Observations & Insight

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Lead Stories

Battered Stock Traders Brace for $1.9 Trillion Option Expiration
Lu Wang – Bloomberg
Stock traders still clinging on after this week’s vicious drop in US benchmarks had better tighten their grip — OpEx is back to whip up more turmoil. The monthly expiration of options tied to equities and exchange-traded funds is notorious for stirring up volatility, and the next event takes place on Friday. Traders will close old positions for an estimated $1.9 trillion of derivatives while rolling out new exposures, all with the S&P 500 on the brink of a bear market.
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S&P 500 on pace to confirm bear market, falls 20% from record close
Amruta Khandekar and Devik Jain – Reuters
The benchmark S&P 500 index is trading down 20% from its Jan. 3 record close in volatile trading on Friday, as investors fretted over the impact of rising inflation on earnings and the fallout of interest rate hikes on economic growth.
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Citigroup: Expect Much Higher Equity Implied Volatility
Bloomberg (Video)
Citigroup Global Markets Head of Asia Trading Strategy Mohammed Apabhai says he expects to see much higher equity implied volatility in the stocks sphere. He speaks with Juliette Saly and Rishaad Salamat on “Bloomberg Markets: Asia.” (Source: Bloomberg)
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BlackRock to close two Russia-focused ETFs
Chris Flood – Financial Times
BlackRock has notified shareholders that it intends to close two exchange traded funds that hold Russian securities after seeing their value plunge following the invasion of Ukraine.
Trading activity was already suspended in early March in BlackRock’s iShares European-listed Russia ETF (CSRU), and BlackRock’s iShares MSCI eastern Europe ETF (IEER) which held a 67 per cent weighting in Russian stocks prior to the invasion.
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Meme-themed, social media-driven ETFs plummet in value
Steve Johnson – Financial Times
Reddit’s Wall Street Bets crowd may once have vowed to take meme stocks “to the moon”, instead they and the exchange traded funds that focus on them have been eclipsed by steady, boring earthbound investments.
The particularly poor performance of social media-driven, meme-themed ETFs is partly due to favoured constituent stocks such as computer game retailer GameStop, cinema operator AMC Entertainment and electric vehicle maker Rivian badly undershooting.
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Wall St Week Ahead As bear market looms, battered Wall St seeks elusive ‘Fed put’
David Randall – Reuters
The Federal Reserve’s determination to raise interest rates until it squashes the highest inflation in decades is darkening the outlook across Wall Street, as U.S. stocks stand on the cusp of a bear market and warnings of a recession grow louder.
At issue is the so-called Fed put, or investors’ belief that the Fed will take action if stocks fall too deeply, even though it has no mandate to maintain asset prices. One oft-cited example of the phenomenon, which is named after a hedging derivative used to protect against market falls, occurred when the Fed halted a rate hiking cycle in early 2019 after a stock market tantrum.
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Exchanges

Clearing innovation & trends
Eurex
March 2020 posed a number of challenges for the cleared derivatives industry. OTC clearing, a relatively new clearing product for which a new workflow was designed, coped very well, trade breaks were limited and the model handled the increased volume.
Futures and options clearing, which at its core hasn’t changed much over the last few decades, didn’t cope as well as we would have liked with the tremendous volume increases and the additional challenges of the global pandemic. The industry worked through these issues, but there was too a lot of noise and room for improvement.
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Strategy

‘The dip is your friend’: Why some advisers are telling young investors to buy stocks, despite stagflation fears roiling markets
Quentin Fottrell – MarketWatch
How low can stocks go? This question has made investors nervous, as they fear one bottom after another.
The answer: Pick a number. Some analysts say brace for further drops, others expect a bounce.
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A bear-market rally could be lurking, but investors should ‘sell any rips,’ says Bank of America
Barbara Kollmeyer – MarketWatch
Despite the extensive losses seen for stock markets so far this year, it’s not over until it’s over — and investors should keep selling into any big rebounds higher.
That’s the advice from a team of strategists at Bank of America, led by Michael Hartnett, in their Friday “Flow Show” note. In focus for the bank is increasing debate about whether the market has capitulated, which refers to investors basically giving up on trying to recapture lost gains.
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Miscellaneous

My Word is My Bond
Jim Toes – TABB Forum
Integrity is essential in every industry, but for securities professionals who play a role in helping citizens grow their assets and safeguard their livelihoods, the stakes are even higher, writes Jim Toes, President and CEO of the Security Traders Association. Over the course of their careers, many traders will come across opportunities for personal gain at the expense of their clients and counterparties. Our vision is for an industry in which every one of these opportunities is rejected, not because of regulatory rules or firm policies, but because of the traders’ own consciences, Mr. Toes says.
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