Poker prowess, game theory at Susquehanna; Ag options; Cboe VIX lawsuit update

Nov 20, 2018

Poker prowess, game theory at Susquehanna; Ag options; Cboe VIX lawsuit update

Nov 20, 2018

Observations & Insight

Tuesday’s Monday Night Note — or, Loving Aberrations and the Em Dash
Spencer Doar – JLN

Options markets are dependent on — and thus justly fascinated by — probabilities — Black Swans, outliers and the three sigma rule of thumb — whatever term, description or metric you want to use.

Then there is the wide world of sports — also a statistical wonderland. Due to the recent expansion of sports betting — thanks to the Supreme Court — I wager the sports stat world is going to get some new entrants as more folks clamor for advanced, novel — inevitably “big data driven” — metrics to find ever smaller edges on the punting competition. (I think it’s safe to say that the fantasy sports world already accelerated the sporting universe down the analytics path.)

With this in mind — how about last night’s Monday Night Football (MNF) game between the Kansas City Chiefs and Los Angeles Rams? It had been hyped to all heck — which is logical, as it was two high-powered offensive teams with 9-1 records.

The teams’ offensive prowess led to the highest ever over/under for an NFL game. The historic O/U was 64 points (63.5 at some places). And whaddya know — the majority took the over. The final score was 54-51 in favor of the Rams. One bookmaking firm — William Hill — said 69 percent of its customers took the over and that led to a seven figure loss. Consider that this game result occurred in an overall NFL season on pace for record-setting scoring, too.

But that was far from the only notable number from the game. The Chiefs now have the honor of being the first team to score 50 points and lose — also making them only the second ever team ever to have two losses when they scored 40-plus points. It was the first time two teams scored 50 points. The point total was the third highest in NFL history. Kansas City QB Patrick Mahomes threw for six touchdowns — the most in any MNF game. Mahomes is only the third player since 1950 with two six (or more) TD games in a season. The game featured 14 total touchdowns — the second most in NFL history.

Long story short, that felt like the Black Swan of football — the only thing missing was Natalie Portman.

Lead Stories

The Poker Aces Playing a Key Hand in the $5 Trillion ETF Market; Harnessing poker prowess and game theory, Susquehanna International has become a key ETF player.
Annie Massa – Bloomberg
On City Avenue in the Philadelphia suburb of Bala Cynwyd, Pa., across the street from a TGI Fridays and California Pizza Kitchen, sits a bland building that looks like any other corporate office. The only notable feature is in the parking lot: a large oak labeled a “significant tree” because it survived the American Revolution.

****SD: As Jim Kharouf said this morning, “Never, ever, smile at SIG.”

Ag Options: Caught In The Fed’s Monetary Policy Vortex
Erik Norland – CME Group
Options on corn, soybeans, and wheat futures have been in an exceptionally low volatility environment for the past several years. And, implied volatility on crop options continues to trade near the lowest levels since 2007 when QuikStrike’s time series begin (Figures 1, 2, and 3).

Cboe Tries To Keep Lid On Discovery In VIX Manipulation MDL
Cboe Global Markets Inc. is urging an Illinois federal court to deny Chicago Board Options Exchange investors a head start on discovery in multidistrict litigation over alleged manipulation of its volatility.

****SD: What’s the point of having lawyers if you don’t make them earn the check?

Options trading firm blows up amid natural gas volatility; is first known casualty of last week’s price spike
Gregory Meyer – Financial Times (SUBSCRIPTION)
The first casualty has publicly surfaced from last week’s mayhem in energy markets, when a sharp decline in crude oil futures was followed by an explosive rise in US natural gas. Accounts managed by “had to be liquidated as a result of these moves,” said INTL FCStone, the company’s futures broker. As its name made plain, specialised in selling options contracts to earn income for its investors.

****SD: If you read this newsletter yesterday there’s not really a reason to click on this story (or the WSJ or the Bloomberg one) as they’re a bit late to the punch bowl with nothing new to report. The one thing I’ll add is that Cordier probably should have opted to ditch the nice watch and cufflinks from his apology video wardrobe.

Risks rise for investors as developed economies falter
Mohamed El-Erian – Financial Times (SUBSCRIPTION)
Life would be better for equity investors if the transition from quantitative easing and ultra-low interest rates was unfolding against a backdrop of solid economic growth. Instead, the global economy is losing momentum and the divergence between advanced economies is growing.
As a result, financial market choppiness has been ruling the day and unsettling investors. That leaves portfolios more vulnerable to technical dislocations and behavioural biases.

Carney On Pound Volatility: Carney Says Pound Volatility Is Here To Stay Amid Brexit Battles
Fergal O’Brien and Charlotte Ryan – BloombergQuint
Bank of England Governor Mark Carney said swings in the value of the pound are here to stay as long as there’s uncertainty about the direction of Brexit.
Carney was addressing U.K. lawmakers, speaking for the first time since Prime Minister Theresa May published her proposed European Union Withdrawal Agreement. He also said the outlook for monetary policy and interest rates will depend on how Brexit affects supply and demand — and the currency — in the coming months.

****SD: What a bold prediction. For a bit more nuanced take on the Brexit impact, see S&P’s blog Sizing Up U.S. Equities In Managing Brexit Risk

Oil Drops Below $54, Downside Risk At Four-Year High On OPEC Inaction Fears
Luke Kawa – BloombergQuint
Energy traders are bracing for an OPEC-induced sell-off like it’s 2014 all over again.
Investors are terrified that major producers are about to pull the rug out from under prices at their Dec. 6 meeting, a replay of four years ago when the group elected to forgo output curbs. Options show a scramble for protection in the United States Oil Fund LP, ticker USO, which aims to track the price of West Texas Intermediate crude futures.

European Trader Says Market’s $1 Trillion Loss Is `Killing Us’
Ksenia Galouchko – Bloomberg (SUBSCRIPTION)
The sell-off in European stocks has been so violent that Guillermo Hernandez Sampere, head of trading at the German asset manager MPPM EK, now spends half his working day on the phone with fearful clients.

Exchanges and Clearing

US futures exchange weighs launch of Brazil soyabean contracts; CME Group considers move as Sino-US trade spat unsettles oilseed prices
Joe Rennison and Gregory Meyer – Financial Times (SUBSCRIPTION)
CME Group, the largest futures exchange operator, is considering launching new contracts on Brazilian soyabeans as US-China trade tensions unsettle prices for the oilseed, its chief executive said.

****SD: What other new derivatives contracts are in the works?

HKEX Annual Review Of Trading-Fee Tiers For Stock Options And Stock Futures
Pursuant to the Operational Trading Procedures for Options Trading Exchange Participants of the Stock Exchange (Appendix B11), the trading fee tier levels of the following stock option classes will be changed, effective from 2 January 2019, as a result of the annual review:

The World Federation Of Exchanges Launches New Website & Members’ Portal
The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has launched a new website and members’ portal as part of its ongoing transformation programme, using digital communications as a key element of its engagement with industry stakeholders and its membership base.


New Greenwich Report Examines SIP Data and Its Shortcomings
John D’Antona Jr. – Traders News
A new Greenwich Associates report found that market participants are spending more than ever on market data as they balance the relative merits of consolidated versus proprietary market data by weighing the importance of the speed, depth and accuracy of the information provided.
The report, based on a recent research study, finds that market participants (including broker-dealers, hedge funds, market makers, and data distributors) are increasingly reliant on exchange data and are largely satisfied with the quality and reliability they receive. Only 26% disagree with the idea that exchanges do a good job of managing their technology.

LexisNexis Risk Solutions Launches Guide To Help Businesses Navigate Complex Global Sanctions
LexisNexis Risk Solutions, the global information solutions provider, has today launched a guide to help businesses navigate the ever-growing complex global sanctions environment.

The rise of ‘quantamental’ investing: where man and machine meet
Robin Wigglesworth – Financial Times (SUBSCRIPTION)
As soon as the financial crisis started to recede, Jordi Visser knew something had to change. Algorithms were starting to rule markets, and hedge funds like the one he managed were confronting a tougher era.
So Mr Visser, chief investment officer of Weiss Multi-Strategy Advisors, started to rethink how the $1.7bn hedge fund could survive in a less hospitable environment. The solution was to evolve and meld man and machine. “We are competing against computers these days, so we had to become more efficient,” Mr Visser said.


Stock market forecast for 2019, investing strategies for correction
Akin Oyedele – Business Insider Prime (SUBSCRIPTION)
For the stock market, the year 2019 is shaping up to be more like 2018 than 2017.
Investors can recall the sleepy days of 2017 when the Cboe’s volatility index fell to record lows as the market underwent a slow grind higher. Stocks took off late in the year and into January before giving way to a sharp correction the following month. And just after the S&P 500 achieved record highs in September, it rolled over once again. Andrew Milligan, the head of global strategy at Aberdeen Standard Investments, is gearing up for a new year that’s just as volatile as the old. In fact, the strategist at the UK-based $736 billion asset manager foresees a 5% to 15% global-market correction next year. Peak to trough, neither the S&P 500 nor the iShares MSCI All Country World Index has fallen by much more than 10% in 2018.

Goldman Says It’s Time for Equity Investors to Boost Their Cash
Divya Balji and Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Base case sees a modest 5% gain in S&P 500 Index next year; Goldman’s downside case has the S&P 500 down 7% by end-2019
Stock investors have had a great run in recent years, but with cash now offering positive inflation-adjusted returns, it may be wise to dial back on risk, according to Goldman Sachs Group Inc.

****SD: Ever since I’ve been a kid I’ve wanted to boost my cash… Jury’s still out on those efforts though.


London Bullion Market Association new member trade reporting system goes live; to increase transparency
Ben Kilbey – S&P Global Platts
In a move to increase transparency in the London bullion market a new trade reporting system goes live Tuesday, an initiative led by trade body the London Bullion Market Association, and one that only gives a snapshot of its own members’ activity.

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We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Options Newsletters

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