Bank of England FX data show shift to options hedging; Crypto Survivors Find Rare Lifeline

Feb 13, 2019

Observations & Insight

What’s Trendy? Shining a Light on 2018 Derivatives Volumes and Open Interest
Spencer Doar – JLN
The totals are in. And the winner is… almost everyone!
It was a great year for the global exchange traded derivatives industry as for the first time ever annual volume was more than 30 billion contracts. Volumes grew at a 20.2 percent clip, the fastest rate since 2010.

****SD: Another tidbit for JLN Options readers – open interest in energy products is down primarily due to a decline in nat gas options positions.


MPs accuse Theresa May of being ‘rumbled’ by her own advisor Olly Robbins over her Brexit plans
ITV News
MP’s have accused the Prime Minister of being “rumbled by her own advisor” over her Brexit plans. They were referring to comments made by her chief negotiator Olly Robbins. He was overheard by ITV News correspondent Angus Walker in a hotel bar apparently suggesting if Mrs May’s deal didn’t pass through the Commons, Brexit could be delayed for 21 months.

****SD: Loose lips sink ships!

Lead Stories

Bank of England FX data show shift to options for hedging
Paul Golden – Euromoney
Strong growth in options trading highlighted in the latest FX data from the Bank of England is indicative of a move away from the use of forwards and swaps for hedging, say market participants. The Foreign Exchange Joint Standing Committee FX turnover survey – based on data collected in October 2018 from 28 financial institutions active in the UK foreign exchange market – shows that while options turnover grew by more than 15% between April and October, swaps were down by 11%.

Crypto Survivors Find a Rare Lifeline
Alistair Marsh – Bloomberg (SUBSCRIPTION)
Desperate to survive the collapse of their market, cryptocurrency diehards are reaching into the financial tool kit to raise some old-fashioned cash.
They’ve begun selling derivatives linked to digital tokens to squeeze something out of their depreciating assets. Their need is so acute that ventures run mainly by software developers and tech experts are negotiating the terms with financial pros who earned their chops on Wall Street.

****SD: While I agree with the first part of the following line, the second sentence doesn’t make much sense: “Options trading has also been propelled by a growing crowd of ex-Wall Street professionals who have quit traditional assets for crypto. Key players include QCP Capital and Akuna Capital, firms staffed by former employees of hedge funds and high frequency trading shops.” Huh? So, Akuna isn’t a high frequency trading shop?

Natixis profits halve after Asian derivative losses
David Keohane – Financial Times (SUBSCRIPTION)
Natixis saw its profits sliced in half in the fourth quarter after some of the French bank’s Asian derivatives trades went bad, as it suffered from the same tough trading conditions hitting rivals.
Natixis, which is majority-owned by mutual group BPCE, saw net income fall 51 per cent to EUR252m in the fourth quarter and revenues come in at EUR2.25bn. Within this, the previously flagged derivative losses cost the French bank EUR259m.

Afternoon Rallies Help Power 2019 Stock Rebound
Amrith Ramkumar – WSJ (SUBSCRIPTION)
Stocks are rallying in the final hour of trading more often than normal, a bullish development for market watchers bruised by recent volatility.

Volatility of Volatility as an Edge
Euan Sinclair – Talton Capital Management
My new book has a section on specific trading edges. Vol of vol gives one such edge. I’ll summarize the effect, give references and a suggested strategy to monetize the edge. The “confidence factor” is 1 to 3. 3 is something that I have high confidence in. Confidence is based on the amount of empirical evidence and the plausibility of a reason for the effects existence.

Fear Goes Missing in the Biggest U.S. Junk Rally in a Decade
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Implied volatility in benchmark junk-bond ETF has tumbled; HSBC and Morgan Stanley question sustainability of rebound
Traders are going all-in on the best new year rally in U.S. junk bonds since 2009, cutting hedges that help cushion nasty shocks like hawkish monetary moves and weak corporate earnings.
At-the-money implied volatility in the $14.9 billion iShares iBoxx High Yield Corporate Bond ETF has more than halved since the December maelstrom and now sits below historic averages. The options are so cheap Macro Risk Advisors recommends protective hedges, reversing a call in November to sell them.

This is what people on the buy-side really do all day
The work-day of a buy-side trader is not what it once was. Not long ago, much of their time was spent researching stocks and chatting with dealers on the phone or through Bloomberg terminals – and of course making trades. But changes in technology and greater oversight has altered how traders spend their day. If nothing else, working on the buy-side may have become less interesting.

Exchanges and Clearing

Miami International to launch third options market Pending SEC approval, Miax Emerald to launch March 1
Bennett Voyles ?- MarketVoice
On March 1, Miami International Holdings will launch its third options market, the sixteenth such venue in an increasingly crowded field. The new market, called MIAX Emerald, continues the company’s strategy of adapting to the evolution of market structure in the U.S. equity options marketplace. The launch was previously planned for February, but the U.S. government shutdown curtailed operations of the Security and Exchange Commission and delayed approval. Final testing is scheduled for Feb. 23, barring another lapse in government funding.

Intercontinental Exchange and the NYSE Launch ‘Insights’
Business Wire
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, and the New York Stock Exchange (NYSE), a wholly owned subsidiary of ICE, today launched the new content platform, an online gateway to inspiring conversations with top global business leaders, entrepreneurs and innovator

Regulation & Enforcement

Sebi looks to make margin rules stricter for derivatives trade The collection of exposure margins from clients was made compulsory last year.
Pavan Burugula – ET Bureau
The regulator wants the exchanges to fix limits for introducing fresh strikes during the expiry day of futures and options. MUMBAI: The Securities and Exchange Board of India (Sebi) is planning to tighten risk management practices in equity derivatives and stocks in the runup to the general elections. The market regulator is likely to tighten margin rules for futures and options trades and restrict introduction of strike prices in options intra-day as it looks to curb wild speculation by traders, said three people privy to the development.


Dash Launches Real-Time Transparency for Portfolio Trading; New Dash360 functionality provides basket-level analytics, visualizations and reports enabling real-time, actionable intelligence throughout the portfolio execution process
Dash Financial
Dash Financial Technologies, the industry’s leading capital markets technology and execution provider, today announced the addition of a new suite of real-time analytics, visualization and reporting tools aimed at portfolio traders. The new tools are available natively in Dash360, the firm’s award-winning, web-based platform that provides order-to-execution level transparency, detailing and visualizing exchange fees, and providing venue controls, routing analysis and performance reporting.

****SD: For more on Dash’s endeavors, see JLN’s recent video with Dash Chief Growth Officer Glenn Lesko.

Low Touch in Derivatives: Following the parallel path
Chris Monnery – Fidessa
In Equities Electronic Trading, the service expectations between the buy and sell sides have seen significant changes over the past couple of years. The buy side has become increasingly involved in how their orders are executed and as a result of automation and increased capabilities on the sell side, electronic trading volumes are trending upward after years of non-existent growth.

Best approaches to adopting a cross-asset trading platform
Jens Persson, Itiviti
As we’ve learned from previous blogs, there’s an opportunity to leverage growing commonalities between the equities and foreign exchange markets into a more streamlined approach to trading and by extension the use of a single trading platform for both market. But what’s the best approach to migrating from discrete set-ups for the two segments to a single platform for both?

Adoption of Cloud By Capital Markets Firms to Accelerate
Monica Summerville – TABB Forum
While cloud adoption within capital markets has progressed, the pace to date has been relatively slow. That is poised to change this year, however. TABB Group’s latest outreach found spending on cloud is expected to increase (see Exhibit 1, below) — and with a small percentage of financial institutions going so far as planning a full migration to cloud over the coming year (see Exhibit 2, below), change definitely is coming.

Options forges alliance with Technancial for real-time risk analytics
Options, the global financial technology managed services and IT infrastructure provider formerly known as Options IT, has struck a deal with the Technancial Company, maker of the Janus risk management platform.

CQG Partners with JB Prime to Provide Multi-Asset Platform
Celeste Skinner – Finance Magnates
Users of JB Prime will be able to trade global equities, CFDs, FX, commodities, and more on CQG’s multi-asset platform.

Abacus Group Acquires Proactive Technologies; The combined company will be the largest provider of IT services in the New York metro region for hedge funds and private equity firms.
Abacus Group
Abacus Group, a global provider of IT services for alternative investment firms, today announced it has completed the acquisition of competitor Proactive Technologies. The two companies will merge under the Abacus Group umbrella, combining their leading-edge technologies, similar philosophies of premium customer service, operational synergies and talent pools.


EM Beware: A Recent History of BofAML’s Most-Crowded Trades
Cormac Mullen – Bloomberg (SUBSCRIPTION)
The most popular trade in global markets is now long emerging markets – – contrarians should prick up their ears.
A quick glance at the recent history of the “most-crowded” trades section in Bank of America Merrill Lynch’s survey of global fund managers shows an asset’s popularity can often peak just before a fall in price. Here’s a look at the last four instances of such trades in reverse chronological order:


Scandal-hit Euribor’s rebirth will still rely on bankers’ judgement
Francesco Canepa – Reuters
The survival of Euribor interest rates, which have been marred by a manipulation scandal, will rely on the “judgement” of some of the very banks that rigged them only a few years ago, under a new methodology proposed on Tuesday.
Euribor is designed to reflect how much a bank pays to borrow euros for between a week and a year and is crucial for pricing trillions of euros worth of derivatives and mortgages.

****SD: Also see Matt Levine’s Libor’s Replacement SOFR Is a Little Too Real

Shiller Says Recession Risk Elevated Amid Longest Bull Market
Carolina Wilson and Sarah Ponczek – Bloomberg (SUBSCRIPTION)
Recession risk is real, according to Nobel laureate Robert Shiller, and one might come as soon as this year.
Whether the U.S. will experience a contraction has become one of the hottest debated topics among investors amid uncertainty surrounding U.S.-China trade talks, deteriorating earnings forecasts and slowing growth around the globe. The ambiguity caused the almost decade long rally in U.S. stocks to come within a whisker of its end in December.

Illinois’ wealthiest man giving $1 million to Chicago mayoral candidate Bill Daley
Gregory Pratt – Chicago Tribune (SUBSCRIPTION)
Billionaire hedge fund CEO Ken Griffin, who has given tens of millions to former Republican Gov. Bruce Rauner and supported Chicago Mayor Rahm Emanuel, is donating $1 million to Bill Daley’s mayoral campaign. In a statement about the contribution, Griffin called Daley “a proven leader who understands the critical importance of working for all Chicagoans regardless of politics, race or background.”

****SD: Only a mil?

I’m a data scientist and I couldn’t stand working in banking
Pseudonym – eFinancialCareers
I’m a data scientist who has left the finance industry. I spent nearly six years in finance and during that time I worked for the sorts of prestigious firms most of you would give your left buttock to get into. I’ve done investment banks. I’ve done top buy-side firms. If you’re determined to make your career in these sorts of places, then good luck to you.

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