Vol spike prompts risk modeling reforms at OCC; Central Banks Kill Volatility – Wall St. Fears a Trap

Mar 20, 2019

Observations & Insight

Saving Big Money: How a small fintech firm figured out how to save banks billions with DLT
Jim Kharouf, JLN
There’s a lot of chatter these days about the viability, perhaps even the legitimacy, of distributed ledger systems for the financial markets. Lost in the “blockchain is dead” noise are some interesting cases that show just how DLT technologies can be used effectively in key pain points in the market.
“This has been a true hype cycle,” said Arjun Jayaram, CEO and founder of Baton Systems.


The Spread – There Goes the Sun – 3/18

Last year we filmed our FIA Boca edition of “The Spread” in a pool. However, we were at a different Airbnb this time, so you are not in for a repeat treat.

Watch the video and see the stories referenced here »

****SD: In case you missed it yesterday.

Lead Stories

Volatility spike prompts reforms at equity-options clearing house
Philip Stafford – Financial Times (SUBSCRIPTION)
The clearing house charged with overseeing the trading of options based on the Vix volatility index expects to finalise new risk models over the summer, after a sharp spike in the benchmark last year exposed flaws in their calculation.
The Options Clearing Corporation has been reviewing its methods amid criticism from users who claimed America’s largest equity options clearing house was asking for far more margin, or collateral to back trades, than was necessary.

****SD: An art and a science.

Central Banks Kill Volatility. Now Wall Street Fears a Trap
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Cross-asset price swings vanish as Goldilocks-lite takes hold; Fewer rewards for shorting vol while macro calm bedevils longs
Wall Street’s volatility complex is roaring back to life as dovish central banks beat recession fears into submission, spurring the fastest return to market calm since 2012. How long the serenity can last is the vexed question. For now, hedge funds are amassing short wagers on equity price swings, while the Cboe Volatility Index sits close to a five-month low. Thanks to lowflation, interest-rate moves in the U.S. have fallen to a record as tranquility takes hold of global currencies.

***SD: Admiral Ackbar approves.

New Brexit Cliff Edge Is Met With a Meh in Markets
Vassilis Karamanis – Bloomberg (SUBSCRIPTION)
If there is any stress surrounding the U.K.’s imminent exit from the European Union, you couldn’t tell by looking at how investors are trading the pound. Even with less than 10 days to go before the departure, sterling is still the best-performing major currency this year. While reports suggest that Prime Minister Theresa May won’t seek a long delay to leave the EU, option traders are unruffled, with a gauge of expected swings in the pound around the end of June — seen as a new potential cliff edge — holding near the lowest in six months.

****SD: Also from Bloomberg – Pound Traders Expecting a Brexit Delay Are Betting Big on a Rally.

FX market volatility at its lowest level since 2014
Peter Wells – Financial Times (SUBSCRIPTION)
If you thought the equity market looked calm at the moment, it can’t hold a candle to foreign exchange, where levels of volatility are hovering around their lowest levels since 2014.

Exchanges and Clearing

CME Group Announces Record COMEX Copper Options Open Interest
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced COMEX Copper options open interest reached a record 62,220 contracts on March 18, surpassing the previous record of 56,674 contracts set on February 22.

****SD: This on the back of yesterday’s Bloomberg story Biggest Trading in Copper Options Ever Signals Supply Troubles.

Galaxy Capital-Backed Caspian to Offer Crypto Derivatives Trading
Yogita Khatri – Coindesk
Galaxy Capital-backed institutional trading and portfolio management platform Caspian is launching trading in cryptocurrency derivatives. Caspian announced Wednesday that it has integrated its platform with the Deribit exchange to offer futures and options (F&O) trading in crypto assets.

Regulation & Enforcement

UAE’s Securities And Commodities Authority And Nasdaq Dubai Collaborate To Raise Awareness Of Derivatives Trading Among Investors
-Inaugural seminar focused on benefits of futures and how to include them in trading strategies Initiative comes amid increasing demand for new tradeable derivatives products
-The Securities and Commodities Authority (SCA) and Nasdaq Dubai have begun a joint awareness campaign on trading derivatives aimed at individual investors.


Old-school traders still ‘kicking and screaming’ over new technologies: Man Group CIO
Beecher Tuttle – efinancialcareers
Man Group Chief Investment Officer Sandy Rattray says there’s still a general feeling of “exceptionalism” among some old-school discretionary traders who refuse to implement machine learning technologies into their business, particularly when it comes to trade execution. Yet he still called artificial intelligence the most overhyped theme of 2018.

****SD: I thought us millennials were the fickle ones?

Cloud Native vs. Cloud Hosted: The Differences Are Big … And They Matter
Fabien Couderc, Axioma – Tabb Forum
Being in the cloud is fast becoming de rigueur for investment managers. But dig a little deeper, and you often find that firms have simply switched to a cloud-hosted infrastructure, rather than a thoroughly modern cloud-native environment. Axioma’s Fabien Couderc explains why the advantages of cloud native far exceed those of cloud hosted.


Busting the “Free Weekend Theta” Myth
Sage Anderson – tastytrade blog
One of the smarter and more successful traders I ever came across is a huge proponent of short premium when trading options. He’s got a natural gift when it comes to numbers, and for him the probabilities associated with short premium (and theta decay) simply can’t be ignored. I can recall the few times he left the office on Friday with a net long (paying) theta position in his overall portfolio. On those rare occasions, you might think he was getting his wisdom teeth pulled over the weekend, or attending some extremely unpleasant event – it was that painful for him. This particular trader loved the “free weekend theta” concept, as he viewed Saturday and Sunday (when the options market is closed) as “free money” in terms of theta collection.


INTL FCStone Acquires the Futures and Options Brokerage and Clearing Business of UOB Bullion and Futures Limited in Singapore
INTL FCStone Inc. today announced that its Singaporean subsidiary INTL FCStone Pte Ltd (“IFP”) has executed an asset purchase agreement to acquire the futures and options brokerage and clearing business of UOB Bullion and Futures Limited, a subsidiary of United Overseas Bank Limited. Closing is conditional upon receiving regulatory approval by the Monetary Authority of Singapore.

India’s Rupee Just Went From Asia’s Worst to Best Currency
Kartik Goyal – Bloomberg (SUBSCRIPTION)
Overseas inflows in stocks, bonds near $5 billion in March; Rupee may advance to 67 per dollar by June-end – Scotiabank
Asia’s worst-performing currency took five weeks to become its best. The turnaround has been fueled by the improved chances of Prime Minister Narendra Modi winning a second term amid recent tensions between India and Pakistan. The optimism has led to local shares and debt luring robust flows, which have turned the carry-trade returns on the rupee to the highest in the world in the past month.

John Lothian Newsletter

So you want to know what’s happening in the financial markets?

We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Newsletters

Vol spike prompts risk modeling reforms at OCC; Central Banks Kill Volatility – Wall St. Fears a Trap

Mar 20, 2019

Observations & Insight

Wednesday’s Miscellany

JLN Staff

MLex has a (paywalled) story titled CFTC’s Giancarlo cites threat from China futures markets in bid for more money. Obviously it is a futures story, but I see it as indicative of the overall “threat” posed by the ongoing development of Chinese derivatives markets.

Check out this Bloomberg/Saxo Bank chart of yuan denominated oil futures trading and you’ll see why Giancarlo said what he did. (Besides, the usual rhetoric about needing money to protect investors hasn’t worked for the CFTC’s budget so maybe some fear-mongering will.) Also see this Reuters story from May – China’s crude oil futures boom amid looming Iran sanctions. ~SD

The newest CFTC Talks podcast is out. It’s a shorter, “FlashCast” episode focused on a single subject and features John Coughlan of the CFTC’s Market Intelligence Branch.

FIA updated its FCM tracker tool. Check it out here.

According to CLS data, currency trading volumes rose 2.6 percent in July on last year, although July volumes were 13.7 percent lower than the previous month of June. CLS said the average daily traded volume of currencies submitted to it reached $1.638 trillion in July, up from $1.596 trillion in the same month in 2017, Reuters reported.~SR


Lead Stories

Traders Pile Into Bets That Stock Rally Will Continue; Tax cuts and a robust U.S. economy boosted corporate profits in the three months through June

Gunjan Banerji – WSJ (SUBSCRIPTION)

With U.S. stock benchmarks mere points away from fresh records, some traders are piling into bets that share prices will rally higher and volatility will remain muted. The S&P 500 and the technology-heavy Nasdaq Composite hit their second-highest close in history on Tuesday. Options investors and traders are wagering the gains will continue. They have been scooping up bullish call options on the S&P 500, contracts that would pay out if the stock index took another leg higher, according to Credit Suisse . Call options give the right to buy shares at a later time if they hit a designated price.


****SD: Initially heralded as a year that would be “different,” 2018 seems more and more like 2017, with long equity, short vol being the strategy du jour (tous les jours).

Tesla options bulls reap windfall on Musk’s going private tweet

Saqib Iqbal Ahmed – Reuters

Tesla Inc’s options activity surged on Tuesday after Chief Executive Elon Musk tweeted he was considering taking the company private and some quickly executed trades netted massive paper profits as shares in the electric car maker rallied as much as 9 percent.


****SD: The role Elon Musk’s twitter feed plays continues to strike me as remarkable. I don’t believe Donald Trump’s tweets – price action-related as they occasionally are – have ever caused a trading halt in a listed name/ETP. At the time of the breaking news, IHS Markit analyst Sam Pierson commented: “[Tesla’s] short interest equates to 20.7% of outstanding shares, down from a YTD peak of 23% observed in June. The short value is higher than any S&P 500 stock, only Under Armor has a higher percentage of outstanding shares short with 24%.”

Volatility slump stokes flames for post-summer blow up

Jamie McGeever – Reuters

Financial market volatility is slumping across the board to historically – or, dangerously – low levels, potentially fanning the flames for a repeat of February’s “volmageddon” explosion that sparked a 10-per-cent correction in U.S. and world stocks.


New Chinese forex crackdown to hit corporate hedging; Despite new reserve requirement, dealers say ‘maturity’ in risk management is here to stay

Blake Evans-Pritchard – Risk.net (SUBSCRIPTION)

Dealers fear a move by the Chinese authorities to reinstate a deposit requirement on foreign currency derivatives could slow a recent pick-up in hedging from local corporates, despite warnings from regulators that firms need to do more to brace for future market volatility.


Sterling/dollar risk reversals at 17-month low, signal more weakness


Nine-month and one-year sterling/dollar risk-reversals fell on Wednesday to the lowest since early-March 2017, as investors rushed to protect themselves from further weakness in the British currency.


Exchanges and Clearing

NSE says working on a structure to address SGX issue


New Delhi: Locked in arbitration proceedings with SGX, the National Stock Exchange on Wednesday said it is working on a “structure” to address the issues and more clarity is likely to emerge in the next two-three weeks.


SGX reports market statistics for July 2018


…Total Derivatives volume was 16.9 million, down 5% month-on-month (m-o-m) and up 19% year-on-year (y-o-y).


Presentation By HKEX Chief Executive Charles Li And Group Chief Financial Officer John Killian On 2018 Interim Results Announcement


…Strong growth in trading volumes: Cash Market headline ADT +67% YoY, Futures and Options ADV +58% YoY, LME chargeable ADV +11% YoY


Dalian Commodity Exchange Holds Training For Corn Options Instructors


To strengthen the corn options training on member units, promote teaching staff construction and guarantee the steady listing and operation of corn options, Dalian Commodity Exchange (DCE) held the training on corn options instructions lately. A total of 100 trainees from 100 units attended the training, including futures companies, risk management subsidiaries of futures companies, spot companies and other financial institutions.



Tradeweb On Track For Record Year Of Trading Activity


…Credit and Equities Derivatives Volumes Climb: Global equity derivatives ADV is up 351.55% and global credit derivatives volume is also up 80.16% year-over-year on the Tradeweb platform.


Redline Trading Solutions Breaks 180 Nanosecond Tick-to-Trade Barrier

Redline Trading Solutions

Redline Trading Solutions, the premier provider of high-performance market data and order execution solutions, today announced the production deployment of its hybrid software and FPGA-based market data and order execution gateway solution.


The art of designing markets. Part III

Eurex Exchange

This is the third article in a series of topics related to the market design of electronic marketplaces. The first article discussed the most common execution models in electronic derivatives markets, while the second covered the various components of an order-generating process that define its arrival time. It thus gave an overview of the three steps market participants need to generate and submit an order to an exchange whereby connectivity drives the third step. We explained that for all participants timing matters but that ‘timing’ means different things to different market participants. Today, we are looking at the electronic connectivity of market participants who are not members of an exchange (i.e. indirect participants), typically institutional investors, but also retail investors.



Morgan Stanley sees two ‘broken legs’ for stocks, heralding ‘significant market correction’

Ryan Vlastelica – MarketWatch

For years, one of the primary factors lifting the U.S. stock market has been the fact that some of the economy’s biggest, fastest-growing names just kept rising.

The strength of growth stocks, in particular some large technology and internet plays, has been a boon for momentum investors, who bet that recent outperformers will continue to do better than the overall market over the medium term. This trade has been one of the easiest ways for investors to make money, but analysts are increasingly concerned that its era may be drawing to a close.


A big shift to the S&P 500 may change the way you invest in tech

Stephanie Landsman – CNBC

The S&P 500 is about to undergo a major structural change that may alter which technology stocks you own.

Facebook and Google’s parent Alphabet will move out of the index’s technology sector and to a newly formed communication services sector in about six weeks. The goal is to make tech appear less dominant in the S&P 500.



Crypto pukes, again; Somebody pass the mop.

Jamie Powell – FT Alphaville

Ah, the crypto.

After the gyrations of early June, it all went pretty quiet recently as bitcoin, and its fellow tokens, began to recover from their lows.


****SD: First, great title. Second, with all these gyrations you’d think there would have been more activity on LedgerX. After all, the exchange did have a “record” July. While open interest seems to be building (4,000+ contracts) and Monday had 400+ trades, yesterday saw only 21 swaps trade. Oh, and the reason attributed to the puking? See Bloomberg’s SEC Postpones Decision on Bitcoin ETF Listing to September

Private Banks Are the New Hedge Funds

Yakob Peterseil – Bloomberg

Who needs hedge funds when a $2.4 trillion private bank is offering global macro trades to navigate late-cycle markets — mimicking fast-money strategies with leverage to boot.

UBS Group AG’s wealth management arm, the world’s largest, is pitching just that to billionaire clients.


John Lothian Newsletter

So you want to know what’s happening in the financial markets?

We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Newsletters

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