Observations & Insight
The Spread: Mini Derivatives Arms Race
This week on The Spread, FTSE Russell and SGX form a strategic alliance, Cboe’s mini VIX futures sell like hotcakes, and more.
‘Divided’ investors caught in inflation confusion
Tommy Stubbington – Financial Times
Investors are worried about deflation. That might sound odd, given that the opposite fear — of rising consumer prices — has grabbed attention and fired up assets such as gold.
But the price of options linked to inflation swaps shows that investors are paying up to protect against extreme scenarios at both ends of the spectrum. The probability of price declines in the US has more than quadrupled to 7.5 per cent since the start of this year, those options show, even while the chance of annual inflation running hotter than 2.5 per cent over the next half decade has almost doubled to 8 per cent, according to analysis by NatWest Markets.
Investors have discarded this common-sense indicator in recent months — and that shows just how out of whack this record-setting stock market is
Abraham Thomas – MarketWatch
Something remarkable is happening in the U.S. equity market. For the last three months, stocks with low-quality earnings have outperformed those with high-quality earnings. And not by a little; by the largest amount in decades.
Earnings Quality, or EQ, is a measure of earnings consistency. Consistent earnings reflect healthy businesses with strong moats and predictable revenues, while inconsistent earnings reflect — at best — businesses that are weak or erratic. At worst, inconsistent earnings could be a sign of short-termism or even fraud, as companies resort to one-off measures like asset sales or accounting changes to artificially boost their quarterly results.
The Median S&P Stock Has Never Been More Expensive
Paul Vigna – WSJ
The record close that the S&P 500 hit last Tuesday, its first since February, has reignited the longstanding debate over whether high valuations are setting stocks up for a fall.
The index is now up more than 50% from its low this spring, erasing all the losses it suffered during the coronavirus pandemic. Despite a bruising recession, many investors appear to be betting the worst of the economic pain is past and that corporate earnings, the most reliable driver of stock prices, will begin climbing again next year.
Exchanges and Clearing
Pushing liquidity in options products – Eurex’s Passive Liquidity Protection
Eurex launched its Passive Liquidity Protection (PLP) back in June 2019 to strengthen order book liquidity. After a successful pilot phase with German and French equity options, on 24 August 2020 Eurex is rolling this out to the remaining equity options segments, as well as its flagship index product, the DAX Equity Options.
Eurex’s incoming options speed bump could disadvantage liquidity takers, HFT firm warns; As Eurex prepares to launch its PLP speed bump initiative on the DAX index options market next week, HFT firm Optiver has warned the scheme could harm liquidity takers.
Hayley McDowell – The Trade
European proprietary firm Optiver has warned the launch of a speed bump to slow down aggressive high-speed trading on the Eurex DAX index options market could disadvantage liquidity takers.
SGX finds new index partner in FTSE Russell as battle for index business heats up
Angela Tan – Business Times
JUST barely three months after long-term partner MSCI Inc said it would migrate from Singapore to Hong Kong licensing for derivatives products on a host of gauges, Singapore Exchange (SGX) has found a new beau in rival index provider, FTSE Russell, to deliver new Asian multi-asset solutions.
Effective August 24, 2020 through August 28, 2020, MIAX Options and MIAX Emerald 2X Opening and Intraday Valid and Priority Quote Spread Relief in All Symbols
Issue Symbol: All Symbols
Reason: In maintenance of a fair and orderly market.
Time: Opening and Intraday
Subject Summary: Please be advised, effective August 24, 2020 through August 28, 2020, the MIAX Regulation Department has granted 2 times opening and intraday quote parameter relief for all symbols on MIAX Options and MIAX Emerald.
MIAX Exchange Group – Options Markets – Corporate Action Alert: Smith & Wesson Brands, Inc. (SWBI)
Smith & Wesson Brands, Inc. (SWBI) has announced a distribution effective for Tuesday, August 25, 2020. On that date, the current SWBI option class will change to SWBI1. The MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange will not list SWBI1 options. Therefore, no options on SWBI will be available for trading on Tuesday, August 25, 2020.
Smith & Wesson Brands, Inc. (SWBI) will resume trading on the the MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange on Wednesday, August 26, 2020.
CME Group To Enter The Listed Volatility Derivative Space
Russell Rhoads – Nasdaq
The final quarter of 2020 will be the start of the last three months of a year that we will all remember (not fondly). Pending regulatory approval, it will also bring traders a new method of getting exposure to volatility expectations with the launch of futures on the Nasdaq-100 Volatility Index (VOLQ) in early October. VOLQ is a product created by Nations Indexes using NDX option prices to calculate expected 30-day volatility for the Nasdaq-100.
Regulation & Enforcement
SR-NASDAQ-2020-050 Notice & Approval
A proposal to amend The Nasdaq Options Market LLC Rules at Options 6, Section 5, titled ‘Transfer of Positions.’
SEC Boosting Privacy for Big Market-Surveillance Database
Alexander Osipovich – WSJ
The Securities and Exchange Commission is moving to bolster the privacy protections of a huge market-surveillance database after critics attacked it as a potential target for hackers. The SEC on Friday proposed that the database, called the Consolidated Audit Trail, or CAT, would no longer be required to contain the Social Security numbers and taxpayer identification numbers of individual investors. The SEC also moved to relax a requirement that the database store individuals’ dates of birth, proposing to replace them with birth years instead.
U.S., European Exchanges Face Very Different Landscapes
Traders Magazine Editorial Staff
While European authorities try to push more trading back onto stock exchanges, which have entered a period of consolidation, US regulators are angling for a more competitive exchange landscape and several new exchanges are set to launch this year. That will potentially support more profitable trading in the US than in Europe as competitive pressure drives down fees. These different environments were established by very similar models of regulatory enforced competition, actively encouraged by the sell side, over a decade ago. In the US, Reg NMS ruled in 2005 that orders must be routed to whichever trading venue offered the best price, pushing trades away from primary exchanges.
SEC Requires Public Comment For NMS Plan Fee Changes
Traders Magazine (press release)
The Securities and Exchange Commission today voted to rescind a rule exception that allowed a proposed national market system (NMS) plan fee amendment to become effective upon filing, prior to review and comment by investors and other market participants. The new procedures require public notice of any proposed NMS plan fee amendment, an opportunity for public comment, and Commission approval by order before a new or changed fee can be charged.
Fidelity veteran trader joins Federated Hermes in latest new hire
Hayley McDowell – Traders Magazine
A fixed income and foreign exchange trader from Fidelity Investments has departed after eight years to join Federated Hermes as the asset manager’s latest addition to the trading desk. Shaun Copeman has joined the trading desk at Federated Hermes as a senior credit trader, according to head of trading Dan Nicholls, who confirmed the new hire in a post on social media. Copeman has 15 years’ experience in buy-side trading, most of which he has spent with Fidelity Investments where he traded bonds, FX and derivatives. At Fidelity, he oversaw execution of investment grade credit, high yield, government bonds, agencies, emerging markets and FX.
Column: Funds pile into CBOT soybeans on huge U.S. sales to China, Midwest dryness
Karen Braun – Reuters
Dry weather and storm damage across the U.S. Midwest coupled with strong U.S. export demand sparked speculators’ biggest buying week in Chicago-traded grains and oilseeds in over a year, and soybeans led the charge.
When combining their moves in CBOT corn, wheat, soybeans and products, and Kansas City and Minneapolis wheat through Aug. 18, investors bought 201,537 futures and options contracts on the net, the most for a week since June 4, 2019.
Hedge funds shift focus from crude to fuels
John Kemp – Reuters
Hedge funds continued to switch their focus from crude oil to refined fuels last week – betting refinery margins are too low and will have to rise even as signals about the benchmark oil prices remain conflicting.
Hedge funds and other money managers purchased the equivalent of 12 million barrels in the six most important petroleum futures and options contracts in the week to Aug. 18.
How to Generate Retirement Income in Rough Economic Environments
Todd Shriber – ETF Trends
Although it often seems as though they’re joined at the hip, the economy and equities market are different beasts. This year proves as much as economic data confirm the U.S. economy is ailing from the effects of the coronavirus pandemic, but the stock market resides around record highs. That can present a tricky scenario for retirees, but the Nationwide Risk-Managed Income ETF can help those investors generate much-needed income regardless of the macro environment.
Tesla Stock Splits This Week. Get Ready: Trading Could Get Wild.
Al Root – Barron’s
Tesla stock is splitting this week. That could mean another wild week of trading. Tesla (ticker: TSLA) shareholders of record on August 21 will receive a dividend of four additional shares of common stock, which will be distributed after the close of trading on August 28. It amounts to a 5-for-1 stock split.
(Webinar) The impending EU CCP recovery and resolution regime and its impact on EU and non-EU firms
24 September 2020 • 10:00 AM – 11:00 AM ET • Webinar
On September 24th, representatives from Allen & Overy’s Global Financial Services Regulatory and Bankruptcy practice in London and New York will provide an overview of the EU legislative framework for the recovery and resolution of CCPs operating in the EU, which has now been finalized. The aim of the framework is to reduce the risk of a CCP failing and to establish procedures for the resolution of a CCP that has failed in order to limit impact on the financial system and on public funds. The regime and the changes it will require to EU CCP practices will be relevant to all direct and indirect participants in EU CCPs. The New York team will moderate and draw out the impact of the EU CCP Recovery and Resolution Regime on US clearing members and contrast the EU framework with the US position for CCP bankruptcy and resolution under the CFTC’s proposed Part 190 bankruptcy regulations and other recovery and resolution initiatives for CCPs.”
(Webinar) OIC Exclusive Event: The State of the Options Industry
Date: Tuesday, September 15, 2020
Time: 03:30 PM Central Daylight Time
Duration: 1 hour
Summary Amid the dramatic changes occurring around the world and in the financial markets, the options industry is having a year unlike any other. But what should investors take away from the developments in the options space? The Options Industry Council wants to help you make sense of it. On Tuesday, September 15, join OIC and our special guest, Henry Schwartz, Sr. Director and Head of Product Intelligence at Cboe Global Markets, for a unique educational event: The State of the Options Industry.
The Stock Market Was Rocked by a Mysterious ‘Flash Crash’ Five Years Ago. What You Need to Know.
Evie Liu – Barron’s
Monday marks the fifth anniversary of the stock market’s last major “flash crash.”
Today, the capital markets seem to be in a healthier place. Changes to market structure, implemented in response to the 2015 seemed to help avoid another similar occurrence during stocks’ sharp selloff in February and March. And one market-structure expert is confident the markets can withstand future tests, as well, whenever volatility inevitably returns.
(Podcast) Volatility Views 411: Election Volatility – Worth It or Waste of Money?
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