China investors catch option fever, prompting regulator warnings

Mar 15, 2019

Lead Stories

China investors catch option fever, prompting regulator warnings
Andrew Galbraith and Samuel Shen – Reuters
A rally that has made China’s stock market the world’s best-performing this year has fed a rush of leveraged bets in the country’s stock options market, prompting regulators to warn investors of rising risks.
Growing interest in China’s equity option market came after a contract soared as much as 19,267 percent in a single session last month.

**** See also: China’s Bull Market Will Be Wild No Matter What Beijing Says

Trading Frenzy Ahead Thanks to ‘Quadruple Witching’
Asjylyn Loder – WSJ
The Ides of March is setting up to be one of the busiest trading days of the year.
Friday marks a quarterly collision that traders call “quad witching,” when equity and index futures and options expire. Adding to the fun, dozens of S&P indexes, including the popular S&P 500, are scheduled to rebalance their holdings at the end of the day.

Liquidity is the scary absentee in stocks’ rebound
Robin Wigglesworth – Financial Times
Earlier this week, Paul Britton chaired an informal meeting of fellow hedge fund managers and asked them why trading conditions have deteriorated so significantly lately. The lack of clear explanations unnerved him.
“We had a robust discussion but no one could give me a good answer,” admitted the founder of Capstone, a $5.6bn hedge fund. “But there’s an impairment in the US stock market’s liquidity. That severely worries me.”

Japan’s imperial transition puts yen flash crash firmly on the radar
Leo Lewis – Financial Times
On April 30, for the first time in more than two centuries, the Japanese Emperor will abdicate the Chrysanthemum Throne. On the following day, his oldest son will accede to the longest unbroken monarchy on Earth. Around that time, say currency traders, there could well be a “flash crash” in the yen.

What is the Swedish Krona Exchange Rate and Why Is It So Weak?
Love Liman – Bloomberg
Sweden’s krona is so weak that some of the biggest Nordic banks say policy makers may take action to prop it up.
The krona is the worst major currency this year, trading near the lowest since the global credit crunch in 2009, even though the Riksbank has started to lift its crisis-era stimulus. SEB AB and Nordea Bank Abp believe policy makers concerned about volatility and the impact on inflation may step in to intervene verbally if it slips further to approach a nine-year low of 11 per euro.

Don’t look now, but global economic reports are starting to surprise investors in a good way
William Watts – MarketWatch
Is that a glimmer of light ahead?
While stock-market bulls took back control in early 2019 on expectations fears of an imminent economic slowdown were off the mark, data from developed market countries is starting to offer some tentative signs of vindication. After a long stretch of ugly readings from Europe and lackluster figures elsewhere, economic surprises over a four-week window have turned slightly positive for the first time since October, said Adam Cole, chief currency strategist at RBC Capital Markets, as noted in the chart below:

JPMorgan’s Kolanovic Says Time to Get Over Your Fear of Stocks
Lu Wang – Bloomberg
Investors who have shunned risky assets since Christmas better start embracing them, according to JPMorgan Chase strategists led by Marko Kolanovic.
The firm advised clients to boost holdings in commodities and cut exposure to safer assets such as government bonds. A U.S.-China trade agreement appears likely and major central banks around the world have adopted a more dovish stance, all setting the stage for an economic rebound in the second half of 2019, the team said.

AllianzGI Sees Equities Delivering `Lowish’ Returns Amid Higher Volatility
Bloomberg (VIDEO)
Lucy Macdonald, chief investment officer of global equities at Allianz Global Investors, discusses U.S. corporate earnings, equity returns and volatility. She speaks on “Bloomberg Surveillance.”

Exchanges and Clearing

Cboe puts the brakes on bitcoin futures
John McCrank – Reuters
Cboe Global Markets said it no longer plans to offer bitcoin futures contracts as the exchange operator reassesses its plans for trading digital asset derivatives amid slumping volumes.
Currently listed Cboe XBT futures contracts, which expire in June, remain available for trading, Cboe said in a statement late on Thursday.

Regulation & Enforcement

Nine banks win dismissal of Canadian rate-rigging lawsuit in U.S.
Jonathan Stempel – Reuters
A federal judge in Manhattan on Thursday dismissed a lawsuit by investors that accused nine large banks, including six from Canada, of conspiring to manipulate a Canadian rate benchmark to improve profits from derivatives trading.


Top Goldman Sachs salesman Jack Johnston leaving for JPMorgan Chase
Alex Morrell – Business Insider
A top Goldman Sachs stock salesman has left the firm, and he’s headed to rival JPMorgan Chase, according to people familiar with the matter.
Jack Johnston, a managing director in equity sales at Goldman since 2013, is leaving for JPMorgan, where he will be a managing director and cohead the US equity sales trading business, the people said.

Goldman Sachs is cutting about 5% of sales and trading staff after senior equities leaders delivered a tough town-hall talk
Dakin Campbell – Business Insider
Goldman Sachs is cutting roughly 5% of its sales and trading staff as its new CEO, David Solomon, conducts a review of the business and looks for ways to improve collaboration between the divisions.
The company notified staff in the securities division of the cuts this week, including those employees who deal with clients trading stocks, bonds, and currencies, according to a person with knowledge of the matter.


Brace yourself for the coming spike in the VIX
Sven Henrich – MarketWatch
Here we go again. The great volatility crushing of stock markets that happens when markets levitate relentlessly and everyone gets bullish. But don’t let the calm waters during this options expiry week fool you — the calm won’t last.
We’ve seen such periods of volatility compression many times before in the last few years, especially during the historic volatility crush of 2017. What invariably happens is that things get too calm, energy builds up, and we get a big launch in volatility out of the blue.

Mind the Signals! Things Are Starting to Get Real: Taking Stock
Michael Msika and Jan-Patrick Barnert – Bloomberg
Trade worries live on after the news that a U.S.-China deal isn’t likely until April at the earliest. Investors weren’t too fazed on Thursday though as the market rallied, and European shares are up 12 percent this year. Still, in these uncertain times, here’s a few things to keep in mind:

How to Trade the Uncertain Story Around Boeing – Bloomberg
Bloomberg (VIDEO)
On this edition of “Options Insight,” MWS Capital Consultants’ Matt Shapiro discusses the performance of U.S. stocks and his options strategy for Boeing Co. with Bloomberg’s Abigail Doolittle on “Bloomberg Markets: The Close.”

These red flags will tell you when it’s time to sell the stock rally: Bank of America Merrill Lynch
Barbara Kollmeyer – MarketWatch
It has been a slow grind higher for stocks this week, but who’s complaining?
The Nasdaq is set for a 3% gain on the week, besting the Dow and S&P 500, which aren’t looking too shabby themselves, with respective rises of 1% and 2%-plus so far. Remember that the Dow has been weighed down by almost daily bad news for aircraft manufacturer and defense contractor Boeing.

Trader’s Edge: The Surge in Trading Copper Options
Dave Lerman – CME Group (VIDEO)
Activity in Copper options has soared in recent months. From less than 200 contracts per day in 2016 to about 3,000 contracts per day in early 2019, users are taking note of:
Greater volume and open interest
Narrowing bid/offer spreads
Increase in block trading
Join CME Group’s Dave Lerman to explore some of the reasons behind the surge in Copper options trading.


Active investors are depressed, but not depressed enough
Tom Braithwaite – Financial Times
Jamie Dimon once complained that new regulations would force him to install a lawyer and a psychiatrist at every trader’s desk.
Now the wider active investment industry needs a shrink: the world’s best-known investors are racked with doubt.

Are nightmares of the recession still haunting your investing dreams?
Anna-Louise Jackson – MarketWatch
This month marks the 10-year anniversary of the current bull market’s beginnings. Yet many Americans remain reluctant to invest in the stock market, a scary hangover from the 2007-09 recession.
From October 2007 to March 2009, the S&P 500 plummeted nearly 57% and it took more than five years for the index to recover. But the share of Americans with money invested in the stock market still hasn’t returned to prerecession levels, according to various studies.

The Hidden Risk When You Own Stocks for the Long Run
Jason Zweig – WSJ
True or false: The stock market is too focused on the short term.
The answer seems almost too obvious. Companies often appear to care only about the next…

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