Options Market Is Losing Confidence in the U.S.; Investors Wager on Continued Volatility

May 20, 2019

Observations & Insight

The Spread – Hip Hop Greeks
What’s your favorite options related rhyme? If you don’t have one, you should after watching this week’s episode of “The Spread.”
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Lead Stories

Options Market Is Losing Confidence in the U.S.
Myron Scholes and Ash Alankar – Bloomberg (SUBSCRIPTION)
U.S. President Donald Trump under-estimated China President Xi Jinping’s resolve when he raised tariffs on about $200 billion of imports from China to 25 percent from 10 percent, warning his counterpart not to respond in kind. That advice was ignored.

****SD: Here’s something China has in its toolbox that the U.S. doesn’t: “Bloomberg News reported May 16 that China’s central and local authorities have $3.65 trillion in unspent budget – the equivalent of Germany’s entire annual economic output – to unleash on public projects if needed.” From Reuters: China’s central bank won’t let yuan weaken past 7 to the dollar-sources.

Volatility Is Here to Stay, Some Investors Wager
Ira Iosebashvili and Gunjan Banerji – WSJ (SUBSCRIPTION)
A growing number of investors are betting that markets will stay erratic as a renewed bout of trade worries roils global stocks. In a sign that investors are shifting how they react to markets, some are abandoning “buy-and-hold” postures and pouring money into bets that would take the edge off a sharp drop in markets or profit from higher volatility. Others are trading more frequently to take advantage of increased price swings or backing away from assets that may be vulnerable to turbulence. Still others are warning clients about the possibility of big declines in their portfolios.

Pound Volatility Climbs as Tory Leadership Race Comes Into Focus
Vassilis Karamanis and Charlotte Ryan – Bloomberg (SUBSCRIPTION)
Traders are starting to bet on swings in the pound next month as the race to replace U.K. Prime Minister Theresa May kicks off.
The Conservative Party leadership contest has caught the attention of options traders as May’s successor is likely to define the course of Brexit. With May expected to agree a timetable for her own departure in June after a final attempt to get her Brexit bill through Parliament, buying protection against currency swings is getting more expensive.

China Trade Turmoil Makes U.S. Investors Nervous Some buy Treasurys and plan to sell stocks, saying 10-year bull market could be in danger
Ira Iosebashvili and Dawn Lim – WSJ (SUBSCRIPTION)
Some prominent U.S. investors are buying Treasurys and planning to sell stocks, saying escalating trade tensions with China could threaten the 10-year bull market for equities. Many have scrambled to reverse bets on an imminent deal between the U.S. and China and are now settled in for a dispute they expect to roil markets for months to come. Others are taking out insurance on further market declines by buying investments that rise in value when stocks fall, such as put options.

Exchanges and Clearing

High-Speed Traders Agree to Back New Stock Exchange
ew venue from exchange group Miami International expected to start next year – WSJBy Alexander Osipovich – WSJ (SUBSCRIPTION)
Some large high-speed trading firms are teaming up with options-exchange operator Miami International Holdings Inc. to create next year what could be the 15th U.S. stock exchange.

****SD: In case you missed the update on Friday.

Luzheng Futures & Guohai Liangshi Capital Management Selected For Cotton Options Market Making, Powered By Horizon – Zhengzhou Commodity Exchange Chooses Luzheng Futures And Guohai Liangshi Capital Management To Provide Market Making For Cotton Options
Horizon Software (Horizon), the leading provider of electronic trading and algorithmic technology, has announced that two of its Chinese clients, Luzheng Futures and Guohai Liangshi Capital Management, have been named among ten companies granted market making licenses for the recently-launched cotton options market on the Zhengzhou Commodity Exchange (ZCE). The new cotton options market in China is the second exchange-traded commodity option on the ZCE and the fifth commodity option in Mainland China.

Chicago CIO Leadership Association Announces Recipients of 2019 CIO of the Year ORBIE Awards
…David Hoag, SVP & CIO, Options Clearing Corporation, received the Corporate ORBIE, for organizations up to $450 million annual revenue.

BOX Exchange: SAIL Order Entry Connectivity Modifications
On June 3, 2019, BOX Exchange LLC (“BOX”) will implement modifications to the connectivity of SAIL Order Entry components.

Election results: Sebi, stock exchanges beef up surveillance before poll results
Economic Times India
New Delhi: Regulator Sebi and stock exchanges have beefed up their surveillance mechanism to check any manipulative activities in the market this week in view of the high-octane election related events lined up.


Fidessa veteran to leave company after 29 years
John Brazier – The Trade
Fidessa’s CEO of buy-side, Paul Nokes, has confirmed that he will part ways with the trading technology vendor after 29 years.

Regulation & Enforcement

U.S. Fines Billions for Wall Street Fraud. Nearly Half the Time It Doesn’t Collect.
Dave Michaels – WSJ (SUBSCRIPTION)
Wall Street watchdogs often tout the fines they levy on alleged wrongdoers. Yet much of that money is never collected.
The Securities and Exchange Commission over the five years ending in 2018 took in 55% of the $20 billion in enforcement fines set through settlements or court judgments, according to agency statistics. During the prior five years, from 2009 through 2013, the SEC collected on 60% of $14.6 billion.

Bank Scandals Turn to Non-Financial Misconduct
Elisa Martinuzzi – Bloomberg (SUBSCRIPTION)
Since the financial crisis, banking scandals have been expensive; now the attention may turn increasingly personal.


Marko Kolanovic stock market forecast: The bull case for the trade war
Joe Ciolli – Business Insider (SUBSCRIPTION)
The recent escalation of President Donald Trump’s trade war with China has injected the stock market with something it hasn’t seen in a while: volatility.
The immediate result was the worst week of the year for the benchmark S&P 500. That weakness spilled over into Monday the following week, and then investors spent the next four days trying to claw their way back out of that tariff-sized hole.


Hedge funds bet the sell-off is over: ‘They have concluded that the correction has run its course’
Thomas Franck – CNBC
The majority of U.S. hedge funds aren’t expecting another big stock market sell-off as more firms curb bets on equity volatility, according to analysis at Nomura.

Index companies to feel the chill of fund managers’ price war
Owen Walker – Financial Times (SUBSCRIPTION)
Cut-throat competition has squeezed prices in fund management but one faction has been immune — the index companies that provide the benchmarks against which trillions of dollars of investment assets are managed.
An icy wind is sweeping in, however, and the likes of S&P Dow Jones Indices, MSCI and FTSE Russell are about to feel the chill.

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