A $4 Trillion Scapegoat for Market Volatility: the Fed’s Shrinking Portfolio

Jan 28, 2019

Lead Stories

A $4 Trillion Scapegoat for Market Volatility: the Fed’s Shrinking Portfolio
Nick Timiraos – WSJ (SUBSCRIPTION)
Some investors blame the stock market’s volatility on the Federal Reserve shrinking its bond portfolio. But the critique puzzles Fed officials and some economists because there is little evidence of turmoil in the two markets where the central bank actively intervened: Treasurys and mortgage debt.

There Are Three New Ways to Bet on Chinese Commodity Markets
Three new commodities options contracts are set to start trading in China on Monday as the world’s biggest consumer of raw materials seeks to build confidence in its febrile markets.
The launch of corn, cotton and rubber contracts will double the amount of options listed across China’s three major commodity exchanges. There’s already trading in soybean meal, sugar and copper.

Powell on the Spot After Fed’s Monetary Messages Whipsaw Market
Craig Torres and Rich Miller – Bloomberg (SUBSCRIPTION)
Federal Reserve Chairman Jerome Powell has some further explaining to do after the central bank’s monetary messages whipsawed financial markets over the last month.
Powell holds a press conference at 2:30 p.m. on Wednesday in Washington following a two-day meeting of the Federal Open Market Committee. Investors expect the FOMC to keep interest rates on hold. Its policy statement will be scrutinized for hints that officials still expect to raise rates twice this year, as they forecast in December.

Bridgewater, RenTech Make $13 Billion in a Grim Year for Hedge Funds
Nishant Kumar – Bloomberg (SUBSCRIPTION)
Ray Dalio’s Bridgewater Associates and Jim Simons’ Renaissance Technologies beat their rivals in a tough year for hedge funds in 2018, making a combined $13 billion for their investors.

Deutsche Bank bosses mulled merger with BNP Paribas, Société Générale
Handelsblatt staff
While Berlin lawmakers try to lure Germany’s largest bank into a tie-up with Commerzbank, it emerges that Deutsche sought partners further afield.

Goldman Cheers as Rand Heads for Best-Ever Start to a Year
Robert Brand – Bloomberg (SUBSCRIPTION)
The rand’s flying start to 2019 may be just the beginning, according to Goldman Sachs Group Inc.
The South African currency is heading for its biggest January gain against the dollar since Bloomberg started compiling the data in 1999. And with expected volatility near an eight-month low, traders are discounting local stumbling blocks in coming months, including a budget speech, ratings review and election.

Exchanges and Clearing

FX Options Strike Listing Change
CME Group
Frequently Asked Questions:
What are the scheduled modification changes?
When will these changes go into effect?
Why is CME making these changes?
How is the new rule different than the old rule?
Do you have an example of how the strike listing rule will work?
Will the changes become immediate on all currently listed options?
Can I add a strike that is not currently listed by the exchange?
Was there an SER and CME Globex Notice connected to these changes?

Derivatives to account for half of SGX’s group revenue in 2019: analyst
Singapore Business Review
It’s set to haul $444m in revenue as rattled investors continue to seek risk management solutions.
Market volatility and heightened demand for risk management solutions may further boost the Singapore Exchange’s (SGX) derivatives business which is set to rack in $444m in revenue in 2019 and make up 50% of SGX’s group revenue, according to a report by OCBC Investment Research (OIR).

Adjustment of Eurex’s Contract Specifications
Eurex Exchange
The Management Board of Eurex Deutschland took the decision to adjust the Contract Specifications for Futures Contracts and Options Contracts at Eurex Deutschland (Contract Specifications) to reflect the respective changes of the Clearing Conditions of Eurex Clearing AG, as published in Eurex Clearing circulars 102/18, 112/18 and 001/19. In particular, these changes are as follows:

Nasdaq ‘Ready to Compete’ Against New Exchanges, Says Adena Friedman
Nasdaq MarketInsite
As a group of big banks and brokers look to create a new U.S. stock market, Nasdaq President and Chief Executive Officer Adena Friedman says the firm is ready for the competition.
The founders of the Members Exchange, or MEMX, are seeking to “increase competition, improve operational transparency, further reduce fixed costs and simplify the execution of equity trading in the U.S.,” the group said in a statement on Jan. 7. Members Exchange founders include Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*Trade, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS and Virtu Financial.

UBS Equity Venue Stays in London as Brexit Pushes Rivals Out
Viren Vaghela – Bloomberg
UBS Group AG’s equity trading venue is staying in London after Brexit, despite rivals accelerating plans to shift trading to elsewhere in Europe.
The Swiss bank’s multilateral trading facility is “taking the calculated gamble” that there will be a deal allowing European Union equities to be traded in London after the U.K.’s departure, according to Richard Semark, head of UBS MTF.


Industry Veteran Joins Cboe Market Data Team
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today announced the appointment of Kevin Maude to its Market Data Services team. Mr. Maude assumed the role of Director, Market Data Sales, earlier this month and is responsible for the expansion and distribution of Cboe’s Market Data and Connectivity Services products throughout the U.S. Mr. Maude brings more than 20 years of experience in the financial services industry to the team. He reports to Drew Carey, Head of Market Data Sales at Cboe.

****WatersTechnology – Maude ‘Boards’ Cboe as Data Sales Director

Regulation & Enforcement

SEBI may overhaul margin management system for equity futures & options –
Palak Shah – The Hindu Business Times
Market regulator Securities EBI is likely to review the margin or risk management system currently obtaining in the equity derivative market, and may even go for a complete overhaul.
The regulator recently tightened the margin requirement for brokers anticipating higher volatility during Budget and the upcoming general elections. But brokers body, the Association of National Exchanges Members of India (ANMI), told SEBI that the tighter margin requirements were excessive and may lead to a virtual shutdown of various segments of trading activity.


The VIX Moving Average to Watch Right Now
Todd Salamone – Schaeffer’s Investment Research
On Friday, Jan. 18, the Cboe Volatility Index (VIX – 17.42) closed barely below 18.03 — half its December closing high — but it was short-lived. The market opened lower last week, sending the VIX not only back above key levels discussed two weeks ago, but also above 20.


$1.5 trillion U.S. tax cut has no major impact on business capex plans: survey
The Trump administration’s $1.5 trillion cut tax package appeared to have no major impact on businesses’ capital investment or hiring plans, according to a survey released a year after the biggest overhaul of the U.S. tax code in more than 30 years.
The National Association of Business Economics’ (NABE) quarterly business conditions poll published on Monday found that while some companies reported accelerating investments because of lower corporate taxes, 84 percent of respondents said they had not changed plans. That compares to 81 percent in the previous survey published in October.

John Lothian Newsletter

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Past Newsletters

Commodity traders profit from blockbuster year of market chaos

Commodity traders profit from blockbuster year of market chaos

Lead Stories Commodity traders profit from blockbuster year of market chaos; Cash bonanza for staff as industry reaps rewards of volatility during the pandemic Neil Hume - FT Commodity traders are sharing bumper spoils with their workers as the industry emerges as one...

A $4 Trillion Scapegoat for Market Volatility: the Fed’s Shrinking Portfolio

Jan 28, 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

Commodity traders profit from blockbuster year of market chaos

Commodity traders profit from blockbuster year of market chaos

Lead Stories Commodity traders profit from blockbuster year of market chaos; Cash bonanza for staff as industry reaps rewards of volatility during the pandemic Neil Hume - FT Commodity traders are sharing bumper spoils with their workers as the industry emerges as one...

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