Jump Moving to Amsterdam; Trade Deadline Bets; Arbitrage Is No Fun

Jun 27, 2018

Jump Moving to Amsterdam; Trade Deadline Bets; Arbitrage Is No Fun

Jun 27, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

Miscellany for Wednesday

John is at the Crypto Evolved conference in New York currently. According to social media coverage of the event, Coinbase is building a low latency matching engine in Chicago.

In case you missed it, Jim Kharouf had a great piece about Coinbase last week.

In a stunner, Germany lost to South Korea in the World Cup this morning and was eliminated from the competition. It is the first time in living memory the winner of the previous tourney has been eliminated in the first round of play. Apparently that flies in the face of some Wall Street robots’ predictions. From FT Alphaville (free access with registration) – Germany are out, sorry Goldman, UBS, football robots

VIX, as of this writing, is on the march up again. Hello 17.

Lead Stories

HFT firm Jump prepares to move London traders to Amsterdam; The Dutch capital is already home to a number of prominent high-frequency trading shops — and Brexit will only see the number ris
Lucy McNulty – Financial News (SUBSCRIPTION)
US-headquartered Jump Trading has picked Amsterdam for its post-Brexit base in Europe and told a group of London-based traders that they could soon be relocated to the Dutch capital.

****SD: Insert jumping ship pun here…

Stock Options Bets Amassing Near Some Key Trump Trade Deadlines
Elena Popina – Bloomberg
Options bets on stocks and exchange-traded funds are piling up around key deadlines in President Donald Trump’s trade crusade and at least one strategist doesn’t think it’s a coincidence.

****SD: Today’s “well, I would think so” news.

Arbitrage Is No Fun Anymore; Also insider trading, Velocity Per Customer and art theft.
Matt Levine – Bloomberg (SUBSCRIPTION)
Here is a delightful New York Fed staff report on “Bank-Intermediated Arbitrage” by Nina Boyarchenko, Thomas Eisenbach, Pooja Gupta, Or Shachar and Peter Van Tassel. We’ll get to their conclusions in a minute, but I want to particularly recommend the paper as a nice layperson’s introduction to what banks do all day. It is stuff like this:
You’ve reached your

****SD: Relevant column from Levine today. Besides a large chunk covering arbitrage, he also discusses the S&P analyst insider trading story we have in our “Regulation” section.

London mayor warns of cliff edge scenario for service industries after Brexit
The Daily Mail
Major job losses will occur if the Government allows service industries to “fall off a cliff edge” after Brexit, London mayor Sadiq Khan has told MPs.

****SD: Each time I see a story about AI taking jobs, I think to myself, “Folks are going to lose jobs in the near and midterm for a whole host of reasons before the robots really kill us.”

We Now Know What The “Trump Tariff Put” Is
Nick Colas, Datatrek Research via Zero Hedge
We got the first sign of a “Trump Tariff Put” on Monday as the White House walked back threats to the Tech sector late in the day after a steep intraday decline in US stocks. That got us wondering: what sort of equity market pullback would it take to have the White House shelve/materially soften its plans to renegotiate numerous trade pacts? Our back of the envelope math: 9% on the S&P from here, or a 3-5% one-day decline on Chinese/European retaliation.

****SD: Sorry to link to ZH, a site with some of the worst advertising and comment sections ever, but this isn’t posted on Datatrek’s site, sooo to Zero Hedge we go…

Bank of England warns on $38 trillion Brexit derivatives crunch
Will Martin – Business Insider
A major financial crunch on contracts worth almost GBP30 trillion ($39.7 trillion) could be on the horizon in March next year, the Bank of England warned on Wednesday.
The UK’s central bank used its latest Financial Stability Report — which looks at the risks to the safety of the UK economy and the global financial system — to warn that Britain’s impending exit from the European Union could have a huge impact on over-the-counter derivative markets.

****SD: For another concerning derivatives shift, see the SOFR recap below. (Through the lens of the equity options and options on futures markets, I see these as hugely relevant “spillover effect” stories.)

Libor transition raises basis risk fear; Shift to secured benchmark could cause dislocation between bank funding and lending rates
Robert Mackenzie Smith – Risk.net (SUBSCRIPTION)
US lenders are preparing to move to a new reference rate for pricing assets, the secured overnight financing rate, or SOFR.
SOFR does not represent bank credit risk, meaning rates on bank assets and liabilities could diverge during a crisis.
Participants fear this divergence could make credit more volatile.
It could also affect how dealers use derivatives for hedging.
Industry groups are working on a solution that involves adding a spread to SOFR to mimic the missing credit risk element.
The US Federal Reserve is understood to be aware of the issue but is unconcerned due to Libor being less linked to bank funding today.

****SD: A hedge isn’t hedge if it’s around the wrong garden. (Don’t think about that too much – it doesn’t really work.)

Hedge Fund Managers See Echo of Past Crashes in Markets
Nishant Kumar and Suzy Waite – Bloomberg
The ranks of hedge fund managers expecting impending market chaos are growing. Greg Coffey, the former star manager at Moore Capital Management who started trading at his own firm this year, is comparing the turmoil in May to the end of dotcom bubble in 2000. Horseman Capital Management’s Russell Clark, one of the most bearish hedge fund managers in Europe, invoked memories of the financial crisis of 2008 in a letter to clients.

F&O upfront margins to rise 30-50%, volumes could dip
Nishanth Vasudevan – Economic Times
Punts in equity derivatives are set to get dearer starting next week. Traders will have to fork out higher initial margins for futures and options positions from July 2 as the capital markets regulator and exchanges look to discourage wild bets on stocks as part of their efforts to reduce the risks to the system. Brokers said the upfront margin requirements could rise by at least 30-50 per cent from current levels, likely affecting trade volumes.

****SD: A second “well, I would think so” story.

Quant hedge funds hit hard by rise in volatility
Saijel Kishan and Vincent Bielski – Bloomberg
Many quant hedge funds – young and old – are struggling to make money this year.
Manoj Narang, who started his hedge fund last year, saw his biggest investor, JPMorgan Chase & Co’s asset management unit, pull its money. Renaissance Technologies, the world’s most profitable hedge fund, is trailing its benchmark in one fund this year through mid-June. Jaffray Woodriff, who runs Quantitative Investment Management, lost 35 per cent in his tactical aggressive fund this year through May.

Exchanges and Clearing

GPX eyes equity options; sector-specific indices
Jack Ball – Global Investor Group (SUBSCRIPTION)
he Warsaw Exchange (GPW) is looking to develop equity options and certain sector-specific indices within the next year as part of the group’s ambitious GPW2022 strategy.
As part of 14 strategic initiatives outlined by GPW on Wednesday to improve the group’s international position, the exchange said it would, in developing its derivative segment further, look to launch new futures tailored to clients’ needs, promote market-makers that support liquidity in the order book and extend promotional and educational programmes for all groups of investors.

Nasdaq Introduces a Ranking Report for Firms on NOM, ISE, GEMX, and MRX
Nasdaq introduces a new Ranking Report available to Members on The Nasdaq Options Market (NOM), Nasdaq ISE (ISE), Nasdaq GEMX (GEMX), and Nasdaq MRX (MRX).
The Ranking Report is a monthly report reflecting the given Member’s market share and rank on a particular exchange as compared to other Members as well as within more specific categories including complex and price improvement mechanisms.

MyOCC and ENCORE Outage On June 30 and July 1, 2018
OCC Notice
OCC will be performing system updates on Saturday June 30, 2018 from 9:00 AM CT until Sunday, July 1 to 1:00 PM CT. Due to these updates, MyOCC and ENCORE will be unavailable during this time.

Cboe Global Markets’ Exchanges Trading Schedule for July Fourth Holiday
Cboe Global Markets, Inc. (Cboe: CBOE | Nasdaq: CBOE), one of the world’s largest exchange holding companies, today announced the following trading schedule for the company’s options, futures, equities and FX trading venues in observance of the July Fourth holiday.

SGX to report FY2018 results on 27 July
Singapore Exchange (SGX) is reporting its results for Financial Year 2018 (FY2018) after the market closes on 27 July 2018.

Regulation & Enforcement

U.S. charges S&P analyst, two others with insider trading in paint merger
A credit ratings analyst for Standard & Poor’s and two other defendants were criminally charged by U.S. prosecutors on Tuesday with insider trading related to Sherwin-Williams Co’s $9.3 billion purchase of Valspar Corp.

****SD: One of the characters in this story is a celebrity hairstylist apparently.

SEBI set to open commodities to MFs
The Securities and Exchange Board of India (SEBI) is gearing up to usher the next set of reforms in the commodity market by allowing mutual funds to participate in the segment while also actively considering allowing derivatives on commodity indices.

Banks fear loss of Emir intragroup exemptions; Firms would have to clear or margin transactions with affiliates in non-equivalent jurisdictions
Luke Clancy – Risk.net (SUBSCRIPTION)
European bankers are urging regulators to clarify whether they will maintain beyond 2018 the intragroup exemptions from clearing and margin requirements for operations based in third countries that are not deemed equivalent under European Union legislation.

****SD: Our recent video with FIA’s Simon Puleston Jones touched on a number of upcoming European regulatory issues.


Markets tap AI as data analytics become major revenue drivers
Artificial intelligence is gaining prominence with leading market infrastructures developing advanced analytics, according to a joint report by Nasdaq and Celent.

LiquidityBook Selected by Dalzell Trading
LiquidityBook, a Software-as-a-Service (SaaS)-based provider of buy- and sell-side trading solutions, today announced that LBX Outsourced Trader, an advanced POEMS (portfolio, order and execution management system) with fully integrated FIX connectivity, has been selected by Dalzell Trading.


The New Volatility Landscape
Stuart Barton – Invest In Vol
Following the events of Feb. 5th, several volatility linked products have been delisted or deleveraged. We thought now was a good time to take a step back and survey the volatility landscape as it exists today. If you’d like to read a brief summary of the causes of Feb. 5th I recommend my earlier article available here. (Invest in Vol – The Volatility Advisor)

****SD: A comprehensive rundown of the trading vehicles available and their characteristics after February. Why a recap? Because “since Feb. 5th, five volatility products have been liquidated and four have had their investment objectives altered.”

Somebody’s Back To Shorting The VIX
Jeff Malec – RCM Alternatives Blog
By now, most investors know what the VIX is, but education on how the VIX and other volatility indices work still leaves a bit to be desired. Cboe Director of Education, Russell Rhoads, is one of the very few who has written a book about the VIX, but he’ll tell you not to read it because things change so fast – it’s mostly outdated! (which, perversely, made us want to read it).

The Best Way To Trade Volatility
Shalom Yariv – Seeking Alpha
There are several approaches to trade implied and realized market volatility. One is to use exchange-traded instruments, such as VIX futures contracts and related exchange-traded notes (ETNs). In this approach traders buy or sell VIX index futures, depending on their volatility expectations. Some traders use the actual VIX futures, but a simpler and more common way is to use ETNs that replicate VIX futures strategies.

****SD: The thing to keep in mind with this sort of analysis can be seen in the “Conclusions” section: “Assuming that market conditions will not dramatically change in the near future, there is a simple recipe for volatility trading…”


Growing global LNG market needs better pricing system: executives
Julie Gordon – Reuters
The growing world liquefied natural gas market requires a better pricing benchmark to facilitate big-ticket investment decisions and stabilize demand, executives said on Tuesday at an industry conference in Washington.

Banks Failing Stress Tests? Not for Much Longer; The Fed is expected to eliminate pass/fail grades as soon as 2019
Ryan Tracy – WSJ
The Federal Reserve is moving toward eliminating passing and failing grades for its stress tests of the nation’s largest banks, replacing them with a capital ratio that the lender must meet during the following year.

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