One Investor Bets Big on Doomsday Scene Needing Monster ECB Cut; Hedge Funds Burned by Volatility Trades That Worked for Decades

May 7, 2020

Observations & Insight

From John Lothian:

The FIA came up with an idea similar to ours (great minds think alike) to hold a webinar on May 13 at 9:30 AM CDT titled “Negative pricing – why it happens and its implications.” The webinar will be moderated by laundry room-home-office-bound Walt Lukken, and panelists include Rob Creamer, President & CEO, Geneva Trading; Mike Davis, Director, Oil Market Development, Intercontinental Exchange; Michael Haigh, Global Head of Commodities Research, Societe Generale; Kari Larsen, Partner, Perkins Coie; and Derek Sammann, Senior Managing Director, Global Head of Commodities & Options Products, CME Group.

FIA has also published a FAQ about negative pricing HERE. The FAQ is very helpful as I could find nothing in the glossaries on the CFTC, CME or NFA websites about negative pricing when I looked back in April. Additionally, negative prices were never mentioned in any of the FCM account form disclosures for a couple I checked. So, this FAQ is greatly appreciated and needed.

JLN’s event on the Bachelier Option Model, which will cover some of the same territory as the FIA event (but better), will be the day after the FIA’s, May 14 at 3:30 PM CDT. Sign up for our event by emailing me at

Lead Stories

One Investor Bets Big on Doomsday Scene Needing Monster ECB Cut
James Hirai – Bloomberg
Trader hoards options targeting ECB slashing key rate to -1%; Interest rate cuts may be in order if economic crisis deepens
The European Central Bank put the onus on banks to fund the pandemic-hit economy’s recovery when it loosened loan conditions last week, but investors are beginning to bet that won’t be enough.

Hedge Funds Burned by Volatility Trades That Worked for Decades
Bei Hu, Viren Vaghela and Nishant Kumar – Bloomberg
The sudden breakdown of a decades-long relationship between U.S. and Asian stocks has blindsided hedge funds, turning what were meant to be low-risk bets on volatility into big money losers.
Managers including Nine Masts Capital Ltd. and Myriad Asset Management Ltd. suffered losses in March on wagers that equity-market swings in Asia would be more extreme than those in the U.S. or Europe, according to people with knowledge of the matter. The bets were widespread among traders who focus on volatility, said Govert Heijboer, co-chief investment officer of Hong Kong-based True Partner Capital, a $1.4 billion hedge fund firm whose flagship volatility product gained 10% in March.

Emerging market FX to struggle against mighty U.S. dollar this year: Reuters poll
Vuyani Ndaba, Vivek Mishra and Gabriel Burin – Reuters
Hobbled emerging market currencies will struggle over the next three months against the stronger dollar as tensions between the United States and China over the coronavirus pandemic mount, a Reuters poll of FX strategists showed. Just as traders were cosying up to unprecedented aggressive policy easing and some investors were a little more ready to enter risky bets in search of higher yields, U.S. President Donald Trump threatened Beijing with new tariffs.

Inside Volatility Trading: May 6, 2020
Kevin Davitt – Cboe blog
Justin Vernon and his band Bon Iver put out their third studio album (winter) in late 2016. Their work is circuitous, dense, ever changing, and beautiful. Last year they finished the seasonal loop when they released (spring) “i, I.” Markets, at least from some perspectives, could be described as dense, ever changing, and beautiful. Of late, global markets seem to be pricing in a potential change in seasons…so to speak. Shorter term (10- and 20-day) realized volatility levels for the S&P 500 have consistently declined over the last five weeks. Not surprisingly, 30-day forward (implied) volatility levels for SPX options have followed suit.

Exchanges and Clearing

CME Can’t Guarantee Trader Safety When Chicago Floor Reopens
Isis Almeida – Bloomberg
CME Group Inc. said it can’t guarantee the safety of workers using its options-trading floor when Chicago pits reopen.
Social distancing isn’t possible in open outcry trading environments and, as a result, the exchange will require anyone willing to resume trading on the floor to sign a waiver accepting the risks of catching the coronavirus, Chief Executive Officer Terry Duffy said at a shareholder meeting Wednesday.

Hong Kong stock exchange CEO Li to step down next year
Alun John – Reuters
Charles Li will step down as head of the Hong Kong stock exchange by October next year, the bourse said on Thursday, kick-starting a search for a successor with his ability to balance the wishes of international institutions, local players and Beijing.
Dubbed by some as Mr China, the boss of Hong Kong Exchanges and Clearing (HKEX) built ties with Chinese mainland markets, attracted major companies to the bourse and oversaw the 2012 acquisition of the London Metal Exchange, though last year’s failed bid for the London Stock Exchange (LSE) removed some of the gloss from his 10-year reign.

Negative Pricing and Strikes for Certain Natural Gas Contracts
CME Group
New York Mercantile Exchange, Inc. (“NYMEX” or “the Exchange”) is putting measure in places to support negative prices and strikes on certain natural gas contracts listed in the table below, effective Sunday, May 17 (trade date Monday, May 18). Subject to operational readiness, negative prices and strikes will be supported on or after the effective date should market conditions warrant.

CME Globex Notices: May 4, 2020
CME Group

Regulation & Enforcement

Pandemic market volatility reinforces need to scrap Libor: BOE
Huw Jones – Reuters
Extreme volatility in markets in response to the coronavirus pandemic has reinforced the need to scrap the Libor interest rate benchmark by the end of 2021, the Bank of England said on Thursday. The London Interbank Offered Rate is used for pricing borrowing costs in contracts worth $400 trillion globally. During rocky markets in March it rose even though the Bank of England cut its interest rate.

Leverage ratio squeeze hits options trades
Costas Mourselas Samuel Wilkes – (subscription)
Derivatives clearing, bank leverage, and options trades make a potent concoction. Add in the volatility caused by the coronavirus pandemic, shake well, and the result is a cocktail that would give most market-makers a nasty headache. Proprietary traders are complaining that the leverage ratio is forcing clearing banks to turn down options business, crimping trade volumes and threatening the orderly functioning of markets.

The Position Limits on Securities Options
OSE sets the position limits and large position reporting threshold on Securities Options, which will be applied from May 8, 2020.


Trading Technologies Launches Connectivity to Borsa Istanbul in Derivatives
Traders Magazine (press release)
Trading Technologies International, Inc. (TT), a global provider of high-performance professional trading software, infrastructure and data solutions, and Borsa Istanbul, the one and only exchange of Turkey, announced that all derivative products listed on Borsa Istanbul Derivatives Market (VOIP) are now available for trading through the TT platform and accessible to TT’s global user base.


A PayPal Options Move for the Nervous Investor
Steven M. Sears – Barron’s
A historic exodus from risky financial markets to the safety of the sidelines has defined the past eight weeks.
As Covid-19 infected the world and shut down economies with stunning speed, investors moved about $1 trillion into conservative money-market funds , raising the total to $4.7 trillion, UBS Global Wealth Management wrote in a recent client note.

Factor Strategies React to Crisis-Induced Volatility
Ivy Schmerken – Traders Magazine
Given the extreme market volatility and disruptions to the economy caused by the spread of the COVID-19 pandemic, asset managers using factor-based investment strategies have seen their risk exposures shift in unexpected ways. At the same time, factor investing has grown as an approach to screening stocks based on the attributes that drive risk and returns. Factor-based strategies including factor ETFs can be used to complement traditional index or active investments in a portfolio.


Are ETFs safe… for retail investors?
Andrea Riquier – MarketWatch
When the price of oil fell off a cliff in April, it upended some previously sacrosanct financial-market beliefs.
The most visible may be that the price of oil, a tangible commodity, even if one that’s currently not much in demand, can actually go negative. But there’s another realization dawning on market participants: letting mom-and-pop investors have access to financial products that were previously the domain of sophisticated traders may not be a win-win after all.

3.2 Million Filed for Unemployment Benefits Last Week
New York Times
Neiman Marcus on Thursday became the first major department store group to file for bankruptcy protection during the coronavirus pandemic. It’s a stunning fall that follows the collapse of Barneys New York late last year and comes as shadows gather over chains like Lord & Taylor and J.C. Penney.

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