Observations & Insight
FIA releases annual trading statistics showing record ETD volume in 2018
FIA today released summary statistics for annual trading activity in the global exchange-traded derivatives markets that showed record activity in 2018. The number of futures and options that changed hands on exchanges around the world rose 20.2% to 30.28 billion contracts, an all-time record. Futures volume rose 15.6% to 17.15 billion contracts, while options volume rose 26.8% to 13.13 billion contracts.
****SD: The rate of growth was the highest since 2010 with APAC and LatAm growing the most rapidly. On February 6, FIA will host a webinar to go over trends in 2018’s options and futures trading. Register here.
China’s Sinopec reveals $687 mln oil trading loss
Meng Meng, Florence Tan – Reuters
Sinopec Corp said its trading unit Unipec lost 4.65 billion yuan ($687 million) on crude oil hedging in the fourth quarter, one of China’s largest derivatives trading losses in nearly a decade. Asia’s top refiner, which said the loss had pulled down its fourth quarter profits, suspended Unipec President Chen Bo last month, citing unspecified trading losses
****SD: Not all hedges are created equal. There are a ton of good stories in today’s newsletter and I was having trouble ordering them. So our top three were determined by dollars involved ($687 million then $285 million then ~$6 million.)
Top Natixis Salesman Exits After Bank Takes $295 Million Hit
Donal Griffin and Viren Vaghela – Bloomberg (SUBSCRIPTION)
Nicolas Reille was head of global market sales for APAC region; Korea autocallables push included ‘Cobra,’ ‘Triple Lizard’
A senior executive at Natixis SA who helped lead a foray into complex Asian derivatives that went wrong has left the French lender, a person familiar with the matter said. Nicolas Reille left earlier this week, said the person, who asked not to be identified as the departure isn’t public. His most recent title at Paris-based Natixis was head of global market sales and financial engineering for the Asia-Pacific region, according to his LinkedIn profile.
****SD: At least this guy was back at work after the losses – that BNP Paribas index trader who racked up $80m in losses just left for Christmas holiday and never came back.
Timely trade in PG&E Corp options reaps millions
Saqib Iqbal Ahmed – Reuters
A well-timed trade in the options on PG&E Corp reaped a massive paper profit on Thursday after the electric utility’s shares soared following a state regulator clearing the company from any responsibilities related to the 2017 Tubbs wildfire.
****SD: Bloomberg with the story here. If only the folks on the winning side of this trade were Californians who lost their homes. Somehow, I doubt that’s the case.
Stock Hedges Are Slow to Return as Traders Let Their Winners Run
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
JPMorgan strategists see gradual return to normal volatility; Low demand for protection may be due to lower equity exposure
Equity traders were more than happy to cash out option hedges as stocks plunged in December. Now that the market is back in rally mode, they’re hesitating to build them back up.
Jump (Experiments In) Trading, LLC
Paul Rowady – Alphacution Research
In the riverfront level of the 600 W. Chicago building (which is in Chicago) – the famed concrete fortress originally home to Montgomery Ward’s mail order business – there used to be the trendy, over-priced hotspot known as Japonais. Japonais is gone now – after an eviction lawsuit from 2015, which apparently means they weren’t high-priced enough – but, I was just thinking how much I could go for one of their blueberry saketini’s about now, which is odd for a bourbon guy… Anyway, an elevator ride to the 8th floor of that very same building – past the old Thinkorswim, now TD Ameritrade, offices – brings you to the global headquarters of Jump Trading, LLC – the legendary and mythological prop shop known mainly for its prowess and longevity in high-speed futures trading, and little else (except among a small group of Chicago quant cognoscenti).
****SD: Good stuff – if you missed his look last week at Two Sigma’s market making book, check that out here.
Exploring the Impact of Exchange-Traded Funds on Volatility
Russell Rhoads – Tabb Forum (Free w/ Registration)
The first article in the most recent issue of the Journal of Finance, “Do ETFs Increase Volatility?” immediately caught my attention, as exchange-traded funds and market volatility are two of my favorite financial market topics. The specific question addressed in the article is if individual stocks now experience higher price volatility due to arbitrage trading between ETFs and the shares that are held by the funds.
Shining An Ever Brighter Light Onto The Execution Lifecycle
Dash Financial’s David Karat, co-founder and chief creative officer, and Glenn Lesko, chief growth officer discuss how they are meeting client demands and managing their own expanding business.
If Everything Is Right With the Stock Market Again, Why Is Volatility So Stubbornly High?
Crystal Kim – Barron’s
The market’s more volatile than it used to be, but few seem to be worried. And that could be a problem.
Thursday marked the 72nd consecutive trading day that the Cboe Volatility Index, or the VIX has remained above 15óas of Thursday afternoon, it was at 20. In fact, since October, the 15 level appears to be the floor for the so-called fear gauge since October. In 2017, the VIX rarely made it above 15.
Yet few seem to have noticed or care about the change in the volatility environment, notes Frank Cappelleri, technical analyst at Instinet.
****SD: Seems like as good a time as any to link to the Youtube video of “The Lego Movie” theme song “Everything is Awesome.” (If you’re having trouble seeing the Barron’s story, Nasdaq reposted it here.
Traders are making huge bets that earnings will be disastrous for these 10 stocks
Akin Oyedele – Business Insider Prime (SUBSCRIPTION)
…Earnings season is now kicking into high gear, which means there are still plenty of landmines out there. To help investors avoid them, Goldman Sachs examined options-market activity for stocks that traders are worried about. The list below highlights the 10 stocks options traders are the most fearful of, judging by their desire for downside protection. It’s sorted in ascending order of the implied move for this quarter’s earnings report, less the average realized earnings move over the past eight quarters.
****SD: And those 10 stocks are Continental Resources, Whiting Petroleum, Palo Alto Networks, Harley-Davidson, Qorvo, Huntsman, Cree, Dish Network, Symantec and Mallinckrodt. CNBC picked up on the report, too.
A $1 Trillion Fund Gorging on Risk Says Fed at `Market’s Mercy’
Cecile Gutscher and Charlotte Ryan – Bloomberg (SUBSCRIPTION)
Don’t overthink it.
The ticket to outperformance this year is as simple as betting the Federal Reserve will temper its tightening plan — and do the bull market’s bidding, according to investors that help oversee a combined $1.4 trillion.
Armed with dovish monetary bets, they’re pouncing on risk assets of all stripes across the globe — but snubbing Europe.
Wall Street Is Making Global Macro Bets With This BlackRock ETF
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Cheap options on FXI allow for bullish or bearish tariff bets; Correlation with SPY suggests possibility of U.S. equity hedge
A $5.9 billion ETF is fast becoming the epicenter for Wall Street bets on everything from the global trade war, U.S. equity volatility and China’s sputtering growth engine.
Regulation & Enforcement
We must rethink our clearing house rules; The EU and US should drop duplicative registration requirements
Dawn Stump – Financial Times (SUBSCRIPTION)
Ten years ago, when the leaders of the G20 nations were struggling to respond to the financial crisis, they agreed to develop a co-ordinated response to change the handling of over-the-counter derivatives. These transactions are used to manage risks such as interest rate changes and credit exposure. During the crisis, the risk of individual parties defaulting on these contracts exposed the global financial system to vulnerabilities.
****SD: Or put another way, “KISS.”
ETF issuers warn stock market experiment could end with ‘winners and losers’
Declan Harty – S&P Global Market Intelligence
A group of Wall Street’s biggest companies is worried that the SEC’s latest stock market experiment will cut demand for their products while giving other companies a competitive advantage. On Dec. 19, 2018, the SEC finalized the Transaction Fee Pilot, a program that will silo nearly 1,500 stocks, exchange-traded funds and exchange-traded notes into two buckets with different trading structures than the rest of the stock market. The pilot is designed to gather data to let regulators examine the web of fees and rebates that U.S. stock exchanges use to drive trading onto their venues, a model that many on Wall Street complain creates conflicts of interest for brokers routing orders.
****SD: This will be a messy one for lots of market participants.
The New Hedge Fund Manager Flies Economy and Stays in Hostels
Suzy Waite – Bloomberg (SUBSCRIPTION)
Brant Rubin started a hedge fund last year only to find it wasn’t the easy path to riches it used to be. He’d quit his job buying into European internet companies for London’s Luxor Capital in 2017 to set up his own shop and raised almost $50 million from family, friends and a couple of former clients. Then, reality struck. The fundraising didn’t cover his overhead and his corner of the market was falling out of favor with the forces he had to answer to: potential customers and European financial watchdogs imposing onerous new rules.
****SD: Wow, it’s almost as if up until now no one had ever heard the phrase, “Live within your means.”
These Are All the Data the Shutdown Is Delaying
Scott Lanman – Bloomberg (SUBSCRIPTION)
The U.S. government produces dataóa lot of data, from figures about the economy to steel to crops to commodity trading. And the partial federal shutdown has slowed the flow of data to a trickle, thanks to the closure of various agencies.
****SD: A comprehensive reference guide.
Virtu Expects ITG Acquisition to be Finalised by Q1 2019
Celeste Skinner – Finance Magnates
Virtu Financial, Inc., a high-speed trading firm, has published an update on its acquisition of independent broker Investment Technology Group, Inc. (ITG), which is worth around $1 billion, this Friday.