Breaking Cboe’s Monopoly on Volatility Products?; Best Earnings Season for Options Traders – Goldman

Feb 7, 2019

Observations & Insight

Dow drops 300 points as sources tell CNBC Trump-Xi meeting unlikely before deadline
Fred Imbert – CNBC
Stocks fell sharply on Thursday after CNBC reported that a meeting between President Donald Trump and Chinese President Xi Jinping is unlikely before a key March deadline.

****SD: VIX up past 17 today has really flattened out the front of the curve.

Lead Stories

A VIX Copycat Tries to Break Cboe’s Monopoly on Volatility Products
Luke Kawa – Bloomberg (SUBSCRIPTION)
MIAX Options is trying to succeed where others have failed; VIX is a wildly lucrative business for Cboe, which owns it
Wall Street’s wildly popular fear gauge — the VIX — may finally get some real competition.
On Feb. 19, MIAX Options plans to debut options on a VIX copycat, the SPIKES Index, in an attempt to break up Cboe Global Markets Inc.’s monopoly on exchange-traded volatility products.

****SD: I’ll repeat something: I have plenty of conflicts of interest when it comes to this story/these players. For one, MIAX sponsors “The Spread,” the weekly options news recap I host/write. I also work next door to the Cboe and I know I’ve consumed some of that local Kool-Aid. They’ve been a gracious host over the years and a sponsor of John Lothian News. There’s an old CBOE cap I have that I wear quite a bit in the summer when working around the house, running errands, grilling, etc. — multiple people have asked me if I work for the exchange. For that matter, Nasdaq is working on a volatility product, VOLQ, and John Lothian News has had sponsor relations with Nasdaq. I/JLN have similar conflicts/anecdotes with BOX and NYSE (another sponsor), plus personal relationships across the industry, so I think of it as being evenly conflicted — I’ve distributed my risk among the players enough so they net out. (Now if only we can get SA-CCR in place in lieu of CEM…) That being said, there is something not mentioned by the story: the potential additive effect for the ETF market maker community. If you trade SPX, you want VIX, but if you trade SPY, doesn’t it make sense to look at SPIKES? Plus, I’m sure there are some geniuses out there prepping crazy arb strategies, as the indices are obviously similar but not copies. (If it were, there’d be lawsuits.) Here is the above Bloomberg story reprinted at Investor’s Business Daily.

This was the best earnings season ever for options traders, according to Goldman
Thomas Franck – CNBC
This has been the best quarter for investors to buy call options ahead of earnings ever since Goldman Sachs first started recording returns.
“We find that stocks have traded up on earnings, even in a challenging market backdrop and when macro has slowed,” Goldman’s Marshall and Fogertey write.

****SD: Now that it’s news, I’m sure the strategy will no longer work.

Virtu’s, Flow Trader’s Optionality? Not So Much…
Paul Rowady – Alphacution Research Conservatory
In the hierarchy of preferred trade types, the riskless trade sits at the top. Capturing a perfectly hedged spread or pricing anomaly, or performing a round turn across the spread and back to flat in some temporal duration measured in micro- or even nanoseconds are examples of riskless trades. Like poker’s rare royal flush hand, a mechanism to persistently discover and then capture ~riskless trades is the most coveted of the trading world.
What comes next in this hierarchy is the directionless trade, where the trader essentially plays both sides of the trade and where success is achieved whether the target ultimately wins or loses. Like poker’s next-in-line straight flush hand, the key caveat to the directionless trade is the requirement that the price of the target moves; that there is enough volatility during the life of the trade to cover the cost of entering and maintaining that trade.

****SD: The blog has an update on Jane Street, too.

Sen. Schatz Plan Would Tax Financial Trades
Laura Davison – Bloomberg (SUBSCRIPTION)
Wall Street would bear the brunt of the latest tax proposal as Democrats jockey for the most progressive tax ideas with the approach of the 2020 elections.
Senator Brian Schatz, a Hawaii Democrat, is working on a plan that would tax financial trades, according to his spokesman, Michael Inacay, who declined to provide details on how, exactly, it would be structured.

How the shadow of the financial crisis shaped this portfolio manager’s strategy to insulate investors
Victor Ferreira – The London Free Press
In 2008, Ryan Marr felt invincible. At 21, as a co-op student from Wilfrid Laurier University, he was handling millions of dollars in investments for Gluskin Sheff and Associates, a Toronto-based firm that had close to $4 billion in assets at the time.

****SD: There’s a hearty dose of options throughout this story. As it pertains to Canadian hedge funds, here’s a good contextual piece about how bad things were last year, from Bloomberg – Embrace the Short Bet Is Canadian Hedge Fund Mantra for 2019. The Canada-based hedge fund industry averaged a 5.7 percent loss in 2018.

Why the VIX Needs to Keep Falling for the Stock Market to Keep Rising
Crystal Kim – Barron’s
One year after the Great Volatility Blowup, the Cboe Volatility Index—also known as the market’s the fear gauge—looks a lot less scary. Calm could persist, but a reversal isn’t out of the question.

Exchanges and Clearing

Cboe Global Markets Begins Rollout of Options on 11 Select Sector Indices Published by S&P
Cboe Global Markets, Inc. (Cboe: CBOE ) today began the rollout of options on 11 Select Sector Indices that comprise a sub-index of the S&P 500 Index, a key U.S. equities benchmark, further expanding Cboe’s suite of products tied to S&P Indices.

What You Need to Know About Cboe’s New Options on Select Sectors
Matt Moran – Cboe
Today, Cboe Global Markets announced the rollout schedule of new large-sized, cash-settled options on 11 Select Sector Indexes from February 7 through 14. The first options on the Materials Select Sector Index launched today.

Euronext announces volumes for January 2019
…In January 2019, the overall average daily volume on derivatives reached 523,542 contracts, down -6.7% compared to January 2018 and down -19.6% compared to the previous month.

Intercontinental Exchange Reports Fourth Quarter 2018
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data and listing services, today reported financial results for the fourth quarter and full year of 2018. For the quarter ended December 31, 2018, consolidated net income attributable to ICE was $611 million on $1.3 billion of consolidated revenues less transaction-based expenses. Fourth quarter GAAP diluted earnings per share (EPS) were $1.07. Adjusted net income attributable to ICE was $536 million in the fourth quarter and adjusted diluted EPS were $0.94, up 25% year-over-year.


Societe Generale reshuffles markets leadership amid EUR500 million cost reduction plans
Hayley McDowell – The Trade
Societe Generale has assigned a new head of its global markets business after confirming plans to cut costs across its investment banking business by EUR500 million.

****SD: Bloomberg has SocGen to Shrink Trading Unit, Cut Costs After Market Rout

Concannon ‘Graduates’ To Fixed Income
Shanny Basar – MarketsMedia
Chris Concannon, the new president and chief operating officer at MarketAxess, said fixed income is just at the start of evolutionary change as investors are looking to increase their use of algorithms and other electronic products.
He told Markets Media: “We are at the beginning of evolutionary change in fixed income – at stage two to three out of 10.”
Concannon joined MarketAxess, the electronic fixed income trading platform, last month from Cboe Global Markets where he was president and chief operating officer.


JPMorgan Says Boost Your Risk Positions. And Unwind Those Hedges
Adam Haigh – Bloomberg (SUBSCRIPTION)
The Federal Reserve’s pause on further tightening, and the chance of a positive surprise from China’s economy, have strategists at JPMorgan Chase & Co. beefing up risk-taking positions, cutting cash levels and favoring industrial metals.

Three Reasons EMEA Stocks May Lead 2019 Emerging-Market Rebound
Srinivasan Sivabalan – BloombergQuint
It’s where the big sell-offs begin and the big rallies arrive last. But after living in the shadows for years, the emerging Europe, Middle East and Africa region is at last coming into its own.

Market Movers: Review of Volatility (VIDEO)
CME Group via TheStreet
Last year between Feb 2-6 the E-mini S&P 500 broke 11%. Is the market still feeling the volatility sting?


Taking the Gold Out of Goldman Sachs
Matt Levine – Bloomberg (SUBSCRIPTION)
…UH: I don’t really know how to put this, so I am just going to say it. Yesterday Tesla Inc. director Linda Johnson Rice exercised options on 1,700 shares of Tesla stock at a strike price of $319.57, and then sold the stock at $320 per share, for net proceeds of 43 cents per share, or $731 total. The options would have expired in July 2024; Bloomberg’s option calculator estimates that they were worth about $160 per share, or $272,000 total. When Tesla granted her the options in 2017, it valued them at $115 per share. She just gave them away for 43 cents. I do not know why you would do this. Rice did the same thing last month — the exercises and sales are part of an automatic Rule 10b5-1 trading plan that she set up in November — and I was puzzled then too. She has another 10,628 options left, worth well over $1 million, and I can only assume that she plans to throw them away for pennies too. I hope that there is some absolutely mind-blowing tax trade going on here.

****SD: The part about Goldman that the column is titled after is good, it’s just that the excerpted portion above is what really got my attention.

UBS wins approval for EUR32bn Brexit swaps transfer; UBS has approval to move almost 6,000 London-booked swaps master agreements to Frankfurt
Helen Bartholomew – (SUBSCRIPTION)
UBS has won high court approval to transfer EUR32 billion ($36.4 billion) of assets – primarily derivatives – from London to Frankfurt. The court order ensures 2,483 of the bank’s EU27 clients retain access to services in the event of a no-deal Brexit by shifting contracts en masse and without the need for contractual changes or a cumbersome novation process that could subject legacy trades to new regulatory requirements.

****SD: Given it’s $36 billion moving around, it’s safe to say there are plenty of swaptions implications, right?

ECB May Delay First Rate Hike to Late 2020, Deutsche Bank Says
Carolynn Look – Bloomberg (SUBSCRIPTION)
Economists at Germany’s largest lender predict the European Central Bank will hold back on interest-rate increases until December 2020 as growth in the euro area is “slowing rapidly.”

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