Observations & Insight
Breaking Down The Merger of JPX and TOCOM
In March 2019, JPX and TOCOM signed an agreement to merge. In this video from FIA IDX, Osaka Exchange President and CEO Hiromi Yamaji talks about the benefits of an all-in-one Japanese exchange for market participants.
Watch the video »
Spencer Doar – JLN
Interactive Brokers sent out an email displaying estimated equity order routing revenue from four firms (plus its own revenue). Here is the breakdown for 2019:
-TD Ameritrade = $490 million
-E*Trade = $174 million
-Schwab = $139 million
-Robinhood = $69 million
-Interactive Brokers = $21 million (that is revenue from options exchanges only)
Need a chuckle? FIA posted photos from IDX – this is the only one I’m in.
Other options-related videos we’ve recently released from IDX include some background on Eurex’s latency protection for French and German equity options markets and an update on JSE’s progress in electronifying its derivatives markets.
Have a good weekend everyone!
Options LiquidityMatrix: Corn Options on Futures Double Year over Year
May options volumes benefited from higher volatility expectations relative to the past three months, as the VIX averaged 16.72 during the month after settling in the lower teens for most of the prior three months. Overall, options market volume was up 12.9% in May 2019 versus May 2018. Year to date, trading volume is behind last year’s record, but continued higher volatility in Q3 and Q4 could push trading in line with 2018.
Options Traders Whipsawed as Yuan Leaps Most in Four Months
Livia Yap and Ran Li – Bloomberg (SUBSCRIPTION)
Yuan traders rushed to bet on a stronger currency as it suddenly heads for its best week since February.
Volume in dollar put options that expire within two weeks surged on Friday, according to two traders who are not authorized to be named commenting publicly on the market. There was also high demand for derivatives that rise when the yuan turns more volatile, they said. The buying activity comes only days after the traders and two others said they bought contracts protecting against depreciation.
Global regulators give banks capital relief on derivatives
Huw Jones – Reuters
Global banking regulators have agreed to introduce more flexibility into how banks compile a broad measure of capital, the Basel Committee said on Thursday.
Traders Prep for ‘Quad Witching’ Amid Market Gains
Asjylyn Loder – WSJ (SUBSCRIPTION)
Traders expect a busy trading day, as Friday marks a quarterly collision that they call “quad witching.”
It refers to the day when equity and index futures and options expire. They are typically some of the busiest trading sessions of the year as traders cash out of their wagers and set up their bets for the coming quarter.
****SD: From MarketWatch – Quadruple witching day on Wall Street as the stock market trades in record territory.
Derivatives revenues grow in May: Acuiti Insight Report
June Revenues among market participants in the global derivatives market generally improved in May the latest Acuiti Derivatives Insight Report has found.
****SD: Keep it up, Mitting! From the report: “Much of the growth came from the US where volatility in the interest rates market drove volumes to near record highs. All five of the fastest growing contracts in May were CME or CBOT contracts with four of those interest rate products,” but “proprietary trading firms and CTAs experienced a mixed month in the US and a poor month in Europe with 43% of respondents from European prop firms reporting a decline in revenues.”
JP Morgan brings complex derivatives to wider audience
JP Morgan has stepped up efforts to get more clients trading credit derivatives, including synthetic CDOs, through a platform that makes it easier for investors to take leveraged bets on corporate debt markets.
The US bank launched its Credit Nexus platform earlier this year, according to a person familiar with the matter. The platform is designed to simplify the cumbersome process investors usually face to trade derivatives, including credit-default swaps, CDS options and synthetic collateralized debt obligations, according to a client presentation obtained by IFR.
Mike Novogratz’s Galaxy Digital rolls out crypto options business as institutional demand grows
The Block via Yahoo
Former hedge fund manager Mike Novogratz’s cryptocurrency merchant bank, Galaxy Digital, has expanded its trading business to offer cryptocurrency options contracts amid the crescendo in demand from institutional investors.
The Case for a Financial Transaction Tax; Governments charge user fees for parks, roads and other infrastructure. Why not do the same for the financial system?
Michael Edesess – Bloomberg (SUBSCRIPTION)
It’s a good conservative principle that where possible, the government should recover the cost of its services from the people who use them, rather than from taxpayers at large. It’s also pretty uncontroversial that the government must oversee financial markets, to ensure that they are free and fair.
What’s at Stake for Oil as Fears of a U.S. Conflict With Iran Rise
Myra P. Saefong – Barron’s
The U.S. and Iran appeared to move closer to military conflict Thursday, and that’s likely to keep a floor under oil prices until the threat of supply disruptions in the Middle East passes, analysts said.
Iran’s downing of a U.S. military drone near the Strait of Hormuz hasn’t caused any losses in oil supplies, but it has ratcheted up tensions between the countries, which had already been at odds following recent attacks on two oil tankers—as well as earlier attacks on other tankers—that Washington blamed on Tehran. That’s heightening worries about potential disruptions to global oil flows.
****SD: Short answer = plenty is at stake. Just take a look at this Reuters story from today about the effect tensions have had on Exxon’s plans in the Middle East – Exxon’s $53 billion Iraq deal hit by contract snags, Iran tensions.
Japan issues warning on excess currency market volatility
Daniel Leussink and Leika Kihara – Reuters
Japan’s top currency diplomat on Friday issued a warning against excessive volatility in the exchange-rate market, threatening to act if currency moves become too volatile.
The warning underscores concerns held by Japanese policymakers about sharp yen rises that could hurt the country’s export-reliant economy.
Exchanges and Clearing
Stocks Are On a Tear. What’s Holding These Exchanges Back?
Gunjan Banerji – WSJ (SUBSCRIPTION)
In one of the best months for U.S. stocks in decades, shares of some brokerages and exchange-operators—venues where investors can trade stocks themselves—are lagging.
Several big exchange-operators and brokerages have underperformed U.S. stocks this month as major indexes have rallied toward records. Shares of Cboe Global Markets Inc. are down 1.4% this month. CME Group Inc. has gained about 4.1% this month, while Intercontinental Exchange Inc. stock is up 5.7%.
Regulator wants circuit breaker in HK bourse
Luo Weiteng – China Daily
Hong Kong’s securities regulator and stock market operator are mulling a marketwide circuit breaker in a bold move to bring Asia’s financial center in line with its global counterparts and combat extreme moves in a volatile market.
Swiss-EU bourse battle breaks out over stalled treaty
Francesco Guarascio and Michael Shields – Reuters
Investors in the European Union and Switzerland will lose direct access to each others’ stock exchanges from July 1 in an escalating row over a stalled partnership treaty.
Frustrated with Swiss foot-dragging, the European Commission will not propose extending the equivalence regime that lets EU investors trade on Swiss bourses, effectively ending it as of July 1, an EU diplomat told Reuters on Friday.
Regulation & Enforcement
SEC says closed-end funds should disclose more, managers differ on requirements
Kristen Haunss, Loan Pricing Corporation – Reuters
Firms that manage closed-end funds agree that regulatory proposals that would force managers to disclose more information to investors including factors affecting performance as well as investment strategies could be beneficial, but disagree on whether regulators should dictate what specific data is shared.
***SD: Does this mean I’ll get a deeper look at what goes on in options-based CEFs? Not that I think there’s a ton that’s crazy in a chunk of them – own a basket of stocks, write XYZ number of ABC delta puts/calls, while repositioning at PDQ days to expiration, right?
FIA President and CEO Walt Lukken on the Basel Committee’s Recognition of Client Cleared Margin As Reducing Exposure
FIA President and CEO Walt Lukken today made the following statement on the Basel Committee’s agreement “on a targeted and limited revision of the leverage ratio to allow margin received from a client to offset the exposure amounts of client-cleared derivatives.”
Giancarlo Statement on Basel Committee Agreement
Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo issued the following statement regarding the recommendation by the Basel Committee on Banking Supervision to exclude initial margin from the leverage ratio.
It May Be Time to Show Some Love to The Russell 2000
Bob Iaccino – CME Group
On May 6, CME Group launched a suite of products aimed at providing smaller, active investors and traders greater access to their heavily traded index futures products. The Micro E-mini index futures, which are 1/10 the tick size and margin requirements of the mini contracts, were an immediate hit trading well over 11 million contracts in the first month.
****SD: Show love? The Micro E-mini suite at CME was the most successful product launch in the exchange’s history. Moreover, Russell index options and IWM ETF options are consistently in the top five most traded options daily in their respective categories. How’s that not love?
‘Low-Volatility’ Stocks Are Big Winners in 2019’s Wild Market
Evie Liu – Barron’s
The slowing economy and increasing market uncertainty have made low-volatility stocks a popular choice for investors this year. They’re likely to stay that way.
The iShares Edge MSCI Min Vol USA ETF (USMV) saw $5.7 billion assets inflow since the beginning of 2019, boosting the fund’s size by 25%. The Invesco S&P 500 Low Volatility ETF (SPLV) attracted $2 billion and increased its assets under management by 20% during the same period.
Gold’s monster run could reach $1,600, say Citi analysts
Barbara Kollmeyer – MarketWatch
Exhausted equity bulls look set to take a breather on Friday.
Who can blame them after a week filled with dovish slants from central banks, notably the Fed, that produced a fresh S&P 500 record. But stay alert for one more distraction. Stock-index futures, stock-index options, single-stock futures, and stock options will all expire simultaneously today, an event known as quadruple witching, that happens every quarter on the third Friday of the last month.
GlobalCapital Global Derivatives Awards 2019: the nominees
Ross Lancaster – GlobalCapital
The awards recognise the institutions, products and services that have bettered the global derivatives markets during the last 12 months, making them more resilient and vibrant. The shortlist below is the result of market soundings and research by GlobalCapital that will now form the base for pitch meetings lasting until the end of July.
Brexit Anniversary: Is the U.K. Economy Worse Off?
Andre Tartar and Christopher Cannon – Bloomberg (SUBSCRIPTION)
Three years after Britain voted to leave the European Union, warning signals for the U.K. economy are finally beginning to flash red.
That’s a change. Until last December, forecasts of major disaster had largely been proven wrong. The Bloomberg Brexit Barometer, a custom index that encompasses all aspects of the U.K. economy, held up rather well in the first 28 months after the June 23, 2016, referendum. The worst-case scenario recession envisioned by the International Monetary Fund was avoided, and the unemployment rate recently fell to 3.8%, a 45-year-low.
Quant Known as Mr. Bear Turned Bullish at Just the Wrong Time
Harry Suhartono and Tom Redmond – Bloomberg (SUBSCRIPTION)
John Rachmat spent three years researching, backtesting and tweaking his quantitative investment model before he was convinced he had a winning formula.
Hong Kong’s Hang Seng Now World’s Best Stock Market
David Watkins – Bloomberg (SUBSCRIPTION)
Central banks have helped supercharge a rebound in Hong Kong stocks.
The Hang Seng Index jumped 5% this week, beating all other 93 major benchmarks tracked by Bloomberg. That’s its best weekly rally since early November. The Hang Seng Enterprises Index was a close second, adding 4.8%. The Hong Kong dollar strengthened towards the midpoint of its trading band with the greenback, a level it hasn’t breached since September.
****SD: Best stock market AND best recent display by concerned citizenry.