A $50 Billion Bond Trade Embraced by Goldman Hinges on ETF Gains; Volatility Heats Up But Volume Doesn’t

Oct 23, 2019

Observations & Insight

The Spread: Negative interest rates, VIX for bonds and an options bet that netted a 14,000% return
JohnLothianNews.com

Will the fed cut rates? Are we headed for negative rates? Fun with acronyms (ICE buys MOVE) and a guy who lucked into a 14,000% return on an options trade making Wall Street Bets on Reddit proud. That and more in this week’s edition of “The Spread.”

Watch the video »

Lead Stories

A $50 Billion Bond Trade Embraced by Goldman Hinges on ETF Gains
Bloomberg
Bond traders at some of the world’s largest banks have more than $50 billion riding on the success of the exchange-traded fund market, according to a new report from BlackRock Inc.
So-called portfolio trades, in which multiple bonds from different borrowers change hands during one transaction, are “a direct result of the growth of fixed income ETFs and their associated ecosystem,” BlackRock executives led by Dan Veiner, the firm’s global head of fixed income trading, wrote in the report. More than $1 trillion is invested in bond ETFs, with trading leaping 41% in 2018 from a year earlier, according to this research.
/bloom.bg/33Qbsn8

****JB: Among other things the article notes, “The options markets on certain fixed income ETFs have been growing even more rapidly than the ETFs themselves.”

Volatility Heats Up But Volume Doesn’t
Larry Tabb – TABB Forum
Volatility and volume dislocated over the past few months. While the average closing VIX increased by 50% from April through July, volume only increased 10%. TABB Group founder and research chairman Larry Tabb looks at the key equities market activity in the second quarter.
bit.ly/2BEDLJ6

With commission-free trading nearly everywhere, here’s what investors should demand now
James Royal – Bankrate
In a matter of a few days, the brokerage industry went from charging customers for making trades to handing them out like candy at Halloween. Virtually every major online broker is now letting you trade stocks and ETFs without a fee. Many are also offering options trades without a base commission, though they do still require a per-contract fee, often around $0.65 a pop.
bit.ly/32GPjaH

Exchanges and Clearing

Performance Bond Requirements
CME Clearing
As per the normal review of market volatility to ensure adequate collateral coverage, the Chicago Mercantile Exchange Inc., Clearing House Risk Management staff approved the performance bond requirements for the following products listed below.
bit.ly/2JfunA0

Regulation & Enforcement

U.S. Companies Advised to Prepare for Multiple Benchmark Rates in Transition from Libor
Mark Maurer – WSJ
Advisers to globally expanding U.S. companies are recommending that they prepare to use several short-term lending benchmarks when the London interbank offered rate falls out of use.
Libor is a scandal-plagued benchmark that is used to set the price of trillions of dollars of loans and derivatives globally. A group of banks and regulators in 2017 settled on a replacement created by the Federal Reserve known as the secured overnight financing rate, or SOFR. Companies must move away from Libor by the end of 2021, when banks will no longer be required to publish rates used to calculate it.
/on.wsj.com/2N4nvql

CFTC Commissioners, Staff Win Reprieve From Contempt Hearing
Dylan Tokar – WSJ
The U.S. Commodity Futures Trading Commission’s top brass can’t be blocked from airing their views on the agency’s enforcement efforts, an appeals court has ruled.
The ruling by the U.S. Court of Appeals for the Seventh Circuit is a victory for the CFTC, which has been locked in a legal battle with Kraft Foods Group Inc. and Mondelez Global LLC over statements the agency released following a settlement with the two food companies.
/on.wsj.com/2PjGGyS

Technology

Data, Data Everywhere: Takeaways from International Trader Forum
Brian Schaeffer – TABB Forum
The massive amount of market data available today can lead to making smarter decisions, but it also can lead to paralysis by analysis. But the democratization of technology means that simple and cost-effective analytics solutions are available to firms of all sizes, and you need to be doing something in this area. Focus on what you can do right now rather than what you can’t, advises Clearpool.
bit.ly/32SLmQc

Strategy

Missed the Brexit Rally? A Racy Bet Backs Both Stocks and Pound
Justina Lee – Bloomberg
For traders who missed sterling’s biggest rally in a decade, there may still be a few clever ways to claim a share of the Brexit spoils. Especially if you’re willing to double-down.
Money managers can position for a rise in U.K. equities and the pound through the end of the month — when Britain is scheduled to leave the European Union — by buying call options on a $2.3 billion BlackRock Inc. ETF tracking the country’s stocks, according to Macro Risk Advisors and Cowen & Co.
/bloom.bg/35XE281

VXX: Shorting Volatility is Bigger, and Riskier, Than Ever
Steve Smith – Stock News
Selling option premium or shorting volatility has often been compared to picking up dimes in front of a steamroller. Despite the risks and the not-too-distant blow-up of VIX- related products earlier this year, more money than ever is piling into these strategies.
And recent reports and data suggest that returns are shrinking, meaning people are now picking up pennies at the risk of being flattened by an adverse event.
bit.ly/2MJlp0d

****JB: In my day the saying was “picking up nickels in front of a steamroller.” Inflation I guess.

Education

What Do You Provide?
OIC
At The Options Industry Council (OIC), we provide education to investors of all levels, from those who are new to options to those who are experienced market professionals. We want every investor to be comfortable with the products cleared by our sponsor, The Options Clearing Corporation (OCC). Whether there’s a question about equity options, index options or any other OCC cleared products, we’re here to help. OIC also supports advisors and trading firm members who may have questions about strategies or market data. We believe that anyone with an interest in the financial markets can understand options, and we encourage learning on our site through our videos, podcasts and popular online webinars, as well as in-person at our live events.
bit.ly/35URPMx

Miscellaneous

The Case for Payment for Order Flow
Larry Tabb – TABB Forum
While the world of payment for order flow sounds murky, it really is not once you understand the challenges of being a market maker and how equity orders are carried out, says TABB Group founder and research chairman Larry Tabb.
bit.ly/2ByHXu9

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

A $50 Billion Bond Trade Embraced by Goldman Hinges on ETF Gains; Volatility Heats Up But Volume Doesn’t

Oct 23, 2019

Observations & Insight

What is going on at LedgerX?
Thom Thompson – JLN
LedgerX may have launched trading on the contract market platform designated by the CFTC in June as reported by the cryptocurrency press on July 31. According to details shared exclusively with CoinDesk, the online news service that broke the story around 9:00 a.m. Chicago time, LedgerX launched deliverable bitcoin futures on Wednesday, making it the first exchange ever to offer deliverable cryptocurrency futures contracts in the United States. CoinTelegraph and Bitcoinist carried similar stories later in the day.
/jlne.ws/2YGhvYI

++++

“FOMO” as a Motivator
MarketsWiki Education
Whether we like to admit it or not, the fear of missing out, or FOMO, does influence our behavior. FOMO is just as likely to lead to a bad trade as it is to a good career choice (or the other way around). In this video from MarketsWiki Education’s World of Opportunity event in Chicago, RSM Partner Todd Briggs talks about how this fear can both positively and negatively impact our lives.
Watch the video »

++++

Trump says US will impose 10% tariffs on $300 billion of Chinese goods starting September 1
CNBC
President Donald Trump said Thursday the U.S. is putting an additional 10% tariff on the remaining $300 billion dollars worth of Chinese goods.
/jlne.ws/2YyELYw

****SD: Twitter risk!

Lead Stories

Cboe nears deal to move HQ to Old Main Post Office
Danny Ecker – Crain’s Chicago Business
The parent company of the Chicago Board Options Exchange is closing in on a deal to move its Loop headquarters to the redeveloped Old Main Post Office, adding to a leasing hot streak at the historic structure as it transforms into a modern office building.
Cboe Global Markets is negotiating a deal for about 175,000 square feet in the mammoth building at 433 W. Van Buren St., according to sources familiar with the discussions.
bit.ly/2YxId5u

OCC July Cleared Volume Up 7.9 Percent; Highest Total Volume Ever for July
BusinessWire
OCC, the world’s largest equity derivatives clearing organization, announced today that total cleared contract volume in July reached 403,483,838 contracts, a 7.9 percent increase compared to last July, and the highest total volume for July in OCC’s history. OCC’s year-to-date average daily cleared contract volume is 19,358,621, down 5.8 percent compared to 2018’s record-breaking pace.
/jlne.ws/2YzWjn3

Susquehanna International Group Case Study: Overview and Executive Summary Available for Download
Paul Rowady – Alphacution
The modern capital markets era begins in the mid-1970’s with the emergence and then convergence of three critical factors: derivatives, computers and data feeds. Together, these factors symbolize the birth of the quantitative research revolution and beginnings of trade workflow automation, and therefore, propel the conception of some of the most consequential product developments, trading strategies and trading firms that the financial world has ever known. A subset of the most notable players were the pioneers in the emerging listed option market. In some ways, they were also the pioneers in quantitative research – the “first quant shops” – developing advanced capabilities in the modeling of option pricing frameworks by way of computers and mathematics.
/jlne.ws/2Yygx0l

The Rationale for Ag Options’ Upward Skew
Erik Norland – CME Group
Across most markets, out-of-the-money (OTM) put options tend to be more expensive than OTM call options. This is most obviously true in the equity market, where investors fear downside risks more than upside risks. It’s also true in the crude oil market, where, despite political risks to the upside, downside risk is usually the main concern. Precious metals, fixed income and currency markets are quirkier and, by-and-large, upside and downside risks are more symmetrical or, at least, more time varying. Options on agricultural goods, however, are unique: call options are usually more expensive than puts – between 74% and 99% of the time since early 2017, depending on the product (Figures 1 -3).
/jlne.ws/2YBWNc4

How derivative compression is easing the Libor transition
Thomas Helm – Practice Insight (SUBSCRIPTION)
Market participants have found a new way of managing the colossal amount of administration work associated with the transition from Libor: compressing swaps and options contracts
/jlne.ws/2K8VDRu

Hedge funds grasp opportunities from stocks rally
Laurence Fletcher – Financial Times (SUBSCRIPTION)
After a miserable 2018, hedge funds are starting to enjoy trading equities again.
Last year’s global stock market sell-off pushed equity hedge funds to a 7.1 per cent average loss, according to data group HFR, but this year they are bouncing back with a 9.5 per cent gain in the first six months of this year. Helped by widespread rallies in global stock markets, this marks their best first half of a calendar year in a decade.
/jlne.ws/2MyxrJS

BNP Paribas says Deutsche Bank prime brokerage transition will be finalised by summer 2020
Hayley McDowell – The Trade
BNP Paribas has said the transition of Deutsche Bank’s prime brokerage and electronic equities units will likely be finalised by summer next year, despite Deutsche Bank’s hopes that the deal will be completed by the end of 2019.
/jlne.ws/2K9rDVw

Exchanges and Clearing

LSE Still Needs to Prove Logic of Buying Refinitiv; Buying Refinitiv will increase London Stock Exchange’s earnings per share by more than 30%
Stephen Wilmot – WSJ (SUBSCRIPTION)
Do investors like the London Stock Exchange’s $14.5 billion acquisition of Refinitivóor do they just like leverage? LSE shares jumped another 6% Thursday morning after the company formally announced an all-share deal to buy the financial data provider for $27 billion including debt. They are now up 24% since LSE gave preliminary details over the weekend.
/jlne.ws/2ZomTRh

Cboe Global Markets Announces Election of Fredric Tomczyk to Board of Directors
Cboe
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today announced its Board of Directors elected Fredric J. Tomczyk, former President and Chief Executive Officer of TD Ameritrade Holding Corporation, to its Board of Directors on July 30, 2019.
/jlne.ws/2Yyd1TH

Cboe Global Markets Declares Increased Third-Quarter 2019 Dividend
Cboe
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today announced its Board of Directors has declared an increased quarterly cash dividend of $0.36 per share of common stock for the third quarter of 2019, representing a 16 percent increase from the prior quarter’s dividend of $0.31 per share.
/jlne.ws/2Yyd9CF

Q3-Q4 2019 Market and Exchange Driven Changes
Vela
Do you know which exchange-driven changes (EDCs) are coming up over the next few months? And are your systems ready?
https://jlne.ws/2KduEEF

TradeZero America Announces Membership on the NYSE American Options Market
Yahoo Finance (Press Release)
TradeZero America, a Brooklyn, New York-based online broker dealer, announced that the firm is now a member of the New York Stock Exchange American Options market. The NYSE American Options exchange provides traders with deep liquidity across listed options contracts with an integrated technology platform offering access to American and Arca options, combined with the benefit of the open outcry trading floor in New York.
/jlne.ws/2MywC3Y

MIAX Options: Amendment To Exchange Rule 520, Limitations On Orders, To Remove Certain Order Entry Restrictions On Electronic Exchange Members
Mondovisione
MIAX Options has amended Rule 520, Limitations on Orders, to allow Electronic Exchange Members (“EEMs”) to enter buy and sell limit orders in the same options series for the account or accounts of the same beneficial owners, other than for the account or accounts of Priority Customers, and the Exchange will no longer need to designate specific classes for EEMs to engage in this type of activity.
/jlne.ws/2KatlpJ

CME Group Inc. Reports Second-Quarter 2019 Financial Results
PRNewswire
CME Group Inc. (NASDAQ: CME) today reported financial results for the second quarter of 2019. The company reported revenue of $1.3 billion and operating income of $699 million for the second quarter of 2019. Net income was $514 million and diluted earnings per share were $1.43. On an adjusted basis, net income was $632 million and diluted earnings per share were $1.76. Financial results presented on an adjusted basis for the second quarter of 2019 and 2018 exclude certain items, which are detailed in the reconciliation of non-GAAP results.
/jlne.ws/2YFfMTv

CME “not overly concerned” by LSE-Refinitiv talks
Louisa Chender – Global Investor Group (SUBSCRIPTION)
Chicago-based exchange says the deal wouldn’t change the competitive landscape
/jlne.ws/2yt8es9

ICE Reports Second Quarter 2019
ICE
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data and listing services, today reported financial results for the second quarter of 2019. For the quarter ended June 30, 2019, consolidated net income attributable to ICE was $472 million on $1.3 billion of consolidated revenues, less transaction-based expenses. Second quarter GAAP diluted earnings per share (EPS) were $0.84. Adjusted net income attributable to ICE was $534 million in the second quarter and adjusted diluted EPS were $0.94. Please refer to the reconciliation of non-GAAP financial measures included in this press release for more information on our adjusted operating expenses, adjusted operating income, adjusted operating margin, adjusted net income, adjusted diluted EPS and free cash flow.
/jlne.ws/2ZlQbQA

SGX reports FY2019 net profit of S$391 million
SGX
Singapore Exchange (SGX) today reported FY2019 net profit of S$391.1 million (S$363.2 million), its highest net profit in 11 years. Revenues were also the highest since listing at S$909.8 million (S$844.7 million).
/jlne.ws/2YDnzRF

SGX seeks “bolt-on” acquisitions
James Thursfield – Global Investor Group (SUBSCRIPTION)
SGX CEO says the exchange is looking for “bolt-on” acquisitions for its newly formed business units
/jlne.ws/2Kb8oez

Euronext publishes Q2 results
Euronext
Euronext, the leading pan-European exchange in the Eurozone with 1,500 listed issuers, today announces its results for the second quarter of 2019.
/jlne.ws/2GGmjqR

Euronext eyes acquisitions in market data or post-trade services
Inti Landauro – Reuters
Euronext (ENX.PA) is looking for opportunities to buy market data or post-trade services providers, CEO Stephane Boujnah said on Wednesday, after larger rival London Stock Exchange (LSE.L) said it was in talks to buy Refinitiv in a $27 billion (GBP22.1 billion) deal.
/jlne.ws/2K8H3to

Strategy

Profiting From the Fear Premium in Tech Stock Options
Steven M. Sears – Barron’s
Institutional investors pretty much own all of the same stocks, yet another bank recently noted. A realist might conclude that such investors operate expensive index funds that all buy the same things and charge high management fees for doing so.
If you want to give your money to these guys, go ahead. But something tells me that is about as appealing to you as buying stocks that are dancing around highs.
/jlne.ws/2MtQ4yJ

History Points To Rocky Markets Ahead
DataTrek Research Blog
Our historical playbook analysis of what happens after the S&P 500 has outsized gains in January has worked every month this year except May when trade concerns spooked markets. Overall, abnormally strong January returns have been a historically clear signal about market direction in the following months and July 2019 further affirmed that trend.
/jlne.ws/2YDouS7

Miscellaneous

The best and worst performing hedge funds so far this year
Bradley Saacks – Business Insider (SUBSCRIPTION)
The market-beating human stock-picker is far from dead.
Quant funds now dominate hedge fund flows and assets, but the biggest winners midway through 2019 are funds run by old-school investors who take large, concentrated bets.
/jlne.ws/2MBzmO5

Fintech firm Revolut launches a Robinhood-style stock trading service
Ryan Browne – CNBC
Revolut British fintech firm Revolut is jumping into the online brokerage space with its own commission-free stock trading platform. The company launched the service ó which lets users buy or sell popular U.S. stocks from Apple to Beyond Meat at the tap of a button ó on Thursday, looking to lure in millennials who normally shy away from investing.
/jlne.ws/2MAqo3p

PanXchange Launches Industry’s First Institutional Grade Industrial Hemp Exchange
John D’Antona Jr. – Traders Magazine
PanXchange, a physical commodities OTC market structure solutions provider, today announced the launch of the industry’s first institutional-grade industrial hemp exchange. The marketplace will allow producers, processors, trade houses and end-users to participate in a transparent and efficient cash market for industrial hemp products and will ultimately pave the way for the creation of hemp derivatives contracts.
/jlne.ws/2KcFtqt

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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