ABN AMRO disciplined by Cboe; JPM sees volatility-liquidity loop

Apr 8, 2019

Observations & Insight

Ushering In The OCC’s Renaissance – John Davidson, OCC

The OCC’s ENCORE clearing system, while resilient, is long in the tooth and inflexible. OCC’s Project Renaissance aims to revamp the central counterparty’s data, risk management and clearing systems. The OCC chose Cinnober as a partner for the multi-year project. While that key initiative is something the OCC has planned for years, the SEC’s decision not to renew the clearinghouse’s capital plan was a curveball.

In this video from JLN’s Industry Leader Series, OCC CEO John Davidson talks about those two developments.
Watch the video »

Lead Stories

ABN AMRO Remand Decision
Cboe Disciplinary Notice
This is a consolidated decision of the Board of Directors of Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) (“Cboe Options” or “Cboe”) and Cboe C2 Exchange, Inc. (f/k/a C2 Options Exchange, Incorporated) (“C2”). 1 This decision concerns two related disciplinary matters involving ABN AMRO Clearing Chicago LLC (“AACC”). The Cboe Board of Directors is issuing this decision as it relates to Cboe Disciplinary Case 14-0177, and the C2 Board of Directors is issuing this decision as it relates to

****SD: The claim is that ABN did not adequately supervise the operations of Simplex, which was in a Sponsored User Agreement with ABN. Simplex “improperly responded” to Complex Order Auctions (COAs). Cboe only allowed eligible market makers and trading permit holders to interact with COA flow – Simplex was neither but was able to engage in the auctions via ABN’s system. The charges pertain to ABN not having proper controls to block Simplex’s auction activity. Since ABN had already paid $45,000 for a previous, related incident, Cboe decided it would only be censured and fined $10,000 more. That means ABN walked away paying a total of $55,000 for these infractions, whereas if Cboe had gone with a fine for each separate incident, ABN would have had to pay $145,000.

JPMorgan Sees `Violent’ Markets on Volatility-Liquidity Loop
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Marko Kolanovic is blaming a “negative feedback loop between volatility and liquidity” for topsy-turvy markets.
The negative correlation between volatility and liquidity has been getting stronger over time, according to the JPMorgan Chase & Co. global head of macro quantitative and derivatives research. As volatility rises, market depth declines exponentially, exacerbating price moves, he said.

Why ‘SPY’ Is King Of Liquidity
Kara Crigger – ETF.com
The $268 billion SPDR S&P 500 ETF Trust (SPY) isn’t just the biggest ETF or the oldest; it’s also the most liquid. On average, SPY trades $18.3 billion daily, at a subpennywide spread. No other ETF even comes close.
How does that type of massive liquidity materialize? It’s not just about assets under management, says Matt Bartolini, managing director of State Street Global Advisors and head of SPDR Americas Research. In fact, SPY’s liquidity has as much to do with options traders and short-sellers as it does with trading in its own ETF shares.

****SD: Random factoid from the piece: “[SPY] trades more than the entire GDP of Japan, and more than every single Dow Jones index stock combined. Essentially, you have to go down to the 92nd company in the S&P 500 ranked by market cap before you surpass SPY’s trading volume, meaning that the top 92 combined trade less than SPY does.”

Cboe RMC Insights: 2019 U.S. Interviews
Cboe Blog
Did you miss this year’s Cboe Risk Management Conference in Carlsbad, California? Never fear, several of our panelists have provided their insights on what’s happening in the markets in the video series below. Go ahead, challenge yourself to think differently about portfolio management with the latest hedging techniques, equity derivatives use cases and volatility trading models.

****SD: Block off some time – there are 30+ videos in this post.

Oil traders hail output cuts but wary on economic outlook
John Kemp – Reuters
Hedge fund managers are becoming progressively more bullish on the outlook for crude and gasoline prices, but they are turning increasingly against diesel, notwithstanding the IMO marine fuel deadline at the end of the year.

***SD: Speaking of oil, see Reuters’ Saudi Arabia threatens to ditch dollar oil trades to stop ‘NOPEC.’

Lyft Is Angry About Lockups
Matt Levine – Bloomberg (SUBSCRIPTION)
In my former career, I was in the business of structuring derivatives, which in my case often meant that I was in the business of saying no to derivatives. “Derivatives” is sort of a vague term, and there is a persistent folk belief that they have magic powers, that any legal or financial problem can somehow be solved by doing a derivative. In this folk belief, the derivative structurers are wizards with arcane powers, respected and feared as long as they can make the rains come, but also treated with great suspicion when the harvest fails.

Exchanges and Clearing

Nasdaq, Euronext deemed fit and proper owners of Oslo Bors
Sudip Kar-Gupta, Terje Solsvik – Reuters
Stock market operators Euronext and Nasdaq, both vying for the control of Norway’s Oslo Bors, have been deemed fit and proper owners by the Norwegian financial supervisory authority, the finance ministry said

MIAX Exchanges Holiday Schedule
Press Release
Please be advised MIAX Options, MIAX PEARL, and MIAX Emerald will be closed on Friday, April 19, 2019 in observance of Good Friday. Weekly Options Expiration for the week ending Friday, April 19, 2019 will take place on Thursday, April 18, 2019.

Merger Benefits Diminished Under Existing JPX-TOCOM Plan
Regulation Asia
Government authorities still do not see eye to eye over the planned consolidation of TOCOM (the Tokyo Commodity Exchange) into JPX (Japan Exchange Group), despite a recent agreement for the two to merge by October.

****SD: The two problems laid out are 1) there could be energy products traded on two separate markets despite it being one exchange family and 2) multiple regulatory bodies would have overlapping oversight.

SGX pioneers interest rate derivatives on Japan repo
Singapore Exchange (SGX) is launching Asia’s first Total Return Futures (TRF), based on the Nikkei 225 Index, as it continues to pivot towards futurised derivatives. The new futures solution further expands SGX’s suite of risk-management tools that meets increasing market demand for new trading instruments, providing greater transparency and capital efficiencies.

****SD: In case you missed it, SGX’s Michael Syn spoke with JLN about the new product in the following video – FX Futures, Japanese Equity Repo and Marine Fuel.

Regulation & Enforcement

City of London alarmed at EU’s no-deal Brexit equity trading plan
Philip Stafford – Financial Times (SUBSCRIPTION)
Fund managers holding European equities are praying that a no-deal Brexit is avoided this week.
Europe operates the world’s most integrated cross-border share trading marketplace but the UK’s possible sudden departure from the EU would cleave this network into two: EU and non-EU markets.

****SD: From the piece – “None of the solutions to preventing a huge drop off in liquidity are clean or clear.”

FIA co-signs letter on equivalence of trading venues under EMIR UK and MiFIR UK’
On 5 April, FIA co-signed a letter to HM Treasury and FCA regarding the equivalence of EEA trading venues. Signing the letter alongside FIA were ISDA (International Swaps and Derivatives Association), AFME (Association for Financial Markets in Europe), AIMA (Alternative Investment Management Association), Assosim (Association for Financial Market Intermediaries), EFET (European Federation of Energy Traders), ICI-Global (Investment Company Institute), SIFMA AMG (Securities Industry and Financial Markets Association Asset Management Group) and UK Finance


Financial Models Are Not a Substitute for Good Judgment
John Authers – Bloomberg (SUBSCRIPTION)
There’s a big problem with the notion that volatility is risk, as espoused by Peter Bernstein in his classic book “Capital Ideas.”

Complacency is sweeping through the stock market
Brian Sozzi – Yahoo Finance
Investors could be getting too fat for their britches.
Across an array of asset classes, there’s no question that a lot of what Wall Street titans call “easy money” has been made this year. Ride-hailing firm Lyft, which has a No. 2 market share in the space, saw its first trade on the sizzling Nasdaq Composite on March 29 at $87.24, above its $72 IPO price. Slow-growing consumer companies such as McDonald’s and Hershey also find their stocks sniffing 52-week highs. The Dow Jones Industrial Average, Nasdaq and S&P 500 are closing in on the record highs achieved with great fanfare in August 2018.

Earnings Countdown Clock is Operating: Big Banks Kick…
JJ Kinahan – Ticker Tape
There’s quite a bit of excitement and nervousness heading into earnings season, but analysts don’t necessarily expect the kind of robust company financial growth many investors got used to the last couple of years. – tickertape.tdameritrade.com
FactSet projects a 4.2% year-over-year decline in S&P 500 earnings for Q1. That’s a big contrast to just one quarter ago, when Q4 earnings grew around 15%.


Inside the Chicago hedge fund turf war between Ken Griffin Balyasny
Bradley Saacks – Business Insider Prime (SUBSCRIPTION)
…All hedge funds are rivals in some sense, fighting one another for talent, data, and alpha — though Balyasny and Citadel appear to be in different leagues, given their asset base and recent performance. But several sources have told Business Insider that the turf war between the two hedge funds has reached new heights.

Leaving London: voices from the financial front lines of Brexit
Financial Times (SUBSCRIPTION)
In the 33 months since the UK voted to leave the EU, thousands of financial services companies with European hubs in London have been assessing their options.

****SD: Check out the infographic on the cost comparisons of different European cities.

Global economy enters ‘synchronised slowdown’
Chris Giles – Financial Times (SUBSCRIPTION)
The global economy has entered a “synchronised slowdown” which may be difficult to reverse in 2019, according to the latest update of a tracking index compiled by the Brookings Institution think-tank and the Financial Times.

Thin Veneer of Calm Reigns for South Africa’s Rand Before Vote
Colleen Goko – Bloomberg (SUBSCRIPTION)
Traders in South Africa’s rand seem to be holding their nerve a month before general elections. Their confidence may be misplaced, measures of volatility suggest.

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