Observations & Insight
NYSE, MIAX and Cboe Exchanges’ Proposals to Amend ORF
SIFMA provides comments to the Securities and Exchange Commission (SEC) on NYSE, MIAX and Cboe exchange family rule proposals which pertain to ORF rate changes which were effective August 1, 2019.
****SD: Ahhh, the much debated Options Regulatory Fee. This is well worth the short read. Here’s a direct link to the PDF of the letter. SIFMA’s objections: 1) the exchanges don’t provide evidence (quantitative data) to support their assertions that the ORFs “are fair and reasonable” and 2) it does not make sense to allow an exchange to charge an ORF on trades occurring on other exchanges.
Good Writers Make Better Hedge Fund Managers; Look for hedge fund managers with expansive vocabularies — but watch out for convoluted sentence structures, a new study shows.
Amy Whyte – Institutional Investor
How well hedge fund managers describe their strategies in writing may say a lot about their performance, according to a new paper from four academic researchers. A well-rounded vocabulary — defined in the paper as “lexical diversity” — could be an indication of better cognitive ability and trustworthiness, leading to higher returns, “superior” Sharpe ratios, lower volatility, and fewer regulatory and legal problems, according to University of Maryland’s Juha Joenvaara, University of Oulu’s Jari Karppinen, Singapore Management University’s Melvyn Teo, and University at Buffalo’s Cristian Tiu.
****SD: Any perspicacious individual would already have intuited such. Soooo, who wants to seed my fund?
A Window on Index Liquidity: Volumes Linked to S&P DJI Indices
Chris Bennett, Tim Edwards, Sherifa Issifu and Craig Lazzara – S&P Dow Jones Indices
A robust and active trading ecosystem benefits asset owners and investment managers by fostering transparency, market efficiency, and investor confidence. This paper document s, for the first time, the extent and nature of that ecosystem for indices produced by S&P Dow Jones Indices. The results offer a window into trading around certain market benchmarks, providing a new perspective on the use of indices as the basis for active and passive investment strategies.
****SD: For one example of the sorts of info contained in the paper, see below chart:
Barclays in Talks to Sell Automated Options Business to GTS
Viren Vaghela, Nick Baker and Stefania Spezzati, Bloomberg via Yahoo Finance
Barclays Plc is in talks to sell its New York-based automated options trading business to electronic market maker GTS. Negotiations are at an advanced stage, but there’s no assurance a deal will be struck, according to people familiar with the matter who asked not to be identified discussing private talks. Barclays representatives and a GTS spokesman declined to comment. Known internally as Automated Volatility Trading, the business buys and sells options to offer liquidity in that market. Its technology and equities heritage make it a natural fit for GTS, which has become one of the largest market makers at the New York Stock Exchange.
****SD: GTS – fast, nimble, and younger (founded in 2006) – taking over AVT from Barclays could be framed as another example of a fintech firm challenging the legacy roles of big banks.
AQR: Risk Parity’s Chances of Exacerbating a Market Crash Are ‘Grossly Overstated’
Alicia McElhaney – Institutional Investor
Concerns that two investment strategies – risk parity and short volatility – can compound market crashes are overblown, according to new research from AQR Capital Management. Researchers from the quantitative investment firm tested claims that the two strategies are correlated, which could result in market destabilization if too many investors use them. The concerns particularly center on how the two strategies would perform in an equity market crash, as it is believed that both would sell significantly, according to the paper, which was published August 15.
****SD: Here is a link to where you can find the full PDF of AQR’s research paper which is called “Risk Parity is Not Short Volatility (Not That There’s Anything Wrong with Short Volatility).” And hey, why not, here’s the obligatory link to a key scene from that Seinfeld episode – Not That There’s Anything Wrong With That.
BofAML Says Even the Options Market ‘Too Tired’ to Price Risks
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Japan ETF may be a good way to hedge U.S. stock portfolios; FX puts are around the cheapest levels since 2008 – strategists
Many investors have been fatigued by the ups and downs across markets — and derivatives may be no different. Bearish put options on the Hang Seng China Enterprises Index are cheapest among global equities despite risks from the trade war and the unrest in Hong Kong, Bank of America Merrill Lynch strategists led by Stefano Pascale wrote in a note Aug. 28. And currency put options are near their cheapest levels in 10 or more years despite risks, which are “yet another example of complacency,” they said.
****SD: This story is reprinted via Yahoo Finance here.
Prepare for the Pound to Become Even More Volatile
Charlotte Ryan – Bloomberg (SUBSCRIPTION)
Measure of sterling swings over three months near year-high; Hedging pound exposure into Oct. is most costly since 2016
Traders are bracing for further turbulence in the pound as the risk increases of a chaotic U.K. exit from the European Union. A measure of expected swings over the next three months, covering the Oct. 31 Brexit deadline, has surged to near the highest this year after Queen Elizabeth II approved Prime Minister Boris Johnson’s request to suspend Parliament for almost five weeks. That sets up a battle with lawmakers trying to block no-deal and the currency is likely to react to every political headline.
****SD: Reuters has Sterling volatility gauges jump as investors fear Brexit showdown.
China Launches New FX Options Trading Pairs in Interbank Market
Regulation Asia (SUBSCRIPTION)
Before Monday, the CFETS only provided FX options trading where one side of the pair was the CNY. New contracts include EUR/USD, USD/JPY, GBP/USD, AUD/USD and USD/HKD.
Trading Volatility In A Changing Political Regime
Stuart Barton, Invest in Vol – Seeking Alpha
Today, volatility can be traded like any other asset. VIX linked Exchange-Traded Products (ETPs) and their underlying futures have become some of the most liquid instruments traded in the United States – almost $1bn a day of the popular Barclays iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) trade each day for example. But unlike simpler assets, volatility and the products that are derived from them, are far more difficult to price. For some background to volatility pricing and related products, I invite you to take a look at Invest in Vol’s research site.
Exchanges and Clearing
SR-NASDAQ-2019-069 – Proposal to modify the manner in which it calculates volume, liquidity and quoting thresholds applicable to billing on the Exchange in relation to a systems issue experienced by SIAC on August 12, 2019, which impacted trade and quote dissemination across all markets.
The Nasdaq Stock Market LLC, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b- 4 thereunder, is filing with the Securities and Exchange Commission a proposal to modify the manner in which it calculates volume, liquidity and quoting thresholds applicable to billing on the Exchange in relation to a systems issue experienced by SIAC on August 12, 2019, which impacted trade and quote dissemination across all markets.
CME no longer looking back to Lehman; Changes to rates margin model move CCP into line with rivals
Costas Mourselas – Risk.net (SUBSCRIPTION)
Almost 11 years after the Lehman Brothers default triggered a global financial crisis, CME Group is finally letting the shocks that reverberated through fixed income markets in the days and months that followed roll off its interest rate swap clearing margin model – sort of.
Options Regulatory Alert #2019 – UPDATED Reminder: Nasdaq Announces Regulation SCI BC/DR Test Details
As announced in ERA #2019-1 and ORA #2019-3, Nasdaq will host its annual Business Continuity and Disaster Recovery Plan test on Saturday, October 26, 2019.
Regulation & Enforcement
Zamansky LLC Investigates Harvest Volatility Management Collateral Yield Enhancement Strategy Sold to Merrill Lynch Wealth Management Customers
Zamansky LLC announces it is investigating the Harvest Volatility Management Collateral Yield Enhancement Strategy (“Harvest CYES”) sold to customers of Merrill Lynch Wealth Management (“Merrill Lynch”), the broker-dealer division of Bank of America Corp. (NYSE: BAC). Harvest CYES is a managed options trading account strategy that was sold to brokerage customers of Merrill Lynch. We are investigating potential legal claims of unsuitability, misrepresentation of risk and material omission by Merrill Lynch customers for losses suffered in Harvest CYES.
****Recall the related UBS story in the WSJ last week: UBS Faces Client Backlash Over Options Strategy.
Wolper Law Firm, P.A. Is Pursuing Recovery Options for Investors Who Purchased Adjustable Rate Certificates of Deposit
Law Firm Newswire
The Wolper Law Firm, P.A. is expanding its investigation of brokerage firms and financial advisors who sold market linked certificates of deposit (“Market Linked CDs”) a/k/a structured certificates of deposit (“Structured CDs”), adjustable rate certificates of deposit (“Adjustable Rate CDs”) and equity-linked certificates of deposit (“Equity Linked CDs”) to retail customers.
****SD: The crux of the matter: “Presently, Market Linked CDs that are correlated to fixed income or derivative benchmarks are no longer paying any income. Investors are now facing the prospect of holding these investments until maturity without an income stream. Alternatively, if an investor elects to sell their Market Linked CD prior to maturity, they may be forced to pay penalties and realize a principal loss. In speaking with many clients who purchased Market Linked CDs, Structured CDs, Adjustable Rate CDs, and Equity Linked CDs, it has become apparent that brokerage firms and financial advisors did not adequately explain the characteristics and risks of these investments prior to the transaction. Many investors believed that they purchased traditional CDs or CDs with a guaranteed minimum interest payment.”
Allied Financial Options Dispute: Supreme Court Asks NCL To Honour F&O Contracts
Arpan Chaturvedi – BloombergQuint (SUBSCRIPTION)
The Supreme Court has asked the NSE Clearing Ltd. to honour the futures and options trade contracts in the Allied Financial Services Pvt. Ltd.’s options settlement case. The cash collateral was extended by clearing broker IL&FS Securities Services towards the F&O trade.
Market Data & Market Data Solutions – The Definitive Guide
When a company, contract or instrument becomes a tradable entity on a stock exchange the amount of data associated with that entity grows exponentially. This data can be grouped into different categories of data, such as reference data, fundamental data and market data.
What to Know When Planning Your Market Data Infrastructure
Robert Anderson, Exegy – Finance Magnates
Market data is the third biggest expense for many of our customers – right behind the cost of rent and maintaining their staff. So, they’ve designated teams to understand and optimize their market data liabilities. However, smaller or newer firms struggle to understand how market data fees add up and apply to their business model. The lack of clarity around market data fees results in difficulty planning annual budgets, adding complications and stress to strategy and technical teams alike.
Traders make bullish short-term bets on 2019’s worst-performing sector
Lizzy Gurdus – CNBC
The retail rout could soon be over.
That’s at least according to the options market, which saw an uptick in bullish activity in the SPDR S&P Retail ETF on Wednesday as traders bet the market’s worst-performing sector this year could turn around.
Delta Neutral and Other Ways to Delta Hedge in Backtests
First a primer, delta hedging usually means buying or selling the underlying to offset a position in options that has a negative or positive delta. For example, if an at-the-money straddle is purchased and the price of the underlying goes up, there will be a positive delta in the straddle. The positive delta straddle will make more if the stock continues to go up than it would make if the stock were to go down. The trader may want to sell the underlying to offset the asymmetric profit picture.
One of the World’s Oldest Quants Is Going All-In With Robots
Justina Lee – Bloomberg (SUBSCRIPTION)
Millburn Ridgefield extends machine learning across strategies; Firm with ’70s-era roots in trend following sees AI as future
A $7.5 billion money manager with roots almost as old as quant-investing itself is going all-in with machine learning. Millburn Ridgefield Corporation placed robots at the very heart of its open systematic strategies after a six-year experiment. Now, the New York firm is raising cash for a new computer-powered strategy trading single-name stocks. Millburn is banking on artificial intelligence as it moves further away from its 1970s-era tradition in trend following, which typically uses futures contracts to surf the momentum of assets.
****SD: From the story: “Millburn is the successor to a quant shop set up back in 1971, shortly before research into options pricing helped unleash an explosion of systematic trading. The firm’s managed-futures program launched in 1977, representing one of the world’s longest-running trend-following strategies.”
Watch Budding Brexit Event Risk in Stocks, Wells Fargo’s Chintawongvanich Says
In this edition of “Options Insight,” Pravit Chintawongvanich, Wells Fargo equity derivatives strategist, discusses the recent market volatility with Bloomberg’s Luke Kawa on “Bloomberg Markets: The Close.”
NERD ETF – Options Now Available For Trading
PRNewswire via Yahoo
****SD: I was unaware that the Roundhill BITKRAFT Esports & Digital Entertainment ETF had taken the NERD ticker. (The ETF was launched in June.)
The Old Post Office nears opening, adds Federal Home Loan Bank of Chicago as office tenant
Ryan Ori – Chicago Tribune
About a month before the first office workers are set to move into The Old Post Office, the firm redeveloping the 2.8 million-square-foot building is adding yet another tenant.
The Federal Home Loan Bank of Chicago has leased 130,000 square feet in the building at 433 W. Van Buren St., the company announced Thursday.
***SD: More on the Cboe’s future home.
Public, Church Pension Plans Face Similar Challenges
Chief Investment Officer
…Cassara writes that the objectives can be reached through a portfolio that has an underlying fixed income investment strategy made up of higher-yielding investment-grade securities, as well as equity derivatives, such as put options and call options, that provide contractual exposure to the equity markets, but in a way in which risk can be managed.