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

Jun 28, 2022

Lead Stories

Explainer: How a massive options trade by a JP Morgan fund can move markets
Saqib Iqbal Ahmed – Reuters
A nearly $17 billion JP Morgan fund is expected to reset its options positions on Thursday, potentially adding to equity volatility at the end of a dismal first half for stocks.
Analysts say the JPMorgan Hedged Equity Fund’s reset roiled markets in the closing hours of the last quarter and has the potential to move markets again this time around.

Meme Stocks Were Too Good to Robinhood; Also Russian debt and crypto depositors.
Matt Levine – Bloomberg
Robinhood Markets Inc. is in the business of getting people to trade stock (and options, and cryptocurrencies) on their phones. The more people who sign up for accounts, and the more they trade, the happier Robinhood is. The way it makes money is that each time its customers trade stocks (or options, or cryptocurrencies), Robinhood sends their order to a market maker, and the market maker pays Robinhood a tiny fee for the right to execute the order. Unlike many other retail brokers, Robinhood charges these market makers a variable fee that is, roughly speaking, higher for very volatile stocks. 1 So the more people who sign up for Robinhood’s service, and the more they trade, and the more volatile the stocks that they trade are, the more money Robinhood makes.

Cryptocurrency ‘bloodbath’ threatens multibillion-dollar hedge fund; Three Arrows Capital founder takes to Twitter to assuage fears after 25% drop in price of bitcoin in a single day
Alex Hern and Dan Milmo – The Guardian
The “bloodbath” in the cryptocurrency sector may claim another victim, with the co-founder of multibillion dollar hedge fund Three Arrows Capital using Twitter in an attempt to battle rumours that the company is insolvent following the market collapse. With a net asset value of $18bn (GBP14.9bn) in its last public statement, the Singapore-based hedge fund was known for taking large, highly leveraged stakes in crypto businesses and cryptocurrencies directly. It holds positions in cryptocurrencies including bitcoin, Ethereum and Solana, as well as equity investments in companies such as the BlockFi exchange and options trading platform Deribit.

BOJ’s Attack on Speculators Leads to Futures Liquidity Drying Up
Chikako Mogi – Bloomberg
Liquidity continues to worsen in Tokyo’s fragile bond market amid echos of the Bank of Japan’s robust defense against speculators betting it would tweak yield curve control.
Volumes in front-month Japanese government bond futures fell to the lowest this year in local trading on Monday, more than 60% below the 12-month average, according to data compiled by Bloomberg. The BOJ’s recent move to clamp down on speculative selling has weakened the contracts’ usefulness as a hedging

Why Hedge Funds Are Shorting the Japanese Yen
Ruth Carson, Nishant Kumar, and Bei Hu – Bloomberg
In Tokyo’s financial circles, the trade is known as the widow-maker. And while it has done nothing but saddle young, cocksure investors from London to New York with crippling losses over the past two decades — ergo the name — they’re lining up once again to take a shot.
The bet is simple: that the Bank of Japan, under growing pressure to stabilize the yen as it sinks to a 24-year low, will have to abandon its 0.25% cap on benchmark bond yields and let them soar, just as they already have in the US, Canada, Europe and across much of the developing world.


Demystifying Derivatives Trading in the EU
International Swaps and Derivatives Association
This paper examines the dynamics of derivatives trading in the EU. It analyzes transactions executed on and off trading venues (TVs), such as multilateral trading facilities and organized trading facilities. The analysis considers why some transactions outside the scope of the derivatives trading obligation are executed on TVs. The paper also explores the composition of transactions executed by systematic internalizers (SIs) and describes the role SIs play in the market, both as liquidity providers to clients and on TVs, where they are commonly referred to as market makers or dealers.

New MIAX Options Obvious Error Procedures Effective July 1, 2022
MIAX Options
The MIAX Option Exchanges will implement a proposed rule change to amend Exchange Rule 521, Nullification and Adjustment of Options Transactions Including Obvious Errors, on July 1, 2022, in coordination with all other options exchanges. The rule amendments include the following.

Regulation & Enforcement

SEC fines Ernst & Young $100 million for employees cheating on CPA ethics exams
Chris Matthews – MarketWatch
Accounting giant Ernst & Young will pay $100 million to settle charges with the Securities and Exchange Commission that hundreds of its employees cheated on the ethics components of the Certified Public Accountant examination and continuing education courses and for withholding information about the misconduct to regulators.
“It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” Gurbir Grewal, the SEC’s enforcement chief said in a press release. “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct.”


DTCC’S Report Hub Community Grows To Over 70 Firms As Industry Prepares For Global Derivatives Trade Reporting Regulatory Changes
Report Hub helps firms manage regulatory reporting complexities across 14 jurisdictions, including global derivatives regulations, SFTR and MiFID II
The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, today announced that the community leveraging its DTCC Report Hub service has grown to more than 70 firms, including leading banks, major swap dealers, and some of the largest custodians, clearing houses and buy-side firms across the globe. The increased adoption of Report Hub comes as the industry prepares for forthcoming regulatory changes in global derivatives trade reporting.


2 Options-Based ETFs To Limit Downside Risks
Tezcan Gecgil – Investing.com
Options-based exchange-traded funds (ETFs) have gained popularity among retail investors looking for shelter amidst the current volatility on Wall Street. ETFs incorporating option strategies are increasingly used as defensive plays to help shield against downside risks.
Recent metrics suggest there are now around 3,000 ETFs stateside, of which nearly 500 have hit the market within the past 12 months. Meanwhile, in 2021, assets under management (AUM) in options-based ETFs grew roughly by $20 billion, up 200% year-over-year (YOY).

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The Spread

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Past Options Newsletters

Crypto Options Trading on Solana Has Mostly Fizzled

Crypto Options Trading on Solana Has Mostly Fizzled

Observations & Insight Registration is open for FIA Expo taking place this 14-15 November at a new location - the Sheraton Grand Riverwalk Chicago. Experience compelling panels that build your knowledge, product demos that deliver innovative solutions, and...

Market Volatility Not Over, Allspring’s Miletti Says

Market Volatility Not Over, Allspring’s Miletti Says

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