Bonds No Longer Work to Diversify Stock Risk, Credit Suisse Says; Sterling traders relaxed on Brexit trade risks

Aug 25, 2020

Observations & Insight

The Security Traders Association 2020 Market Structure Conference, which is being held virtually this year rather than in Washington, DC, will kick off with a fireside chat with Cboe Executive Chairman, President and CEO Ed Tilly and Cboe EVP, Head of Markets Bryan Harkins. The conference is to be held on October 7 and 8. The cost for the three day event is $295, though employees of sponsoring firms and government employees are welcome at no cost. You can register HERE.~JJL

Lead Stories

Bonds No Longer Work to Diversify Stock Risk, Credit Suisse Says
Joanna Ossinger – Bloomberg
Investors can no longer rely on bonds to help mitigate equity risk because the relationship between assets has broken down, according to Credit Suisse Group AG.
The 21-day correlation between the S&P 500 Index and 10-year Treasury yield turned negative on Aug. 21, after having been at nearly 0.80 in mid-July.

Sterling traders relaxed on Brexit trade risks
Eva Szalay – FT
Currency traders have slipped up on Brexit many times over the past four years, but they are relaxed about the prospect of dropping out of the EU’s trade arrangements without a safety net this time around, even as negotiations flounder.
The pound has recovered from the ugly blow it suffered against the dollar when coronavirus ripped through markets in March, hovering close to its highest point of the year just above $1.31. Meanwhile, the options market that companies and investors use to hedge against losses or to profit from exchange-rate shifts suggests sterling faces no big risks in the next six months, even as the clock ticks down to the December 31 exit from the EU’s single market and customs union.

The Shakeout in the ETF Industry Is Accelerating
Michael Wursthorn – WSJ
Asset managers have closed more exchange-traded products than they have launched this year, a sign of how market gyrations have accelerated an industry shakeout.
So far this year, 188 exchange-traded products, including funds and notes, have been shut down, the most on record, according to FactSet. The closures occurred at big and small asset managers alike, including BlackRock Inc., which manages the popular suite of iShares ETFs; JPMorgan Chase & Co.; Invesco Ltd.; ProShares and Direxion.

Inside Volatility Trading: August 25, 2020
Kevin Davitt – Cboe blog
In a previous Inside Volatility we highlighted the French Revolution and the potential shifting of volatility regimes. In Charles Dickens’ magnum opus, A Tale of Two Cities, he documents the French Doctor Manette after his years of imprisonment during the Reign of Terror. The novel’s beginning is an interesting lens through which to see the dichotomies of today’s market environment: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…we had everything before us, we had nothing before us – in short, the period was so far like the present period…in the superlative degree of comparison only”.

Exchanges and Clearing

MGEX Announces a Pair of Top 25 Records
MGEX, a Designated Contract Market (DCM) and Derivatives Clearing Organization (DCO), reports that Friday, August 21st ranked as the 21st best day for daily total volume with a grand total of 23,482 contracts. In conjunction, Friday also entered into the record book as the 23rd best day for daily electronic volume with 20,928 contracts traded. At the close of market, open interest was recorded at 82,547 contracts.

Pushing liquidity in options products – Eurex’s Passive Liquidity Protection
Eurex launched its Passive Liquidity Protection (PLP) back in June 2019 to strengthen order book liquidity. After a successful pilot phase with German and French equity options, on 24 August 2020 Eurex is rolling this out to the remaining equity options segments, as well as its flagship index product, the DAX Equity Options.

Change To The Last Trading Day And Last Trading Day Trading Hours For The Bakkt TM Bitcoin (USD) Monthly Futures Contract
Intercontinental Exchange
Effective for the start of trading for trade date Thursday, October 1, 20201 , the Exchange will implement amendments to the Rules for the Bakkt Bitcoin (USD) Monthly futures contract to: (1) Change the Last Trading Day for expiring monthly contracts to the first Business Day prior to the Delivery Day for the contract (from the current second Business Day prior); and (2) Provide that trading in an expiring monthly contract shall end at 2:30 pm NY time on the Last Trading Day. The amendments do not change the Delivery Day for the monthly futures contract, which remains as the third Friday of the calendar month.

MIAX Options – All Systems Operating Normally – Notice of Delay in Symbol Download
MIAX Options
Please be advised there was a delay in the availability of downloading symbols listed on MIAX Options until 7:09 AM. All trading systems are operating normally.

MIAX Exchange Group – Options Markets – Corporate Action Alert: The Scotts Miracle-Gro Company (SMG)
MIAX Options
The Scotts Miracle-Gro Company (SMG) has announced a Special Cash Dividend. Associated strike price adjustments will become effective on Wednesday, August 26, 2020. SMG options will continue to trade without interruption on the MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange. All GTC orders resting on the MIAX order books in SMG will be canceled at the close of business on Tuesday, August 25, 2020. Additional details about The Scotts Miracle-Gro Company (SMG) dividend are provided in the attached OCC Memo.

Regulation & Enforcement

Wall Street cop amps up sleuthing to ferret out spoofing Trades
Matt Robinson – Bloomberg News
Wall Street should be put on notice: the government has new tools to look over traders’ shoulders in close to real time to spot misconduct.
The main U.S. derivatives regulator, after years of relying on exchanges and whistle-blowers for tips on financial fraud, is beginning to reap benefits from an effort to bolster surveillance to help root out rogue trading. The U.S. Commodity Futures Trading Commission is touting the first fruits of a three-year project to enhance its ability to more closely watch how traders are buying and selling in the US$558.5 trillion global derivatives market, making it easier to move quickly against illegal tactics. New tools that help the regulator rapidly analyze trades and detect suspicious transactions were credited with helping bring an enforcement case against Bank of Nova Scotia this week.

FIA and FIA PTG comment in support of the CFTC’s electronic trading proposal
Washington, DC – FIA and FIA PTG (collectively, “FIA”) today submitted comments supporting the CFTC’s Electronic Trading Risk Principles rule proposal. The CFTC proposal reflects a carefully reasoned principles-based approach that builds on the industry’s efforts over the years to mitigate the risks of electronic trading. As such, FIA strongly encourages the agency to prioritize the proposal in its rulemaking agenda.


Tesla’s Stock Split Is Looming. How to Play It With Options.
Steven M. Sears – Barron’s
Shares of Tesla recently broke above $2,000, creating hysteria among investors who think the stock will rally higher and others who think it will soon collapse. The argument has occurred for most of Tesla’s existence—and typically centers around valuation. Some people think the company is trading for far more than it is worth. Others see the stock as undervalued as the future of electric cars is unlimited. The argument often shifts from the objective to the subjective, and an impending stock split has exacerbated passions.


Viewing Options Volatility Through a Different Set of Lenses
Jayanthi Gopalakrishnan – The Ticker Tape (TD Ameritrade)
Option traders love to look at and discuss volatility (vol). Many option traders monitor the Cboe Volatility Index (VIX) and try to choose the appropriate options trading strategy for a given level of implied volatility (IV). This makes sense because mechanically, vol can impact the price of an option. Implied volatility, for example, is derived from current options prices via a pricing model. So vol can definitely inform you about options prices. But they’re not the same thing. Looking at price and vol as equal can be misleading. Viewing vol through a slightly different lens could help clear up some misunderstandings and help you see how vol can be your friend when buying stocks or selling options. Volatility is a forecast that indicates the state of the market and stock at the present moment. Keep in mind, those expectations can change, sometimes very quickly.

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