Observations & Insight
Half Week Notes
Spencer Doar – JLN
According to Vance Harwood’s calculations (he writes the Six Figure Investing Blog), a 1.5x leveraged vol fund needs to reverse split every 8-22 months. UVXY just did a 5:1. This is its ninth reverse split, but the first since the fund’s leverage was changed from 2x to 1.5x. For more, see this post.
Premier Li Keqiang said China will not devalue the yuan to help boost exports. On a related note, look at soybean prices. Also see Reuters’ Inside China’s strategy in the soybean trade war.
Denmark’s largest bank is in serious money laundering trouble. Some $234 billion of transactions look suspicious and the CEO resigned today.
Options Market Share Is Being Spread Around
Options Market LiquidityMatrix – TabbFORUM
The two largest exchange groups, Cboe and NASDAQ, have captured 73.2% of options volume in 2018, but the three smaller exchange operators have gained market share. NYSE’s share is up 2.8%, to 16.5%; MIAX has gained 2.7%, to 8.2%; and BOX’s share is up 0.01%, to 2.2%.
Cboe SKEW Index Tops 150 for Record Four Straight Trading Days; Some Cite Surge in Black-Swan Hedging
Matt Moran – Cboe Blog
For the first time ever, on Tuesday, September 18, the Cboe SKEW Index (SKEW) closed above 150 for four straight trading days.
A recent headline in Bloomberg stated a “Surge in Black-Swan Hedging Casts Shadow Over U.S. Stock Rally,” and noted the Cboe SKEW Index near all-time high underscores hedging demand. The story suggested, “Elevated levels could also reflect lack of demand for calls” ….’This has everything to do with trade risk in my view,’ said Dennis DeBusschere, the head of portfolio strategy at Evercore ISI.”
****SD: SKEW has been the theme of the week thus far.
Hedge-Fund Veteran Shuns Volatility Wagers This Time Round
Netty Idayu Ismail – BloombergQuint
Stephen Diggle, who co-founded a hedge fund that made $2.7 billion on volatility wagers during the global financial crisis, isn’t betting on similar fluctuations now even as central banks begin to roll back years of extraordinary stimulus.
Governments and central banks worldwide now see themselves as “guardians of the capital markets” and will always be ready to provide liquidity to prevent a repeat of the unprecedented price swings a decade ago, said Diggle, the chief executive officer of family office Vulpes Investment Management. Increased trading by computers and algorithms will also smother fluctuations, he said in an interview.
Buyback ‘Blackout’ to Test U.S. Stock Market
Amrith Ramkumar – WSJ
A steady stream of robust earnings and economic data has virtually zapped volatility from U.S. stocks, but a coming freeze on share buybacks could challenge the market.
Leveraged ETFs and Volatility Jumps
Wes Gray and Jack Vogel – Alpha Architect
This study provides an updated look at the leveraged and inverse global ETFs offerings. It alerts investors on the risk and return characteristics of these products, which are riskier than their one-time long-only counterparts. Specifically, their short-term risk characteristics can be even more volatile than the leverage multiple suggests.
Vela expands SuperFeed with additional Asia Pacific markets
Vela, a leading independent provider of trading and market access technology for global multi-asset electronic trading, announced the addition of key Asia Pacific (APAC) exchanges to SuperFeed, Vela’s normalized Market Data Feed. This continues Vela’s expanded presence in the region, providing new ways to access and trade both local and global markets.
Your Network Has Been Hacked. You Have 72 Hours to Report It. Companies are scrambling to meet new regulations that require them to figure out what’s going on—quickly
Jeff Stone – WSJ
Multinational corporations are taking steps to more quickly detect and report data breaches, in part to avoid steep penalties under a sweeping set of regulations from the European Union.
****SD: The OCC is one company this article focuses on, and OCC’s Chief Security Officer Mark Morrison is quoted. We wrote about Morrison and security shortly after he joined the OCC.
Is Python the New Excel?
Rob Garfield, FINCAD – TABB Forum
Over the last few decades, having good Excel skills has been of paramount importance within the financial industry, almost regardless of your role. What we are now observing is that this paradigm is shifting at a rapid pace with Python becoming the tool of choice for financial industry participants. I dare say that Python is becoming the new Excel.
****SD: I thought Excel was the new Excel.
Exchanges and Clearing
The art of designing markets. Part VI
…The last article explained that especially in options the European market for large or complex orders is, to a large extend, still organized via phone or chat. While this market structure has proven to work over a very long time in very different market phases, it is obvious that over time also this market structure will embrace electronified processes to increase efficiency and resilience of the off-book market segment.
Institutional Digital Asset Exchange Seed CX Welcomes John Hart as Its New Chief Information Officer Former Managing Director of Technology Engineering for Globex Joins ‘Dream Team’ of Markets and Exchange Professionals
Seed CX, which through its subsidiaries offers a licensed exchange for institutional trading and settlement of spot digital asset products and plans to offer a market for CFTC-regulated digital asset derivatives, announced today that John Hart would be joining the company as Chief Information Officer. Hart joins Seed CX with decades of experience designing, building and operating high-performance, scalable financial markets and exchange infrastructure.
Regulation & Enforcement
Futures Regulator Fines NEX Group Subsidiary $50 Million; CFTC alleged Intercapital Capital Markets had attempted to rig the ISDAfix rate
Dave Michaels – WSJ (SUBSCRIPTION)
Intercapital Capital Markets LLC agreed Tuesday to pay $50 million to settle claims that its brokers helped manipulate a financial benchmark used to calculate a range of interest-rate products.
****SD: Swaptions spotted in the wild! Financial Times here and CFTC release here. Bank of America was fined for its ISDAFIX activities today.
SEC Commissioner Calls for Regulators to Bolster Market Oversight
Gretchen Morgenson – WSJ (SUBSCRIPTION)
A top securities regulator is calling for his agency to beef up its oversight of the nation’s stock exchanges to root out conflicts and curb rising fees that he says are harming investors.
Tesla Criminal Probe Into Musk Tweet May Open Pandora’s Box
Matt Robinson, Greg Farrell and Tom Schoenberg – BloombergQuint
All it took to draw the U.S. Justice Department into investigating Tesla Inc. was a single tweet by Chairman Elon Musk. But now that prosecutors have a toehold, they can look for other signs of misconduct at the electric-car maker.
It’s Never Been More Expensive to Hedge Against Falling Pot Stocks
Elena Popina – BloombergQuint
As equity investors caught up in the cannabis craze push pot stocks to record highs, options traders are paying the most ever to hedge against a comedown. Skyrocketing marijuana stocks have pushed the $560 million ETFMG Alternative Harvest ETF, ticker MJ, up more than 60 percent since mid-August. At the same time, the cost of options to protect against a 10 percent drop in the fund has surged to an all-time high relative to those betting on gains of the same magnitude.
****SD: 1) This sector has only been tradeable in the US for a brief period, so “never been more expensive” in this sense is very different from talking about Apple or a gold miner ETF or something. Ten months ago, this ETF didn’t even exist in its current form – it was the Tierra XP Latin America Real Estate ETF, ticker symbol: LARE. 2) Doesn’t it make sense that a business revolving around a commodity that still exists in a bit of a gray area globally would have high implied volatility? Just look at MJ’s top three holdings (accounting for more than 30 percent of the fund’s holdings) – Tilray, Canopy and Cronos exhibit trampoline price action. (Tilray and Cronos made the IC most active options list today.)
Options Strategies For The Ultra-High Net Worth Family Balance Sheet
John Pantekidis – Forbes
In a low yield environment, derivatives can be uniquely positioned to generate balance sheet alpha for the ultrahigh net worth (UHNW) family. One approach is a multi-faceted strategy that basically underwrites publicly-traded “insurance policies” with pre-defined levels of risks. In an increasingly complex and uncertain environment for the UHNW worth family office with globally diversified balance sheets, innovative solutions like these are required to meet new and evolving challenges. Here’s how it works.
Study Examines European Demand for U.S. Exchange-Listed Equity Options
Gary Delany, Director of European Marketing and Education for The Options Industry Council (OIC), Friday presented the findings of a study from late 2017/early 2018 at the Cboe Risk Management Conference (RMC) Europe that looked at European use of U.S. options products, both multi-listed options, as well as proprietary options.
Investors get comfortable with Brent crude at $80 a barrel
Amanda Cooper – Reuters
Traders and investors have loaded up on bullish Brent oil bets this week, after signals that Saudi Arabia is in no rush to increase production, even with the price near $80 and as buyers grow uneasy over the impact of U.S. sanctions on Iranian supply.
What trade fears? U.S. stock investors are extremely calm
Ryan Vlastelica – MarketWatch
If you were to look at the headlines, you might think that U.S. stock-market investors have plenty of issues that they could be worried about, including the prospect of a full-blown trade war, a variety of issues in emerging markets, and central banks that are becoming less accommodative across the world.
If you look at the stock market, however, investors now seem as calm and cool as they were in 2017, a year marked by a remarkable level of calm.
****SD: For more on this point, see Why Tariffs Aren’t Scaring the Stock Market from Barron’s.