Observations & Insight
The Spread – Rimshot Please – 7/27
We’ve added more props for this week’s episode of “The Spread” for your viewing pleasure!
Watch the video and see the stories referenced here »
Spencer Doar – JLN
Russell Rhoads has left the Cboe after a decade with the exchange and starts a new role today with the TABB Group.
Priceonomics posted a blog about which companies in the S&P 500 generated the most revenue per employee (RPE) in 2017. 13 of the top 20 companies belong to the energy sector – Valero is #1 with $9.4m RPE. Only six of the top 50 are financial companies. One of those was Cboe at 23 – $2.5m RPE.
Japan, the U.S., India, Brazil and the U.K. all have central banking meetings this week. Bloomberg has the complete rundown of all the week’s activity – it’s a lot – here.
Today is the first day of our Chicago MarketsWiki Education World of Opportunity event. Today’s speakers are Adam Honore of the CME Group, Jeff Isaac of the Boy Scouts of America, John Hague, recently of RSM, Dan Basse of AgResource, Bill Weldon of Weldon Resources and Kevin Darby of Blue Trading Systems.
At odds with most forecasters, U.S. Treasury Secretary Steve Mnuchin said he sees three percent growth for the next four to five years.
I like infographics – who doesn’t? Visual Capitalist had one I really liked last week that showed major tech acquisitions from 1991 to 2018.
OCC Financial Safeguards Framework Approved by SEC
OCC, the world’s largest equity derivatives clearing organization, today announced that the U.S. Securities and Exchange Commission approved the company’s proposed Financial Safeguards Framework, which impacts how OCC sizes its Clearing Fund and allocates contributions to the Clearing Fund from OCC’s clearing members. OCC plans to implement the FSF starting on September 4.
****SD: The three shifts in the new framework are that the clearing fund is now “sized to cover the simultaneous default of its two largest clearing members versus a default by its single largest clearing member”; is “now based on stress testing results that include historical and other ‘extreme but plausible scenarios’ rather than trebling margin variances” and “more appropriately risk-weights OCC’s allocation of clearing fund contribution requirements to each of its clearing members.” OCC has said before that it needs to keep abreast of the times, as its “use of models inherently exposes OCC to model risk.” But you can’t please all the people all the time – grumbling about any change to contributions to the OCC is a well documented phenomenon.
Bank of America shakes up derivatives trading team in Europe; The changes come after futures and options volumes shot up in the first half of 2018
Samuel Agini – Financial News (SUBSCRIPTION)
Bank of America Merrill Lynch has shaken up one of its key trading teams after a period of increased activity in the global exchange traded derivatives market.
****SD: Other BofA news – Bank of America the latest to hire an ex-hedge fund portfolio manager as an MD
Cboe backs latest move to boost US options
Luke Jeffs – Global Investor Group (SUBSCRIPTION)
The head of US options giant Cboe Global Markets has welcomed a US bill designed to tackle bank capital requirements the exchange claims is stifling the US options market.
US senators Mike Rounds (R-SD) and Senator Tammy Duckworth (D-IL) introduced on Thursday the Options Markets Stability Act, which formalises a unanimous vote last month by the US House of Representatives to change US bank capital rules.
Oil prices steady as fund managers cease liquidation:
John Kemp – Reuters
Hedge funds appear to have completed the recent wave of liquidation, with bullish positions increased slightly last week after heavy falls the week before, helping to steady the main crude oil benchmarks.
Hedge funds and other money managers raised their net long position in the six most important petroleum futures and options contracts by 37 million barrels in the week to July 24.
Exchanges and Clearing
Deutsche shifts chunk of euro clearing to Frankfurt from London
Deutsche Bank has begun clearing a “large part” of new euro-denominated derivatives trades in Frankfurt instead of London, a spokesman confirmed on Monday as a key Brexit battleground in financial services heats up.
The shift by Germany’s largest bank is will help Deutsche Boerse’s efforts to attract a large part of the euro clearing market from London as Britain exits the European Union.
Regulation & Enforcement
S.Korea to impose capital gains tax on all stock derivatives
Cynthia Kim – Reuters
South Korea will expand capital gains taxes to cover all stock price index options and futures transactions as part of changes to tax codes following an annual review, the finance ministry said on Monday.
Barclays FX trader seeks to dismiss US charges over HP deal; Lawyers argue bank had no ‘fiduciary’ duty to US tech group on Autonomy acquisition
Martin Arnold – FT (SUBSCRIPTION)
The US head of foreign exchange trading at Barclays has asked a judge to dismiss criminal charges against him for allegedly defrauding Hewlett-Packard by front-running a GBP6bn currency deal linked to its takeover of UK software maker Autonomy.
CFTC chances improve for first budget boost in four years after lawmaker retreats
A senior lawmaker who has consistently blocked US Commodity Futures Trading Commission funding increases said he is backing down, opening the door for the derivative regulator’s first hike in four years.
FIX Onboarding: The Confusion & The Time Bomb
Chris Lees, FixSpec – TABB Forum
Electronic messaging and APIs are at the heart of modern financial markets. While we all get there eventually, the process is far from robust, pretty or efficient. Chris Lees explores some drivers of inefficiency, shares his top three takeaways, and warns of a potential compliance time-bomb lurking in the shadows.
Emerging Currency Traders Are Being Kept on Their Toes
Katherine Greifeld, Ben Bartenstein and Aline Oyamada – Bloomberg (SUBSCRIPTION)
Gap between emerging-, developed-market FX volatility widened; Turkey, Argentina and China keeping traders’ attention
Emerging-market foreign-exchange traders are being kept on their toes even as their counterparts dealing in developed currencies might be struggling to stay awake amid the lull of the northern summer.
Prepare for the biggest stock-market selloff in months, Morgan Stanley warns
Ryan Vlastelica – MarketWatch
The U.S. stock market has been partying all throughout July, and a hangover is coming.
That’s according to analysts at Morgan Stanley, who said that Wall Street’s rally is showing signs of “exhaustion,” and that with major positive catalysts for trading now in the rearview mirror, there’s little that could continue to propel equities higher.
Volatility Arbitrage and Cross-Border Options
A new paper, by Adriano Tosi, of the University of Zurich, Switzerland, looks at the mispricing of a cross-section of international option returns, which suggests that there is money to be made (in more decorous language a “positive risk premium” may be “commanded,”) by selling exchange-traded products and buying the corresponding index options.
Speculative VIX futures net shorts hit six-month peak – CFTC
Tom Sims and Huw Jones – Reuters
Speculators increased their net shorts in Cboe Volatility Index futures to the highest levels in about six months this week, signaling their bets the U.S. stock market would stay in a narrow trading range, according to Commodity Futures Trading Commission data released on Friday.
Arbitrage Opportunities In The Age Of Machine-Made Volatility
Oliver Dobbs – AlphaWeek
Investors are entering a brave new world. The machine-made crash we saw in the early part of the year was illustrative – one market misstep can create a vortex of selling. As herding in ‘smart beta’ ETFs drives increasing correlations, we could witness another snap back in a market showing signs of diminishing support. After a decade of directionality, allocators are now looking to strategies with uncorrelated sources of return – of which, some will find their diversification claims tested in potentially ultra-bearish conditions.
Updated Implied Volatility Charts for SPX, FB, AAPL, AMZN, & GOOG
Matt Moran – Cboe Blog
This past week the financial markets experienced some big earnings announcements, Facebook had the biggest one-day loss of market value by a single company in U.S. stock market history, and Cboe has received more interest in updated volatility charts and analysis.
Paper: how Eurex offers synthetic exposure to the MSCI Korea Index
As institutional investors increasingly shift their focus towards emerging markets, and in particular towards the Korean Peninsula, the South Korean market is gaining more and more attention. We have now published a paper illustrating how Eurex creates synthetic exposure to the MSCI Korea Index and showing how this exposure could be achieved at substantially below 1 percent tracking error from 2012 to 2017.
****SD: There are options on MSCI Emerging Markets Asia Index, but they don’t trade.
Widely Watched Recession Signal May Be Falsely Lit by Growth
Akane Otani – WSJ (SUBSCRIPTION)
A decade-old recession predictor is flashing warning signs, but a flattening yield curve doesn’t necessarily portend falling stock prices.
The yield curve, the gap between short- and long-term government bond yields, has narrowed to near 11-year lows in recent months, raising fears the U.S. economy may be headed for a slowdown. Over the last 50 years, a recession has followed every time the yield on two-year Treasurys has exceeded that of 10-year Treasurys—a scenario known as an inverted yield curve.
Revealed: The Trader Who Made a Massive Short Bet Against Nintendo
Yuji Nakamura – Bloomberg (SUBSCRIPTION)
Melvin Capital has a $402 million bet against Nintendo; Share declines have bewildered analysts and executives
****SD: Analysis does not include options, so maybe the position was even larger?