Cashing In on Volatility Tougher Than Expected for Cboe; Thinning Liquidity in E-Minis Worries Traders

Mar 25, 2019

Observations & Insight

The Spread – The Madness Sets In – 3/22
‘Tis the season for college allegiances to come roaring back to the forefront of conversation, but the options world stops for no one.
Watch the video and see the stories referenced here »

****SD: Speaking of odds, see NCAA’s 1 NCAA tournament bracket stays perfect into Sweet 16 for first time ever.

Lead Stories

Cashing In on Volatility Has Been Tougher Than Expected for Cboe; To regain investor confidence, options exchange operator is undergoing one of the biggest transformations in decades
Gunjan Banerji – WSJ (SUBSCRIPTION)
Chicago-based Cboe Global Markets Inc. is trying to convince investors that new products and a technology upgrade can pull it out of a year-long share-price slump. Shares of one of the country’s oldest and biggest options exchange-operators have tumbled 23% since the start of last year to become the worst-performing U.S. exchange-operator in that period. Rivals CME Group Inc., Nasdaq, Inc. and Intercontinental Exchange Inc. gained at least 3% during that time.

****SD: The VIX manipulation accusations are scary for investors.

Volatility Knocked Off Historic Lows as Markets Question Growth
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Historically low volatility has been a defining feature of markets in the past couple of months. Friday’s market action knocked things back toward “normal.”
A “micro-burst” in volatility metrics, Citigroup Inc. rates strategist Edward Acton called it. U.S. equities tumbled and longer-term Treasury yield slid below those on T-bills in wake of poor manufacturing PMI readings. Those came days after the Federal Reserve suggested it was more concerned about the outlook than many had anticipated.

Rude Awakening for Asia as Volatility Spikes Back: Taking Stock
Eric Lam – Bloomberg (SUBSCRIPTION)
Volatility returned with a vengeance to Asia, home to some of the best stock-market returns in the world this year before Monday.
The MSCI Asia Pacific Index slumped 2.1 percent on Monday, heading for its biggest decline since October and erasing monthly gains. Shares in China, Hong Kong and Japan lost 2 percent or more, with S&P 500 Index futures dropping as much as 0.7 percent.

Thinning Liquidity in Key Futures Market Worries Traders; E-mini S&P 500 futures have gotten harder to trade since volatility shook U.S. stocks last year
Alexander Osipovich – WSJ (SUBSCRIPTION)
A retreat by traders from an important corner of the U.S. financial system has some worried it could make the stock market more susceptible to shocks. E-mini S&P 500 futures, a huge market where over $200 billion changes hands on average daily, are widely used on Wall Street to bet on market moves or protect against adverse stock swings. The futures have gotten harder to trade since volatility shook U.S. stocks last year, according to trading data and market participants.

****SD: The market making world needs a healthy equity futures complex to manage its risk.

Goldman to markets: chill out over gloomy German factory data
Sarah Provan – Financial Times (SUBSCRIPTION)
Market volatility late last week that was ignited by grim data on Germany’s sprawling factory sector was a “major overreaction”, Goldman Sachs has said as the investment bank stuck to its view that factory-sector weakness would be “manageable”.

Local trading firms brace for Brexit anyway; Many firms and exchanges are setting up new offices on the mainland, primarily in Amsterdam or Dublin.
Lynne Marek – Crain’s Chicago Business
When it comes to Brexit, Chicago trading firms and exchanges can’t afford to be caught flat-footed so most have, or are in the process of, making changes to comply with regulations on the European mainland.
As Britain moves toward an exit from the European Union, whether or not by a March 29 deadline, Chicago’s electronic trading firms that buy and sell stocks, bonds and derivatives all over the world have to make sure their activity in Europe isn’t disrupted. To that end, many are setting up new offices on the mainland, primarily in Amsterdam or Dublin.

Finance sector hopes for smooth Brexit, plans for the worst
Laura Noonan – Financial Times (SUBSCRIPTION)
Two years after the UK’s historic vote to quit the EU, the Financial Times asked senior finance executives which big Brexit risks were still on the table. “What risks have been taken off the table?” responded one of the City’s most senior bankers, in a tone that betrayed the depth of his frustration. A year later, things have improved only slightly.

INTL FCStone acquires UOB’s brokerage, clearing business unit
Quynh Nguyen – Deal Street Asia
INTL FCStone Pte, a subsidiary of INTL FCStone Inc, has executed an asset purchase agreement to acquire the futures and options brokerage and clearing business of UOB Bullion and Futures Limited, a subsidiary of United Overseas Bank Limited, according to an announcement.

Exchanges and Clearing

CME’s Terry Duffy talks about retail investors increased activity
Dan DeFrancesco – Business Insider
Main Street investors are more interested than ever in managing their own investments, and CME Group chairman and CEO Terry Duffy is happy to oblige.
Duffy’s exchange group, which owns and operates some of the largest trading venues for futures, told Business Insider that there is a growing population that’s taking its money out of Wall Street’s hands. In 2018, CME saw a 27% uptick in trading activity from its retail customers compared to the previous year.


Vela Certifies Metro Trading with BNP Paribas’ FIX Order Gateway
Traders Magazine
Vela, an independent provider of trading and market access technology for global multi-asset electronic trading, announced that its Metro trading platform has connected to the FIX order gateway at BNP Paribas, a global provider of banking and financial services. This certification will enable BNP Paribas’ global clients to use Metro’s options pricing, execution, and risk management tools and enable seamless integration and market access to the BNP Paribas FIX order gateway.

Investing 2.0: How Bots Are Forging the Next Generation of Funds
Sarah Ponczek and Rachel Evans – Bloomberg (SUBSCRIPTION)
Kensho Technologies was focused on analyzing North Korean missile launches, earthquakes and elections when John van Moyland joined in 2014. The Central Intelligence Agency was among its early backers.
Now, its focus has shifted to finance. S&P Global Inc. bought the firm last year and the artificial-intelligence startup lasered in on another technical challenge: developing the next generation of indexed funds. According to van Moyland, machines are ready to design better indexes to underpin investment vehicles passively managing $7.3 trillion in the U.S.


‘Fatal Trifecta’: How JPMorgan Is Eyeing Market Risk
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Lack of volatility calls for vigilance in other areas; Watch for signals in positioning and valuations: strategist
In markets, too much of a good thing is often framed as bad. When things are too calm, investors too enthusiastic, or valuations too rich, there is a category of analysts who reliably get worried

Where Did The Volatility Go? A Look At UVXY
Seeking Alpha
Given the recent bull run in the equity markets and corresponding decrease in volatility, I thought it would be fitting to look into one of the more common underlying securities used to trade volatility, UVXY. Since October 2018, we have seen volatility increase quite rapidly through the end of December and subsequently contract fairly steadily until the present time. As per the Seeking Alpha News release yesterday “U.S. equity market volatility has fallen to its lowest level since early October as investors are reassured by the Federal Reserve’s “patient”, “wait-and-see” stance regarding future interest rate hikes.”

Volatility ETFs Jump on Global Growth Concerns
Sweta Killa – Nasdaq
Volatility took the front seat following the rounds of downbeat data across the globe that has escalated fears of a global slowdown. This is particularly true as the Eurozone manufacturing sector activity in March contracted at the fastest pace in nearly six years, per the latest IHS/Markit research data.
German manufacturing activity growth was weakest in six and a half years while France’s private sector also sank. Moreover, the U.S. manufacturing sector Flash Purchasing Managers’ Index (PMI) tumbled to its lowest level in nearly two years. Another sign of U.S. economic downturn is the Fed’s surprise move for no rate hike this year.


D.E. Shaw gives special access to its biggest investor Blackstone and it shows the power of large investors
Bradley Saacks – Business Insider
Every hedge fund — even the biggest firms run by celebrity investors — is most concerned about one thing: Keeping its biggest investor happy.
For $50 billion quant fund D.E. Shaw, that means giving its biggest investor — private equity giant Blackstone —preferential treatment, according to several sources inside the manager.

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