCG in December.

Regulation & Enforcement

Prosecutor drops insider trading case against former Deutsche Boerse CEO
Reuters
The Frankfurt prosecutor’s office has dropped an insider trading case against former Deutsche Boerse (DB1Gn.DE) Chief Executive Carsten Kengeter in exchange for payments of almost 5 million euros ($5.68 million).
/goo.gl/mrY7Uo

Miscellaneous

‘ETFs as Asset Class’ Is Among the Top 2019 Trends in Markets
Sarah Ponczek and Vildana Hajric – Bloomberg
Funds are a key ‘tool for institutional portfolios’: Greenwich; Investors should treat ETFs differently from individual stocks Wall Street’s going to have to adjust its business to account for a not-so-new but fast growing asset class: exchange-traded funds.
/jlne.ws/2CMz817

Interactive Brokers Volumes Rise in December 2018
Aziz Abdel-Wader – Finance Magnates
Electronic brokerage firm Interactive Brokers LLC (NASDAQ:IBKR) said its trading volumes rose in December from a month earlier, an indication that investor confidence in the financial market is rebounding after having been fairly mixed in the third quarter.
/jlne.ws/2CMGjXb

The reasons for last year’s stock-market gyrations are alive and well
Ivan Martchev – MarketWatch
Last January started with an unsustainable surge that was driven by $103 billion of record inflows into U.S. stocks.
Sure enough, a month later there was a sharp drop, driven by the record air pocket created by those same record inflows that caused January to be a big “up” month. The reason why such air pockets exist in February is because the guidelines for major asset managers are to put new money to work almost immediately. That new money comes from pension funds and other institutional investors which, for various reasons, tends to come in January, creating positive seasonality.
/jlne.ws/2CMmmQ5

Market Volatility Puts Spotlight on Safe Haven Assets – Bloomberg
Bloomberg (VIDEO)
In “Futures in Focus,” Bill Baruch, president at Blue Line Futures, discusses the focus on safe havens in the current market selloff. He speaks with Bloomberg’s Vonnie Quinn on “Bloomberg Markets.”
/jlne.ws/2CMq501

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