Hedge Funds Had a Fine Year Amid Covid Volatility; The valuation warning signs for stock markets

Dec 10, 2020

Observations & Insight

$17,911/$300,000 (6.0%)
Steve Crutchfield


Cboe Global Markets announced yesterday the retirement of Chief Marketing and Communications Officer Carol Kennedy. Carol has been a steady hand at the Cboe for 27 years through all the market and company changes, including the retirement of former Chairman and CEO Bill Brodsky and the elevation of now-Chairman and CEO Ed Tilly. Stacie Flemming has been named as Carol’s replacement. On behalf of JLN, we want to thank Carol for her years of service. And we want to congratulate Stacie on her new role. Her international experience will work well with a CBOE that is now Cboe Global Markets


Steve Crutchfield was the latest donor to the JLN MarketsWiki Education GoFundMe campaign. Steve is a longtime JLN friend back from his days at NYSE Euronext. He is now the head of market structure and underlying market making at CTC. He gave one of the most brilliant MarketsWiki Education talk several years ago about how to design an options trading strategy in 10 minutes. Thank you to Steve and all who have given and all who have yet to give. Support our efforts to preserve industry history by donating to our GoFundMe campaign.

Lead Stories

Hedge Funds Had a Fine Year Amid Covid Volatility. That’s Not Enough
Mark Gilbert – Bloomberg
Despite its enduring mystique as the smartest corner of finance, the hedge fund industry has been shrinking in recent years as investors disappointed by underwhelming returns increasingly favor lower-cost alternatives for managing their money. This year’s Covid-fueled market volatility hasn’t redrawn that picture. Figures just in for November suggest that even when stock pickers do well, they still can’t beat the markets against which their performance is measured.

The valuation warning signs for stock markets
Ian Harnett – Financial Times
The rationale behind the current optimism among many equity investors is shifting as markets emerge from the pandemic shock. In the yield-starved pre-Covid-19 world, a common mantra of the bulls was the acronym TINA — there is no alternative. Now that has mutated to TRINA — there really is no alternative.
Investors remain overweight equities even though U.S. valuations have returned to levels last seen in the January 2000 dotcom boom. Are investors right to be so bullish when share prices are so high relative to earnings and cash flow?

The Trends Behind the Russell 2000 Index’s Record Monthly Gain
Matt Moran, Director, Institutional Product Advancement – Cboe
The Russell 2000 Index (RUTSM) had its largest ever monthly percentage gain in November 2020, rising 18.3%. The index performed so well it out-performed several other indices, as noted in a recent edition of Inside Volatility Trading. So, what caused this dramatic increase?

Sterling falls as markets re-evaluate no-deal Brexit risk
Elizabeth Howcroft – Reuters
The pound extended its losses against the dollar and the euro on Thursday, and one-week implied volatility gauges rose to their highest since March, as market participants became more cautious about the risk of a no-deal Brexit.
The pound dropped late on Wednesday, after a dinner between UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen ended with both sides still “far apart.”

Boris Johnson Says Prepare for No EU Trade Deal After Brexit
Edward Evans and Alex Morales – Bloomberg
U.K. Prime Minister Boris Johnson warned Britain should prepare to leave the European Union’s single market without a trade deal as negotiations with the bloc falter. “There’s now the strong possibility we will have a solution that’s much more like an Australian relationship with the EU than a Canadian relationship with the EU,” Johnson said in a pooled TV interview on Thursday. “We’re not stopping the talks, we’ll continue to negotiate. But looking at where we are, I do think it’s vital that everybody now gets ready for that Australian option.”

Exchanges and Clearing

LCH launches clearing for Oslo Børs derivatives market; LCH SA goes live clearing the Oslo Børs derivatives market following the acquisition of the Norwegian exchange operator by Euronext last year.
Annabel Smith – The Trade
The London Stock Exchange Group’s (LSEG) clearinghouse LCH SA has gone live clearing for the derivatives market at Oslo Børs. Since the migration five new members are now clearing listed equity derivatives contracts for Norwegian single stocks and indexes on Oslo Børs, LCH said.

Volatility Trading Through The End Of The Post-Brexit Transition Period
The Brexit process continues with the next big deadline coming on December 31 when the post-Brexit transition period comes to an end. There is a lot of uncertainty as to what the end of this temporary normalcy will bring. The financial impact of moving to the next phase of Brexit will be felt most in Europe and no other index will reflect the market’s concerns or relief associated with this process than VSTOXX.

CME Globex Notices: December 7, 2020
CME Group

CME STP Notices: December 10, 2020
CME Group

MIAX and MGEX Announce SPIKES Futures December 14 Relaunch
MIAX Options
Miami International Securities Exchange, LLC (MIAX) and the Minneapolis Grain Exchange (MGEX) today announce the planned December 14 relaunch of futures on the SPIKES Index (SPIKES Futures) on MGEX via the CME Globex platform.

January 2021 Brazilian Real/US Dollar Futures and Options Contracts Terminate Trading Wednesday, December 30, 2020 at 9:15 AM CT
CME Group
The January 2021 Brazilian Real/US Dollar (“BRL/USD”) futures and options termination of trading day is Wednesday, December 30, 2020 at 9:15 a.m. Central Time (“CT”). The Central Bank of Brazil (“Banco Central do Brasil”) has confirmed that the end-of month spot “PTAX Rate” that it will publish on Wednesday, December 30, 2020, will be the same rate as determined and published on Thursday, December 31, 2020. Chicago Mercantile Exchange, Inc. (“CME” or “Exchange”) utilizes the reciprocal of the end-of-month “PTAX Rate” to cash settle expiring BRL/USD futures and options contracts.

Cboe Global Markets Announces Planned Retirement of Chief Marketing and Communications Officer, Appoints Successor
Cboe Global Markets, Inc., a market operator and global trading solutions provider, today announced the planned retirement of Carol Kennedy, Chief Marketing and Communications Officer, after 27 years of service to the company, on December 31, 2020. Cboe plans to promote Stacie Fleming, current Vice President, Marketing and Communications, and former Head of Marketing and Communications for Cboe Europe, to Senior Vice President, Marketing and Communications, effective January 1, 2021.

Regulation & Enforcement

CFTC’s Tarbert Says He’ll Step Down as Chairman Early in 2021
Lydia Beyoud and Benjamin Bain – Bloomberg
Heath Tarbert, a Republican lawyer who has led the U.S. Commodity Futures Trading Commission Chairman since last year, is planning to step down in January, he said in a statement Thursday. Tarbert, 44, joined the nation’s main derivatives regulator in July 2019 after serving as a senior official in President Donald Trump’s Treasury Department. He said in the statement that his time at the agency had been “an extraordinary privilege.” He didn’t say what he plans to do next.

U.S. authorities urged to investigate ‘illegal’ changes to CME market data fee policies; EDI has called on the CFTC, House of Representatives, and the US Senate to investigate fee changes at CME Group that would increase costs each year for the firm.
Annabel Smith – The Trade
Data distributor Exchange Data International (EDI) has urged regulators in the US to investigate derivatives exchange CME Group’s proposed changes to its data fee policies. Under the changes to fees, CME Group intends to charge redistributors like EDI a total of $120,000 per year from 2021 for redistribution of data across each of its four markets.

U.S. exchanges face added pressure on data fees under SEC clampdown
Patrick Temple-West – Financial Times
The New York Stock Exchange and Nasdaq face new threats to their revenues from selling stock market data after the US Securities and Exchange Commission toughened regulation and moved to inject more competition into the market.
New rules adopted unanimously by the commission on Wednesday would require more public access to information about stock prices, the SEC said.


How to Invest in a Market That Keeps Bouncing Back
Steven M. Sears – Barron’s
Stock prices have reached what looks like a permanently high plateau. Economist Irving Fisher said that just before the Crash of 1929. But this time is different. Really.
Despite the Covid-19 pandemic entering a more dangerous phase, with Washington still arguing over economic stimulus legislation, the S&P 500 index is trading near its highest levels ever. The options market’s fear gauge, the Cboe Volatility Index, is around 20, suggesting that sophisticated investors are confident about the stock market’s near-term future.


CFTC position limits: looking ahead to implementation and compliance
10 December 2020 • 10:00 AM – 11:30 AM EST
On 10 December FIA will provide members with a detailed overview of the CFTC’s final position limits rule. Panelists from FIA, the CFTC, CME, ICE and Willkie Farr & Gallagher LLP will discuss the development, effective and compliance dates, and requirements of the final rule. Special emphasis will be placed on implementation issues and the expanded role of the exchanges in administering federal position limits and hedge exemptions. The panelists also will respond to questions from the attendees. /bit.ly/2VLDyho


This is how costly panic selling can be in the pandemic-era stock market
Mark DeCambre – MarketWatch
Panic on Wall Street isn’t uncommon. So it is no surprise that when anxiety reached a fever pitch in financial markets back in March, investors unloaded assets considered risky like stocks, in an attempt to avert the money-losing proposition implied by COVID-19 pandemic that was gripping the nation.
However, the knee-jerk attitude of sell-first-ask-questions-later can be tremendously costly in the long run. It is a point that Wells Fargo Investment Institute attempts to illustrate in a striking chart published on Tuesday (see attached).

FIA Marketvoice Magazine: December 2020 Edition

(Podcast) OPR 343: Fight FOMO With A Fig Leaf
Options Playbook – Options Insider Network

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