Nerves Remain High, Vol Futures Curve Shows; Gatsby Update; Goldman’s VAR

Feb 19, 2019

Observations & Insight

“Making options beautiful” and other miscellany
Spencer Doar – JLN

A ways back we had a story from American Banker about a new, no commission options trading platform called Gatsby that received $500,000 in funding from an array of backers, including former Goldman MD Alex Wohl and Barclays.

The marketing materials used the line, “Don’t complicate the uncomplicated” and the platform only allows for the purchase of puts and calls. The Gatsby team, according to American Banker, “tried to emulate apps like Guitar Hero and Blue Apron that simplify something like playing an instrument or cooking a meal, and remove the need for the user to have expertise.”

I just got an email from the company today regarding a platform update with the header “Making options beautiful.” Here was how Gatsby addressed the two biggest features of the upgrade:

“-Performance Improvements – Gatsby has totally redesigned the way it communicates with our market data providers and the exchanges in an effort to dramatically improve application performance. In the end we saw more than an 80% improvement in load speed so the app will no longer feel like swimming through porridge.
-Limit Orders – We also launched the ability to place limit orders. By default, orders will still be sent as market orders but you can change the order to a limit order and set your limit order price on the ‘swipe to execute’ screen.”

They didn’t allow limit orders before? If you’re a millennial, mobile-first user with no previous options experience, are you going to be aware what defaulting to a market order means for a trade? Let’s just say if Gatsby takes off, there ought to be a hearty competition for that “uncomplicated” order flow.

(I don’t know what to make of the previous user experience being described as akin to “swimming through porridge.” I take it the Gatsby crew operates under a startup mantra that brutal, self-deprecating honesty is the best policy?)



-Roughly 80 percent of companies in the S&P 500 have reported Q4 earnings. Via FactSet: “Companies in the S&P 500 that have reported negative earnings surprises for Q4 have seen a decrease in price of 0.4% on average from two days before the company reported actual results through two days after the company reported actual results.” Over the past five years that decrease averaged 2.6 percent. So, we got that going for us, which is nice.

-Yesterday we had this story from Bloomberg: Swedish Krona Set for Bumpy Ride on Volatile January Inflation. So what happened today? The krona fell one percent against the dollar.

Lead Stories

Stock Market Nerves Remain High, Volatility Futures Curve Shows
Cormac Mullen – Bloomberg (SUBSCRIPTION)
Despite this year’s fall in equity volatility, the futures market indicates traders don’t believe the calm will last, according to Commerzbank AG.
Volatility futures in both the U.S. and Europe remain above their historical averages in shorter-term contracts, strategists Alexander Kraemer and Matthias Bausch wrote in a note Monday. This has resulted in a flatter than normal curve and is a sign investors expect moderately higher swings.

Goldman suffers first VAR breach since 2016
Alessandro Aimone – (SUBSCRIPTION)
Goldman Sachs incurred two value-at-risk backtesting exceptions in the fourth quarter of last year as a result of larger-than-expected trading losses.
The US dealer reported two days during the three months to end-December when trading losses exceeded its VAR model estimates. Market risk reports show last quarter’s VAR exceptions were the first reported by Goldman since Q2 2016.

****SD: As always, the emphasis is on “model” and “estimates.”

The derivatives market is heating up in crypto, and Binance might be the next firm to jump in
Frank Chaparro – The Block
Cryptocurrency trading is stuck in the doldrums but one corner of the market is heating up, according to numerous market specialists.
Derivatives. It’s a word that has finally found its way from the world of pedantic Wall Street parlance to the center of the crypto trading world. Derivatives markets cover an array of financial products including options, futures, swaps, contracts for differences — all of which provide exposure to the market in a way that doesn’t touch underlying crypto.

Investors make hay betting on wild swings The notional turnover of Indian derivatives market has grown nearly 2.5 times in last two years.
Pavan Burugula – Economic Times Bureau
Investors in Indian derivatives market have outlandish expectations these days. They are betting on wild swings in indices, buying deep-out-of-the-money options and driving up notional value of contracts. Take a look at these figures for instance. The notional turnover of Indian derivatives market has grown nearly 2.5 times in the last two years against the premium turnover that grew by only 60 per cent. According to data compiled from NSE, the notional turnover of options has gone up to Rs 187 lakh crore in fiscal from Rs 79 lakh crore in FY17 in the current fiscal year.

****SD: Check this out: “‘Many traders, especially the retail ones, are moving more towards out-of-money options as trading in them is cheaper. If something goes wrong in the market and Nifty fluctuates 5-8 per cent, the out of money options could hurt the markets significantly,’ said Chandan Taparia, derivative analyst at Motilal Oswal.”

Why markets should get set for “QE4”; World’s financial system has become dependent on huge central bank balance sheets
Michael Howell – Financial Times (SUBSCRIPTION)
Modern financial systems have grown dependent on huge central bank balance sheets. Yet the assets of central banks around the world have begun to contract significantly, relative to gross domestic product, for the first time since the 2008 crash.

****SD: In an options context, I see stories like this and always think about Chris Cole and his research regarding the implicit short vol trade (as opposed to the explicit short vol trade). Also from the FT this week: Federal Reserve nears decisions on its asset portfolio.

Morgan Stanley derivatives exposures grow
Alessandro Aimone – (SUBSCRIPTION)
Derivatives exposures at Morgan Stanley rose during the three months to end-December in the first such increase since the second quarter of 2017.
Total derivatives exposures, as measured for the purposes of the Federal Reserve’s supplementary leverage ratio (SLR) calculation, went up by $5.1 billion quarter-on-quarter, or 3%, to $195 billion.


Credit Suisse quietly hired Morgan Stanley’s rising star in equity derivatives
Sarah Butcher – efinancialcareers
Credit Suisse has hired a rising star from Morgan Stanley’s equity derivatives business. Matteo Mazzetto, an executive director in Morgan Stanley’s fund linked derivatives business, is understood to be joining Credit Suisse in London this week. Credit Suisse declined to comment.

Deutsche Bank just made another major equity derivatives hire
Sarah Butcher – efinancialcareers
Deutsche Bank is on a roll. Since global head of equities Peter Selman told the Financial Times last December that DB planned to do, “quite a bit more” equities hiring, the German bank has made two major equity derivatives hires in London. The latest equity derivatives professional to sign Deutsche’s dotted line is understood to be Eric Bensoussan, who is (re-)joining the German bank in the next few months. Bensoussan’s arrival may coincide with that of David M. Ryan, who is joining Deutsche as head of equity derivatives sales in Europe, as we reported last week.

Regulation & Enforcement

European Broker Ban on Retail Binary Options Is Extended Again
Silla Brush – Bloomberg (SUBSCRIPTION)
A European Union prohibition on the sale of binary options to retail clients will be extended for three months amid a regulatory clampdown on speculative derivatives trades.

HSBC misses profit, blames Brexit, trade tensions
Margot Patrick – MarketWatch
HSBC Holdings PLC reported lower than expected fourth-quarter profit Tuesday as choppy financial markets, U.S.-China trade tensions and Brexit uncertainty weighed on the global bank.

****SD: Included in regulation because of this very last line: “Also on Tuesday, HSBC said the European Commission has asked it for information around potential coordination in foreign exchange options trading. It said the matter is at an early stage.” Manipulation of FX benchmarks has been under investigation since at least 2013, and the EC’s investigation involves an array of the biggest big banks. Looks like the gears of justice will continue to slowly churn on the FX front.

Do we need a global technology regulator for financial services?
Guest Post: Axel P. Lehmann, UBS and Steffen Kern – Financial Times (SUBSCRIPTION)
Consistent international standards are vital to underpin the efficient flow of capital to the best opportunities. Cross-border financial intermediation provides the necessary connection between borrowers and savers, which supports GDP growth.

Exchanges and Clearing

EU derivatives traders to get hard-Brexit reprieve; One-year licences for London clearing houses begin if UK leaves bloc without deal
Philip Stafford – Financial Times (SUBSCRIPTION)
European companies and investors will still be able to rely on London to complete derivatives trades in the region’s EUR660tn market if the UK leaves the EU abruptly next month, as regulators try to contain the potential fallout from a hard Brexit.

****SD: Other big Brexit news via Politico: Jean-Claude Juncker: Brexit delay beyond EU election is possible.

Tel Aviv Stock Exchange expects IPO to go ahead this year -CEO
Steven Scheer – Reuters
The Tel Aviv Stock Exchange (TASE) expects to float nearly a third of its shares in an initial public offering some time this year, its chief executive officer said on Monday.

CCPs Must Not Compromise on Risk or Tech
Tore Klevenberg, Baymarkets – Tabb Forum
Clearing house risk management has been thrust back into the spotlight in recent months, raising important questions over how to maintain robust standards in emerging markets where market participants have fewer resources to contribute to a default fund. A clearing member default at Nasdaq Clearing in September 2018 highlighted the need for improvements in margining and risk management practices among central counterparties (CCPs), prompting industry bodies to update their guidance in this important area.


Post-Trade Investment Continues To Rise
Shanny Basar – MarketsMedia
Brian Collings, chief executive of Torstone Technology, which provides post-trade securities and derivatives processing technology, said the trend for increased post-trade investment has continued this year as firms review their medium-term strategies after MiFID II.

Outsourcing crucial as industry shifts from best execution to smart execution Market participants agree that trust is a key aspect for firms looking to work with technology providers on their execution processes.
Hayley McDowell – The Trade
As the industry shifts from meeting best execution requirements towards smarter execution processes, foreign exchange (FX) market participants have agreed that outsourcing will play a key role for both buy- and sell-side firms.


Bears could be in for a ‘great few weeks’ as S&P 500 hits a wall
Barbara Kollmeyer – MarketWatch
Investors left equities parked in a choice spot ahead of the President’s Day break, as trade-talk euphoria helped drive the best winning streak for blue chips since late 2017 and tech stocks out of a bear market.

‘Panic buying’ likely to drive stock market higher in the near term
Fred Imbert – CNBC
Stocks could get a short-term boost as fear of missing out on gains leads more investors to plow more money into the U.S. equity market, analysts said.
The S&P 500 posted its seventh weekly gain in eight last week, rising more than 2 percent in that time period. The surge in stocks comes as investors increasingly bet China and the U.S. will strike a trade deal in the near future. It also follows the Federal Reserve signaling it will be patient in tightening monetary policy moving forward.

Euro’s bounce fades as focus shifts back to economy, ECB policy
Shinichi Saoshiro – Reuters
The dollar was steady against its peers on Tuesday, lacking strong direction as U.S. markets were shut for a holiday the previous day, while the euro’s latest bounce faded as the focus drifted back to the economy and European Central Bank policy.
The dollar index versus a basket of six major currencies was nearly flat at 96.881 after ending the previous session unchanged. U.S. financial markets were closed on Monday for Presidents’ Day.

Enter the `Twilight Zone’ as Stock Nightmares Meet Credit Dreams
Ksenia Galouchko – Bloomberg (SUBSCRIPTION)
By one measure, it’s been decades since stock traders were willing to pay so much for the strongest companies out there — just as credit investors rush to the weakest balance sheets.
U.S. firms with solid financials now trade close to the highest valuation relative to their fragile peers since the dot-com era of 2003, according to Goldman Sachs Group Inc. indexes.


Analyze Your Options
Friday, February 22, 2019 from 9:00 AM to 2:00 PM (CST)
OCC is sponsoring an options conference on Friday with @Options_Edu? and @barronsonline? hosted by ?@UChicago? – Interested?


‘I See Trees Of Green’: 10 Most Amazing Facts About The Current Market
Seeking Alpha
The past 50 days have been anything but shades of grey. Since Christmas, the market has been nothing but “trees of green” wherever you look.
From an asset class perspective, stocks are clearly leading the way.
US indices are outperforming the global/international counterparts.

****SD: Lots and lots of data. Here’s just one: “No less than 46 (or 96%) out of 48 country ETFs are trading in positive territory, thus far in 2019, with an average return of +8.7%.” The two country ETFs with negative returns? Qatar and India.

Trump says ‘stock market would be down 10,000 points by now’ had ‘the opposition’ done this
Mark DeCambre – MarketWatch
President Donald Trump on Tuesday tweeted that the stock market would effectively have crashed had he lost the 2016 race for the White House, reiterating a number of similar statements he has made that have assigned credit to his administration for buoying financial markets over the past two-plus years.

****SD: Just for some context, the financial crisis saw the Dow Jones Industrial Average go from 13k levels to 7k levels. A 10,000 point decrease now would put the Dow back to levels last seen in the winter of 2013.

Intercontinental Exchange Launches Marine Fuel Contracts in advance of IMO 2020
Intercontinental Exchange
Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today launched new Marine Fuel 0.5% futures contracts in advance of the implementation of the 0.5% sulphur cap by the International Maritime Organization (IMO) in 2020.

****SD: These are futures product launches, but during the FIA’s annual global volume overview webinar the gasoil complex was specifically mentioned as notable. Per the above ICE release: “Gasoil futures and options volume grew 10% in 2018 versus 2017, while Open Interest reached a record 1.15 million lots in September 2018.”

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