Central Bank Decisions, Not G7, Seize Options Traders’ Attention; UBS Faces Backlash Over Options Strategy

Aug 23, 2019

Observations & Insight

Itiviti Expands Offerings Amid Industry Consolidation
Itiviti is working with Bloomberg to help clients using Bloomberg SSEOMS transition to Itiviti’s multi-asset Order Management System (OMS). It’s just one indication of how as other firms pull back, cut costs and/or sunset legacy technology, Itiviti is expanding its services. In this video, Itiviti President of EMEA North Lee Griggs talks about the firm’s growth strategy moving forward.
Watch the video »


CME Globex Notices
CME’s Globex notices for the week are up here. CME Group is introducing iLink 3, a new order entry protocol, that will launch in new release on Monday, August 26. All those using the Market Segment Gateway need to migrate to iLink 3 by Q4 2020. The CME’s client impact sheet and more on the timeline can be found here.

Lead Stories

Central Bank Decisions, Not G7, Seize Options Traders’ Attention
Vassilis Karamanis – Bloomberg (SUBSCRIPTION)
Euro-options traders seem little concerned by the impending G7 summit and have started placing their bets for when things will really matter: the Sept. 12 to Sept. 18 period.
That’s when the European Central Bank and the Federal Reserve will hold their policy meetings. Investors expect the central banks to be dovish, yet the extent of the stimulus they may provide remains in question. With some traders looking for a Fed cut of more than 25 basis points, and amid uncertainty about whether ECB President Mario Draghi will announce a major stimulus package once again, the market may find itself wrong footed. Options traders are taking no chances.

****SD: How quickly things can change. In the middle of the night, S&P futures were pointing to a positive open. Then, tariff developments and pow! Right in the kisser. Given current volumes in ETF options, it looks like today is going to be a good day for volumes after a week that saw daily volumes well below the YTD average. For more on central banks, see Reuters’ Seeking clarity from Fed’s Powell? Good luck with that and Powell’s speech from Jackson Hole.

UBS Faces Client Backlash Over Options Strategy
Gretchen Morgenson – WSJ (SUBSCRIPTION)
A complex investment strategy pitched as low-risk by stockbrokers at UBS Group AG has triggered a backlash from clients of its securities unit.
The strategy, called Yield Enhancement Strategy, or YES, has generated at least $60 million in losses for clients and more than two dozen customer complaints, according to a lawyer for the investors.

****SD: An update on an ongoing iron condor debacle. (The strategies in question go well beyond “simple” condors, but that’s the gist of it.) Lawyers for investors claim that the potential risks and losses from YES were not well disclosed and were instead marketed as “safe” or “stable” alternatives for investors. And this is not just limited to UBS – Credit Suisse, Merrill Lynch and Morgan Stanley have also offered yield enhancement strategies through varying fund constructs and structured notes. They are also being investigated by legal teams on behalf of investors. Harvest Volatility Management also comes up in legal documentation for its CYES offering (collateral yield enhancement strategy). Recall that Harvest was going to be purchased by Victory Capital, but the deal fell through “‘in light of recent adverse market conditions’ that affected Harvest’s investment strategies” (via MarketVoice). Harvest’s AUM decreased 17% in the 12 months preceding April 2019.

Equity Volatility Does Not Spell Recession
Blu Putnam – CME Group
Equities and bonds are worried about a recession. With the escalating trade war with China, the odds of a U.S. recession have risen a little, to say a one-in-three chance. Still, we are hard pressed to see an actual U.S. recession.

****SD: It might not spell recession but it does spell “edge.”

Stock Hedges a Steal as VIX Flashes Calm Ahead of Fed Speeches
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
The Cboe Volatility Index, or VIX, has fallen back quickly after spiking earlier this month — a little too quickly, according to some. And that may spell opportunity.
As the Jackson Hole summit looms, Wall Street banks say options are now looking decidedly cheap to hedge a backlash against the Federal Reserve’s interest-rate policy. After spiking as high as 24.59 earlier this month, Wall Street’s fear gauge closed on Thursday at 16.68, below its one-year average.

****SD: Let’s hope you “stole” those hedges before today’s market action. The VIX is up more than 20% and the futures term structure moved into backwardation. (To be fair, at the open there was a Dec kink in the curve, but things have steepened considerably.)

Suspicious Carbon Black Call Buying
Henry Schwartz via LinkedIn
Unusual call buying in Carbon Black (CBLK) hours before deal announcement was identified as an aggressive sweep in our system and highlighted within two minutes for our clients! Indicative valuation by FT Options shows same-day returns over 100% or $102K
Chart here.

****SD: I did not realize FT Options gives you some courtesy calculations with its Wingman software – pretty slick. For more on the CBLK deal, see Bloomberg’s VMWare to Buy Carbon Black for $2 Billion.

SIFMA Options Symposium Data
Henry Schwartz via LinkedIn
Sneak peek at data I will present next month at the SIFMA Options Symposium in New York. August 2019 ADV>21.5M is best of the year, favoring index and ETFs but single stock is consistently running above 2018 record levels. Hope to see you next month for more detail!
Charts here.

Turmoil in Hong Kong Streets and Markets Keeps Investors Worried
Hong Kong’s financial markets are in one of their most volatile periods in years, and signs of a turnaround are few and far between.

Exchanges and Clearing

Six months Eurex ESG Futures – a first summary
Eurex Exchange
Six months after their launch in February, our Environmental Social Government (ESG) derivatives have reached 235,000 traded contracts and recently peaked at EUR 782 million in open interest. Time for a first review with Michael Peters, Member of the Eurex Executive Board.

****JB: From the press release, “Market participants can expect more to come [later] in Q4 (options, further regions and more ESG focused index methodologies). It remains Eurex’s focus to provide market participants with efficient derivatives instruments to meet the requirement to incorporate ESG into their investment strategies.”

SR-CBOE-2019-050 – Proposal to amend the Rules regarding routing services, including the Hybrid Agency Liaison (HAL).

****SD: “The Exchange proposes to harmonize its rules in connection with routing functions on the Exchange to that of the Cboe Affiliated Exchanges.”

Moscow Exchange Announces Results For The Second Quarter Of 2019
….Derivatives trading volumes were down 12.0% as a result of lower activity in FX and index contracts. Trading volumes of commodity derivatives increased 20.8%, while single-stock derivatives rose by 27.2% and interest rate derivatives grew 320.3%. Volumes in the Standardized OTC Derivatives Market increased 46.4%. The shift in the structure of traded contracts in favor of commodity and equity contracts, together with a UCP-linked fee rate increase and robust activity in OTC derivatives helped achieve a 4.9% growth in fee and commission income.

Regulation & Enforcement

FSS should not pass the buck to banks
Kim Bo-eun – Korea Times
The Financial Supervisory Service (FSS) has been in the hot seat for its loose supervision of banks’ risk management system as the latters’ sales of controversial derivatives products are set to end up incurring major losses for individual investors.

Wall Street spent years fighting the Volcker Rule, but small banks win the most relief in Trump regulatory rewrite
Francine McKenna – MarketWatch
The biggest Wall Street banks are finally getting some relief from the Trump administration on the heavily protested Volcker Rule, but smaller banks are really the big winners.

Kraft is taking the CFTC to court keep the lid on $16 million fine
Jesse Pound – CNBC
Kraft and Mondelez are taking the Commodity Futures Trading Commission to court in a bid to keep the agency from discussing a $16 million fine to settle allegations of manipulating the wheat markets.


Ex-Morgan Stanley Asia Derivatives Head Joins Alumni Crypto Firm
Alastair Marsh – Bloomberg (SUBSCRIPTION)
Jeffrey Wang, who used to run foreign exchange spot and derivatives trading for Asia at Morgan Stanley, has joined a cryptocurrency firm run by his former colleagues, part of a growing cohort of ex-Wall Streeters taking a shot in the volatile world of digital assets.


As Uncertainty Rises, Investors May Seek the Defensive Attributes of Convertible Bonds
Nicholas Jasinski – Barron’s
With stocks just below all-time highs and bond yields near record lows, many investors are left searching for capital appreciation and current income. There’s one often-overlooked asset class that could satisfy both needs, while insulating investors from a downdraft: convertible bonds.


Fall in share buybacks poses threat to US stocks
Richard Henderson – Financial Times (SUBSCRIPTION)
Big companies across America spent less on their own shares for a second quarter in a row, threatening a key pillar of support for the stock market that has helped to push indices to record highs.
US-listed groups spent $166bn on stock buybacks in the second quarter, down from $205bn in the first quarter and $190bn for the same period a year earlier, according to data from S&P Global.

****SD: It isn’t just central bank easing – share buybacks have also been an important contributor to years of low vol.

Investors pull money from hedge funds at fastest pace since 2016
Lindsay Fortado – Financial Times (SUBSCRIPTION)
Investors pulled around $56bn from hedge funds in the first seven months of this year, the worst start for fundraising since 2016 despite the best stretch of performance in a decade for the struggling industry.
Only 37 percent of hedge funds have had net inflows so far this year, according to data from eVestment published on Thursday. Redemptions totalled $8.4bn in July alone, though the rebound in returns meant the industry’s total assets under management ticked up to $3.3tn.

Overstock Stock, Options Volume Soar on CEO Exit
Andrea Kramer – Schaeffer’s Investment Research via Yahoo Finance
The shares of Overstock.com Inc (NASDAQ:OSTK) have catapulted higher today, after being halted earlier for news. Specifically, the e-commerce and blockchain concern announced that CEO Patrick Byrne is resigning, effective immediately. The exit comes just a week after Byrne said he was involved in a federal probe into Russia and 2016 presidential candidate Hillary Clinton. In a letter to shareholders, Byrne said, “My Rabbi made me see that ‘coming forward’ meant telling the public (not just the government) the truth.” At last check, OSTK stock is up 8.4% at $21.13, and call options are trading at a faster-than-usual clip.

****SD: For more on Patrick Byrne’s recent actions see the FT’s Patrick Byrne and the comic tragedy of life as a 40-something man and the NY Times’ Patrick Byrne, Overstock C.E.O., Resigns After Disclosing Romance With Russian Agent. Yet again, truth proves stranger than fiction.

Winners unveiled in SGX Orb Awards recognising excellence in financial news and content
Singapore Exchange (SGX) has unveiled the winners of the second edition of the SGX Orb Awards, which seeks to encourage broader and deeper coverage of financial news to empower individuals to become savvier investors.
As the global business and financial landscape becomes increasingly complex, investors are seeking quality news and content that not only offers balanced insights, but also presents stories in an easy-to-understand and engaging manner. At the same time, with the proliferation of mobile technology, everyone now has a voice and the ability to influence. The vast amount of information on social media platforms also requires investors to be discerning in what they read and take action on.

****JB: We are all for encouraging better financial news coverage.

Against the grain: bearish US forecast sows seeds of doubt in corn market
Emiko Terazono – Financial Times (SUBSCRIPTION)
After more than four years of low prices, extreme weather, and a trade war with China, frustration on American farms seems to be boiling over.
For one farmer, last week’s shock forecast from the US Department of Agriculture — which pushed corn futures prices down 6 per cent, the largest daily sell-off in six years — could have been the final straw. The person phoned to threaten violence against a USDA employee taking part in an annual crop tour held this week, the government said, as it pulled its entire staff from the privately run trip.

Tabula ETF debuts on Deutsche Boerse
Investment Europe
…The Tabula J.P. Morgan Global Credit Volatility Premium Index Ucits ETF tracks the difference between realised and implied volatility in the markets for credit default swap (CDS) index options. The index reflects the performance of put options on European and North American High Yield CDS indices and hedges the risk of credit spreads daily through delta hedging.

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