Observations & Insight
Compliance Complexities in Communications Monitoring
While Google Assistant, Siri and Amazon Alexa might make natural language processing seem perfectly ready for widespread, plug-and-play adoption, those offerings are for general use cases. Voice technology when it comes to monitoring and surveillance trading communications is a far different, more nuanced matter. In this video, Tony Foreman, a former pit trader and now head of sales for Fonetic, talks about the difficulties presented by trading environments and lingo. (Not every “pack” mentioned by a trader is a reference to eurodollars, after all. Maybe someone was just readying for a cigarette break.)
Watch the video »
Acuiti Derivatives Insight Report: Euribor Flash Rally Hits Proprietary Traders – A Spike In Trading In A Euribor Spread Caused Significant Losses To Several Proprietary Trading Firms In July
An anomaly in trading in the Dec 20/Mar 21 Euribor spread on ICE has resulted in a number of proprietary trading firms reporting significant losses in July, the latest Acuiti Derivatives Insight Report found.
****SD: Check this out: “[The widening of the Dec 20/Mar 21 Euribor spread] caused havoc with several strategies with the Fly of Flys (the strategy in which a trader sells the 1st butterfly spread, buys the middle butterfly and sells the 3rd) moving 500 basis points without a move in the yield curve.”
Miami International Holdings and Advanced Fundamentals Announce Partnership; Proprietary Commercial Real Estate Derivative Products to Follow on MIAX Exchanges
Miami International Holdings, Inc. (MIH), the parent holding company of the MIAX, MIAX PEARL and MIAX Emerald options exchanges (the MIAX Exchange Group), and Advanced Fundamentals, LLC (Advanced Fundamentals), an owner and developer of next generation beta indexes, today announced that they have partnered to develop a complex of proprietary financial products based on Advanced Fundamentals’ commercial real estate indexes (CRE Indexes).
****SD: MIAX’s activities so far in the past year include launching the industry’s newest options exchange, planning an equities exchange, launching SPIKES options and planning for SPIKES futures.
Big Treasury Options Trade Shows Anxiety About Jackson Hole
Edward Bolingbroke – Bloomberg (SUBSCRIPTION)
Bullish wager is hedge against 10-year yield dropping to 1.45%; Option expires hours after Powell delivers Jackson Hole speech
Bond traders appear worried that Federal Reserve Chairman Jerome Powell’s Friday speech in Jackson Hole could reignite the rally that drove Treasury yields to multiyear lows last week. A purchase of Treasury options for more than $8 million on Tuesday suggests that large positions — the hedging of which contributed to the rally — remain at risk in the event that Powell sounds dovish notes.
****SD: The 60,000 lot trade was done in two blocks.
Is Higher Volatility Making a Comeback?
Erik Norland – CME Group
-Long dormant volatility begins to stir anew across several asset classes
-Copper still undecided even as gold, silver implied volatility heads higher
-Fed’s serial rate hikes could be the cause if volatility returns in a big way
Occasional brief spikes notwithstanding, volatility has been dormant across most asset classes (excluding energy) over the past eight years. Equities, fixed income products, currencies, metals and agricultural goods saw steep declines in implied volatility after 2010 and it has generally remained at exceptionally low levels for the past several years. In the past few months, however, there have been signs that implied volatility might be in the early stages of a transition to much higher levels in the coming months or years across a wide range of assets.
The Variance Risk Premium is Pervasive
Larry Swedroe – AlphaArchitect
The variance risk premium (VRP) refers to the fact that, over time, the option-implied volatility has tended to exceed the realized volatility of the same underlying asset. This has created a profit opportunity for volatility sellers – those willing to write volatility insurance options, collect the premiums and bear the risk that realized volatility will increase by more than implied volatility. Because the equity VRP risk (specifically, when the sale of options performs poorly) tends to show up in bad times (when risky assets perform poorly), we should expect a significant premium, one that cannot be arbitraged away. On the other hand, price shocks happen at different times for different assets. For example, volatility in natural gas prices may be driven by weather, which is not correlated with equity risks. And volatility in agricultural prices may be driven by Midwestern floods like we experienced in May 2019.
****SD: The research noted that “Selling volatility is profitable in virtually all markets nearly all the time, including the five-year period surrounding September 2008.” So, there potentially is such a thing as a free lunch, just with occasional periods where the food provided is an awful sandwich that would probably make you sick if eaten.
Blame the Computers for Last Week’s Market Wipeout
Chief Investment Officer
The algorithms did it. That’s the verdict of JP Morgan’s top trading strategist when describing last week’s volatility, with last Wednesday’s breathtaking 3% plummet in the S&P 500 as the centerpiece. It all seemed to confirm August’s reputation as the worst month for equities. “More than half of equity moves were driven by systematic rather than fundamental trading,” wrote Marko Kolanovic, the bank’s global head of macro quantitative and derivatives strategy, in a research note.
****SD: From the piece: “By [Kolanovic’s] estimate, the big downdraft’s primary fuel was $75 billion in computer-driven selling. Banks’ hedging and index options delta, where the underlying stocks also dragged down the options pricing, were two of the most salient forces, he indicated.”
The Truth Behind Plunging Bond Yields: Largest Convexity Hedging Flow Since 2008 And Retreating HFTs
The Heisenberg Report
Last week marked the culmination (so far) of a truly dramatic collapse in developed market bond yields. The frantic duration grab manifested itself in 10-year US yields diving below 1.50%, 30-year yields pushing below 2% for the first time, ultra futures trading limit-up in extended hours action Wednesday morning and, of course, the 2s10s inverting that same day, much to the chagrin of equities and a frustrated US president.
Volatility Bogeyman Seen Lying in Wait With Event Risk Looming
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Tallbacken sees swings fueled by almost any Fed rate scenario; BofAML says options are underpricing a variety of risks
The decline in equity volatility from its early August highs looks overdone given the number of risk events that lie ahead, according to market participants.
Bankers hawk hedging as trade war hits China’s yuan
Samuel Shen, Andrew Galbraith – Reuters
In a Shanghai room packed with small businesses ranging from furniture makers to garment exporters, Zhu Yuan, a currency expert at Bank of Communications, explains why Chinese companies need to build their defenses against currency volatility.
Inside Volatility Trading: August 20, 2019
Kevin Davitt – Cboe Blog
Ronald Reagan used to joke that if Trivial Pursuit were designed by economists, “it would have 100 questions and 3,000 answers.” In a similar vein, acerbic investors often point out that economists have “accurately predicted all 21 of the last 4 recessions.”
Exchanges and Clearing
MIAX Options Exchange – Complex Auction Allocation Priority Change – Effective August 21, 2019
Effective Wednesday, August 21, 2019, MIAX Options Exchange will use the less aggressive of the Complex Order’s original limit price or the Complex Order’s protected price at the conclusion of Complex Auctions and upon evaluation after ABBO uncrossings during regular trading to determine allocation priority.
Euronext announces nominations to the Managing Board and Supervisory Board
Euronext today announced that the Supervisory Board has made five nominations in the governance of Euronext N.V.. All five nominations are for four year terms, and are subject to approval by an Extraordinary Shareholders’ Meeting of Euronext N.V., as well as all the applicable regulatory non-objections.
Regulation & Enforcement
Here Are the Key Wins for Wall Street in the Weakened Volcker Rule
Based on a quick reading of the new Volcker Rule, the FDIC fact sheet, Director Marty Gruenberg’s dissent, and comments made at the FDIC meeting, financial regulators handed Wall Street its biggest victory since the 2008 financial crisis. In addition to not finalizing the Fair Value Accounting Test – which was vehemently opposed by Wall Street– the new rule delivers the following wins for Wall Street’s biggest banks
SEC Rule 606 Endgame: The Guidance Is Out
Chris Montagnino, Jordan & Jordan – Tabb Forum
The SEC finally released guidance on Rule 606 to assist broker-dealers and the industry with implementation of the new routing disclosure requirements that are scheduled to go into effect on Oct. 1, 2019. Jordan & Jordan’s Chris Montagnino breaks down the detailed questions and responses into a five-minute read with a consolidated synopsis of the most salient aspects of the guidance and the new rules’ potential impact.
PMorgan metals trader pleads guilty to spoofing, resigns from bank
Jonathan Stempel – Reuters
A JPMorgan Chase & Co precious metals trader pleaded guilty to spoofing, or placing bogus trade offers, on Tuesday, when he also resigned as an executive director at the bank.
The Big Interview: Rob Mackay; Rob Mackay, CEO of Itiviti, talks to The TRADE about last year’s merger with Ullink, the firm’s ongoing work with Bloomberg, and why the enterprise vendor space is failing on legacy technology.
John Brazier – The Trade
How have the initial months at the helm of Itiviti been for you and what have been your first priorities during your first few months in charge?
Rip-roaring bond rally revives talk of ‘widow-maker’ trade; Shorting debt is back on the agenda as investors bet global growth fears are overdone
Robin Wigglesworth, Laurence Fletcher and Colby Smith – Financial Times (SUBSCRIPTION)
Every investor has one trade that they rue more than any other. The most famous “widow-maker” trade in financial markets ó one that has frustrated generations of money managers ó is betting against Japanese government bonds. Yields have sagged to eye-popping lows for the past three decades, even as government debts have risen, repeatedly tempting traders into “shorting” Japanese debt. Yet time and time again yields have only dipped lower, inflicting painful losses on successive generations of money managers.
Risk Parity + Trend Following = ?
RCM Alternatives Blog
Bridgewater & Associates is commonly known as the world’s largest hedge fund, with more than $140 Billion in assets under management and close to 1,500 employees. Its founder Ray Dalio is about as eccentric as you would expect from the founder of the world’s largest hedge fund – penning his own manifesto, and installing a work culture where employees watch recordings of each other’s meetings in an effort to have “radical transparency”. But behind all these billions and quirky management techniques is actually a pretty simple investment concept known as risk parity. A strategy a 2015 Financial Times article estimated has upwards of $400 Billion of assets using it.
Russell Rhoads’ Derivatives Look Forward: Benchmark Replacement Scrum Heats Up (VIDEO)
Russell Rhoads, TABB Group
LIBOR’s days are numbered, but in the first quarter of 2019, only 2.5% of over-the-counter interest rate derivatives were based on any of the LIBOR replacements, reports TABB Group head of derivatives research Russell Rhoads.
Incentive programs are sweeping crypto exchanges, but they look different from Wall Street’s by Frank Chaparro – The Block
-New incentive and rebate programs are sweeping the derivatives market for crypto
-But experts from the old world of commodities and derivatives says they’re nothing like they’ve ever seen
Hedge Fund Traders Get Better in Existential Panics, Study Says
Elena Popina – Bloomberg (SUBSCRIPTION)
Sometimes it takes a crisis to bring out your best.
True in politics and marriage, and also, according to a new study, in active fund management. University of Manchester researchers Xinyu Cui and Olga Kolokolova found that during times of outflows, highly paid traders exhibit above-average stock-picking skills. Their paper is called “Do Hedge Fund Managers Work Harder Under Pressure?”
Hedge fund performance forces prime brokers to rethink risk; Prime brokers are stepping up their due diligence of hedge funds, becoming more forensic when looking to bring a hedge fund onto their balance sheet.
Joe Parsons – The Trade
Performances within the hedge fund industry last year are causing prime brokers to reassess the credit and counterparty risk of financing. The $180 million loss within Citi’s FX prime brokerage business in December last year spurred a new debate over whether prime brokers are charging a fair price to finance hedge funds making speculativ