Drop in Nasdaq Volatility Index Is Latest Sign of Options Froth; Is Europe the New FAANG? Not So Fast

Sep 9, 2020

Observations & Insight

JJL: The CME Group Launched an FX Options Volatility Converter Tool yesterday. This new service is the first-ever tool to price CME Group’s listed FX options liquidity in over-the-counter (OTC) terms, helping foreign exchange traders to more easily monitor price relationships, make more informed decisions across markets, and ensure best execution for their trading strategies.

Lead Stories

Drop in Nasdaq Volatility Index Is Latest Sign of Options Froth
Lu Wang and Yakob Peterseil – Bloomberg
On a day when technology shares shook as hard as they have in six months, a measure of volatility on the same set of stocks did a strange thing: it went down.
With the Nasdaq 100 swooning 4.8% to cap a three-day, 11% correction, a gauge of index turbulence that is partly a reflection of options prices also dropped — another in a series of unified moves that has now lingered for two weeks. Normally, the two gauges move in the opposite direction, as declining stocks buttress expectations of a rougher road ahead.

Is Europe the New FAANG? Not So Fast; European stock markets look more exposed than before to new-economy industries, but for better or worse it is a numerical mirage
Jon Sindreu – WSJ
European stock markets look a bit more like the technology-rich Nasdaq than they used to. Looks, though, can be deceptive. On Tuesday, the Nasdaq Composite fell again, taking the total drop since last week’s peak to 10%—so-called correction territory. This is partly the result of unraveling bets made through options contracts by both a wave of amateur day traders and mammoth Japanese investor SoftBank. European equities have fared better, falling less than 2%. They even managed to pull off an impressive contrarian rally on Monday, and bounced back in morning trading Wednesday.

Short Selling Stocks Proves Costly for Some Investors; Traders who have given in to the temptation to bet against a stock have often paid a stiff price
Michael Wursthorn and Geoffrey Rogow – WSJ
U.S. tech shares have posted their largest three-day decline since the March rout, but investors who have tried to bet against hot stocks this year can tell you there is no sure thing. Despite recent market turbulence, the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite are all still up at least 48% from their March lows. Traders who have given in to the temptation to go short—borrowing shares, selling them and returning them in the future at what they hope to be a lower price so they can pocket the difference—have often paid a stiff price.

U.S. options investors pull back on tech bets, but SoftBank’s trade looms large
April Joyner – Reuters
As a tech-fueled sell-off hits Wall Street, investors are looking to options markets – including the positioning of Japan’s SoftBank Group Corp – to determine how much more volatility may be in store.
For now, few investors appear eager to buy the dip, which has sent the tech-heavy Nasdaq down 10% from its highs and rocked major U.S. stock indexes for three straight sessions.

Bigger Stock Swings Put Volatility-Targeting Quants on Notice
Yakob Peterseil – Bloomberg
The biggest tech slump since the depths of pandemic despair is sending alarms across a $300 billion breed of quant acutely sensitive to market volatility.
Historical price swings in the S&P 500 Index have jumped in the wake of the plunge in American growth stocks, likely sending automated sell signals to systematic managers who run volatility-targeting strategies.

Hedge funds need to deliver in their year of opportunity
Laurence Fletcher – Financial Times
The turbulent financial market conditions dominating 2020 are providing hedge funds with one of their best chances to shine in years. Many are not taking advantage.
The relative tranquility of recent years, broken only by the occasional sell-off, had prompted complaints from hedge funds that trillions of dollars of asset purchases from central banks was making it harder to sift good and bad stocks, and suppressing the volatility they liked to trade.

Exchanges and Clearing

CME Group unveils FX options volatility converter tool; New FX Options Vol Converter tool will allow users to price CME Group listed FX options liquidity in over-the-counter (OTC) terms.
Annabel Smith – The Trade
US derivatives exchange CME Group has launched an FX options volatility tool in a bid to help traders monitor price relationships for better execution quality during volatility. The FX options volatility tool takes price data that is functionally equivalent to over the counter (OTC) options and creates a volatility grid by tenor and deltas to provide a comparison.

Robinhood Reveals Major Changes to Options Trading Products; Robinhood tightens eligibility requirements to make it harder for options traders to qualify to trade sophisticated products.
Aziz Abdel-Qader – Finance Magnates
Robinhood is making multiple changes to its options trading products, part of the improvements the app promised to do after one of its customers died by suicide thinking he incurred losses of over $700,000.

Eurex’s global MSCI offering – the perfect choice for Asia
With 136 MSCI futures and 22 MSCI options covering emerging and developed markets, Eurex is the exchange with the most comprehensive suite of global MSCI derivatives available across all time zones. Together, Eurex and MSCI, provide clients with the most diverse and innovative range of index derivatives and have signed an agreement on the long-term extension of their strategic relationship, providing the stability the market needs during these turbulent times.

Addition of the CME Globex Electronic Trading Venue for all Options on Weather Futures Contracts and Related Administrative Amendments to Certain Product Chapters
CME Group
(SER 8647R supersedes SER 8647 dated September 2, 2020 and is being issued to correct the US Seasonal Strips Weather Cooling Degree Day (CDD) Options product name and product seasonal strip commodity codes as noted in Exhibit 1 below in blackline format. No other amendments have been made to the original SER.) Effective Sunday, September 20, 2020, for trade date Monday, September 21, 2020, and pending all relevant CFTC regulatory review periods, Chicago Mercantile Exchange Inc. (“CME” or “Exchange”) will permanently list all options on weather futures contracts (the “Contracts”) for trading on the CME Globex electronic trading platform (“CME Globex”).

Effective September 8, 2020 Through September 11, 2020, MIAX Options And MIAX Emerald 2X Opening And Intraday Valid And Priority Quote Spread Relief In All Symbols

Regulation & Enforcement

NYSE American, Inc. Letter of Acceptance, Waiver and Consent No. 2018057171903
NYSE American
From April 16 through April 20, 2018, Sanford C. Bernstein & Co., LLC violated Rule 17a3(a)(6)(i) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and NYSE American Rule 956NY (Record of Orders) by failing to accurately record the order receipt and order transmission times of manual options orders it had routed to NYSE American and various other national securities exchanges for execution.

NYSE Arca, Inc. Letter of Acceptance, Waiver and Consent No. 2018057171904
From April 16 through April 20, 2018, Sanford C. Bernstein & Co., LLC violated Rule 17a3(a)(6)(i) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and NYSE Arca Rule 6.68-O (Record of Orders) by failing to accurately record the order receipt and order transmission times of manual options orders it had routed to NYSE Arca and various other national securities exchanges for execution.

Adoption of new Exchange Rule 1326, Transfer of Positions
MIAX Options
MIAX Options, MIAX PEARL and MIAX Emerald have adopted Rule 1326, Transfer of Positions that provides a process by which Members may transfer option positions in limited circumstances.

MIAX Exchange Group – Options Markets – Delisting of SandRidge Permian Trust (PER)
MIAX Options
SandRidge Permian Trust (PER) will be de-listed from the MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange effective on Wednesday, September 9, 2020. All GTC orders resting on the MIAX order books in PER will be canceled at the close of business on Tuesday, September 8, 2020.

FIA releases surveillance and market abuse guidelines
London, UK – FIA today released new guidelines to assist market participants in fulfilling obligations set by UK and European regulators in relation to surveillance and market abuse requirements. “Market abuse is a global concern and global regulators consider market participants to be the ‘first line of defence’ in the identification and prevention of market abuse,” said FIA’s Head of Europe Bruce Savage. “Our goal is to help FIA members and other market participants meet their obligations under the Market Abuse Regulation.”


Vela Expands Fixed Income Offering with Fenics UST; Adds to DMA Platform with US Treasuries market coverage to include cash and derivatives
Vela, a leading independent provider of data and execution technology for global multi-asset electronic trading, today announced the addition of Fenics US Treasuries (Fenics UST), owned and operated by BGC Financial, to its fully-hosted and managed Direct Market Access (DMA) Platform. With Fenics, Vela expands its Fixed Income offering providing global clients with access to cash and derivatives trading venues via a single platform.


A Stock Selloff Without Sanctuaries Is Worth Preparing For
Mike Bird – WSJ
U.S. stocks have dipped from their record highs, and while the fall has only erased a month’s gains, there’s an interesting—and worrying—trend that bears watching: Not much of anything is providing good downside protection these days.
To guard against falls in equities, most investors own something with a chance of rallying when stocks fall. That’s the traditional role of a mixed portfolio of bonds and stocks.


Cboe Global Markets to Present Virtually at the Barclays Global Financial Services Conference Tuesday, September 15
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, announced today that Ed Tilly, Chairman, President and Chief Executive Officer, and Brian Schell, Executive Vice President, Chief Financial Officer and Treasurer, will present at the Barclays Global Financial Services Conference on Tuesday, September 15 at 2:00 p.m. ET.


Climate Change ‘Poses a Major Risk’ to U.S. Financial System, Warns Regulator
Leslie P. Norton – Barron’s
Climate change “poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy,” according to the Commodity Futures Trading Commission in a new report.
The report, titled “Managing Climate Risk in the U.S. Financial System,” is believed to be the first-ever detailed assessment by a U.S. financial regulator of how climate change can affect the U.S. financial system. The CFTC regulates the U.S. derivatives markets.

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