JP Morgan’s widely followed analyst Kolanovic sees market bounce Friday and continuing next week
Thomas Franck – CNBC
J.P. Morgan’s Marko Kolanovic told clients Friday that a combination of technical factors should lead to a market bounce during the session and into next week. “Given the rapid selloff yesterday, the reverting feature of yesterday’s option hedging impact should have a positive market impact today,” he said. Kolanovic has blamed the recent sell-off on so-called systematic strategies like risk parity funds and options hedging rather than fundamental forces.
****SD: ‘Option hedging is a temporary impact (intraday momentum) that tends to revert,’ Kolanovic said. ‘Consistent with this, we saw Monday U.S. morning weakness, a large Tuesday rally and end of the day squeeze, a Wednesday U.S. morning reversal, and yesterday acceleration on the downside – all significantly driven by dynamic hedging of index options.'” Also from CNBC – Goldman CEO Solomon says part of October’s market sell-off driven by programmatic trading
US Market Volatility: The Market Keeps Punishing Stock Bulls
Elena Popina and Lu Wang – BloombergQuint
Pity the tech investors who poured $2 billion into an exchange-traded fund just yesterday. Pity the bulls who thought they’d ride their way to riches buying the S&P 500 on Labor Day.
Pity just about anyone who isn’t long volatility, as the U.S. stock market twists in its fifth one-percent swing in seven days. The VIX is above 20, the S&P 500 is down 5 percent in three weeks, and 10-year Treasury yields aren’t far below the highest level since 2011.
EU derivatives market valued at EUR660 trillion
Hayley McDowell – The Trade
The derivatives market in the European Union has been valued at EUR660 trillion, with interest rate derivatives dominating the market. A report based on data submitted under the European Markets and Infrastructure Regulation (EMIR) revealed that as of 31 December 2017, the EU derivatives market amounted to EUR660 trillion of gross notional outstanding transactions. Interest rate derivatives make up the bulk of that total, with around 69% outstanding, followed by currency derivatives at 12%, and all other asset classes, such as equity, credit and commodity derivatives, accounting for less than 5% of the total.
Banks urge U.S. regulators to reconsider ‘Volcker Rule’ tweaks
Pete Schroeder – Reuters
Banks on Thursday pushed back on how regulators are attempting to simplify rules prohibiting banks from trading on their own account, a development that is likely to delay efforts to wrap up the overhaul in the coming months.
****SD: Would a Volcker revamp help bank trading? Sure. But I find it hard to believe the bank trading landscape would revert to pre-financial crisis levels by altering the rule. The horses have already left the stable.
Industry experts expect digital asset derivatives will focus on bitcoin for now
The marketplace for derivatives backed by digital assets is changing rapidly. But depending on who you ask, that pace of change could either be too fastóor not fast enough. That was the message shared by industry leaders at FIA’s 34th Annual Futures & Options Expo in Chicago on Oct. 18, in a discussion titled “Digital Assets: Emerging Derivatives Products.”
Rising U.S. shale exports turn WTI into 24-hour benchmark: CME
Julia Payne – Reuters
Rising U.S. crude oil exports to Europe and Asia have had a knock-on effect in the futures market, turning the U.S. West Texas Intermediate contract into a near-24 hour benchmark, exchange operator CME Group said.
Exchanges and Clearing
NYSE, Nasdaq Take It on the Chin in Washington
Dave Michaels – WSJ (SUBSCRIPTION)
The country’s biggest stock exchanges are on a losing streak in Washington.
The Securities and Exchange Commission’s decision this week to block the exchanges from raising fees on some data products is the latest example. The three main exchange operators also are fighting to kill off a two-year SEC initiative to test lower trading fees. Separately, the SEC has rebuffed their requests to delay and pare back a surveillance database that exchanges are nearly a year late in delivering.
London Stock Exchange to lift stake in LCH
Philip Stafford – Financial Times (SUBSCRIPTION)
The London Stock Exchange Group has unveiled plans to buy a further 15.1 per cent of LCH for up to EUR438m, strengthening its grip on the clearing house that is at the centre of arguments between regulators of the global derivatives market.
SGX reports 1Q FY2019 net profit of S$91 million
Singapore Exchange (SGX) today reported 1Q FY2019 net profit of S$91.1 million (S$90.7 million), on the back of revenues of S$208.9 million (S$204.5 million). Operating profit was S$106.4 million (S$106.0 million), with earnings per share at 8.5 cents (8.5 cents). The Board of Directors has declared an interim dividend of 7.5 cents (5 cents) per share, payable on 5 November 2018.
Regulation & Enforcement
Brussels hits back at US exchanges threat EU insists on its right to regulate and says it wants to keep markets open
Jim Brunsden and Philip Stafford – FT (SUBSCRIPTION)
Brussels has hit back at US threats to shut off European banks from parts of the financial system, insisting on the EU’s right to press ahead with regulatory plans that are fiercely opposed by Washington. The European Commission on Thursday said proposed powers for EU financial supervisors to oversee derivatives trading were aimed at maintaining open markets and were modelled on the US’s own rules.
CFTC Commissioner: Programmers Could Be Prosecuted for Writing Predictive Smart Contracts
Cali Haan – CrowdFund Insider
Developers that write predictive smart contracts could be subject to various types of enforcement action and liability, CFTC Commissioner Brian Quintenz told an audience in Dubai yesterday. Quintenz, whose agency regulates derivatives markets in the US, singled out both securities-performance predictive software (“It could look like providing investment advice, or…(if anonymous) could be used nefariously to facilitate insider trading”) as well as prediction markets like Augur, which is now operating on the Ethereum and allowing users to place bets on, “the outcome of future events, like sporting events or elections, using digital currency.”
****SD: A lot of elements intersecting in the above story. Given how regulators have gone about pursuing certain spoofing actions, I find it worthwhile to keep an eye on how the creator/programmer of the code/algo/tool/asset can get roped into the actions of the end user of the code/algo/tool/asset.
CFTC’s Berkovitz expresses optimism over agency’s agenda
Recently confirmed Commissioner Dan Berkovitz expressed optimism that the Commodity Futures Trading Commission will forge ahead on a “timely” agenda of issues in a bipartisan way.
Berkovitz, who was confirmed on Aug. 29 along with Dawn DeBerry Stump to create a full complement of five CFTC commissioners, spoke on Oct. 18 with FIA President and CEO Walt Lukken at the 34th annual Futures and Options Expo in Chicago.
SEC Launches FinHub Portal
Ginger Szala – ThinkAdvisor
The new fintech hub provides one-stop information on digital marketplaces, automated investment, blockchain and AI.
Interactive Brokers’ TWS platform switches to more precise Mark Price IV calibration method
Maria Nikolova – FinanceFeeds
The new Mark Price IV calibration method provides a better and more comprehensive volatility surface.
Software Reliability at Optiver
Errors are inherent in the building of software systems. Therefore, a strategy for mitigating the risk of error is paramount. As we mentioned in our first post, Optiver is a proprietary trading firm operating in a domain characterized by intense competition among technically sophisticated firms.
How to Invest in Gold ó Whether You’re Playing the Upside or the Downside
Gunjan Banerji – Barron’s (SUBSCRIPTION)
Gold prices have rallied recently, but the metal’s behavior in recent years makes it a tricky wager for options investors. Gold prices recently hit their highest level since July, with investors flocking to traditional safety plays as U.S. stocks recorded their worst week in months. The turbulence is unlikely to recede soon, analysts say. Stocks stabilized to start the week, but dropped sharply on Thursday.
Wall Street’s top bull: The market is wrongly pricing in a recession
Carmin Chappell – CNBC
Tony Dwyer of Cannacord Genuity said that with the recent sell-off, the market is “inappropriately beginning to discount a recession” despite strong economic indicators.
In an interview with CNBC’s “Fast Money” on Thursday, Dwyer said that a fall in the markets should have been expected, since there has been “historically low volatility” and “historically high complacency” lately.
S&P Holds Key Moving Average Amid Sell-Off
Emma Duncan – Schaeffer’s Investment Research
U.S. stocks closed sharply lower in today’s trading, extending the prior session’s late-day Fed jitters. Heavy losses for Chinese stocks prompted weakness in big names like Caterpillar (CAT), which weighed on the Dow. And while the VIX snapped its four-day string of declines, the S&P 500 showed some resilience, battling back from its session lows in the final minutes to close just fractions of a point above its 200-day moving average.
Many Billions of Dollars Shaken Out From Mini-Rout: Taking Stock
Arie Shapira – Bloomberg (SUBSCRIPTION)
October hasn’t been a kind month for stocks, and Thursday was a good example of that as the S&P 500 had its third-worst decline since early April — though note that we’re seeing a bounce in the futures this morning after positive earnings from megacaps Honeywell and Procter & Gamble just crossed the tape.
Surveillance: VIX Is A Technical Story, Santos Says (Podcast)
Gabriela Santos, JPM Asset Management Global Market Strategist, says markets haven’t priced in a negative outcome from the Saudi Arabia headlines. Robert Hormats, Kissinger Associates Vice Chair, is concerned that neither U.S. political party is focused on debt. Jim Grant, Grant’s Interest Rate Observer Founder & Editor, says we’ve yet to see inflation at the checkout counter. Jim Suva, Citi Managing Director & Senior Analyst, ruminates over where Apple may be headed.