Cheap Negative Rate Bets Fly Off the Shelves Before Fed Decision

Jul 28, 2021

Observations & Insight

****SR: The FIA on Tuesday released new data for the first half of 2021 that shows global futures and options trading reached 28.9 billion contracts in the first half of the year, up 32.1% compared to the first half of 2020.
FIA’s data also show that in the second quarter, 14.08 billion futures and options were traded on derivatives exchanges worldwide, down 5% from the record-breaking 14.83 billion contracts traded in Q1 2021, but up 34.4% from the second quarter of 2020.
FIA will hold a webinar TODAY at 10 a.m. Eastern Time to discuss the volume and open interest data in more detail. You can go here to register.

Lead Stories

Cheap Negative Rate Bets Fly Off the Shelves Before Fed Decision
Edward Bolingbroke – Bloomberg
Traders are piling into inexpensive options that hedge against negative interest rates as bets on Federal Reserve hikes are pushed further out into 2023.
Over the past 10 days, demand has emerged for an array of 100.00 call strike options on eurodollar contracts — which are priced off Libor — protecting against potential interest-rate cuts. More than 100,000 options have been bought across an array of tenors during that period. The call strike coincides with a Libor rate of zero, compared with Wednesday’s return of 0.1285%.

Market fragility lingers as VIX climbs even with U.S. stocks rising to peaks, BofA says
Christine Idzelis – MarketWatch
Some investors appeared increasingly nervous in recent weeks, reflecting the market’s fragility, even as major U.S. stock benchmarks rose to fresh new peaks in recent weeks, according to BofA Global Research.
The Cboe Volatility Index, known as the VIX, has been rising despite the S&P 500 index posting new highs, BofA analysts said in an equity derivatives report Tuesday. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite each posted record highs Monday, though they were trading down Tuesday afternoon.

This Type of Day Is Price of Progress in Post-Pandemic Stocks
Vildana Hajric and Katherine Greifeld – Bloomberg
The Nasdaq 100 Index trades for 38 times earnings. Abby Joseph Cohen says it’s a market with “no margin for error.” It’s only July, and the S&P 500 Index has put in a gain that most fund managers would consider a stellar year.
So when big drops like Tuesday’s land with no obvious bad news to explain them, it’s useful to consider how far the market has already come.

‘The IPO is a black box’: Robinhood’s unconventional stock market debut
Madison Darbyshire and Eric Platt – Financial Times
The decision by retail brokerage app Robinhood to reserve an unusually large stake in its initial public offering this week for its own customers has money managers girding for a volatile trading debut.
The company, which enabled retail investors to drive vertiginous moves in meme stocks, expects to allocate as much as 35 per cent of the 55m shares it plans to sell to investors buying directly through its app.

****JB: Also see the Reuters story, Robinhood’s meme stock status fuels IPO uncertainty and The Wall Street Journal’s story, Robinhood Walks IPO Pricing Tightrope.

Robinhood’s IPO to Test Loyalty of Retail Trading Legion It Helped Create
Despite having access to buy in to one of the buzziest trading events of the year, some individual investors are saying: No thanks
Caitlin McCabe – WSJ
Robinhood Markets Inc. has spent the better part of a decade trying to entice nonprofessional investors to fall in love with markets.
This week, the company will face its first public test of whether those same traders love Robinhood back.
The wildly popular trading platform’s initial public offering is expected to price Wednesday night and begin trading Thursday in one of the most highly anticipated deals of the year. In an unusual move, Robinhood, which boasts 22.5 million users with funded accounts, is expected to sell its users up to 35% of its IPO shares, or up to 18.3 million shares.


Eurex and Capitalab first in Europe to execute compression in equity index derivatives; Successful production run was completed on 20 July
Eurex is the first European exchange to support compression services in its listed equity index business, addressing the industry-wide challenge of high cost of underlying capital for trading derivatives. Capitalab is an established compression services provider which now offers compression of exchange-traded European equity index derivatives, starting with EURO STOXX 50 Index Options listed at Eurex.

NYSE Pillar Options Migration: Arca Options Pillar Cert, Proprietary Market Data Specifications, New Migration Resources
NYSE Arca Options’ Pillar Certification environment (“Pillar Cert”) is available for testing and includes most outright, complex and risk control functionality, in addition to the below recently added items listed below.

CME Group Inc. Reports Second-Quarter 2021 Financial Results
CME Group
CME Group Inc. (NASDAQ: CME) today reported financial results for the second quarter of 2021.
The company reported revenue of $1.2 billion and operating income of $675 million for the second quarter of 2021. Net income was $510 million and diluted earnings per share were $1.42. On an adjusted basis, net income was $589 million and diluted earnings per share were $1.64. Financial results presented on an adjusted basis for the second quarter of 2021 and 2020 exclude certain items, which are detailed in the reconciliation of non-GAAP results.1


Colt Technology Services provides connectivity to Cboe Europe Derivatives
IBS Intelligence
ColtColt Technology Services, a provider of high bandwidth connectivity solutions, announced it would provide connectivity to Cboe Europe Derivatives (CEDX) via Colt’s financial extranet, Colt PrizmNet. Colt will offer connectivity to the new pan-European equity derivatives market from its launch in September 2021.


April Survey: FX Volumes In North America Rise 26% To $966 Billion
Abdelaziz Fathi – Finance Feeds
The Foreign Exchange Committee (FXC), a multi-national cooperative conducting a semi-annual survey that includes FX data from leading dealers and banks in North America, today issued its 34th report, which covers April 2021.
According to a New York Fed filing, the average daily volume in over-the-counter (OTC) foreign exchange instruments (including spot, outright forward, foreign exchange swap and option transactions) was $966 billion in April 2021. This figure was up 26 percent from the ADV metric in the year before, which was reported at $764 billion.

GameStop Is Coming To An Index Fund Near You. It’s A New Stage In The Stock Market’s Hallucinogenic Trip.
Antoine Gara – Forbes
Ever since armies of Redditors and traders on Robinhood emerged on the scene in 2020 and 2021, they’ve laid siege to the ivory tower of financial theory.
Efficient markets? Yeah right. Discounted cash flow analysis? No way!
Weekly call options trades have soared to volumes like never seen before and retail trading has, at many times over the past year, dominated total market trading volumes. Meme stocks like AMC Entertainment, BlackBerry and GameStop have sometimes soared to inexplicable levels, pummeling many hedge fund investors.

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