Observations & Insight
The Spread – 8/10 – Pump up the Vol(ume)
In this week’s recap of happenings in the options world we delve into some confusing terms, Spinal Tap and Recep Erdogan’s plight.
Watch the video and see the stories referenced here »
Turkey’s Collapse Sinks Emerging Markets on ‘Manic Monday’
Rita Nazareth and Ben Bartenstein – Bloomberg (SUBSCRIPTION)
Turkish measures could be too little, too late, analysts say; Argentine century bond yield surges to 10% as peso tumbles
Turkey’s market carnage rippled across emerging markets, sending both stocks and currencies toward their lowest levels in a year.
The lira led losses among global peers after the nation’s first steps to bolster the financial system were seen by some analysts as insufficient to protect markets in times of distress. As President Recep Tayyip Erdogan lashed out at the U.S., took higher rates off the table and said he wouldn’t accept an international bailout, traders pushed down Turkish assets in a selloff that spilled over to other developing economies. The rand’s one-month implied volatility soared by the most since December 2015, while the yield on Argentine’s century bonds rose to 10 percent as the peso sank to 30 per dollar.
****Turkey remains the narrative affecting global markets. On the upside (if you can call an “upside” to any currency meltdown) there were good opportunities to buy luxury goods on the cheap in Turkey, apparently (via Bloomberg). More on currency concerns and volatility below.
OCC’s move to ‘Cover 2’ won’t cost members more, CRO says; New clearing fund methodology will shift cost burden to firms that take more tail risk; Some clearing members may see a cut in clearing fund contributions
Dan DeFrancesco – Risk.net (SUBSCRIPTION)
The Options Clearing Corporation may have found a way to cover two defaults for the price of one. The Chicago-based clearing house announced in July that the Securities and Exchange Commission had approved a new clearing fund methodology. The new format switches to stress-testing from treble-margin variance; it will flip the OCC’s current contribution requirements to focus on risk; and lastly, it will move the clearing fund to Cover 2 from Cover 1.
Currency Markets Are ‘Hidden Thorns’ for Stocks in Full Bloom
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Global FX volatility gauge in biggest one-day move since 2016; ‘Matter of time’ before it spills into U.S. stocks: Maley
Currency markets are sounding alarms that U.S. stocks seem hellbent on ignoring.
As Turkey’s lira crisis batters emerging-market currencies while trade tensions intensify and the yuan continues to weaken, a JPMorgan Chase & Co. index of exchange-rate volatility just experienced its biggest surge since 2016’s Brexit vote. The gauge now sits at its highest since February
CAT Is Not OATS … CAT Is So Much More
Chris Montagnino, Jordan & Jordan – TABB Forum (Free Registration)
The Consolidated Audit Trail is the most significant regulatory requirement impacting order/transaction reporting since the implementation of the Order Audit Trail System almost 20 years ago, and the burden on firms to comply will be considerable. But there are substantial differences in CAT from OATS. What challenges will firms face resulting from those differences, and how can firms prepare for the new requirements?
Online Stock Trading Has Serious Security Holes
Brian Barrett – WIRED
It’s never been easier to trade stocks; just a few taps or clicks will do the trick. But most of the platforms that millions of market participants rely on to move their money suffer from cybersecurity shortcomings, new research warns. As if stocks weren’t risky enough already.
A new report from Alejandro Hernández, a security consultant at IOActive, found that nearly all of the 40 major online trading platforms he investigated had at least some form of vulnerability. While they range widely in severity and scope, the overall picture is of an industry that has not taken security measures proportional to the sensitive information involved. Hernández will present his research at the Black Hat security conference in Las Vegas on Thursday.
****SD: Does your firm have a Chief Security Officer?
Was GAM right to block investors taking money out of its funds?
Owen Walker yesterday – Financial Times (SUBSCRIPTION)
Swiss fund manager GAM acted swiftly to block investors withdrawing money from its embattled absolute return bond strategies this month. But industry commentators are questioning whether the gutsy decision was a rash one.
On the morning of July 31, GAM announced it had suspended one of its top portfolio managers, Tim Haywood, who oversaw the SFr11bn (EUR9.5bn) unconstrained/absolute return bond strategy, known as ARBF. The company’s share price plunged by a fifth on the news.
****SD: The ARBF strategies “followed a so-called ‘go anywhere’ approach” which meant there could be almost anything in there. Senior industry figure quote: “The striking thing to me is how many swaps and derivatives there are. Unwinding all the hedges or outright derivative positions would take an absolute age. If you sold just the liquid stuff to meet the redemptions, you could be stuffing the remaining shareholders with all the illiquid ‘toxic’ stuff.”
Exchanges and Clearing
Commodity options see steady rise on bourses
Ashish Rukhaiyar – The Hindu
Options contracts in non-agricultural commodities like gold and crude that were unveiled a few months ago are seeing good investor participation due to a combination of factors like market making, attractive lot size and the hedging requirements of market participants, though some of the other commodities are yet to register a strong traction.
Regulation & Enforcement
Mifid II DEA rules “suitably clear” – legal expert
Louisa Chender – Global Investor Group (SUBSCRIPTION)
Further guidance on direct electronic access authorisation rules is unlikely, an associate at law firm Fieldfisher says
Inside chat app Symphony’s battle to break into a $28 billion Wall Street market – and avoid becoming Bloomberg roadkill
Oscar Williams-Grut – Business Insider Prime (SUBSCRIPTION)
Major Wall Street banks like Goldman Sachs and JPMorgan have invested almost $300 million in Symphony, a startup building encrypted, cloud-based communication tools. Google is also an investor.
The banks want to build a platform they can all communicate on to help them cut down on expensive Bloomberg terminals.
Almost four years into the project, Symphony has over 300,000 users.
But there are questions around usage, partnerships, and whether it’s really having an effect on Bloomberg.
CMC Markets now Offers its Aussie Clients Access to International Markets
Celeste Skinner – Finance Magnates
CMC Markets Stockbroking, the Australian brokerage unit of CMC Markets, announced today that it has expanded the offering on its platform. By launching International share trading and Exchange Trade Options (ETO) features on its platform, investors now have access to international markets including US, Europe, Canada and Asia.
Asset Class Correlations Affect Portfolio Volatility and Return
Phillip Brzenk – S&P Dow Jones Indices
In recent years, the term “risk parity” has become a catch-all phrase to describe strategies that attempt to allocate based on risk. The launch of the S&P Risk Parity Indices last week is a testament to the proliferation and the popularity of the style. As we noted in a prior blog, there is a lack of proper benchmarks to measure the effectiveness of such strategies.
Rand Traders Brace for Turmoil as Turkey Saps Risk Appetite
Robert Brand – Bloomberg Quint
Traders are positioning for more turmoil for the rand as Turkey’s financial crisis damps risk appetite among emerging-market investors.
The rand’s one-month implied volatility against the dollar soared by the most since December 2015 on Monday. The South African currency plunged by the most in about a decade during Asian trading hours, but has since pared its decline. The yield on benchmark government bonds climbed above 9 percent for the first time since June.
That sinking feeling? Sterling traders prepare for Brexit meltdown
Tommy Wilkes, Ritvik Carvalho and Tom Finn – Reuters
Having sunk to 13-month lows, sterling could fall by up to another 10 percent in the coming months should Britain crash out of the European Union without a deal on future trade ties, luring more speculators to bet against the currency.
OptionMetrics Announces 7th Annual Research Conference (ORC2018) in Fall, Opens Submissions for Paper Presentations
OptionMetrics, an options database and analytics provider for institutional and retail investors and academic researchers, will host its 7th Annual Research Conference (ORC2018) on Monday, October 15, at Fordham University, Lincoln Center Campus, New York City. Abstracts to present papers or case studies are due Friday, August 24. Tickets for ORC2018 can be purchased online.
Citadel converts $10,000 investment in 1990 into $1.3m; Hedge fund’s annualised 19.1% return since inception outstrips Buffett’s Berkshire Hathaway
Chris Flood – Financial Times (SUBSCRIPTION)
An investor with the foresight to have staked $10,000 in Citadel’s first fund when the Chicago-based hedge fund manager was launched by Ken Griffin in 1990 would now be sitting on a pot worth more than $1.3m. A $10,000 stake in shares in Berkshire Hathaway, Warren Buffett’s company, would have grown to $315,000 over the same period, while an S&P 500 tracker fund would have increased to $131,000 (including dividends but excluding fees).