OCC returns $110 million to exchanges as capital plan unwind begins; Trend-following failures

Mar 1, 2019

Observations & Insight

Fed Chief Jerome Powell Says U.S. Economy ‘Is in a Good Place’
Nick Timiraos – WSJ (SUBSCRIPTION)
Federal Reserve Chairman Jerome Powell said the U.S. economy is doing well, but he highlighted recent risks to growth that prompted the central bank to signal it is done raising interest rates for now.

****SD: I’d be curious to know if Powell is a fan of the TV series “The Good Place.” Spoiler alert: In that show, the good place refers to hell. Hopefully this isn’t Powell making an inside joke.

Lead Stories

Options Clearing returns $110 million to exchanges as it begins unwinding capital plan
The Chicago-based options clearinghouse is being forced to act after an SEC order called its four-year-old plan into question.
Lynne Marek – Crain’s Chicago Business (SUBSCRIPTION)
Options Clearing, which acts as a guarantor for all U.S. stock options trading, is unwinding a four-year-old capital plan and returning $110 million to three major U.S. stock options exchanges.

****SD: One last (maybe?) hurrah for the bank accounts of the OCC’s big three shareholders (Cboe, Nasdaq, NYSE).

One of Wall Street’s Most Popular Trading Strategies Is Now Failing; Machines that decide when to buy and sell are struggling to keep up with central banks and Donald Trump.
Nishant Kumar – Bloomberg (SUBSCRIPTION)
Sometimes machines are only as smart—or dumb—as the humans who program them. Hedge fund investors learned that the hard way last year when data-crunching computers that invest $220 billion based on historical price trends did worse than most other managers, robot or human. The losses were so bad that investors pulled billions of dollars out of an investment strategy that for years had, paradoxically, been regarded as a great way to protect portfolios from downside risks.

****SD: From the piece: “Robotic traders now manage about $1 out of every $3 held in the world’s $3 trillion hedge fund industry.” I fell down a bit of a trend-following rabbit hole this week as I was looking through old Hedge Fund Journal (HFJ) articles, particularly this profile of Eckhardt Trading, which heavily covers the firm’s (and its founder’s) approach to trend-following. Worth the read as a much more in depth companion piece. A more up-to-date take from HFJ with a more mathy slant is Trend-Following CTAs vs Alternative Risk-Premia.

Even If You Weren’t Before, We’re All CAT People Now
James Dolan, Luminex – TABB Forum
Almost 10 years after the Flash Crash prompted regulators to call for the Consolidated Audit Trail, the change of CAT processors is expected to delay CAT reporting for broker-dealers to April 2020. So why should you care about the CAT? As the reporting initiative evolves, broker-dealers will be required to transmit to regulators data on who placed every order and made every trade. This, as much as anything, is why you need to pay attention.

****SD: Going for the acronym “CANINE” to describe the project would have been too wordy.

MSCI hands Chinese stocks bigger role in global markets; The decision by the index provider could send up to $125bn into the Chinese market
James Kynge and Emma Dunkley – FT (SUBSCRIPTION)
The world’s leading equity index provider, MSCI, took its biggest step yet to integrate China’s domestic stock markets with international capital on Friday in a move that could see an estimated $125bn flowing into the country’s equities this year.

****SD: The WSJ has Chinese Shares Gain Global Sway Thanks to Index Firm’s Move and China’s Stock Market Isn’t Too Big to Ignore. Reuters with the news here and Bloomberg has MSCI Head Fernandez Says China Opening Faster Than You Think.

Markets must adjust to a new type of sudden shock
Robin Wigglesworth – Financial Times (SUBSCRIPTION)
It isn’t your imagination, markets really have become more tempestuous. But instead of extended storms, they are suffering shorter but more intense hurricanes. That raises some interesting questions over whether this is just a statistical oddity, a cyclical shift, or a structural change in the financial system.
The bad memories of 2018 have faded quickly, with the S&P 500’s volatility returning to lows last seen in early October and the benchmark index up double digits this year. Indeed, despite the late-2018 mayhem, volatility last year was lower than the annual average since 1928. It may have felt turbulent, but arguably only compared to how calm things were in 2017.

FX traders unconvinced by clearing – INTL FCStone
James Thursfield – Global Investor Group (SUBSCRIPTION)
Hedge funds are comfortable with the prime broking system for FX and FX options markets, an expert at INTL FCStone said

****SD: Lots of OTC options coverage this week on the back of the CCP12 report about OTC derivatives.

Pound set for biggest weekly rise in a month as no-deal Brexit fears fade
Saikat Chatterjee – Reuters
The pound slipped on Friday after survey data showed British factories slashing jobs in February but is headed for its biggest weekly rise in a month on receding fears that Britain will leave the European Union without a deal.

Exchanges and Clearing

SEC Rule Filing – SR-NASDAQ-2019-011
Nasdaq FIling
The Exchange proposes to create an alternative way for Participants to earn the Tier 3 NOM Market Maker Rebate to Add Liquidity in Penny Pilot Options. Today as set forth in Options 7, Section 2(1) , the Exchange offers NOM Market Maker Rebates to Add Liquidity in Penny Pilot Options. These rebates are structured as a six tier program ranging from $0.20 to $0.48 per contract, with increasing volume requirements for each tier. Participants currently receive a $0.30 per contract (or $0.40 per contract in the symbols AAPL, QQQ, IWM, SPY and VXX) Tier 3 rebate for adding NOM Market Maker liquidity in Penny Pilot Options and/or Non- Penny Pilot Options above 0.20% to 0.60% of total industry customer equity and ETF option ADV contracts per day in a month.

London Stock Exchange to cut 250 jobs, drops margin target
Noor Zainab Hussain and Huw Jones – Reuters
The new boss of the London Stock Exchange Group Plc announced a round of job cuts on Friday as the bourse prepares for Brexit after delivering annual results that met expectations. Goldman Sachs veteran David Schwimmer, who took charge last August, said businesses, including those perceived to be most exposed to Britain’s impending exit from the European Union on March 29 such as clearing, continue to perform well, with no change in market position.

****SD: Other LSE stories: Financial Times has New LSE chief abandons growth targets in favour of investment and The Trade has LSEG sees revenues continue to rise in 2018 but will miss 2019 growth targets.

Hong Kong exchange operator sharpens rivalry with Singapore
Philip Stafford – Financial Times (SUBSCRIPTION)
The operator of the Hong Kong stock exchange plans to become a “department store” for investors looking to increase their exposure to China, in a bet that Beijing will persist with its ambition to open its capital markets to the rest of the world.
Hong Kong Exchanges and Clearing said on Thursday that it would extend the equity and bond schemes that connect it to China’s biggest exchanges, where stocks have been especially volatile in recent months.

BME: The Spanish Exchange Traded EUR32.31 Bn In February
…Trading in the Financial Derivatives market increased by 3.9% in the first two months of the year compared to the same period of 2018. This growth took place mainly in Stock Futures, up 314.6%. Trading in IBEX 35 Options rose by 14.8% in February.

Regulation & Enforcement

FIA co-signs letter on equivalence of trading venues under EMIR and MiFIR
Today FIA, alongside ISDA (International Swaps and Derivatives Association), AFME (Association for Financial Markets in Europe), AIMA (Alternative Investment Management Association), Assosim (Association for Financial Market Intermediaries), EBF (European Banking Federation), EFET (European Federation of Energy Traders), ICI-Global (Investment Company Institute), IA (Investment Association) and SIFMA AMG (Securities Industry and Financial Markets Association Asset Management Group) signed a letter to European Commission Vice President Jan Dombrovskis regarding the equivalence of UK Trading Venues.


The hottest tech jobs at J.P. Morgan don’t require a post-graduate degree
One of J.P. Morgan’s most critical strategic changes over the last year was the creation of the bank’s digital and platform services unit, a division launched in September aimed at streamlining technology spending within it corporate and investment bank (CIB). The new unit replaced the old system, where “everyone was building their own platform” across the CIB – a strategy that was “clearly bananas,” an anonymous J.P. Morgan executive told the FT.

Deutsche Bank’s global head of program trading quietly left the bank
In a blow to Deutsche Bank’s sales and trading business, Yao-Chung King (‘Yao King’) is understood to have left the German bank.


UBS is using laser beams and 5G to trade stocks in the latest escalation of a technological ‘arms race’
Dan DeFrancesco – Business Insider PRime (SUBSCRIPTION)
From fiber optic cables to dark fibre and microwaves, financial firms have spent the better part of a decade looking to slice fractions of milliseconds off how quickly they can trade stocks. But the latest chapter in how firms are aiming improve their trading speed and execute trades more efficiently for their clients reads like something out of a science fiction novel.

TickSmith Announces its Partnership with Vela to Provide Financial Institutions with Storage and Analytics Capabilities on Streaming Market Data
TickSmith, a software company that combines cutting-edge data management technology and deep knowledge in Capital Markets, has partnered with Vela, a leading independent provider of trading and market access technology for global multi-asset electronic trading. TickSmith’s big data based Analytics Platform is now compatible with Vela’s market data feed, SuperFeed.


Amid a wild week for Tesla, trader bets stock will drop 10% in two weeks
Tyler Bailey – CNBC
It’s been a wild week for Tesla as CEO Elon Musk finds himself at the center of a confluence of headlines.

Gold Bugs Rejoice!
Sage Anderson – tastytrade blog
While I’m not a gold bug per se, I can always get behind a winning trade – and long gold has been just that in recent months.
Since the end of November 2018, gold prices have increased roughly $100/ounce, or about 10%. With gold briefly moving above $1,340 in late February, we are now back in sight of the “nosebleed” prices observed at the start of this decade (about $1,800/ounce in 2011).

Bearish mood of many investors does not trouble the contrarians
Alice Ross – Financial Times (SUBSCRIPTION)
At the start of the year, wealthy people, like many others, were sitting on their hands when it came to investing. When FT Wealth asked readers how they felt about investing in 2019, 62 per cent said they would invest more cautiously.
The caution is understandable: world stock markets fell in 2018 amid concerns over trade tensions, economic growth and the effect of less stimulation by central banks. This caution is having effects on the wealth managers who run rich people’s portfolios: from UBS to Julius Baer, the first few weeks of this year saw a series of warnings about investors pulling money from equities, falling assets under management and not much hope on the horizon for 2019.


The Key to Investing Success Is Less Stress
Jared Dillian – Bloomberg (SUBSCRIPTION)
My mother is 73 years old. She has a nice sum of money saved up from a long career as a public servant that is invested in two mutual funds. One is a high dividend fund that mostly consists of international stocks, and the other is a short/medium duration corporate bond fund. Her investment objective is to earn income, and the blended portfolios yield about 4 percent. She has a 43 percent allocation to stocks.

****SD: And don’t go into debt. Debt is the mind-killer. (Debt habits and management are one of Dillian’s key talking points in his columns.)

Cboe FX Reports Weaker Volumes for February 2019
Finance Magnates
Cboe’s institutional spot FX platform on Friday reported ?its trading volumes for the month ending February 2019, which saw a ?notable drop compared to a month ago.

****SD: I guess Finance Magnates didn’t get the memo, as the accompanying photo is of former Cboe President Chris Concannon.

How Much Effect Does Trump Actually Have on Oil Prices?
Bloomberg (VIDEO)
A tweet from U.S. President Donald Trump calling for lower oil prices sent the market into a spin on Monday. The Cboe/Nymex WTI Volatility Index for West Texas Intermediate futures jumped 10 percent, the most in more than two months.

London Has No Rival in Derivatives Markets, CFTC’s Giancarlo Says
Bloomberg (VIDEO)
CFTC Chairman Christopher Giancarlo discusses London’s importance to the global derivatives markets, the need for continuity in U.S. and U.K. markets in the face of Brexit, and the performance of Bitcoin futures. He speaks on “Bloomberg Surveillance.”

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