Observations & Insight
Guess Who’s Back (Office)? Reimagining the Trade Life Cycle
In this compilation video from FIA Expo, Minium CEO Patrick Tessier, Fidessa Chief Operating Officer and Global Head of Derivatives Justin Llewellyn-Jones, and Eventus Systems CEO Travis Schwab talk about automating the trading life cycle and what streamlining that workflow means for the future.
Watch the video and read the rest »
OCC Clears Record Monthly Volume in October
OCC, the world’s largest equity derivatives clearing organization, announced a record 567,833,544 total contracts cleared in October, the highest monthly total since OCC’s founding in 1973.
October volume was up 48.9 percent compared to October 2017 volume of 381,467,272. OCC’s year-to-date average daily cleared contract volume is up 21.3 percent, with 20,698,059 contracts compared to 17,070,435 contracts in 2017.
Colombia Plans Mexico-Style Oil Hedge After Recent Volatility
Matthew Bristow – BloombergQuint
Colombia is planning to hedge its oil exports to protect the government from the violent swings in revenue it suffered in recent years.
The financing bill to be presented to Congress Wednesday proposes the creation of a fund that can buy derivatives from “foreign entities specialized in operations of this type”, according to a copy of the bill seen by Bloomberg. The bill needs to be passed by Congress to become law, and would take effect on Jan. 1.
****SD: Another sovereign wants to join the fray! Mexico is renown for its annual “Hacienda Hedge” and Iraq said in spring 2017 that it is considering hedging its production, too. Then there is the array of airlines directly tied to the state (a number of Middle Eastern airlines come to mind) that engage in the activity. That is not to say that everybody is good at it. These hedges are large-in-scale and require expertise. In 2009, Sri Lankan state oil refiner Ceylon Petroleum Corporation (CPC) made the news for all the wrong reasons when it’s oil play blew up, leaving the firm on the hook for some $460 million. CPC’s bank counterparties took the firm to court. If you’re intrigued, check out these slightly older but relevant pieces from Mercatus Energy Advisors – A New Look at Sovereign Oil Hedging Strategies and Sovereign Oil & Gas Hedging – A Different Perspective.
Market turmoil sees investors turn to ETF options for protection; A chastening October reminds some investors about the risks of a further drop
Chris Flood – Financial Times (SUBSCRIPTION)
Warning signals are flashing from the exchange traded funds industry as investors intensify their use of ETFs to shield portfolios from the risk of a sharp correction in the US stock market.
The huge volume of trading activity linked to ETFs means these index tracking funds have become a closely watched barometer of US market conditions for institutional investors and professional traders.
Goldman Says Traders More Worried Over Single Stocks Than Market
Lu Wang – Bloomberg (SUBSCRIPTION)
Options skew falls for S&P 500 while rising for average shares; Earnings reaction for stocks poised for the biggest since 2009
October has been a month of tectonic shifts in equities, when investors decided individual companies didn’t matter and braced for a storm that would knock everything over at once. Right? Wrong.
****SD: So where’s the story that it’s now a “stock-picker’s market”?
Pound Sees Biggest Rally in Nine Months on Faster Rate-Hike Bets
Charlotte Ryan and Shoko Oda – Bloomberg (SUBSCRIPTION)
The pound headed for its biggest rally in nine months as the Bank of England signaled a faster pace of interest-rate hikes and investor hopes for a Brexit deal rose.
****SD: There is still plenty of uncertainty surrounding Brexit. As Bloomberg reports in this story, EU negotiator Michel Barnier said that the report on the potential financial services Brexit deal was misleading. More from the Financial Times here.
Trap In Store for Bond Investors Who Skipped the Small Print
Tasos Vossos – Bloomberg (SUBSCRIPTION)
Investors of top-tier bonds probably haven’t paid much attention to covenants in recent years. They may want to start.
An era of rising prices has laid a trap for holders of investment-grade notes that carry change-of-control clauses. And a boom in leveraged buyouts is threatening to spring it, according to HSBC Holdings Plc.
The oft-ignored options allow investors to hand their debt back at a pre-determined price, usually close to face value.
****SD: Puttable bonds have cropped up plenty in the newsletter this year, but usually in the context of Chinese debt markets.
After a 673-point, 2-day surge for the Dow, is the worst over for the stock market?
Mark DeCambre – MarketWatch
It’s Wall Street’s version of an inquiry that might be fielded by a parent on a long car trip: Are we there yet?
In this case, the there refers to the bottom of a stock market that had seen year-to-date gains for the Dow Jones Industrial Average DJIA, and the S&P 500 index SPX, briefly erased this week and pushed the Nasdaq Composite Index COMP, into a correction, usually defined as a drop of at least 10% from a recent high, for the first time in about two years.
****JB: This article lists the case for the bears and the bulls.
Exchanges and Clearing
CME Group’s First Multi-Lateral Equity Options Compression Cycle Successfully Reduces Nearly 590,000 Contract Sides
CME Group, the world’s leading and most diverse derivatives marketplace, today announced four firms participated in its first-ever multi-lateral compression cycle for equity options on futures, which successfully reduced 587,000 contract sides and compressed portfolios submitted for this cycle by 22 percent.
****SD: Currently the service is for S&P 500 and E-mini S&P 500 options.
Nasdaq Futures Exchange confirms CEO departure
Haley McDowell – The Trade
Rick Beaman was appointed CEO of Nasdaq Futures Exchange in 2016, although is leaving to pursue an opportunity with a startup
****SD: Kevin Kennedy, the head of Nasdaq’s options franchise, will now oversee all U.S. derivatives.
Apis Capital Management lists first tokenized hedge fund on Nasdaq Fund Market
Apis Capital Management became the first asset management firm to offer a tokenized investment option earlier this year, when it launched the Apis Token, leveraging the Stellar blockchain protocol to provide security and liquidity that is vastly superior to traditional investment structures. Last month, Nasdaq Fund Network, a leading platform for mutual funds and hedge funds, listed the Apis Token (under symbol ZAPISX) making it available on networks ranging from Bloomberg’s Terminal to Yahoo Finance. Apis Token is also registered with the Cayman Stock Exchange.
****SD: “Apis Capital Management focuses on volatility trading, with a concentration on VIX (Volatility Index) futures, S&P 500 Index options, and volatility based ETNs.” I guess the thought process was, “Let’s combine two of the most difficult to understand asset realms for Main Street (crypto + volatility derivatives) and blend them!”
Pressing the PaaS Button: Why It’s Time to Rethink Derivatives Platforms
Gerry Turner, Vela – TABB Forum
The margins for derivatives trading firms already are razor-thin, and in an environment where volume is falling, lower transaction revenue threatens to weigh on margins even more. A platform-as-a-service approach to trading systems and software not only can sharply cut costs and re-inflate margins, it also lets companies focus on their core business. What factors should a firm consider in selecting a provider?
Regulation & Enforcement
Bank Rules Are Seen Easing Further Even If Democrats Seize House
Yalman Onaran – BloombergQuint
Efforts to ease post-crisis banking rules probably will continue even if Democrats triumph in next week’s midterm elections and pressure regulators to reverse course.
Sebi fines two entities for ‘non-genuine trades’ in illiquid stock options
Markets regulator Sebi has slapped a penalty of Rs 5 lakh each on two entities for engaging in non-genuine transactions, which created a misleading impression of trading in illiquid stock options segment.
Stock Market Volatility? – ?Why It’s Happening And What You Can Do About It
Edgar Radjabli – Seeking Alpha
The US stock market has gone through a period of uncertainty and volatility in 2018, with two major market corrections in one year, leading many investors to ask themselves what they can do to protect themselves. While there are valid concerns about whether this 10-year bull market is coming to an end, macroeconomic and technical data both suggest that this is volatility that can be ignored, and that investors should maintain exposure to equities. Active investors, or those with a shorter-term outlook, can benefit from strategically using volatility as a speculative tool or as a hedge, especially with exchange traded products such as VXX. If they choose to do so, they can use technical analysis of the term structure of VIX futures to identify optimal entry and exit points for their trades.
SocGen Cuts Stock Allocation, Says S&P 500 May Drop Below 2,500
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
U.S. Treasury 10-year yield above 3% seen having an effect; Higher volatility also considered risky for equity holdings
Higher credit yields may finally be affecting the U.S. stock market and it’s time to reduce the allocation of assets to equities versus bonds, according to Societe Generale SA.
A boost from tax cuts kept stocks resilient as yields rose initially, but now that the U.S. 10-year Treasury yield has been above 3 percent since September it’s starting to affect equities, SocGen strategists led by Alain Bokobza wrote in a note Wednesday.
‘Godfather’ of chart analysis says damage done to the stock market is ‘much, much worse’ than anyone is talking about
Sunny Oh – MarketWatch
Prominent market technician Ralph Acampora says the stock market is in bad shape and it’s worse than many on Wall Street investors appreciate.
A pioneer in the field of chart-based trading, Acampora said the technical damage that has resulted in the Dow Jones Industrial Average DJIA, and the S&P 500 index SPX, erasing all of their gains for 2018, and the Nasdaq Composite Index COMP, falling into correction territory—usually characterized as a decline of at least 10% from a recent peak—will take months to repair.
Listed Options Symposium – November 15 – New York, NY or Webinar
SIFMA’s Listed Options Symposium will examine market liquidity, fragmentation, risk, regulation and its impact on customers, firms and market makers.
Credit Markets Suffer Worst October in a Decade, Led by Junk
James Crombie – BloombergQuint
Last month was brutal for U.S. credit markets, with both high-yield and investment-grade bonds suffering the heaviest losses for an October since 2008.
High yield’s 1.6 percent fall was the steepest for the 10th month of any year since 2008, when the market tumbled almost 16 percent following the collapse of Lehman Brothers in September that year.
****JB: For a another take on this read MarketWatch’s Why ‘junk bond’ resilience offers comfort to stock market bulls
AMAZONIAN Sized Risk (and why the Sharpe Ratio is stupid)
We can’t help but stare at the Amazon ($AMZN) charts this month in amazement. An investment down -25% over the case of a few weeks is generally seen as an unmitigated disaster. As a sign of big problems and a failing business. But while Amazon has shed a quarter of its Trillion dollar value recently (with Bezos personally losing a record -$20 Billion over two days), it’s still up by about 50% over the last 12 months and 10s of thousands of percent overall (and Bezos is still the world’s richest person), making Amazon and Bezos’ resulting wealth the mother of all outliers.
Interactive Brokers Group Reports Brokerage Metrics and Other Financial Information for October 2018, includes Reg.-NMS Execution Statistics
Interactive Brokers Group, Inc. (IEX:IBKR) an automated global electronic broker, today reported its Electronic Brokerage monthly performance metrics for October.
****SD: Average equity options order size was 8.1 contracts with an average commission of $5.46. And check out this stat – “986,000 Daily Average Revenue Trades (DARTs), 41% higher than prior year and 22% higher than prior month.”