It’s a ‘Golden Age’ for Short-Volatility Trades

Apr 25, 2019

Observations & Insight

Making an Independent FCM a Global Ag Powerhouse – Gerry Corcoran, R.J. O’Brien

It’s not easy being a futures commission merchant (FCM) in today’s environment, but R.J. O’Brien, the oldest and largest independent FCM, is thriving, bringing in record revenues of $600 million in 2018. In this video, R.J. O’Brien Chairman and CEO Gerry Corcoran talks about the firm’s recent initiatives and approach to global expansion.

Watch the video »

Lead Stories

It’s a ‘Golden Age’ for Short-Volatility Trades
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Technical factors are set to boost returns for betting on calm; MRA sees echo of ‘two very profitable years’ in current market
Traders going all-in on the U.S. rally may be better off shorting volatility than buying stocks, as the strategy flashes bullish signs evoking the “golden age” of 2017.

Susquehanna and the Option Gods: Hiding in Plain Sight
Who are the buy-side’s smartest and most powerful players today? Alphacution is working towards a clear answer to this question. Not just a list, but a ranking of the top players in global markets today – starting with the buy-side. Chances are high that the players that earn their way onto such a list – and, rise towards the top – are going to deploy a lot of technology to create a ton of automation (and, speed) to trade a big list of names across product classes, asset classes, regions and complementary strategies. Skipping a more detailed description and justification for now about the qualifications for our “Buy-side Leaderboard,” one thing’s for sure: The smartest and most powerful players on the buy-side are skilled in derivatives trading. Trading options, in particular, vs. not trading options, is like the difference between 3-dimensional and 2-dimensional chess. Mathematically, it’s like the difference between curved lines and straight lines; or, motion vs. standing still.

Modernizing the technology of clearing; OCC’s John Davidson describes the vision behind the Renaissance Initiative
Will Acworth – MarketVoice
Big changes are under way at Options Clearing Corporation, the Chicago-based clearinghouse that ranks as one of the largest in the world in terms of processing volume. Earlier this year OCC launched a multi-year effort to modernize the institution’s risk management, clearing and data systems. Dubbed the Renaissance Initiative, the project aims to comprehensively redevelop and modernize the company’s technology. But according to John Davidson, the clearinghouse’s chief executive officer, the changes go far deeper than that.

Making Sense of the Market in the Age of Algorithmic Trading
Steven M. Sears – Barron’s
Good luck trying to make sense of stock movements this earnings season.
In the age of algorithmic trading, a small, increasingly powerful group of dealers are locked in a technology arms race with each other and the exchanges, and are increasingly struggling to determine how S&P 500 index stocks, options, and futures will react to events like earnings reports and economic data.

Hedge Funds Keep Failing to Deliver on What They’re Selling
Barry Ritholtz – Bloomberg (SUBSCRIPTION)
The stark underperformance of hedge funds and others in the alternative-investments business since the end of the financial crisis has been a long-running mystery. Or as Worth so starkly put it, “What the Hell Happened to Hedge Funds?”

Trading Surges on Bearish Options of U.S. Dollar ETF
Bet looks to be made by one trader who expects the dollar will weaken this year
Gunjan Banerji – WSJ (SUBSCRIPTION)
A large wager took place on Wednesday which showed that the recent strength in the U.S. dollar could be short-lived.
Almost 200,000 bearish options changed hands on the Invesco DB U.S. Dollar Index Bullish Fund, or UUP, according to Trade Alert. The bets sent options volumes on the fund to more than 100 times the average in the last month.

Exchanges and Clearing

Cboe Global Markets Plans Listing of Options on Pinterest (PINS), Zoom Video Communications (ZM) on April 25
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today announced it plans to list options on both Pinterest, Inc. (PINS), a social media company known for its lifestyle photos, and Zoom Video Communications, Inc. (ZM), a video and web conferencing company, on Thursday, April 25.

CME Group Announces 2019 Annual Meeting Location Change
CME Group
CME Group Inc. (NASDAQ: CME), the world’s leading and most diverse derivatives marketplace, today announced that, due to ongoing construction, its 2019 Annual Meeting of Shareholders will now be held on the 14th floor at CME Group, located at 20 South Wacker Drive, Chicago, Illinois. The meeting will begin at 10:00 a.m. Central Time Wednesday, May 8, 2019, and visitors should enter the building through the Monroe Street entrance.
The presentation will be broadcast live over the internet and can be accessed via the exchange’s website at Additional information about the Annual Meeting is contained in the company’s Proxy Statement for the Annual Meeting, which was made available to shareholders of record prior to the Annual Meeting.

Keeping an Eye on the Open: New Guidance from the CME Group
The definitions that govern disruptive trading practices are constantly evolving and one area that has garnered an increasing amount of surveillance interest in the last several years concerns activities that occur immediately before and during the market open. As an example of this focus, the CME Group has issued a new Market Regulation Advisory Notice (MRAN) that deals specifically with this period of time in the trading day. While this MRAN is primarily a clarification and consolidation of previously issued guidance, its publication is an indication of how important the opening period and Indicative Opening Prices (IOPs) are to futures markets. The contents of this new IOP MRAN are a helpful guide to understanding the ins-and-outs of surveilling the market and the compliance issues that are either best observed or avoided.

SGX reports 3Q FY2019 net profit of S$100 million
Singapore Exchange (SGX) today reported 3Q FY2019 net profit of S$99.7 million (S$100.5 million), against revenues of S$228.8 million (S$222.2 million). Operating profit was S$118.2 million (S$117.9 million), with earnings per share at 9.3 cents (9.4 cents). The Board of Directors has declared an interim dividend of 7.5 cents (5.0 cents) per share, payable on 13 May 2019.


Singapore Takes Split-Second Chance to Be FX Hub for Rich
Ruth Carson, Chanyaporn Chanjaroen, and Chikako Mogi – Bloomberg (SUBSCRIPTION)
Singapore is grabbing an opportunity measured in milliseconds to win a bigger slice of the world’s $5.1 trillion-a-day foreign exchange market.
The Southeast Asian nation is encouraging major foreign-exchange players to build systems in the country that would remove the sub-second delay caused by routing trades via Tokyo or London. The move is part of a plan to expand the island’s overall currency-trading industry, said Monetary Authority of Singapore’s Benny Chey. UBS Group AG and Citigroup Inc. have already set up pricing engines on the island and MAS hopes to bring in six to eight more big players, including non-banks and multi-dealer platforms.


A fear markets are overvalued is holding back investors, says BMO strategist
Barbara Kollmeyer – MarketWatch
A year from now, some investors may be kicking themselves for not buying into this relentless bull market.
They might look back and say, ‘Wow, now that was a great time to buy.’
Or not, because all this caution that seems to keep dogging the market’s attempt to push it higher — such as the Nasdaq and S&P giving up a foray into record territory on Wednesday—may not be for nothing.


Warren Buffett: ‘I’m having more fun than any 88-year-old in the world’
Robert Armstrong, Oliver Ralph and Eric Platt – Financial Times (SUBSCRIPTION)
In the stock market, small margins separate success from failure. Ten per cent is a big difference in performance; 100 percent, an oceanic one.
And then there is Warren Buffett. Over the past 54 years, shares in his company, Berkshire Hathaway, have outpaced the S&P 500 — a broad index of American stocks — by almost 2.5 million percentage points. The degree to which Buffett has outwitted successive generations of Wall Street rivals almost defies comprehension.

Crypto’s Long Road to Acceptance May Have Started Here
Alastair Marsh – Bloomberg (SUBSCRIPTION)
In the wake of the 2018 crash, two dozen traders gathered to plan its emergence as a new asset class. Step one: a clearinghouse.

Are you a great investor — or is it just the market?
Simon Edelsten – Financial Times (SUBSCRIPTION)
Most people have heard of the Russian scientist Ivan Pavlov, whose dogs salivated at the sound of a ringing bell when trained to associate it with meal times. Less well-known is his colleague Nikolai Studentsov — but his downfall holds a warning for all DIY investors (and a few fund managers).
In the early 1920s, Studentsov trained a mouse to run to a feeding rack on the sound of a buzzer. It took 298 tries for the mouse to get the hang of it. He then trained the mouse’s offspring and got it down to 114. The mouse’s grandchildren picked it up in 29 goes and the great-great grandchildren in just six.

Argentina is on the brink
Colby Smith – Financial Times (SUBSCRIPTION)
When Mauricio Macri was elected Argentina’s president in 2015, he was hailed as a pro-market, pro-reform leader willing to make the difficult policy decisions that would eventually re-right the country’s struggling, inflation-wracked economy.
One extended currency crisis and the largest IMF programme in history later, and his administration’s approach to muddling through market volatility while keeping constituents happy is failing ahead of the all-important presidential election in October.

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