Big Eurodollar Options Trade; Cost Comparison of S&P 500-Related Options; Citadel’s Data Exhaust

Mar 28, 2019

Observations & Insight

FX Futures, Japanese Equity Repo and Marine Fuel – Michael Syn, SGX
Japan is the second biggest securities borrowing market in the world. Given the general wealth of the populace and a low-yield environment, there is a high demand for structured products and plenty of trading desks occupy their time attempting to replicated those payouts. SGX already offers long-dated dividend futures and equity options; to address the final piece of the puzzle, it will soon be rolling out equity repo futures.

That’s a new interest rate product and a first for Asia, but it’s far from the only thing on SGX’s plate. In this far ranging interview with SGX’s Head of Derivatives Michael Syn, he talks about the drastic change coming to marine fuel standards in 2020 and why SGX, as a shareholder in the Baltic Exchange, is focused on the future of freight. Syn also paints an upbeat picture for continued impressive growth in its FX futures complex.
Watch the video »

****SD: What a timely moment for Reuters to run the story Oil traders wait to assess impact of IMO regulations, one of the key issues Syn talks about in the above video. I talked with a few other folks after learning more about the IMO 2020 deal — it really does seem to be flying too far under the radar for something so significant to global transit, commodity markets, and the environment.

Lead Stories

A Cost Comparison of S&P 500-Related Options
CME Group
When it comes to trading S&P 500 options, there are multiple products available to investors and a multitude of factors to consider before choosing the optimal product. This report focuses on transactional liquidity and compares the relative execution quality between two of the most liquid S&P 500-related options products: CME’s options on E-mini S&P 500 futures (ES) and CBOE’s options on the S&P 500 cash index (SPX). The analysis to follow shows that, on average, ES options can offer superior execution relative to SPX options by between 0.04 to 0.15 index points. In dollar terms, ES options offer cost savings of $4 to $15 per contract.

****SD: First off, I’m sure the folks on Van Buren took note that CME went with “CBOE” instead of “Cboe.” Note that this cost comparison is in implicit costs and not explicit costs (broker/exchange/clearinghouse fees). When you factor the wide range of explicit costs per contract into the equation, the $4 to $15 cost benefit per ES contract CME found could easily be eaten up.

A Huge Options Trade Is Betting Markets Are Wrong on Fed Cuts
Edward Bolingbroke – Bloomberg (SUBSCRIPTION)
Total of $30 million plowed into eurodollar put-option wager; Position would benefit if Fed refrains from easing this year
There may be a new eurodollar whale in town. About $30 million has been plowed into an options bet that the market has gone too far in pricing in Federal Reserve cuts this year.

****SD: In the past week, one month ATM Eurodollar implied volatility has surged from roughly 6.5 percent to nearly 13 percent, per OptionsWorks data. (The same metric for one week has surged from 6.5 percent to nearly 15 percent.)

A Storyboard Built on Citadel’s Data Exhaust
Paul Rowady – Alphacution Blog
As excerpted from the upcoming case study, Deconstructing Citadel Securities (download the executive summary, below): The early highlights of this story are well established among students of the hedge fund and proprietary trading arenas – and given the extremes of financial and technological success that have taken root here, they are well known to the broader financial services industry, too. Certainly, recent tales of the founder’s real estate trophy-hunting exploits have helped to fuel the current potency of ongoing mystique and mythology surrounding the organization.

****SD: Per Merriam-Webster: “citadel 1) a fortress that commands a city 2) stronghold.” As a Chicagoan, my question to Mr. Griffin is, “What city is Citadel protecting?”

The Triple Lizard Is a Love Story and a Cautionary Tale
Matt Levine – Bloomberg Opinion (SUBSCRIPTION)
The exotic-derivatives business is simple and easy until the bank realizes its large profits were actually large losses.

CFTC study sees steady automated trading growth not tracked by volatility rise
Maya Weber – S&P Global
While automated trading in futures markets increased steadily across commodities from 2013 to 2018, volatility based on end-of-day prices did not rise in tandem, staff of the Commodity Futures Trading Commission concluded in an analysis released Wednesday.

****SD: In case you missed the full study, which we had in yesterday’s newsletter.

Exchanges and Clearing

Tokyo bourse to take over Japan’s once-mighty commodities exchange
Aaron Sheldrick, Takahiko Wada – Reuters
Japan Exchange Group (JPX), owner of the Tokyo Stock Exchange, said on Thursday it would take over the Tokyo Commodity Exchange (TOCOM) to create an all-in-one bourse that would attract more international traders and investors.

****SD: Related press releases – Basic Agreement Toward Realizing A Comprehensive Exchange: Japan Exchange Group And Tokyo Commodity Exchange and JPX’s 3rd Medium-Term Management Plan.

Cboe RMC Recap: Days Two and Three
Cboe Blog
Day Two of the 35th annual Cboe Risk Management Conference was jam-packed with new information, engaging panels, networking opportunities and lots of finger food! Cboe Chairman, President and CEO Ed Tilly kicked off the day with an update on Cboe’s business and advocacy efforts. He also thanked Cboe VP of Research Bill Speth for his 24 years of “wisdom, guidance and friendship.” Bill retires this month after a legendary career at Cboe.

Osaka Exchange To Perform Proof Of Concept Testing For Derivatives Trading
As recent years have seen the diversification of data and the growth of alternative data, Osaka Exchange, Inc. performs proof of concept (the PoC), in cooperation with a range of parties concerned, regarding the feasibility of using new data and service that are expected to contribute to the development of securities markets.

Japan Mulls Overhaul of Stock Benchmarks and Exchanges
Min Jeong Lee and Keiko Ujikane – Bloomberg (SUBSCRIPTION)
Japan is reviewing options to overhaul its stock benchmarks and exchanges and will consider ways to simplify them. This means one of its two startup gauges, or both, may go away.

Regulation & Enforcement

Europeans Try to Kill MiFID Rule in Brexit Derivatives Fight
Viren Vaghela and Silla Brush – Bloomberg (SUBSCRIPTION)
The City of London is getting another reminder of how fraught post-Brexit dealings with the European Union could get in the $1.5 trillion-a-day market for exchange-traded derivatives.
Lobbyists for Deutsche Boerse AG, Euronext NV and other exchanges are calling on EU officials to reverse a key part of the bloc’s trading law called open access — a policy that has wide support in London. The rule allows derivatives to be traded on one exchange and cleared at another.

Reg AT ? Reg NB (Not Bad): Determining the Shape of Reg AT
Colleen Graham and Ari Pine, NextGen Compliance and Digital Gamma – TABB Forum
Though CFTC Chairman Christopher Giancarlo put to rest the Reg AT proposal that would have required all automated trading systems to file source code with the regulator, he left open the possibility of a new framework. A control framework is necessary to make the futures markets safer; it just needs to be practical. The industry should welcome a framework that is largely principles-based and that will not reinvent the wheel.

Das-led RBI set to bring back ‘exotic currency bets’; A strong lobby is believed to be in favour of scrapping the ban.
Sugata Ghosh – Economic Times Bureau
After the derivative losses — where banks also took a hit when clients refused to honour deals — the RBI banned exotic products, allowing only plain-vanilla currency options. After a decade, the Reserve Bank of India is set to lift the ban on ‘exotic currency derivatives’, the double-edged, fancy products that had left a trail of destruction in 2007-08 amid allegations of mis-selling and court battles when bets by corporates backfired as the euro, Yen and Swiss franc surged.

Exotic derivatives can make GIFT a viable global financial hub
Business Standard
The Reserve Bank of India (RBI) is contemplating bringing back exotic derivatives, a move that may finally establish Gujarat International Finance Tec-City (GIFT) as a viable global financial hub.

****SD: So far the GIFT has been a chunk of coal.


Fulbright Securities Limited goes live with Horizon Options Market Making Platform for HKEX
Exchange News Direct
Horizon Software (Horizon), the leading provider of electronic trading and algorithmic technology, today announced that Fulbright Securities Limited, a large securities company located in Hong Kong, has deployed Horizon’s Platform for Market Making on listed options connecting to the Hong Kong Stock Exchange (SEHK).

Algo trading software and the human touch: Finding the execution sweet spot
Vela Blog
For much of the past decade, market players have been focused on low-touch or no-touch execution solutions. As market electronification has taken off, quant funds and other proprietary trading firms have looked to automate most, and in some cases all, of their trading. The development of ever more sophisticated algo trading software bore out the wisdom of this strategy and you don’t have to look far to find low-touch advocates.

Nasdaq Dorsey Wright Teams With OptionsPlay To Bring Options Insights To Investors
Nasdaq Dorsey Wright, an investment advisory, research and model portfolio business, announces it is integrating OptionsPlay, an options analysis suite for investors and traders, into its Global Research Platform. The integration will enable users of the Nasdaq Dorsey Wright Research Platform to seamlessly access options strategies on Nasdaq Dorsey Wright research and portfolios.

****SD: Congrats to Mark Engelhardt, Tony Zhang, and rest of the OptionsPlay crew on the deal.

RJO Futures Offers Orion Multi-Trader With dxFeed
Chicago-based R.J. O’Brien & Associates (RJO), the oldest and largest independent futures brokerage and clearing firm in the United States, today announced that its private client division, RJO Futures, is offering Orion Trading Systems’ flagship platform, Orion Multi-Trader powered by dxFeed’s data.


Volatility Is Back! Here’s How to Profit From It.
Steven M. Sears – Barron’s
In late March, when the Cboe Volatility Index was down 46% for the year, it prompted observations that the “fear gauge” was having its worst quarter on record, which frankly sounds rather ominous. What any of this may ultimately mean is anyone’s guess, and whatever answer is offered says more about the person speaking, and their world view, than the VIX. It has become financial Silly Putty that anyone can use to add dramatic intent to any point about the market.

Brexit Chaos and Pound Futures
Sage Anderson – tastytrade blog
The proposed exit of Britain from the European Union went from disorganized to outright chaotic during the last week. –
At this stage, the best thing that Britain has going for it is Scotland’s presence in the United Kingdom, which means the entire British population can lean heavily on the strong spirits originating from that region.


Second Ex-Barclays Trader Found Guilty of Rigging Euribor
Will Mathis and Franz Wild – Bloomberg (SUBSCRIPTION)
Ex-Barclays Plc trader Colin Bermingham was convicted of helping to manipulate a benchmark interest rate by a London jury, the ninth conviction secured by U.K. prosecutors in a seven-year probe of rate-rigging.

****SD: But a Barclays trader did beat FX options front-running charges, so Barclays trials haven’t been all guilty verdicts.

Nodal tries to rev up market for trucking futures with world first; Launch of freight futures contracts reflects demand to hedge costs in $700bn US market
Gregory Meyer – Financial Times (SUBSCRIPTION)
Trucks are set to join oil tankers and dry-bulk ships as tradable commodities, as a US-based exchange launches the world’s first futures contracts based on the price of hiring a vehicle.

****SD: Keep your eye on this one and I’ll be the first to let you know when the “should we do options on the futures?” conversations start.

U.S. Is a Rich Country With Symptoms of a Developing Nation; The country is backsliding based on a host of troubling metrics.
Noah Smith – Bloomberg (SUBSCRIPTION)
The other day I was late to dinner, but it wasn’t my fault. Traffic was backed up throughout the city of San Francisco, because chunks of concrete had started falling from the upper deck of the Richmond-San Rafael Bridge. Unfortunately, this wasn’t a particularly unusual occurrence — in 2016, the Bay Bridge was shut after concrete chunks began to fall from the walls of a tunnel. Nor are such issues limited to bridges — the $2.2 billion Transbay Transit Center was closed in late 2018 when cracks were discovered in the beams.

***SD: FT’s semi-related story – UK ‘like an emerging market’, warns veteran fund manager.

Here Are the Manager Finalists for the 2019 Hedge Fund Awards
Stephen Taub – Institutional Investor
Last year was brutal for hedge funds. The industry posted its worst aggregate performance since the 2008 financial crisis, and nearly two-thirds of all hedge funds lost money in 2018. But a few funds finished the year with gains — an impressive feat given the market backdrop.

Deutsche Bank discusses raising up to EUR10bn for Commerzbank deal
Stephen Morris and Olaf Storbeck – Financial Times (SUBSCRIPTION)
Deutsche Bank is discussing plans to raise as much as EUR10bn in fresh equity as part of a potential merger with Commerzbank, a move designed to end the debate over whether Germany’s largest lender has enough capital.

Spencer Doar

Spencer Doar


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