Negative Oil Prices, the Vix, and the Risks of Trading ETFs You Don’t Understand; BofA Says S&P 500 to Hit Fresh Lows If Volatility Pattern Holds

Apr 22, 2020

Lead Stories

Negative Oil Prices, the Vix, and the Risks of Trading ETFs You Don’t Understand
Randall W. Forsyth – Barron’s
The financial world has been turned upside down by extraordinary events in recent years. First there were negative interest rates, something that had never happened in 5,000 years of recorded history. Now it’s negative oil prices , a phenomenon that sparked headlines Monday far beyond financial news.
There are important differences between the two, however. Negative interest rates were imposed by central banks in Europe and Japan as part of their conduct of monetary policy. Oil, by contrast, trades in a relatively free market that, once again, is proving to be resistant to control by government-run cartels.

BofA Says S&P 500 to Hit Fresh Lows If Volatility Pattern Holds
Joanna Ossinger – Bloomberg
U.S. stocks are likely to see new lows if VIX patterns from yesteryear hold sway, according to Bank of America Corp.
The current bear-market rally most closely resembles what occurred in 2008, and suggests there’s limited further upside before a turn that drags the S&P 500 to fresh lows, strategists led by Benjamin Bowler wrote in a note Tuesday. They drew that conclusion by measuring from the peak of volatility in the three most recent major sell-offs and comparing those with the present one.

Billionaire investor Howard Marks said oil’s unprecedented crash is ‘perfectly rational,’ and ‘not a panic’
Saloni Sardana – Markets Insider
Negative US oil prices, the lowest international oil prices since 1999 and no place to store oil has spooked investors across both sides of the Atlantic, but one billionaire investor thinks it is no big deal.
Billionaire investor Howard Marks who founded Oaktree Capital Management, told CNBC on Wednesday: “It’s not a panic. The move is completely rational.”

World’s largest oil ETF revamps portfolio after market chaos
Gregory Meyer and Derek Brower – Financial Times
The world’s largest oil-backed exchange-traded fund has been forced to make far-reaching changes to its portfolio, after below-zero crude prices raised the spectre of unlimited losses for investors and its holdings ballooned to almost a quarter of the benchmark US futures market.
The United States Oil Fund, an ETF with more than $4bn in assets, said it would shift money out of the West Texas Intermediate futures contract set to expire in June, in favour of later-dated contracts and possibly even other kinds of energy derivatives.

Oil price volatility likely to continue – CFTC Chairman – Agricultural Commodities
John McCrank – Reuters
Oil price volatility will likely continue in the near future due to fundamental supply and demand issues, which are now being reflected in the financial markets, Heath Tarbert, chairman of the Commodity Futures Trading Commission, said on Tuesday.

Gold prices will nearly double to a record $3,000 as central banks fuel ‘financial repression,’ Bank of America says
Ben Winck – Markets Insider
Central banks’ stimulus frenzy amid the coronavirus pandemic will drive gold to a lofty record by October 2021, Bank of America analysts projected in a note on Monday.
The firm’s analysts lifted their 18-month price target for the precious metal to $3,000 per ounce from $2,000, praising gold as “the ultimate store of value” during the severe economic downturn. After an initial sell-off and subsequent rebound, the safe-haven asset sits near its highest level in eight years, but Bank of America reckons that potent easing policies around the world will send its value 50% higher than its record.

A $6 Billion Windfall: Mexico’s Massive Oil Hedge Is Paying Off
Lorena Rios and Javier Blas – Bloomberg
Mexico is on track to cash in on a $6 billion windfall once its massive insurance program against low oil prices kicks in following a dramatic plunge in prices, President Andres Manuel Lopez Obrador said on Wednesday. For the past two decades, Mexico has locked in its oil revenue via put options it buys from a small group of investment banks and oil companies in what’s considered Wall Street’s largest — and most closely guarded — annual oil deal.

Celebrate Earth Day with Sustainable Investing
Cboe blog
The importance of ESG, or Environmental, Social and Governmental, initiatives has grown rapidly within the past few years – especially in the finance industry. As Ed Tilly, Chairman, President and CEO, wrote recently, everyone has a role to play in sustainability. At Cboe, we are guided by our commitment to being better global citizens as we regularly seek new ways to reduce our environmental impact and give back to our local communities. We know we are part of a worldwide effort by companies and individuals who are searching for sustainable solutions in every aspect of their life, including investing.

Exchanges and Clearing

Nasdaq cautious as volume spike drives first-quarter profit beat
John McCrank, Noor Zainab Hussain – Reuters
Nasdaq Inc. reported higher-than-expected first-quarter profits on Wednesday, benefiting from market volatility fueled by the coronavirus crisis, but the transatlantic exchange operator also warned of uncertainty ahead.

Switch to Bachelier Options Pricing Model – Effective April 22, 2020
CME Group
Pursuant to Clearing Advisory 20-152 that was published on April 8th, the clearing house will switch the options pricing and valuation model to Bachelier to accommodate negative prices in the underlying futures and allow for listing of option contracts with negative strikes for the set of products specified in the link below. The switch will be effective for the margin cycle run at the end of trading tomorrow April 22, 2020 and will remain in place until further notice.

Regulation & Enforcement

US consolidated audit trail timeline disrupted due to COVID-19; The US watchdog has extended a delay for broker-dealers reporting to the CAT after system officially went live earlier this month.
Hayley McDowell – The Trade
The timeline for broker-dealers reporting to the consolidated audit trail (CAT) for equity and options trades in the US has been delayed a second time due to the ongoing coronavirus pandemic.

Application for Review of Action Taken by CAT LLC and Certain SROs in Violation of Exchange Act Sections 19(d) and 19(f)
SIFMA applies for review of action taken by Consolidated Audit Trail, LLC and certain Self-Regulatory Organizations (SROs) in violation of Exchange Act Sections 19(d) and 19(f).

SEC issues updated CAT reporting timeline
Brian Croce – Pensions & Investments
The Securities and Exchange Commission issued an exemptive order Monday establishing a new consolidated audit trail reporting timeline for broker-dealers due to the COVID-19 pandemic. The order allows for equity and options reporting in phases, taking into account the complexity of reporting events, the SEC said in a statement. In order to “address the impact of COVID-19 while preserving progress toward existing milestones,” the order also allows for a delayed start to CAT reporting conditioned upon compliance with certain other obligations, the SEC said.


QB Launches First Options on Futures Execution Algorithm, “Striker”
Trader’s Magazine (press release)
Quantitative Brokers (QB), an independent provider of advanced execution algorithms and data-driven analytics for futures and U.S. Cash Treasury markets, today announced the launch of a first-ever, intelligent algorithm for options on futures markets. Striker joins QB’s suite of award-winning best execution algorithms: Bolt, Strobe, Legger, Closer, Octane and The Roll.


20-year-old trading phenom shares investing strategy that’s made $3 million
Christopher Competiello – Business Insider
Nour Atta — a 20-year-old day-trading maestro — first became interested in the stock market at a time when most teenagers are worried about Fortnite, making TikToks, and what they’ll wear to school the next day.
“It kind of sounds crazy, but I’ve honestly been learning about the stock market since middle school,” Atta said in an exclusive interview with Business Insider. “My dad was a long investor.”

****JB: Options are an important part of his overall strategy.


Hedge-Fund Redemptions Are the Largest Since the Financial Crisis
Carleton English – Barron’s
Investors are yanking money from the hedge funds amid a period of unprecedented volatility .
Assets fell below $3 trillion in the first quarter for the first time since the third quarter of 2016, data from Hedge Fund Research, released on Wednesday, shows. At the end of 2019, assets stood at a record $3.3 trillion. HFR specializes in data and analytics for the hedge-fund industry.

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