CME to buy NEX; White House Amazon Whiplash Adds to Tech Volatility

Mar 29, 2018

CME to buy NEX; White House Amazon Whiplash Adds to Tech Volatility

Mar 29, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

Editor’s Notes
There will not be a JLN Options newsletter tomorrow, as major U.S. and European markets will be closed for Good Friday. Japanese and Taiwanese exchanges will be open.

An interesting development in ags via USA Today – U.S. soybean acres planted to exceed corn acreage for the first time in 35 years.

Hope everyone has a great holiday weekend and enjoys the start of the MLB season. (I’ll refrain from baseball partisanship – there are some office schisms…)

Lead Stories

Exchange operator CME Group to buy Britain’s NEX for $5.5 billion
Noor Zainab Hussain, Sinead Cruise – Reuters
U.S. exchange operator CME Group has agreed to buy NEX Group for $5.5 billion to create a cross-border powerhouse for investors trading in the multi-trillion dollar foreign exchange and government debt markets.

****SD: It’s a cash/OTC play, but when you think of the CME Group as more than a “futures exchange” as it has some of the most liquid options contracts in the world – the E-mini S&P, eurodollars, the 10 yr, etc. – then this is a huge story for an “options exchange.” At CME’s InformationXchange at FIA Boca, CME broke the usual mold by focusing on options rather than a rundown of each business silo. (Is it weird to wonder when the group will try to snag a straight up equity options exchange?) Other sources – CME Press Release; CNN; WSJ; Pensions & Investments; WatersTechnology and Bloomberg

White House Whiplash on Amazon Adds to Sky-High Tech Volatility
Luke Kawa – Bloomberg
First Donald Trump was “obsessed” with regulating Then the U.S. president had “no plans” to change policy toward the e-commerce behemoth. Finally there was the tweet.

****SD: “What a country!” – Yakov Smirnoff

`No Such Thing as Decoupling’ for Asia Stocks Swinging With VIX
Abhishek Vishnoi and Min Jeong Lee – Bloomberg
It happens a lot. An American company like Facebook Inc. stumbles, its stock losing $23 billion of market value in a day. And then Japanese and Chinese equities with no obvious connection erase many times that amount over the next few hours.
It’s a frustrating feeling, having your whole market sucker-punched by news an ocean away, according to Edward Lim, chief investment officer of Covenant Capital in Singapore. But it’s the furthest thing from surprising.

Exotic ETF Trading Is Surging Once Again
Dani Burger – Bloomberg
The prime suspects in last month’s global rout may be at it again.
Inverse exchange-traded funds — which use leverage to bet against stocks and volatility indexes — have seen trading activity skyrocket to ominous levels as markets have whipsawed in the past few days. In fact, turnover has only been higher two other times since the financial crisis: in 2016 during a correction and in February when a surging Cboe Volatility Index forced short funds to unwind.

****SD: An update on yesterday’s Bloomberg piece.

Inflation Fears Bypass the Bond Market
Jim Bianco and Ben Breitholtz – Bloomberg
The recent surge in stock volatility has captivated the financial community. Throughout the swings, however, bonds have remained unusually calm. The markets are so disconnected that when the Dow Jones Industrial Average tanked more than 400 points on Friday amid concern China would sell its hoard of more than $1.1 trillion in U.S. Treasuries in retaliation for the Trump administration’s proposed tariffs, bonds barely budged.

Extreme bearish options on Tesla making money as stock dives
Saqib Iqbal Ahmed – Reuters
The sharp slump in Tesla Inc’s shares this month could unlock massive gains on equity option bets investors placed over the last several months that pay when the electric car maker’s stock slides.

****SD: Mark Longo’s quote from the piece – “These puts have actually become something of a running joke on my network with many different people weighing in on why someone would trade a seemingly worthless option.” One potential reason from Longo – companies selling Tesla credit default swaps are hedging a potential Tesla bankruptcy. Tesla is having an up day today, so those puts aren’t as fun as they were when this piece came out yesterday. From CNBC – Tesla bonds blowout is a warning for risk, credit

Global market bull runs out of charge in first quarter
Marc Jones – Reuters
The turbulent start to 2018 in financial markets has finally brought an end to one of the longest ever global bull runs – and there have been few places to hide.

****SD: Or as Barry Ritholtz framed the market activity in Bloomberg today – Markets Stopped Being Boring in the First Quarter

Exchanges and Clearing

Intercontinental Exchange Releases 2018 Corporate Responsibility Report
Intercontinental Exchange
Intercontinental Exchange, a leading operator of global exchanges and clearing houses and provider of data and listings services, today released its annual Corporate Responsibility Report. The report is a comprehensive, 59-page overview of the company’s efforts to support the communities in which it operates, invest in its people, promote principles of good governance, and uphold its commitment to environmental sustainability.

BOX Options Exchange April Fee Change
Effective April 2, 2018, BOX Options Exchange, LLC is amending Section II.D of the Fee Schedule (Strategy QOO Order Fee Cap).

****SD: I like to think I’m pretty familiar with a large chunk of terms for varying trading strategies, but this is the first time I’ve seen mention of the type of calendar spread called a jelly roll. I’m of the millennial cut that remembers “Gelly Roll” – the colorful pens which were a super fad. If you’re lost by that comment, and need to waste time, see Bustle’s A Complete Written History Of The Origins Of Gelly Roll Pens That Ruled The ’90s.

Launch of NDX 2020 LEAP Expiration
On Monday April 2, 2018 , Nasdaq PHLX, Nasdaq ISE and Nasdaq GEMX will list for trading the December 18, 2020 expiration for the traditional Nasdaq 100 Index (NDX) AM Settled Index Option.

Regulation & Enforcement

SEBI to boost equity derivatives market
PTI via MoneyControl
Regulator SEBI today decided to rationalise and strengthen the framework for equity derivatives market by facilitating greater alignment of the cash as well as futures and options segments. Besides, physical settlement for all stock derivatives would be carried out in a phased and calibrated manner, according to a release issued by SEBI after its board meeting.

****SD: Not too often that I see “quarter sigma order size” in an article. *golf clap*

NYSE’s lapses lead to first enforcement under ‘Reg SCI’ continuity rule
Julie DiMauro – Reuters
In the first case involving a rule aimed at ensuring the stability of financial market operations, three NYSE exchanges have agreed to pay a fine of $14 million to settle allegations by the Securities and Exchange Commission that due to a variety of lapses from 2008 through 2016 they failed to comply with laws and regulations governing registered securities exchanges.

****SD: The rule applies to SROs, clearing firms and FINRA.

Commercial Court evaluates the mechanism for calculating “close-out amounts” in transactions for derivatives under the 2002 International Swaps and Derivatives Association Master Agreement
In Lehman Brothers Special Financing Inc. v National Power Corporation and another [2018], the Commercial Court was tasked with evaluating the mechanism for calculating “close-out amounts” in transactions for derivatives under the 2002 International Swaps and Derivatives Association Master Agreement (“2002 ISDA”). The 2002 ISDA is a standard market agreement used to set out the standard terms in transactions for derivatives; this replaced the 1992 ISDA Agreement (“1992 ISDA”). The 2002 ISDA is used widely in international markets for sales of derivatives including bonds, stocks and commodities.


E*TRADE Adds Tool to Spot Technical Events
With volatility increasing thanks to all sorts of events from tariffs to earnings, E*TRADE is aiming to make it easier for its active traders to spot technical events thanks to a new trading tool. In a post on Twitter, the New York-based online brokerage unveiled what it is calling a “first of its kind” technical recognition and education tool that melds education with trading.

****SD: Recall that last week Cboe’s DataShop added Wall Street Horizon’s event data to its offerings.


You’d Better Suspend Your Covered Call Program In This Market
Denis Atamanov – Seeking Alpha
As a follow up to the previous article (Catching A Falling Knife With Put Options On SPY) devoted to the put options valuation in oversold markets, this one is about the other side – call options – in the similar market condition. The emphasis will be on the covered call strategy and the input that short calls make to the whole portfolio’s expected return.

Option Delta & Probability
Kevin Hincks – The Ticker Tape
Options trading, like all investing really, is about decision making: weighing the potential reward against the potential risk, and the probabilities thereof.


China’s crude oil futures contract should confound the skeptics: Kemp
John Kemp – Reuters
China’s new crude oil futures contract, which began trading this week, has a good chance of confounding the doubters and becoming a regional benchmark where other contracts have failed.
The history of futures and options trading is littered with new contracts launched amid great fanfare but which subsequently failed to develop sufficient liquidity and have been discontinued or faded into irrelevance.

****SD: Included for contrarian subject reasons – the LACK of options. We’ll see when the OOFs come about and if their absence adversely affects the contract. Anyway, for some other China news from Reuters, see New China financial regulator says to deepen reform, fend off risk

Why U.S. Dollar is Lagging Euro, Yen Despite Higher Rates? (VIDEO)
Bluford Putnam – CME Group
The U.S. dollar has not appreciated against the euro and yen despite the Fed raising rates, due to increased risk from trade disputes with China and others.

Equity volatility returns: blame uncertainty
Matías Salord – FXStreet
Analysts at Natixis point out that the equity market volatility in the recent period may be explained by the return of uncertainty about growth, inflation, monetary policies and economic policies.

****SD: How much did someone get paid to come up with the genius theory that an increase in volatility is related to more uncertainty?

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