Explainer: How a massive options trade by a JP Morgan fund can move markets

Sep 30, 2022

Lead Stories

Explainer: How a massive options trade by a JP Morgan fund can move markets
Saqib Iqbal Ahmed – Reuters
A nearly $16 billion JP Morgan fund is expected to reset its options positions on Friday, potentially adding to equity volatility at the end of a gloomy quarter for stocks.
Analysts have in the past pointed to the JPMorgan Hedged Equity Fund’s quarterly reset roiling markets, and see it as a source of potential volatility during Friday’s session.
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Stalled Barclays VIX Note Finally Unfreezes After Bizarre Error
Sam Potter – Bloomberg Law (Subscription)
A now-infamous $578 million exchange-traded note from Barclays Plc is functioning as normal, more than six months after an embarrassing error by the British bank brought sales and issuance of the product to a shuddering halt.
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Wall Street and Main Street Bail on Stocks as Fed Is Enemy No. 1
Lu Wang – Bloomberg
The Federal Reserve isn’t done tightening the screws on the economy — and doesn’t care what that does to your portfolio.
It took six months, but that message is getting received loud and clear in the stock market, day by day. From retail traders to smart-money speculators, virtually every constituency on Wall Street is pulling up stakes.
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Larry Summers warns that the risks building in the market look similar to the onset of the Great Financial Crisis as volatility in the UK threatens to spread globally
Matthew Fox – Business Insider
A series of inflation, interest rate, and currency shocks have led to increased market volatility around the world.”In the same way that people became anxious in August of 2007, I think this is a moment when there should be increased anxiety,” Summers told Bloomberg.
Former US Treasury Secretary Lawrence Summers thinks today’s market risks are looking eerily similar to those that surfaced just before the Great Financial Crisis.
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UK Economic Crisis Risks Spilling Across Markets
Denitsa Tsekova – Bloomberg
The UK’s rapid descent from stability to crisis is threatening to expose the fragility of global efforts to crush inflation, raising the specter of chaos spreading across financial markets.
Volatility has surged to the highest level since March 2020 across currency and bond markets. Bank of America’s global cross-asset market risk indicator also jumped to a level not seen since the start of the pandemic. Current and former government officials in the US warned about potential spillover.
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What to Watch as Commodities Career Into Another Wild Quarter
Bloomberg
Commodities face a daunting set of risks in the final stretch of a turbulent year, from demand disruption and Russia’s escalation in Ukraine to extreme weather and deep policy uncertainty in China.
Bloomberg’s raw materials gauge just tumbled to an 8-month low on broad fears of a global economic slowdown. But the fourth quarter carries plenty of challenges for both supply and demand that could drive fresh volatility and greater divergence between commodities. Currency swings loom large, and the long consequences of Russia’s attack on Ukraine are still unfolding across energy, metals and crops.
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El-Erian Warns ‘Economic Accident’ Would Precede Any Central Bank Pivot
John McCorry and Jonathan Ferro – Bloomberg
Mohamed El-Erian has a cautionary word for anyone anticipating an end to interest-rate increases from the Federal Reserve and other central banks.
“All of you who are looking for a pivot, be careful what you wish for,” the chief economic adviser at Allianz SE and Gramercy Funds chairman told Bloomberg Television’s The Open on Friday. “This pivot only happens if you have an economic accident or a financial accident. And the journey to an economic accident or a financial accident is a very painful journey.”
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Exchanges

MIAX Options And Pearl Options Exchanges – October 1, 2022 Fee Changes
Press Release
Effective October 1, 2022, MIAX Options and MIAX Pearl Options will amend certain transaction fees.
Attached is a highlighted summary of the October 1, 2022 fee changes for each exchange along with a combined summary of the fee changes. For full details, please review the October 1, 2022 Fee Schedules and Summaries on the MIAX website at MIAX Options Fee Schedule and MIAX Pearl Options Fee Schedule.
For additional information, please contact MIAX Sales at Sales@MIAXOptions.com or (609) 897-8177 or MIAX Trading Operations at TradingOperations@MIAXOptions.com or (609) 897-7302.
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Regulation & Enforcement

Morgan Stanley’s Reason for FX Trader’s Exit Found ‘Defamatory’; Finra panel rules language in regulatory filing should change; Head of FX options Thiago Melzer left Morgan Stanley last year
Donal Griffin – Bloomberg
The reason Morgan Stanley gave for the dismissal of senior currencies trader Thiago Melzer was defamatory, an arbitration panel found. A Financial Industry Regulatory Authority panel of independent arbitrators said that the reason set out on a regulatory filing for Melzer’s exit should be “deleted in its entirety.” Instead, it should show that the bank terminated him because of its “perception of his supervisory actions which were not related to any securities, customer interaction or sales practices,” according to a copy of the September judgment obtained by Bloomberg.
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SEC hits Barclays with $360mn penalty over $18bn sale error
Joshua Franklin in New York and Stefania Palma – Financial Times
Barclays has agreed to pay $361mn to settle charges that a clerical error led the UK bank to offer for sale billions of dollars worth of structured financial products that it was not permitted to trade.
The error dated from 2019 to March this year, when Barclays offered $17.7bn worth of products that had not been registered for sale with the US Securities and Exchange Commission — an “unprecedented” amount of unregistered securities, the regulator said in announcing the penalty on Thursday.
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FIA, ISDA respond to ESMA call for evidence on pre-hedging
FIA
FIA and the International Swaps and Derivatives Association have jointly responded to a European Securities and Markets Authority call for evidence on pre-hedging activities. FIA and ISDA offered comments on ESMA’s proposed definition for pre-hedging, how to distinguish it from hedging, the relationship with MiFID and MAR including legitimate and illegitimate indicators, the treatment of RFQs and more.
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FIA responds to second Basel consultation on cryptoassets, urges regulators not to penalize client clearing
FIA
FIA filed a response to the Basel Committee on Banking Supervision’s second consultation on the prudential treatment of cryptoassets urging the Basel Committee not to penalize client clearing. FIA cautions that without clarification the proposed framework would undermine consensus post-crisis reforms and discourage banks from facilitating the central clearing of crypto-asset linked derivatives, thereby limit the risk-reducing effect on crypto-asset markets that central clearing has on other derivative markets and limit hedging opportunities for market participants.
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Moves

Sean Moore, OCC’s director, strategic sourcing, is looking to hire an associate principal, strategic sourcing.

Strategy

How Exchange Fund Replication (EFR) Brings the Power of Options to Investors
Eric Metz, President and Chief Investment Officer, SpiderRock Advisors – Cboe
Exchange Fund Replication (EFR) is a strategy designed to achieve the diversification and capital-gains tax deferral of exchange funds—not to be confused with exchange traded funds (ETFs) —while also providing greater liquidity, transparency, flexibility and tax efficiency.
EFR allows investors to diversify their concentrated stock positions by applying option strategies within a separately managed account (SMA). Although some investors, and even advisors, may automatically equate option strategies with risk and speculation, option strategies are more often used to precisely hedge and manage risk and taxes. For example, collar option strategies on individual securities are a tried-and-true method for managing portfolio risk, especially and more importantly, idiosyncratic risk.
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An ETF to Consider as Wall Street Bets on More Volatility
Nasdaq
Wall Street appears to be placing its bets on more volatility ahead as inflation continues to rise while the U.S. Federal Reserve resumes its path of raising interest rates in response to rising prices.
“Over 1.1 million call-option contracts on the Cboe Volatility Index (VIX) traded on Monday, the highest since the Covid-19 crash in March 2020,” a Wall Street Journal report noted. “That’s over three-times the average of 313,000 contracts that exchanged hands on a daily basis for the year prior to this week.”
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Education

How Trading Halts May Impact Option Investors
Options Education (OIC)
A trading halt on a stock occurs when a listing exchange determines there are circumstances that necessitate a stock to be halted. A halt may be brief or for an extended period of time, but no matter the length, the impact on investors could be significant, including option holders and writers.
Trading halts are not a common occurrence. However, when considering the vastness of the financial markets, it is important to understand the process and the factors that may cause a halt.
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