Cboe Was a Winner From Recent Market Turmoil

Aug 27, 2019

Observations & Insight

Note: Ignore the truncated email that arrived shortly before this. There was an issue with our email distribution provider.


Vol Funds According to EurekaHedge and BarclayHedge
According to EurekaHedge, all four of the vol strategies it covers – long, short, relative value and tail risk – were negative for July, with relative value performing the best at nearly even. Tail risk was the worst performer at -4.42%. The worst performer year-to-date is long vol at -8.09%. BarclayHedge’s volatility index, which tracks 24 funds, was up .06% for July and down 1% for the year. ~SD


Editor’s Note
Spencer Doar

I will be leaving JLN in two weeks time to pursue another opportunity at a PR firm serving clients in the fintech space. So Chicago area derivatives folks will still have to deal with seeing my mug bouncing around town 🙂

It has been an absolute pleasure diving into the nuanced world of options with you all. When I first came on board at JLN, covering equity derivatives for an audience of derivatives professionals seemed an impossible – and extremely intimidating – task. But as I listened, learned, travelled and networked, I slowly became comfortable with this crucially important industry. It’s full of such brilliant, stand-up people who have made me feel welcome – I cannot thank you and my colleagues at JLN enough.

Rest assured, I’ll still remain plugged into the options biz, because frankly there are too many issues and themes I’ve been covering for the last five years that have yet to be resolved. I want to see what happens! How will SA-CCR implementation progress? Will strike de/listing procedures finally get straightened out? How will the volatility product offerings space evolve? Will Nasdaq actually let a medallion go unused (like NYSE) by closing a low volume exchange? Who’s going to be the next victim of consolidation? Will Chinese options on futures actually gather substantial open interest and become less of a day trading product? How will the OCC’s roadmap play out? And on and on.

So, stay in touch, everybody. I’m getting new contact info set up, but my phone number and LinkedIn are still easy ways to reach out.

I’ll see you around the way.

And do not fear, the JLN Options Newsletter will continue to be published as usual after my departure.

Lead Stories

Cboe Was a Winner From Recent Market Turmoil
Gunjan Banerji – WSJ (SUBSCRIPTION)
It is a good time to be in the business of trading volatility.
Cboe Global Markets Inc. CBOE -0.85% shares have rallied 23% this year, outperforming the S&P 500 and reversing a punishing 2018 slump that made it one of the worst-performing exchange operators.
Cboe shares ticked down about 0.5% Tuesday to $120.12, but its gains continue to outpace some of its exchange peers and the S&P 500’s financial sector, which has risen about 9.6% this year.

VIX Dropped Below S&P 500 Realized Volatility
Berlinda Liu – S&P Dow Jones Indices
While everyone has been concerned about the inverted yield curve, the CBOE Volatility Index (VIX) has been under the 21-trading-day realized volatility of the S&P 500 since Aug. 16, 2019. Since volatility traders care not only about what is expected but also what actually transpired, the spread between implied volatility and realized volatility is one of the most important gauges for them to keep an eye on.

Reforms may boost banks’ algorithmic trading, Fitch says
James Langton – Investment Executive
Last week’s move to ease the rules prohibiting U.S. banks from engaging in risky trading may enhance banks’ ability to compete in market making, but any move back to risky proprietary trading would be viewed negatively, says Fitch Ratings.
In a new report, the rating agency said that the U.S. regulators’ recent changes to the Volcker Rule — a post-crisis rule that aims to prevent U.S. banks from engaging in prop trading, and from controlling hedge funds and private equity funds — relaxes the rule’s compliance requirements, which may enhance banks’ market-making activities, boosting market liquidity.

The Paradox of the Pre-Trade Cost Model
Quantitative Brokers
QB’s clients are very interested in pre-trade transaction cost estimates, with good reason: As financial markets get more efficient and alpha signals get more fleeting, transaction costs are often one of the largest determinants of investment success. A good understanding of likely costs for a proposed trade can be an important ingredient in making and adjusting trade decisions. Questions such as “how large a trade can we do”, or “what time horizon should we set”, or even “does this trade have a strong enough alpha to overcome the transaction costs” can all be systematically evaluated using a good pre-trade cost model.

****SD: More good stuff from QB.

This Little Black Box Does Heavy Lifting for Wall Street
Telis Demos and
Alexander Osipovich – WSJ (SUBSCRIPTION)
Every day, about 10% of all orders sent to the U.S. stock market first pass through black boxes created by a 50-person technology company, Hyannis Port Research Inc. in Needham, Mass.
HPR, whose boxes do risk checks on the trade orders, is little known outside Wall Street technology departments. But it is at the center of a high-stakes contest among big banks to keep their trading arms relevant and profitable.

****SD: While HPR started in equities, its asset footprint is larger now. (No surprise here – seven of the eight open positions on HPR’s website are for engineers/computer science professionals including an FPGA design engineer and a Linux system admin.)

Trade Tantrums Turn U.S. Stock Market Into a Macro Play
Luke Kawa – Bloomberg (SUBSCRIPTION)
Equities have been moving in unison over the past month; Realized correlations have soared amid trade headline barrage
It’s all or nothing in the U.S. stock market.
The S&P 500’s top constituents have shown a greater tendency to move in the same direction over the past month than at any time since the aftermath of the Brexit referendum in 2016. So-called realized correlations have soared, sending stocks up or down en masse under a barrage of trade headlines.
You’ve reached your free article limit.

****SD: Two more Trump trade stories from Bloomberg: In Trump’s Tweet-Speed Market, Facts Take Back Seat to Hope and Trump Has Added an Element of Randomness to Markets.

Worst-Case Scenario for Tariffs – and the Stock Market – Keeps Getting Worse
Avi Salzman – Barron’s (SUBSCRIPTION)
Early on in the trade war, analysts sketched out a “worst-case scenario” where all goods traded between the U.S. and China faced 25% tariffs. But the tariff “ceiling” now looks like a floor after President Donald Trump announced late Friday he would add 5 percentage points to all existing and planned tariffs, lifting rates on $250 billion in goods to 30%, and raising expected tariffs on more than $130 billion in other goods to 15% from 10%.

Oil funds sidelined by economic uncertainty
John Kemp – Reuters
Hedge fund managers cut short positions in petroleum last week amid slow vacation trading and continued conflicting signals about the health of the economy and the outlook for oil supply.
They and other money managers increased their net long position in the six most important petroleum futures and options contracts by 8 million barrels in the week to Aug. 20.

Here’s how market shares for fixed income and equities trading changed, by bank, since 2017
Sarah Butcher – eFinancialCareers
If you want to work for a market leading bank in fixed income or equities trading, the lesson of the past two years is this: don’t count on the leader today being the leader tomorrow. There are a few consistencies in both markets – Morgan Stanley is almost always top in equities, and Citi and JPMorgan are always at the top in fixed income, but there are big variations too. Today’s winner is tomorrow’s loser and yesterday’s loser might make a comeback.

Exchanges and Clearing

Forget Stocks, Invest In Stock Exchanges
John Markman – Forbes
Digital transformation brings transparency, speed and a world of opportunity to entrepreneurial companies.
Intercontinental Exchange, an operator of commodity and stock exchanges, reported spectacular financial results on Aug. 1, and managers have plans to disrupt other lucrative markets soon.

Regulation & Enforcement

FIA Supports CFTC and SEC Update on Foreign Futures and Options Transactions
FIA today submitted a comment letter in support of the CFTC and SEC’s effort to update, harmonize and simplify decades-old rules with respect to the minimum required margin to be collected by security futures intermediaries.

Someone Just Blew a Hole in the Volcker Rule
Editorial Board – Bloomberg (SUBSCRIPTION)
Up to now, President Donald Trump’s largely ill-conceived effort to roll back financial regulation had one redeeming feature: a mostly sensible plan to improve the Volcker Rule, a piece of the 2010 Dodd-Frank Act aimed at limiting banks’ ability to take undue risks with taxpayer backing.
Not anymore. A new round of tweaks, which regulators are in the process of approving, threatens not to fix the rule, but to blow a big hole in it.


Alternative data provider Quandl is changing its strategy as industry giants like Bloomberg and S&P push into the $7 billion market
Dan DeFrancesco – Business Insider Prime (SUBSCRIPTION)
Adapt or die. One of the first alternative data providers has taken that message to heart, as larger, traditional data powerhouses move into its market. Quandl, one of the early sellers of unique data sets from nontraditional sources, has been forced to rethink its business strategy as industry giants such as Bloomberg and S&P have launched alternative data offerings of their own. Tammer Kamel, Quandl’s CEO and co-founder, told Business Insider that the company, which was acquired by Nasdaq in 2018 for an undisclosed amount, now sees more opportunity creating proprietary data sets as opposed to just selling others’ feeds. The change in philosophy comes at a time when larger data companies have gotten into the lucrative business of selling alternative data. “I don’t want to be offering a data product that’s on eight other platforms,” Kamel said. “What’s my case to the customer that they should buy it from me as opposed to anyone else? … I can’t out compete Bloomberg at that game, so why would I get into it? I will out compete Bloomberg by offering better data products.”

****SD: Quandl was the first firm to put “alt data” on my radar.

The Cost of a Legacy: Why the Network You Once Revered Is Now Hindering Your Business
Mark Casey, Apcela via TABB Forum
The financial services industry is understandably conservative and does not like making changes to its technology infrastructure. Replacing one system with another can feel like trading the devil you know for one you don’t. With so much riding on the rails of enterprise wide area networks (WANs), CIOs at financial services companies are prone to taking a cautious approach. However, this trepidation has put the financial services industry years behind the curve on adopting the transformational technologies of cloud computing and software-defined WANs (SD-WANs).

Morgan Stanley also has its very own proprietary programming language
Sarah Butcher – eFinancialCareers
Investment banks are nothing if not innovative. Decades ago, long before the likes of Java or Python were used widely, banks spotted gaps in the market and stepped in with their own programming languages devised to suit their particular needs. Goldman Sachs famously concocted ‘Slang’. Less famously, Morgan Stanley concocted A+. – And, like Slang, it’s still in use.


The world’s biggest wealth manager just told clients to sell stocks — saying ‘brace for higher volatility’ from the trade war
Yusuf Khan – Markets Insider
UBS Wealth Management, the world’s largest wealth manager with more than $2.4 trillion under management, just turned bearish on equities, trimming its core equity recommendation to underweight.
While the US is likely to avoid a recession in 2020, “Downside risks are increasing for both the global economy and markets,” said Mark Haefele, UBS’ global chief investment officer, in the note dated August 26. “With talks between the US and China dominating market moves over the near term, investors should brace for higher volatility.”

Disney’s Streaming Service Is Coming. How to Play It With Stock Options.
Steve Sears – Barron’s (SUBSCRIPTION)
If the world lurches into permanent dystopia because the U.S. and China cannot settle the trade war, Walt Disney stock should offer shelter from the storm. If a trade war is averted, and concerns about global economic growth disappear in the wind, the home of Mickey Mouse also should shine.

Traders bet AMD could surge 6% by the end of the week
Lizzy Gurdus – CNBC
One semi stock could be set to surge.
That’s at least according to the options market, which is tentatively betting that the recent chip stock whiplash could soon come to an end, said Michael Khouw, co-founder and chief strategist at Optimize Advisors.

Have The Anticipated Rebalancing Flows Kicked In? Nomura’s McElligott Says Maybe
The Heisenberg Report
Have the anticipated rebalancing flows kicked in? Is that what we saw in the US on Monday when equities managed to sustain a bounce predicated on ostensible “trade optimism” tied to a phone call that probably exists only in President Trump’s mind? Maybe. “Rebalancing of the extreme month-to-date UST over SPX outperformance began in earnest yesterday”, Nomura’s Charlie McElligott writes, in a Tuesday note, adding that the performance gap for August ranks in the 7th %ile since 1982.


The World’s Best-Performing Hedge Fund Is Up 278% This Year
David Ramli – Bloomberg (SUBSCRIPTION)
Three years ago, Chong Chin Eai watched Donald Trump’s shock election victory roil markets. His months-old Vanda Global Fund Ltd., founded with $24 million from friends and family, was down more than 50%. At his nadir, Chong considered using his own savings to cover investors’ losses and shut up shop.

****SD: Ahhh, leverage.

Could poker make you a better investor?
Proinsias O’Mahony – Irish Times
Good poker skills certainly seem to help if you’re a hedge fund manager. A new study, Hedge Fund Hold’em, has found hedge fund managers who do well in poker tournaments enjoy significantly better fund returns. “This effect is stronger for tournaments with more entrants, larger buy-ins, larger cash prizes and for managers who win multiple tournaments,” the study notes, “suggesting poker skills are correlated with fund management skills.” Is it possible the hedge fund managers in the sample are simply big gamblers who got lucky, or that they were rewarded for taking extra risk? No – managers who played poker “are not more risk-seeking than their non-player counterparts”. Quite simply, the results show “skilled poker players are, on average, better fund managers”.

The End of Libor: Wall Street Prepares for Benchmark Change
Lananh Nguyen and Alex Harris – Bloomberg (SUBSCRIPTION)
Libor is dying, warn global regulators, and there’s nothing banks can do to stop it.
Their only choice is to prepare for the end.

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