Extinction by Algos Threatens Chicago’s Silenced Trading Pits; Weakening of Foreign Currencies Opens Up Hedging Options

May 28, 2020

Observations & Insight

****JJL: CME Group is going to launch Micro E-Mini S&P 500 options and Micro E-Mini Nasdaq-100 futures contracts in the fall. I therefore expect next spring the CME Group will launch E-Nano S&P 500 futures in order to allow better hedging of the E-Micro S&P 500 options. They will be out-minimizing the Small Exchange. And just in case you are wondering what will come after CME offers E-Nano options, here are the next levels: pico (million-millionth), femto (million-billionth), atto (billion-billionth), zepto (billion-trillionth), yocto (trillion-trillionth)

Lead Stories

Extinction by Algos Threatens Chicago’s Silenced Trading Pits
Elizabeth Stanton and Alyce Andres – Bloomberg
Eurodollar options floor handled half of volume before close; Electronic players look to capitalize on virus threat
Pete Kosanovich can’t wait to put his trading jacket back on and return to the noisy Chicago pit where he’s worked for 17 years. The burly former football player is known on the floor by the letters “MGLA” printed on his badge, a nickname referencing the 1960s cartoon “Magilla Gorilla.”

Weakening of Foreign Currencies Opens Up Hedging Options
Mark Maurer – WSJ
Alamos Gold Inc. last month decided to take advantage of low currency-exchange rates for the Canadian dollar and Mexican peso against the U.S. dollar. The Canadian gold miner protected more of its currency exposure and extended that cover for a longer period.
Other companies with international operations like Alamos Gold have been making such aggressive shifts in recent weeks, disrupting currency-hedging programs put in place years ago to guard against unexpected changes in exchange rates. Just a few months ago, by contrast, many said they didn’t see a need to change course because foreign-exchange rates and market forecasts were relatively stable.

Currency Volatility Is a Headache for Companies Reducing Reliance on China
Anooja Debnath – Bloomberg
Executives looking to cut their reliance on China as tensions with the U.S. ramp up have a new nemesis to fight: currency volatility.
Unlike most nations, the world’s second-largest economy has the relatively tame yuan, with the People’s Bank of China setting a reference rate every day. The currency’s offshore and onshore rates aren’t identical, but they often move in tandem.

Ice swap rate adds safety net with Tradeweb quotes
Helen Bartholomew – Risk.net (subscription required)
A key benchmark used to price swaptions and some rate-linked structured products will move to a new methodology on May 29, after failing to print on more than a third of occasions this year. The Ice swap rate, a daily measure of term-Ibor referencing swap rates from one to 30 years, vanished for several days in March as dealers pulled firm swap quotes from electronic order books – currently the only permissible inputs.

New York Gold Traders Drown in a Glut They Helped Create
Justina Vasquez – Bloomberg
The New York gold market has been flipped on its head in just a couple of months, with a scramble for the metal turning into a glut.
Earlier this year, traders who had sold contracts paid a steep premium to close positions after the coronavirus pandemic grounded flights, sparking worries about the ability to get gold to New York. That drove futures to the highest premium to the spot price in four decades, attracting a flood of metal to the U.S. from around the world. Now, contract holders are trying to avoid taking delivery from the massive inventory.

Exchanges and Clearing

SGX Facing More Competition, Payout Scrutiny After MSCI Deals
Ishika Mookerjee – Bloomberg
Singapore Exchange Ltd. faces heightened competition, a drop in profits and close monitoring of its dividend policy after MSCI Inc.’s decision to shift index licensing for some derivatives to Hong Kong, analysts said.
MSCI will stop licensing for most derivatives products on SGX’s platform early next year, while separately agreeing to let Hong Kong Exchanges & Clearing Ltd. sell futures and options contracts based on its gauges. The move has renewed concerns about competition for China futures traded in Singapore, after Hong Kong last year announced that it will start offering futures on the MSCI China A Index. Here’s what analysts had to say.

****JB: Also read Singapore Exchange’s growth ambitions undermined by MSCI’s HK move.


BrokerTec And TriOptima Collaborate To Deliver First End-To-End Repo Workflow Solution
CME Group
BrokerTec, a leading provider of electronic trading platforms and technology services in fixed income markets, and TriOptima, a leading infrastructure service that lowers costs and mitigates risk in OTC derivatives markets, today announced that they have collaborated to deliver the industry’s first end-to-end repo workflow solution for industry participants. This provides full automation across the lifecycle of a repo trade.


Stock-market bubble forming, cheap strategy to hedge: Bank of America
Akin Oyedele – Business Insider
Stock-market rallies do not have to be as monumental as the dot-com boom to qualify as bubbles.
For equity-derivatives strategists at Bank of America, the forces lifting the market higher are powerful enough to potentially make stocks vastly overpriced. None of these catalysts is hard to dismiss — even for bearish investors who doubt that the economy will quickly recover from the coronavirus crisis in a V-shaped manner.


U.S. firms shield CEO pay as pandemic hits workers, investors
Jessica DiNapoli and Ross Kerber – Reuters
Sonic Automotive Inc (SAH.N), which operates 95 U.S. car dealerships, started laying off and furloughing about a third of its workforce as the coronavirus pandemic crushed its sales. Then it changed its executives’ pay packages – handing them a multimillion-dollar windfall. On April 10, Sonic’s board gave its top executives stock options to replace performance-based share awards, regulatory filings show. The options it gave Chief Executive David Smith, whose family controls the company, are now worth about $5.16 million – more than four times the value of the performance-based stock awards he got last year.

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