Billions Rotate Through Giant Tech ETF Thanks to Options Boom; Short Sellers Are Rushing Back Into Stocks as Volatility Returns

Sep 22, 2020

Lead Stories

Billions Rotate Through Giant Tech ETF Thanks to Options Boom
Katherine Greifeld – Bloomberg
Billions of dollars are on the move in one of the world’s largest exchange-traded funds as soaring options activity collides with the uncertain outlook for tech shares.
One trading session after recording its worst exodus in 20 years, the Invesco QQQ Trust Series 1 (QQQ) ETF saw its best day for new assets in the same period. Investors had withdrawn $3.48 billion from the fund on Friday, but they poured $4.16 billion back in on Monday as the Nasdaq 100 Index erased almost all of a 2.4% intraday drop.

Short Sellers Are Rushing Back Into Stocks as Volatility Returns
Lu Wang and Vildana Hajric – Bloomberg
One group of equity skeptics who faded out of view during the summer rally are making a comeback with the S&P 500 heading for its worst September in almost a decade.
Investors who sell borrowed shares in anticipation of price declines are back in force. Bearish wagers climbed to about 7% of total stocks available for lending this month, up from 2020’s low of a little above 6% reached in August, data compiled by JPMorgan Chase & Co. show. That’s poised for the biggest increase since March.

Investors brace for months of big market swings as virus, political worries loom
April Joyner – Reuters
Investors are bracing for an extended period of market volatility as worries over a potential resurgence in coronavirus cases and political uncertainty roil stocks.
The Cboe Volatility Index, known as “Wall Street’s fear gauge,” hit its highest level in nearly two weeks as concerns over waning fiscal stimulus and the long-term economic consequences of the coronavirus pandemic took the S&P 500 down to a seven-week low on Monday.

Veterans of FX’s Wilder Days Are Loving Bitcoin’s Volatility; Some Wall Street traders have embraced the cryptocurrency because its manic moments remind them of yesteryears.
Vildana Hajric – Bloomberg
Rob Catalanello could’ve sworn he’d seen everything in his more than two decades on various foreign exchange desks in New York, from the unpegging of Brazil’s and Argentina’s currencies from the dollar to the Russian debt crisis. Then he started trading Bitcoin. In March, when the cryptocurrency plunged more than 30%, “it was more busy than any day I saw in 20-odd years in FX,” Catalanello says. “Just the amount of deals, the violence of the move, the unpredictability of the move, and the amount of risk that we had to hedge.”

Inside Volatility Trading: September 22, 2020
Kevin Davitt – Cboe
Sometimes it helps to go back before you try to move forward. We know a lot about the past and it can be instructive about the future. Before we run afoul with compliance—we all KNOW that past performance is not indicative of future results. If you go back to 1928, the average daily (close over close) change in the S&P 500 Index (which wasn’t the S&P 500 until 1957) is just over 0.72%. It likely goes without saying, but 2020 hasn’t exactly been an “average” year. The question becomes, to what extent has the year been unusual and what might that mean going forward?

Exchanges and Clearing

The chiefs of Cboe and CME have a warning for City Hall
A.D. Quig, Lynn Marek – Crain’s Chicago
“We are no longer four walls with a trading floor,” said CME Group CEO Terry Duffy, cautioning that if the city taxes financial transactions, the exchanges could pick up and leave. City officials seeking revenue to help fill a gaping 2021 budget hole got a strong warning from the heads of two big U.S. financial exchanges based in Chicago: Don’t touch LaSalle Street.

OCC Issues Paper on Central Clearinghouse Resiliency and Stability
In the midst of record cleared contract volume, OCC, the world’s largest equity derivatives clearing organization, today released a paper titled, Optimizing Incentives, Resilience and Stability in Central Counterparty Clearing, on central counterparty (CCP) clearing resiliency, recovery and resolution. The paper details OCC’s approach as a market utility, to risk and capital management, ensuring industry feedback is received and considered, enhancing operational resiliency, and providing greater transparency to market participants. The paper can be found here on OCC’s website.

*****MR: See also Patomak Partners’ response to this paper here.

OCC Recovery and Orderly Wind-Down Plan Participant Guide
Designation as a Systemically Important Financial Market Utility
Regulatory Oversight
Who OCC Serves
Purpose of Recovery and Orderly Wind-Down Plan
Expected Content of Recovery and Orderly Wind-Down Plan
Governance of Recovery and Orderly Wind-Down Plan
OCC’s Critical Services
OCC’s Default Management Waterfall
OCC’s Enhanced Risk Management and Recovery Tools
OCC’s Recovery Tools and Illustrations

Understanding Values-Based Investing with Cboe’s New S&P 500 ESG Index Options
Matt Moran – Cboe
Today, Cboe Global Markets™ launched cash-settled options on the S&P 500 ESG Index. The S&P 500 ESG Index is designed to align investment objectives with environmental, social and governance (ESG) values, and the new index options are a potential tool for investors to implement hedging, risk management, income enhancement and asset allocation strategies. Let’s take a look at some recent findings and trends with ESG investing.

S&P 500 ESG Index Options
Cboe offers options on the S&P 500 ESG Index, which is designed to provide improved Environmental, Social, and Governance (ESG) representation while offering a risk and return profile similar to the S&P 500. Using S&P DJI ESG Scores and various ESG exclusions, the index ranks and selects eligible companies, targeting 75% of the market capitalization in each S&P 500 GICS industry group.

Singapore, India Bourses to End Arbitration, Push Trading Link
Ishika Mookerjee – Bloomberg
Singapore Exchange Ltd. and the National Stock Exchange of India Ltd. are formally ending a years-long disagreement related to derivatives trading, with the two exchanges set to launch a cross-border trading link.
Both exchanges will withdraw arbitration proceedings that began after a dispute erupted in 2018 regarding the trading of Indian stock-based derivatives in Singapore, according to a statement from the Singapore exchange. The exchanges have received another round of regulatory approvals on implementing a connect that will allow market participants to trade NSE Nifty 50 Index futures and options contracts from India’s Gujarat International Finance Tec-City.

Cboe Global Markets Announces Date of Third-Quarter 2020 Earnings Release and Conference Call
Cboe Global Markets, Inc., a market operator and global trading solutions provider, today said it will announce its financial results for the third quarter of 2020 before the market opens on Friday, October 30, 2020. A conference call with remarks by the company’s senior management will begin at 7:30 a.m. Central Time (CT), 8:30 a.m. Eastern Time (ET).

Regulation & Enforcement

SEC charges S&P employee with index insider trading
Jamie Powell – Financial Times
A few thoughts on this rather bonkers story.
While we’ve heard about investors trying to arbitrage index inclusion and, conversely, accusations of companies gaming their accounts to meet the index’s arbitrary rules for years, this is the first time we’ve heard of insiders allegedly trading on index inclusion.
Mr Yang’s LinkedIn profile states that he was on the index committee for several indices including the S&P Dividend Aristocrats, the Dow Jones Select Dividend and the Dividend 100:

Options Regulatory Alert #2020 – 33 UPDATED – PHLX, NOM, BX, ISE, GEMX and MRX – Quarterly Quote Spread Parameter Relief through December 18, 2020
Effective September 23, 2020, the updated market maker quarterly quote width requirements on Nasdaq PHLX (PHLX), The Nasdaq Options Market (NOM), Nasdaq BX (BX Options), Nasdaq ISE (ISE), Nasdaq GEMX (GEMX) and Nasdaq MRX (MRX) will be effective through December 18, 2020. The exchanges may, in their discretion, amend these requirements by providing notice to members.

CME Group
Unless otherwise agreed to by the principal counterparties to the block trade, the seller, or, in the case of a brokered transaction, the broker handling the block trade, must ensure that each block trade is reported to the Exchange within the time period and in the manner specified by the Exchange. The report must include the contract, contract month, price, quantity of the transaction, the respective clearing members, the time of execution, and, for options, strike price, put or call and expiration month. The Exchange shall promptly publish such information separately from the reports of transactions in the regular market.


MATCHNow Conditionals: How to Achieve Block Size Executions
Cboe blog
The Canadian equity trading landscape has evolved over the past decade, leading to the rise of dark pools, inverted venues, minimum guaranteed fill facilities and asymmetrical speed bumps. Client demand and the difficulty in sourcing blocks within a fragmented marketplace led MATCHNow to launch Conditional Trading in January 2019. Firms up rates in the high 90% range coupled with the inherent cost savings of a midpoint block are proving to be valuable factors in reducing overall trading costs for the street.


The S&P 500’s September ‘five-day bear window’ is here, when investors stand least chance of making money
Amanda Cooper – Markets Insider
The S&P 500 has fallen for three straight weeks, and things may be about to get tougher, considering that this week the “bear window” is open, when investors have the least chance of making money on US stocks, one veteran trader says.
On average, over the last 30 years, September has been the worst month in the year for S&P bulls, with a decline of around 0.32%, compared with April, when the index has registered an average gain of 2.1% since 1990.

Some investors see opportunity in betting against election-driven volatility
Sunny Oh – MarketWatch
Even as Wall Street declares a contested presidential election as one of the biggest risks to the stock market rally, some are quietly looking at betting that swings in U.S. equities around election time won’t be as violent as feared.
A large camp of investors fret that the intense acrimony between the Democrats and Republicans, a fight over who will decide the next Supreme Court justice, and doubts about the ability of Washingtonto reach agreement on another round of aid to the economy could create a perfect bearish storm for a stock market that traded at records only a few weeks ago.


The impending EU CCP recovery and resolution regime and its impact on EU and non-EU firms
24 September 2020 • 10:00 AM – 11:00 AM ET • Webinar
On 24 September, representatives from Allen & Overy’s Global Financial Services Regulatory and Bankruptcy practice in London and New York will provide an overview of the EU legislative framework for the recovery and resolution of CCPs operating in the EU, which has now been finalized. The aim of the framework is to reduce the risk of a CCP failing and to establish procedures for the resolution of a CCP that has failed in order to limit impact on the financial system and on public funds. The regime and the changes it will require to EU CCP practices will be relevant to all direct and indirect participants in EU CCPs. The New York team will moderate and draw out the impact of the EU CCP Recovery and Resolution Regime on US clearing members and contrast the EU framework with the US position for CCP bankruptcy and resolution under the CFTC’s proposed Part 190 bankruptcy regulations and other recovery and resolution initiatives for CCPs.”


Stocks won’t move higher until US sees a vaccine and a return to ‘more normal’ life, the world’s largest wealth manager says
Emily Graffeo – Markets Insider
Mark Haefele, UBS Global Wealth Management chief investment officer, told CNBC on Tuesday that the world is facing a “new normal” way of life, but the market won’t be able to move higher until we get to the “more normal stage.”
The “new normal” is a more digital world, with more deficit stimulus, greener initiatives, and more “local” focus, said Haefele. But the “more normal stage” will involve a return to life more similar to the world before the pandemic. A COVID-19 vaccine is essential for this stage, he added.

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