Observations & Insight

The Spread – Wild West – 3/8
A judge’s comparison of FX options trading to the Wild West, MIAX’s news-making tear, and a little bit of Simon and Garfunkel await viewers of this week’s episode of “The Spread.”
Watch the video and see the stories referenced here »

U.S. Options Industry Creates New Lifetime Contribution Award and “Crowd of Fame”
OCC, the world’s largest equity derivatives clearing organization, today announced the creation of the U.S. Options Lifetime Contribution Award. The award was created by the U.S. options exchanges and the Options Industry Council (OIC), an industry resource managed by OCC.


Celebrating International Women’s Day with TT Women in Tech
Elise Fleischaker – Trading Technologies blog
As a woman who’s spent a decades-long career working for technology-focused companies, I’ve taken a personal interest in the rising women-in-tech movement. While it’s brought to light many personal stories about women’s negative experiences and struggles working in male-dominated tech firms, the movement has also presented the technology community with an opportunity to take constructive action that’s spawned many positive outcomes.

****SD: The first all-female spacewalk is coming up.

Lead Stories

Options Market Quality Shows Some Cracks Amid Record Volumes in 2018
Russell Rhoads – TABB Forum
US options industry volume topped 5 billion contracts for the first time in 2018, increasing 20% year over year. But digging into market activity in 2018 reveals some possible liquidity concerns. TABB Group head of derivatives research Russell Rhoads looks at the numbers.

****SD: The thin shell of liquidity strikes again!

Oil price volatility weighs heavily on energy investors; Understanding the effect on producers and end users is vital
Jamie Webster – Financial Times (SUBSCRIPTION)
Concerns about oil market volatility and its impact on companies and consumers are part of a narrative stretching back long before the rise of the “lower for longer” era for crude prices. But volatility has come into sharper focus due to a series of significant market changes, led by the shorter development cycle of shale, the increased sway from Opec’s partnership with Russia and other producers, and the growing willingness of the US to utilise energy sanctions to meet its foreign policy goals.

****SD: “Understand the effects?!” Ugh, now I have homework?

Exclusive: SEC scrutinizes fairness of stock exchange pricing
John McCrank – Reuters
The U.S. Securities and Exchange Commission is investigating whether the multi-tiered pricing system used by stock exchanges favors large brokers at the expense of small ones, according to a person familiar with the matter.

****SD: Here is a transcript of SEC Chairman Jay Clayton’s and SEC Director Brett Redfearn’s remarks at Fordham University titled “Equity Market Structure 2019: Looking Back & Moving Forward.”

Trading slips away from London ahead of Brexit
Huw Jones – Reuters
A quiet, permanent shift in trading from London to the European Union ahead of Brexit is picking up speed as stock and bond platforms in Amsterdam and Paris crank into action.
Few expect London to lose its position as Europe’s biggest financial hub, but Britain’s departure from the EU is turning into a multibillion-euro boost for the bloc’s protracted efforts to build a deeper capital market to rival the UK capital.

This trader turned $100,000 into $2.5 million in just a few weeks; now he’s getting ready for ‘the next big catalyst’
Shawn Langlois – MarketWatch
In 2017, Steve Oliverez had a hunch. The entrepreneur had already enjoyed a stellar run during the stock market’s “Trump bump,” but, with the year winding down, he identified what he believed to be an opportunity for reaping next-level gains.

****SD: We don’t have a “degenerate trading” subsection, but maybe we should… MarketWatch has developed a penchant for hitting up the biggest YOLO-ers on /r/wallstreetbets – both the winners and losers.

Taxing Financial Transactions Has Many Benefits
Douglas Cliggott – Bloomberg Opinion (SUBSCRIPTION)
The financial services industry generally does not like the idea of taxing financial market transactions, like that proposed this week by Democrat Senator Brian Schatz of Hawaii in the aptly named Wall Street Tax Act of 2019. Perhaps the concern is that it would reduce “market liquidity” and harm the economy. These concerns are misplaced.

****SD: Maybe the full title should be “Taxing Financial Transactions Has Many Benefits, But None for Financial Services/Traders.”

Merging the Market Structure Schematic with the Context Machine
Paul Rowady – Alphacution Research Conservatory
Alphacution’s Top 100 Players in US Listed Market Structure schematic (v1.0) was a huge hit last week; breaking almost all content engagement records on our various publishing channels to date. Apparently there is a demand for eye candy. Who knew?

****SD: If you missed Alphacution’s report on Spot Trading posted yesterday, you can find that here.

Day Aussie Freaked Shows How Volatility Can Get Out of Hand
Ruth Carson and Michael G Wilson – Bloomberg (SUBSCRIPTION)
How much is too much? For traders of the Australian dollar, the wild swings on Feb. 21 illustrates why trading the notoriously high-beta currency can at times be almost impossible.
That Thursday started innocuously enough. As traders arrived at their desks, markets were digesting the Federal Reserve’s January minutes released late Wednesday, while U.S.-China trade talks were due to resume in Beijing. The key local event was Australia’s monthly jobs report, which was expected to provide evidence for why central bank Governor Philip Lowe had recently turned more dovish.

****SD: I’ve seen an Aussie freak out before – the accent made it kind of amusing (I was a bystander).

Chinese Stocks Plunge and It All Started With a Single Downgrade
Bloomberg News (SUBSCRIPTION)
PICC drops by daily limit on bearish Citic Securities note; Sell rating is like a ‘depth charge’ for the market: Lingze
Chinese stocks tumbled the most in nearly five months as traders took a rare sell rating from the nation’s largest brokerage as a sign that the government wants to slow down the rally.

****SD: I didn’t know Domino’s traded in China.

Who Pays for This Hedge Fund Happy Meal?
Chris Hughes, Bloomberg via WaPo
Vodafone Group Plc’s jumbo 3.4 billion-pound ($4.5 billion) fundraising this week offers stupendous returns for hedge funds and a fee bonanza for the banks involved. For the U.K. mobile phone company’s shareholders, value for money is harder to gauge. The mandatory convertible bond is a rarified instrument that, to investors, looks unattractive at first glance. It gets repaid in Vodafone shares – not in cash. What’s more, it pays a coupon of as little as 1.2 percent. Buy the shares outright and you can get a dividend yield of more than 9 percent.

Exchanges and Clearing

The Dutch Gas Market Could Become the World’s Most Important
Mathew Carr – Bloomberg (SUBSCRIPTION)
Intercontinental Exchange Inc. says its Dutch natural gas market has the potential to become a world beater in energy trading.

Intercontinental Exchange Announces Record Trading in TTF Natural Gas and JKM LNG (Platts) Contracts
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced record trading in February in the TTF Natural Gas and JKM LNG (Platts) contracts. TTF futures and options combined hit an open interest (OI) record of 1.47m lots in February and hit a volume record of 968.69 TWh.

SGX reports market statistics for February 2019
…Total Derivatives volume was 18.2 million, down 2% month-on-month (m-o-m) and up 1% year-on-year (y-o-y).

Regulation & Enforcement

FIA responds to QFII and RQFII regulations
FIA submitted a Consultation Paper on the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors. The objective is to unify the qualification requirements for QFII and RQFII. This means Foreign Institutional investors will only need to submit a single application and FIA is supportive of this consolidated approach. FIA also supports the harmonization of QFII/RQFII requirements with those under the Stock Connect and Foreign Direct Access to China Interbank Market regimes. The full letter can be viewed here.

Former Equifax Executive Pleads Guilty To Insider Trading
Associated Press via NPR
A former Equifax executive who sold shares for nearly $1 million a week and a half before the company announced a massive data breach pleaded guilty Thursday in Atlanta to a federal insider trading charge. Jun Ying, 43, exercised all his available stock options before making the sale and realized a gain of more than $480,000 on the sale, prosecutors said. That’s about $117,000 more than it would have been worth immediately after the price plummeted when the breach was disclosed.

EU watchdog holds fire on derivatives action under no-deal Brexit
Huw Jones – Reuters
The European Union’s markets watchdog has ruled out the need for measures to avoid potential disruption in certain cross-border derivatives contracts if Britain leaves the bloc this month without a deal.


TLDR Options helps value startup stock grants
Nick Bastone – Business Insider
When software engineer Beth Andres-Beck was looking to switch jobs two years ago, she received multiple offers from startups, all of whom offered her some kind of equity in the company. But none of them were able to provide a simple answer to one of her most pressing questions: How much money was that equity actually worth?

****SD: This story is a little different from our usual fare.

Struggling Sugar Giants Turn to Machines for a Trading Edge
Isis Almeida and Fabiana Batista – Bloomberg News (SUBSCRIPTION)
The world’s largest sugar traders are turning to algorithms in a bid to better cope with the rising influence of funds that track trends rather than market fundamentals. Brazilian sugar giant Raizen and France’s Sucres et Denrees SA have forged partnerships to develop models that will help predict price moves. Alvean, the top sugar trader, Louis Dreyfus Co. and ED&F Man Holdings Ltd. have opted to hire quantitative traders to develop internal solutions.


Goldman Sachs further shrinks commodities trading
Dmitry Zhdannikov, Sinead Cruise – Reuters
Goldman Sachs Group Inc , once one of the most active banks in commodities trading, has cut 10 roles to further downsize its global commodities trading division amid rising costs and shrinking profits.


Options & Dividends: When to Optimally Exercise
Talton Capital Management
There are two ways for a trading idea to be big enough to make it worthwhile. It can have depth or breadth. Index options have depth but there aren’t many indices to trade. Equity options have more breadth. There are currently over 3000 companies with listed options and, although liquidity drops off fast after the top few hundred, equity options are worth trading.

Options Secrets: The Important Signals from Forward Implied Volatilities
We discussed the calculations of forward volatilities and flat forward volatilities in this prior post.
Today we will talk about a little know secret derived from the relationships of flat forward and forward volatilities calculations. And the bulls may not like what the signal is saying now.

Gold Price Volatility Is ‘Ridiculously Low,’ SocGen’s Scott Says
Bloomberg (VIDEO)
On this edition of “Options Insight,” Societe Generale’s Andrew Scott discusses the volatility in gold and oil prices with Bloomberg’s Abigail Doolittle on “Bloomberg Markets: The Close.”

Why It’s So Hard to Buy the Market at the Bottom and Hang On
James Mackintosh – WSJ (SUBSCRIPTION)
True contrarians only buy stocks when it makes them feel physically sick. This week is exactly 10 years since the vomit-inducing moment when the S&P 500 hit an intraday low of 666 (rounding down), Citigroup became a penny stock and General Motors was considering bankruptcy.

****SD: The hardest part is implicit in the title – figuring out the dang bottom.


Draghi’s Dim View on Europe Still Isn’t Bleak Enough for Markets
John Ainger – Bloomberg (SUBSCRIPTION)
Euro-area bond markets are signaling that European Central Bank President Mario Draghi still may not be doing enough to support the region’s economy.
Commerzbank AG cut its view for an ECB rate hike in 2020 and its German yield forecasts after the central bank on Thursday lowered its growth and inflation outlook, announced a new wave of cheap loans for banks and pushed back guidance for a rate increase. Societe Generale SA also said it doesn’t expect a hike until 2021 and that it plans to lower yield expectations, while Danske Bank A/S shed its forecast for a hike in the next 12 months.

****SD: We need a bigger bazooka!

Citadel’s Aptigon Stock Unit to Close and Its Head Is Leaving
Katia Porzecanski and Sonali Basak – Bloomberg (SUBSCRIPTION)
Eric Felder took the helm of group last year amid shake up; Most of its money managers will join other equity units
Billionaire Ken Griffin is shutting down the Aptigon stock unit at his hedge fund Citadel a year after restructuring the group, according to a person with knowledge of the matter. Eric Felder, who has led Aptigon since last February, will leave the firm Thursday, said the person, who asked not to be named because the matter is private. Most of Aptigon’s money managers and their teams will join Citadel’s three remaining equity units: Citadel Global Equities, Surveyor Capital and Ashler Capital, said the person.

High-Yield Rally Not Enough to Lure Buyers Into Riskier Debt
Marianna Duarte De Aragao and Laura Benitez – Bloomberg (SUBSCRIPTION)
Europe’s high-yield bond market has recouped the losses suffered toward the end of last year but that’s still not enough to convince some investors to buy.
Fears of a late credit cycle and expectations that primary supply may pick up is deterring them from subordinated debt or complex credits, fund managers say.

Who wins and who misses out when there’s market volatility
Janet Nguyen – MarketPlace
The stock market hasn’t exactly been stable over the past year. The major U.S. indexes slid on Thursday morning after the European Central Bank lowered its economic growth forecast for the year and announced a round of measures to help the struggling eurozone economy.
These drops follow last year’s bout of market volatility, which increased by 157 percent, according to the Volatility Index.

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