OCC allows risk offsets for SPIKES, VIX; Investors take note of “gamma trap”

Jul 9, 2019

Lead Stories

OCC allows risk offsets for SPIKES, VIX
James Thursfield – Global Investor Group (SUBSCRIPTION)
Sources say the OCC now allows portfolio risk offsets for the SPIKES and VIX volatility products

****SD: Can lowering trading costs in a nascent product ever work out poorly?

Markets Are Calm, Then Suddenly Go Crazy. Some Investors Think They Know Why; Investors have noticed a force some call a ‘gamma trap,’ and use tools to estimate its size and direction in order to predict market moves
There’s a powerful force at work in markets that helps explain why stocks seem to do nothing for long periods and then suddenly lurch into activity.

****SD: From the story: These ‘low-vol strategies’ often sell put options with a life of one month or less. Because the options are short-term and are often priced close to the current market levels, this has the effect of increasing gamma in the market.

“Who Knew Trump Would Offer a Truce With Xi?”: The Mystery of the Wall Street Trump Trades
William D. Cohan – Vanity Fair
Is Donald Trump’s erratic behavior fueling a business model? Some Wall Street options traders are beginning to suspect so. They’ve taken note, with increasing alarm, of people making strange bets tied to Trump’s actions and then cashing in bigly when the odd bets pay off. “If you had the ability to make hundreds of millions of dollars, or billions, and you knew how to hide it and it was impossible to find, wouldn’t you do it?” a longtime Wall Street options trader asks me sarcastically.

****SD: One unnamed trader with a conspiratorial mindset is the only source for this story.

Hedge Funds Post Best First Half in Decade as Equities Lead
Melissa Karsh, Hema Parmar, and Katia Porzecanski – Bloomberg (SUBSCRIPTION)
Hedge funds reported the best first half since 2009 as equity managers capitalized on the surge in stocks.
Funds rose 5.7% from January through June, according to Hedge Fund Research Inc.’s asset-weighted index of managers. Equity funds were the best-performing broad strategy, gaining almost 9% in the period.

Managed futures performance fizzle not deterring investors
Christine Williamson – Pensions & Investments
Managed futures industry assets are declining due to high outflows in the first quarter after poor performance in 2018, but managers report continued interest from asset owners seeking diversification and risk mitigation.

Markets underestimate risk of sterling Brexit volatility: BlackRock
David Milliken – Reuters
Currency markets are underestimating the chance of big Brexit-related swings in the value of sterling over the next 12 months, BlackRock, the world’s biggest asset manager, warned on Tuesday.

****SD: Also from Reuters – Sterling slides towards 2-yr lows as outlook darkens.

Exchanges and Clearing

MX proposes new fortification against fat finger trades
James Langton – Investment Executive
In an effort to guard against trading errors such as “fat finger” mistakes and other sources of extreme market volatility in early hours trading, the Bourse de Montréal Inc. (MX) is proposing to introduce a new trading control.
The MX is planning to introduce new “top-of-the-book price limits” to help act as a bulwark against erroneous trades and excessive market volatility, alongside its other existing trading controls.

Regulation & Enforcement

File No. USRI-5765 Star No. 20150480375 – Citadel Securities LLC

****SD: Citadel was censured and fined $70,000, while neither admitting nor denying the charges that it failed to expose agency orders routed to BZX on the exchange for at least a second.

France, Germany to Lobby for Financial Transaction Tax
Joe Kirwin – Bloomberg Tax (SUBSCRIPTION)
France and Germany will seek to persuade EU member states to back the bloc’s proposed financial transaction tax at the July 9 Council of Economic and Financial Affairs meeting.


DV Trading Contracts with Trading Technologies to Leverage TT Score Machine Learning for Trade Surveillance
Trading Technologies
Trading Technologies International, Inc. (TT), a global provider of high-performance professional trading software, infrastructure and data solutions, today announced that DV Trading, a leading proprietary trading organization, has contracted to utilize TT Score, TT’s cutting-edge trade surveillance software for advanced detection of manipulative trading activity.

Corvil to be acquired by capital markets technology provider Pico; Dublin-based Corvil is set to be acquired by Goldman Sachs-backed technology services provider Pico.
Hayley McDowell – The Trade
Global capital markets technology services provider Pico has signed an agreement to acquire Dublin-based analytics firm Corvil.

Electronic traders strategy for investing in fintech
Dan DeFrancesco – Business Insider (SUBSCRIPTION)
They made a name for themselves early on for their ability to move in and out of positions in fractions of a second. However, Wall Street’s most sophisticated traders have taken a much longer view on some of their investments in recent years.


A Stock Option Trade That Works Whether Stocks Rally or Plunge
Steven M. Sears – Barron’s
On Friday, a day after trading had taken a hiatus for the July 4 holiday, the White House Twitter account focused on one of the great barometers of American prosperity: the stock market.


How a Chicago Suburb Became a Center of ETFs
Asjylyn Loder – WSJ (SUBSCRIPTION)
There is a gutted brick bank about an hour’s drive west of downtown Chicago that bears testament to an unusual feature of the suburb of Wheaton, Ill.: It has played an outsize role in the $6 trillion exchange-traded-fund industry.

The Short Road From Libor’s Death to ‘Armageddon’
Mark Gilbert – Bloomberg (SUBSCRIPTION)
Precious few market participants have grasped the urgency of replacing Libor. A sea of lawsuits may ensue.
When law firm Linklaters decided to organize a seminar about the forthcoming demise of Libor last week, it planned to hold the event in its London auditorium, which seats about a hundred people. After more than 500 attendees signed up, it was forced to move to a larger venue.

How Much Is Jeffrey Epstein Worth? How Did He Make His Money?
….He joined Bear Stearns in 1976 as a lowly junior assistant to a floor trader. In a swift rise, trading options, he made partner four years later, with former Chief Executive Officer Jimmy Cayne praising his skills. He left in 1981 to set up J. Epstein & Co., but one bank executive said he remained close to Cayne and Greenberg and was a client until Bear Stearns’ demise.

****SD: The above paragraph is from the middle of the story.

The New Quant Billions Are Hiding in the Bond Market
Cecile Gutscher, Yakob Peterseil, and Dani Burger – Bloomberg (SUBSCRIPTION)
For all his years preaching to a world of finance where quant investing is a religion, Patrick Houweling inspired few believers. Suddenly, he’s got a flock.
Hedge funds, investment banks and sovereign wealth funds are racing to discover the next big thing in fixed income. In so doing, they’re heeding the counsel of the soft-spoken Robeco manager whose 2014 paper is a touchstone for quants channeling the boom in factor investing that’s taken over stocks.

****SD: MarketWatch on bonds – JPMorgan says bond-market rally faces risk of ‘tantrum’ like 2013 and 2016.

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