Observations & Insight
The Spread – College Football Edition – 11/16
A chance to talk sports?! And derivatives trading?! This week offered up a glorious opportunity for “The Spread” and we pounced.
Watch the video and see the stories referenced here »
Bloomberg’s Kinda Misleading Chart
Spencer Doar – JLN
As I’m sure many of you know, Bloomberg puts out a chart of the day.
Here’s Bloomberg’s description of today’s chart – “This year has been less volatile for U.S. stocks than the ups and downs of the past few weeks would suggest. The gap between the S&P 500 Index’s Sept. 20 high and the Feb. 8 low is 13.6 percent, according to data compiled by Bloomberg. There hasn’t been a narrower range for a full year since 2005, when the spread was 11.9 percent.”
Is this a good indicator of volatility? The market could be bouncing off a range’s ceiling and floor like a kid on a pogo stick – or you could have started the year at the low and marched to the higher level in an steady, orderly fashion. That being said, this is kind of a helpful point from a psychology perspective – after years of subdued movements, it’s worth keeping in mind that anything can feel crazy compared to the sub-10 VIX levels seen in 2017 and January 2018.
This is particularly the case if you’re younger and have no down-and-to-the-left market experience.
OptionSellers.com Investment Loss Recovery
On November 15, 2018, OptionSellers.com notified its investors in an email entitled “Catastrophic Loss Event” that it not only lost all their money, but that they would also owe money to Intl FCStone for margin calls. According to OptionSellers.com, they lost a substantial portion of their investors’ assets due to a short call position in crude oil that, according to Optionsellers.com “was so fast and intense that it overwhelmed all risk measures in place.” It then informed investors that they have a debit balance in their accounts which they need to bring back to zero by paying INTL FCStone the difference. So, in addition to trying to process the news all their money is gone, they also have INTL FCStone breathing down their necks demanding they pay the money they owe for its margin calls.
****SD: It appears that James Cordier, the (now former?) head of OptionsSellers.com, was short a lot of nat gas calls last week and was totally wiped out. Making matters worse, he separately managed people’s individual accounts. So his 290-odd clients aren’t just looking at balances of zero, many are on the hook for margin calls incurred from his reckless trading.
Cordier put out a very emotional and just kind of odd 10-minute apology video. It’s painful to watch and he spends a good chunk of it individually addressing some of the firm’s 290 clients: “To a client in Kansas City, thank you so much for the barbecue sauce. I will enjoy it and think of you always in the future. For [hard to discern name], looks like I owe you a Cuban sandwich. Our client in Marseilles, my wife and I were certainly looking forward to joining you in the French Riviera. It sounded so beautiful. Our clients on the Gold Coast in Australia, I was hoping to see that beautiful sunset that you spoke of so many times.” It goes on.
It seems as if there aren’t many people picking up on this news other than ZeroHedge and Reddit threads (although OilPrice.com put out a piece citing ZeroHedge.) The Epsilon Theory Blog has a piece on it from a more philosophical perspective regarding “the process.” See below.
That’s Just Putting On a Nice Sweater
Rusty Guinn – Epsilon Theory
We love process over answers here. But any honest discussion of process has to come to grips with a problem: process has become a right-sounding idea.
****SD: I have to agree with the blog’s comment on the now dark OptionSellers website: “…you need to go to cached versions of the site. You will learn that the principal was a regular on cable financial news networks. That shouldn’t be a surprise. You will learn – hopefully, again, without surprise – that the website used to look like a bad Cialis advertisement. I guess you really can’t come right out and say, ‘Are you a bored, retired white male with a ton of money who needs to feel alive again?'”
Bond Traders Face More Volatility as Fed Uncertainty Increases
Liz McCormick – BloombergQuint
Option volatility is much too low, TJM’s David Robin says; Index of Treasury swings implied by options rose last week
An apparent change in tone from top Federal Reserve policy makers could mean that muted volatility in the Treasury market is coming to an end.
That’s the take from one bond-market veteran following comments last week from Federal Reserve Chairman Jerome Powell and Vice Chairman Richard Clarida that have dampened market expectations of central-bank increases.
You’ve reached your free art
Measuring uncertainty helps investors navigate risk
Howard R. Gold – Chicago Booth Review
When the United States and Mexico reached a new understanding about trade matters this past summer, renegotiating parts of the North American Free Trade Agreement, President Donald Trump cheered. Others had questions: How would the deal affect the US auto industry? How would it affect consumers? What would it mean for recent tariff hikes on steel and aluminum imports? You could almost hear executives across the continent reaching for antacids.
Swings in Energy Prices Could Herald Broader Volatility
Gunjan Banerji – WSJ (SUBSCRIPTION)
Volatility signals in markets such as high-yield bonds and currencies are picking up – a potential warning that the wild swings in energy prices this week could spread to other assets.
Spreads on high-yield corporate bonds on Thursday hit the highest level this year, while bearish trading picked up on an exchange-traded fund that tracks the high-yield market.
****SD: You mean to tell me that wild price changes in one of the world’s most important commodities could impact other assets?! Blasphemous.
Oil market bull run ends as hedge funds square up positions
John Kemp – Reuters
Hedge fund managers have exited from all the bullish positions in crude oil and fuels they accumulated in the second half of 2017 as the bull market has unwound.
How RBI-government rift moved currency traders
Saikat Das – Economic Times
The perceived rift between India’s central bank and the government has led a section of concerned currency traders to cover their rupee exposure in the options market as they expect volatility in the local monetary unit to continue.
China’s Fight Against Smog Drives Palladium Higher
Marvin G. Perez – Bloomberg (SUBSCRIPTION)
Hedge funds are adding to their bullish outlook. In the week ended Nov. 13, money managers increased their net-long position, the difference between bets on a price increase and wagers on a decline, for a second straight week to 12,837 futures and options, according to data from the Commodity Futures and Trading Commission published Friday. That’s the most since March 6.
Exchanges and Clearing
SEC approves Nasdaq PHLX’s proposal to expand use of Snapshot functionality of Floor-Based Management System
Maria Nikolova – FinanceFeeds
The proposed change will allow for the Snapshot functionality of the Floor-Based Management System to be used for all orders.
****SD: The Nasdaq circular on this can be found here.
Nasdaq ISE, Nasdaq GEMX, and Nasdaq MRX Intra-day Electronic Quoting
Options Regulatory Alert
Below is a reminder of the intra-day quoting obligations for Nasdaq ISE (“ISE”), Nasdaq GEMX (“GEMX”), and Nasdaq MRX (“MRX”) Primary Market Makers (“PMMs”), Competitive Market Makers (“CMMs”), and Preferred CMMs (together, “Market Makers”), respectively. A Member is required to meet each market making obligation separately. A CMM who is also the PMM will be held to the PMM obligations in options series in which the PMM is assigned and will be held to CMM obligations in all other options series where assigned. A CMM who receives a Preferenced Order shall be held to the standard of a Preferred CMM in all options series of the options class in which it receives the Preferenced Order.
MIAX Options: Updates To Interface Specifications
MIAX Options Interface Specifications have been updated to support: Functionality applicable to the trading of proprietary products such as SPIKES.
London Metal Exchange Warehouse: London Metal Exchange Is Changing How It Does Business In India
Sajeet Manghat – BloombergQuint
The world’s largest setter of metal prices is in talks with Indian companies to set up warehouses in the country as the market regulator seeks a phased transition towards physical settlement of all commodity derivatives.
Regulation & Enforcement
Finra Arbitrators Let Thousands of Brokers Purge Infraction Records
Jean Eaglesham and Coulter Jones – WSJ (SUBSCRIPTION)
Thousands of brokers have scrubbed their records clean of complaints by customers and employers, allowing them to hide information from potential investors, according to a new study.
IOSCO Members Found Mostly Compliant With Principles For Commodity Derivatives Markets
The Board of the International Organization of Securities Commissions (IOSCO) today published the findings of an updated survey that show respondent IOSCO members to be broadly compliant with the IOSCO Principles for the Regulation and Supervision of Commodity Derivatives Markets (the Principles).
AcadiaSoft Collaborates with Capitalab’s Initial Margin Optimization Services
Business Wire via Associated Press
AcadiaSoft Inc., the leading industry provider of risk and collateral management services for the non-cleared derivatives community, today announced that it is collaborating with Capitalab, a division of BGC Brokers L.P., for the provision of their initial margin (IM) optimization service, designed to allow clients calculating IM to optimize exposures to result in lower margin payments and to reduce capital funding requirements.
The Stock Market’s Low VIX ‘Fear Gauge’ Is Misleading You
Mark Hulbert – MarketWatch
What does it mean that the VIX is only barely higher than average, even as the stock market is experiencing remarkable volatility?
The VIX is the CBOE Volatility Index. Though its calculation is complex—derived from the implied volatilities of S&P 500 options maturing over the subsequent month—it is generally known as an “investor fear index.” Contrarians interpret high levels to be bullish and low levels as bearish.
Using Stock Options to Bet on a G-20 Trade Deal
Gunjan Banerji – Barron’s
A puzzling dynamic is playing out in the options market.
U.S. stock indexes logged weekly losses after having violently gyrated up and down in recent weeks. S&P 500But investors aren’t rushing to buy stock protection—options that hedge against a deeper swoon.
Larry Berman: Controlling beta risk in ETF portfolios – Part 2
Larry Berman – Bloomberg
I often get asked about when to use covered call ETFs versus similar exposure that does not have the enhanced yield.
Wall St. partying to cut their bonus tax bill
John Aidan Byrne – NY Post
Bankers and traders will be celebrating the prospect of massive, multimillion dollar payouts — and they’ll use the mega-expenses of year-end blowouts as write-offs for their inflated tax bills, according to industry sources.
Sweeter Bonuses for Women This Year as Wall Street Confronts Gap
Sonali Basak – Bloomberg
Options Group sees bumps for women, quants and stock traders; Recruiting firm also predicts more moves in industry in 2019
Trading desks, renowned bastions of gender inequality, will sweeten compensation for women this year to narrow the gap with men, according to recruiting firm Options Group.
Wall Street leaders are facing heavier pressure this year to make their workplaces more attractive to women with better pay and faster promotions. That’s going to be top of mind as managers set bonuses in coming weeks, said Mike Karp, Options Group’s chief executive officer.
****SD: “He also expects that more Wall Street employees will jump to new employers in 2019, especially people with expertise in equity derivatives or quant strategies, data science, machine learning and artificial intelligence. Those skills are in high demand, and banks will have to sweeten compensation packages in those operations to avoid defections.”
Bin Salman, Trump and Putin Control the Oil Price Now
Julian Lee – Bloomberg (SUBSCRIPTION)
OPEC has lost what control of the oil market it ever had. The actions (or tweets) of three men — Presidents Donald Trump and Vladimir Putin and Crown Prince Mohammed Bin Salman — will determine the course of oil prices in 2019 and beyond. But of course they each want different things.