China’s High-Stakes Bid to Boost Stocks; Korean Retail Investors Suffer Huge Annual Derivatives Losses

Feb 12, 2019

Observations & Insight

Taking Wall Street Know-How to the Cannabis Industry

A Gallup poll at the end of 2018 found that 66 percent of Americans support the legalization of marijuana. These opinions run across demographics and party lines, too – 53 percent of Republicans were for legalization and 59 percent of people over the age of 55 responded “aye” to legal cannabis. When Gallup first asked about legalization in 1969, only 12 percent of respondents favored the move.

Currently, two thirds of states have medical marijuana laws on the books while 10 have legalized it for recreational use.

Enter Sachin Barot, CEO of CERESLabs, a cannabis testing laboratory. Its ancillary services are required by state regulations. (Note: that means the company does not produce or distribute cannabis ó simply tests it for things like the absence of pesticides.)

A 20-year veteran of Wall Street with more than 10 years at FlexTrade, Barot is in the rare position to bring that entrepreneurial financial know-how to the burgeoning marijuana industry. In this video from STAC’s 93rd Annual Midwinter Meeting, he talks about what it’s like to pivot from the Street to California and cannabis.
Watch the video »

****SD: Obviously this is not options, but the growth of the marijuana sector does have tangential repercussions. At some point these crops are going to need a hedging mechanism, right? It is just another commodity. As regulatory frameworks evolve, all of these producers and distributors should eventually be able to gain access to conventional banking (the federal versus state angle of current marijuana legislation has prevented those relationships from developing thus far). As for our industry, just look to the explosive growth of trading in options on some of the big U.S.-listed companies ó Cronos, Tilray, Canopy Growth, Aurora Cannabis et al. ó and the fact that in Canada pot-related stocks attract the most options volumes. There is a lot of money flooding into this space. (I won’t even get into the potential offered by the production of industrial hemp ó that’s a whole other bag of worms. Let’s just say if some of these staple crop prices stay at low levels, don’t be surprised to hear that more farmers are swapping beans for hemp.)

Lead Stories

China’s High-Stakes Bid to Boost Stocks Risks Inflating Bubble
Sofia Horta e Costa – Bloomberg (SUBSCRIPTION)
Securities regulator is removing some curbs imposed in 2015; Speculative manias have roiled the market over past decade
Beijing is walking a tightrope between reviving its downbeat equity market and engineering another bubble. China’s securities regulator has started to remove many of the curbs designed to keep out speculators, signaling an end to the highly restrictive era that started when a boom in the country’s stocks turned to bust in 2015. The result has been an intensifying appetite for risk not seen in years. A gauge of small cap stocks surged almost 9 percent over the past three sessions, the most since 2016.

Retail Investors Suffer Huge Losses from Investment in Overseas Exchange-traded Derivatives Yoon Young-sil – BusinessKorea
Retail investors are found to have been losing tens of billions of won every year by trading futures and options which are traded in overseas exchanges or are designated as quasi overseas exchange-traded derivatives. Financial authorities said that individual investors should take care not to make transactions through unauthorized brokers.
Retail investors had an annual average loss of US$81.86 million (92.13 billion won) from 2011 to 2017, according to the data from the Financial Supervisory Service on domestic investors’ investment in overseas exchange-traded derivatives, excluding FX margin. Individual investors made a loss of US$87 million (97.92 billion won) in the first quarter of 2018 alone, which was higher than the annual average loss. They have been suffering a loss from the investment regardless of market conditions.

****SD: Yonhap also has the news.

Weird Markets Mean No One Knows If It’s Goldilocks Or Bust
Eddie van der Walt – Bloomberg (SUBSCRIPTION)
Metals surge as China slows; U.S. small caps rise late cycle; Basic-resources companies are outperforming in Europe
Investors are riding helter-skelter markets — causing headaches as they try to figure out whether Goldilocks is back or recession is nigh. From stocks, currencies to commodities, a slew of assets are moving in seemingly erratic ways.

India Plans Circuit Filters for Derivative Stocks to Curb Swings
Nupur Acharya – Bloomberg (SUBSCRIPTION)
Sebi move follows sharp plunge seen recently in many stocks; 40 stocks in F&O segment saw swings of over 20 percent: Sebi S
The Securities and Exchange Board of India Monday proposed extending circuit filters to stocks that are part of the derivatives market, as it seeks to curb extreme swings that have shocked investors in recent weeks.

Exchanges and Clearing

WFE 2018 FY Market Highlights
The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has today published its 2018 Full Year Highlights report.

Cboe Global Markets Begins Rollout of Options on 11 Select S&P Sector Indices
John D’Antona Jr. – Traders Magazine
Cboe Global Markets, Inc. (Cboe: CBOE ) began the rollout of options on 11 Select Sector Indices that comprise a sub-index of the S&P 500 Index, a key U.S. equities benchmark, further expanding Cboe’s suite of products tied to S&P Indices.

****SD: This has the rollout timeline in case you need the update. A Cboe Blog on the rollout is here.

Fixed Income Highlights – February 2019 edition
A cautious start is how I’d describe the start to 2019. European Fixed Income (FI) markets have been notably quiet with a risk-off tone evident throughout. Carry trades look set to be the theme in Q1 as there is a strong correlation between market moves and absolute levels of carry (adjusted against volatility ratio’s) which implies the market is positioning for future volatility. It’s hard to get excited at this juncture as the underlying market is trading in tight ranges, with a low level of realized volatility contributing to weaker volumes in Eurex’s core markets. Having said this, volumes at the beginning of 2018 set a high bar and January had plenty of event risk.

SGX reports market statistics for January 2019
Securities daily average value rises 18% m-o-m, as STI gains about 4% in January 2019; Commodities Derivatives volume increases to highest since November 2016

Exchange giants take their rivalry to Texas as shale oil booms; Battle of the contracts reflects Houston’s growing status as an energy trading hotspot
Gregory Meyer and David Sheppard – FT (SUBSCRIPTION)
The world’s two biggest energy exchanges have taken their fierce rivalry to Houston, Texas in pursuit of business linked to the millions of barrels of shale oil arriving in the city every day. Last last year, exchange operators CME Group and Intercontinental Exchange introduced duelling futures contracts that track the price of West Texas Intermediate crude as delivered at the coastal city.

MEMX Is a Cautionary Tale for Market Operators: Ignore Customers at Your Peril
Roger Rutherford, ParFX – Tabb Forum
Shares of the biggest exchanges in the US fell early in the trading day on Jan. 7 as news rippled through the stock market that nine major Wall Street firms, disillusioned with complex and opaque fees incurred for market data and other services, had taken matters into their own hands.


TT hires ex-Stellar Peter Crouch
Louisa Chender – Global Investor Group (SUBSCRIPTION)
Peter Crouch joins Trading Technologies’ London office as a sales manager

Regulation & Enforcement

Nearly $60 million in customer money mixed up at collapsed broker
Sarah Danckert – Sydney Morning Herald
Administrators picking through the wreckage of one of the country’s largest online broking houses Halifax Investment Services, have found that $57 million in money invested by clients has been mixed up with funds belonging to the company.

Illiquid options for money laundering: Crackdown may net a windfall; The regulatory probe involves over 9,000 entities including brokers, wealthy investors and promoters of several small companies.
Pavan Burugula – ET Bureau
The investigation pertains to use of stocks where options are thinly traded in the market to launder money. The crackdown against use of illiquid stock options for money laundering could boost the cash reserve of the Securities and Exchange Board of India (Sebi). The regulatory probe involves over 9,000 entities including brokers, wealthy investors and promoters of several small companies and is expected to fetch over Rs 600 crore for the market regulator in fines. This is among the biggest crackdowns undertaken by Sebi since its inception, said two people privy to the development.


Hedge funds will spend $2 billion on web-scraping software to gain an edge, and it’s part of an investing gold rush
Bradley Saacks – Business Insider Prime (SUBSCRIPTION)
Hedge funds and asset managers scraping the web for investment purposes represented 5% of all Internet traffic in 2018, and is expected to increase rapidly. As investors look for new ways to beat the market, total spending on web scraping for investment purposes is expected to exceed $1.8 billion by 2020.


Investors Hedge a Stock Doomsday With Record Fixed-Income Inflows
Cecile Gutscher and Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Investors are amassing an expensive insurance policy against market doomsday.
Confident that fragile economies will keep monetary policy makers in dovish straight-jackets, they poured another $490 million into the iShares 20+ Year Treasury Bond ETF last week — bringing its year-to-date inflow to a record $2.3 billion.

E*TRADE Financial Corporation Reports Monthly Activity for January 2019
Business Wire
E*TRADE Financial Corporation (NASDAQ: ETFC) today released its Monthly Activity Report for January 2019. Daily Average Revenue Trades (DARTs) for January were 282,499, a nine percent decrease from December and a 10 percent decrease from the year-ago period. Derivatives represented 33 percent of DARTs during the month. The Company added 48,211 gross new brokerage accounts in January and ended the month with approximately 4.9 million brokerage accountsóan increase of 18,288 from December.

****SD: Finance Magnates on the results here.

Most hedge funds started 2019 on positive note with returns of 2.22%
The Eurekahedge Hedge Fund Index rallied 2.22% in January, supported by the global equity market rally which resulted from the Fed’s dovish stance and optimism over potential progress in the US-China trade talks.

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