Rate Uncertainty Spurs Strong Options on Interest Rate Futures Activity in April

May 22, 2019

Observations & Insight

Addressing Concentration and Liquidity Risk – Alex Lamb, The Technancial Company
In this video, Technancial Head of Business Development Americas and Head of Marketing Alex Lamb talks about how market participants look to stay one step ahead of their clearing member.
Watch the video »

Lead Stories

Rate Uncertainty Spurs Strong Options on Interest Rate Futures Activity in April
Tabb Options Liquidity Matrix
Through April 2019, industry-wide US options volumes year to date have been lower, totaling 1.55 billion contracts, a drop of 12.1% versus the same period in 2018 (see Exhibit 1, below). As a direct result of there being much less equity market volatility during the first four months of 2019 compared to early 2018, a period that included the “volmageddon” price action in February 2018, volumes for options on stocks, ETFs, and equity indexes in particular have been much lower through April than in the same time period in 2018. Volume for options on stocks and ETFs experienced a year-over-year drop of 10.5% (Exhibit 1); options on indexes fared even worse.

SEC requires more information on exchange fee increases, starts fee pre-pilot
Hazel Bradford – Pensions and Investments
Stock exchanges will have to provide more details before being allowed to raise fees or offer discounts to some traders, the Securities and Exchange Commission said in new guidelines issued Tuesday.

****SD: WSJ has Exchanges Face Higher Hurdles in Boosting Data Fees. Also see the below story from Themis in Tabb Forum.

Don’t Sue Your Regulator
Joe Saluzzi and Sal Arnuk, Themis Trading LLC
The SEC is pressing ahead with the Transaction Fee Pilot (TFP), even as the exchanges continue to try to slow them down through the courts. In addition, the regulator also issued guidance on exchange fee filings requiring the exchanges to justify proposed new fee increases. Maybe suing their regulator was not such a good idea after all, say Themis Trading’s Joe Saluzzi and Sal Arnuk.

Euan Sinclair – Talton Capital Management
“The only real mistake is the one from which we learn nothing.” – Henry Ford
I recently wrote about how people can be fooled by selling strangles (equal amounts of out-of-the-money puts and calls). The fact that it is possible to make money trading strangles even if your forecast is wrong could be seen as a good thing. It emphatically is not. It leads people who should not be trading at all to think they have an edge.

JPMorgan raises its Brexit no-deal probability forecast to 25 from 15%
Guy Faulconbridge – Reuters
U.S. investment bank JPMorgan raised its probability of a no-deal Brexit to 25 from 15%, saying its base case is that Boris Johnson becomes prime minister, followed by a general election and then another delay to Britain’s exit to the end of the year.

Exchanges and Clearing

HKEX to introduce protection function for LPs of USD/CNH Options; The new protection function will be implemented on June 3, 2019.
Maria Nikolova – FinanceFeeds
Hong Kong Futures Exchange Limited (HKEX) today announces its plans for the introduction of the Liquidity Provider (“LP”) Protection Function for LPs of the USD/CNH Options contracts. The new function is set to be implemented on June 3, 2019.

Holding Margin for a Rainy Day
Tore Klevenberg, Baymarkets – Tabb Forum
Central counterparties need to be prepared for when markets turn sour. Clearing houses should use risk add-ons to ensure margin requirements will be sufficient during stressed market conditions.

Meet the Man Supporting Cboe Women
Cboe Blog
Brian Schell was recently recognized by the Security Traders Association Women in Finance for his commitment to gender diversity and inclusivity with the Ken Heath Award. Brian joined his fellow award recipients to discuss the importance of gender diversity in the workplace. As Cboe’s Executive Sponsor of Diversity Initiatives, Brian works to support women in finance as he strives to continue Ken’s legacy.

Cboe FX Announces Launch of Cboe FX Point
Cboe FX Markets, a Cboe Global Markets, Inc. (Cboe: CBOE) company and a leading platform for institutional foreign exchange (FX) trading globally, today announced the launch of Cboe FX Point, a new one-to-one execution solution that allows institutional clients to create custom, relationship-based connections with one or more of their preferred counterparties to meet their specific trading needs.

Regulation & Enforcement

U.S. to mirror EU moves in scrutinizing derivatives clearers
Huw Jones -Reuters
Foreign clearing houses for derivatives face tougher scrutiny for risks they would pose to the United States economy if they collapsed, a senior regulator said on Tuesday, mirroring recently-approved European Union reforms.

Sebi allows mutual funds in exchange traded commodity derivatives
Economic Times India
The Securities and Exchange Board of India (Sebi) on Tuesday allowed mutual funds to participate in exchange-traded commodity derivatives (ETCD). However, the regulator has decided to keep away MFs from trading in derivatives of sensitive commodities.

****SD: We’ll know the results of India’s big election tomorrow.

BSE stock options: Sebi fines 4 entities Rs 22 lakh for fraudulent trade
Press Trust of India via Business Standard
Markets regulator Sebi Wednesday imposed a total fine of over Rs 22 lakh on four entities for executing fraudulent and manipulative trades in the illiquid stock options segment of BSE.


Oil: Are Options Skews Reliable Price Indicators? (AUDIO)
Erik Norland – CME
Off The Charts! examines the pertinent economic issues of the day, providing a deeper dive into complex topics and framing the issues in a way that can lead to a better understanding of the financial and commodities markets.

Short Aussie, Long Yen Is the Hot New FX Bet for Trade War
Ruth Carson – Bloomberg (SUBSCRIPTION)
Citigroup, JPMorgan Asset expect Australia’s dollar to weaken; Oanda’s Halley says Aussie-yen can easily decline below 70
Short Australia’s risk-sensitive currency against the haven yen. That is emerging as one popular currency trade as investors look to profit from the U.S.-China trade war.


Jet Stream Detour Leaves Midwest Farmers Drenched, Canada Dry
Brian Sullivan and Ashley Robinson – Bloomberg (SUBSCRIPTION)
North American farmers are stuck between a flood and a dry spot, and there is little immediate help ahead.
Two high-pressure ridges have trapped the jet stream between them, forcing it into an unusually stagnant S-path in which it gathers warm, very moist air from the Pacific, carries it across the Rockies and dumps it in the Great Plains and U.S. Midwest. The resulting storms have drenched the region, putting U.S. seeding at the slowest pace on record for this time of year.

****SD: What does this mean for the pollen count?

Purpose Investments Launches New Options Income Strategy, Purpose Enhanced Premium Yield Fund
Globe Newswire
Purpose Investments, Inc. (“Purpose” or “Purpose Investments”) is pleased to announce the launch of Purpose Enhanced Premium Yield Fund (the “Fund”) to give investors a new way to access an innovative alternative-income strategy. Purpose has completed the initial public offering of the Fund and it will commence trading on the Toronto Stock Exchange today under the ticker symbol “PAYF.” The Fund is also available in mutual fund versions.

Confusing signals cloud London nickel market
Andy Home – Reuters
The London Metal Exchange (LME) nickel market was last week gripped by the most acute tightness in a decade. Time-spreads flexed into backwardation as a long-running downtrend in exchange stocks squeezed short position holders. Falling inventory and tighter spreads are normally strong bull signals in a commodity market.

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Rate Uncertainty Spurs Strong Options on Interest Rate Futures Activity in April

May 22, 2019

Observations & Insight

Wednesday’s Miscellany

JLN Staff

MLex has a (paywalled) story titled CFTC’s Giancarlo cites threat from China futures markets in bid for more money. Obviously it is a futures story, but I see it as indicative of the overall “threat” posed by the ongoing development of Chinese derivatives markets.

Check out this Bloomberg/Saxo Bank chart of yuan denominated oil futures trading and you’ll see why Giancarlo said what he did. (Besides, the usual rhetoric about needing money to protect investors hasn’t worked for the CFTC’s budget so maybe some fear-mongering will.) Also see this Reuters story from May – China’s crude oil futures boom amid looming Iran sanctions. ~SD

The newest CFTC Talks podcast is out. It’s a shorter, “FlashCast” episode focused on a single subject and features John Coughlan of the CFTC’s Market Intelligence Branch.

FIA updated its FCM tracker tool. Check it out here.

According to CLS data, currency trading volumes rose 2.6 percent in July on last year, although July volumes were 13.7 percent lower than the previous month of June. CLS said the average daily traded volume of currencies submitted to it reached $1.638 trillion in July, up from $1.596 trillion in the same month in 2017, Reuters reported.~SR


Lead Stories

Traders Pile Into Bets That Stock Rally Will Continue; Tax cuts and a robust U.S. economy boosted corporate profits in the three months through June

Gunjan Banerji – WSJ (SUBSCRIPTION)

With U.S. stock benchmarks mere points away from fresh records, some traders are piling into bets that share prices will rally higher and volatility will remain muted. The S&P 500 and the technology-heavy Nasdaq Composite hit their second-highest close in history on Tuesday. Options investors and traders are wagering the gains will continue. They have been scooping up bullish call options on the S&P 500, contracts that would pay out if the stock index took another leg higher, according to Credit Suisse . Call options give the right to buy shares at a later time if they hit a designated price.


****SD: Initially heralded as a year that would be “different,” 2018 seems more and more like 2017, with long equity, short vol being the strategy du jour (tous les jours).

Tesla options bulls reap windfall on Musk’s going private tweet

Saqib Iqbal Ahmed – Reuters

Tesla Inc’s options activity surged on Tuesday after Chief Executive Elon Musk tweeted he was considering taking the company private and some quickly executed trades netted massive paper profits as shares in the electric car maker rallied as much as 9 percent.


****SD: The role Elon Musk’s twitter feed plays continues to strike me as remarkable. I don’t believe Donald Trump’s tweets – price action-related as they occasionally are – have ever caused a trading halt in a listed name/ETP. At the time of the breaking news, IHS Markit analyst Sam Pierson commented: “[Tesla’s] short interest equates to 20.7% of outstanding shares, down from a YTD peak of 23% observed in June. The short value is higher than any S&P 500 stock, only Under Armor has a higher percentage of outstanding shares short with 24%.”

Volatility slump stokes flames for post-summer blow up

Jamie McGeever – Reuters

Financial market volatility is slumping across the board to historically – or, dangerously – low levels, potentially fanning the flames for a repeat of February’s “volmageddon” explosion that sparked a 10-per-cent correction in U.S. and world stocks.


New Chinese forex crackdown to hit corporate hedging; Despite new reserve requirement, dealers say ‘maturity’ in risk management is here to stay

Blake Evans-Pritchard – Risk.net (SUBSCRIPTION)

Dealers fear a move by the Chinese authorities to reinstate a deposit requirement on foreign currency derivatives could slow a recent pick-up in hedging from local corporates, despite warnings from regulators that firms need to do more to brace for future market volatility.


Sterling/dollar risk reversals at 17-month low, signal more weakness


Nine-month and one-year sterling/dollar risk-reversals fell on Wednesday to the lowest since early-March 2017, as investors rushed to protect themselves from further weakness in the British currency.


Exchanges and Clearing

NSE says working on a structure to address SGX issue


New Delhi: Locked in arbitration proceedings with SGX, the National Stock Exchange on Wednesday said it is working on a “structure” to address the issues and more clarity is likely to emerge in the next two-three weeks.


SGX reports market statistics for July 2018


…Total Derivatives volume was 16.9 million, down 5% month-on-month (m-o-m) and up 19% year-on-year (y-o-y).


Presentation By HKEX Chief Executive Charles Li And Group Chief Financial Officer John Killian On 2018 Interim Results Announcement


…Strong growth in trading volumes: Cash Market headline ADT +67% YoY, Futures and Options ADV +58% YoY, LME chargeable ADV +11% YoY


Dalian Commodity Exchange Holds Training For Corn Options Instructors


To strengthen the corn options training on member units, promote teaching staff construction and guarantee the steady listing and operation of corn options, Dalian Commodity Exchange (DCE) held the training on corn options instructions lately. A total of 100 trainees from 100 units attended the training, including futures companies, risk management subsidiaries of futures companies, spot companies and other financial institutions.



Tradeweb On Track For Record Year Of Trading Activity


…Credit and Equities Derivatives Volumes Climb: Global equity derivatives ADV is up 351.55% and global credit derivatives volume is also up 80.16% year-over-year on the Tradeweb platform.


Redline Trading Solutions Breaks 180 Nanosecond Tick-to-Trade Barrier

Redline Trading Solutions

Redline Trading Solutions, the premier provider of high-performance market data and order execution solutions, today announced the production deployment of its hybrid software and FPGA-based market data and order execution gateway solution.


The art of designing markets. Part III

Eurex Exchange

This is the third article in a series of topics related to the market design of electronic marketplaces. The first article discussed the most common execution models in electronic derivatives markets, while the second covered the various components of an order-generating process that define its arrival time. It thus gave an overview of the three steps market participants need to generate and submit an order to an exchange whereby connectivity drives the third step. We explained that for all participants timing matters but that ‘timing’ means different things to different market participants. Today, we are looking at the electronic connectivity of market participants who are not members of an exchange (i.e. indirect participants), typically institutional investors, but also retail investors.



Morgan Stanley sees two ‘broken legs’ for stocks, heralding ‘significant market correction’

Ryan Vlastelica – MarketWatch

For years, one of the primary factors lifting the U.S. stock market has been the fact that some of the economy’s biggest, fastest-growing names just kept rising.

The strength of growth stocks, in particular some large technology and internet plays, has been a boon for momentum investors, who bet that recent outperformers will continue to do better than the overall market over the medium term. This trade has been one of the easiest ways for investors to make money, but analysts are increasingly concerned that its era may be drawing to a close.


A big shift to the S&P 500 may change the way you invest in tech

Stephanie Landsman – CNBC

The S&P 500 is about to undergo a major structural change that may alter which technology stocks you own.

Facebook and Google’s parent Alphabet will move out of the index’s technology sector and to a newly formed communication services sector in about six weeks. The goal is to make tech appear less dominant in the S&P 500.



Crypto pukes, again; Somebody pass the mop.

Jamie Powell – FT Alphaville

Ah, the crypto.

After the gyrations of early June, it all went pretty quiet recently as bitcoin, and its fellow tokens, began to recover from their lows.


****SD: First, great title. Second, with all these gyrations you’d think there would have been more activity on LedgerX. After all, the exchange did have a “record” July. While open interest seems to be building (4,000+ contracts) and Monday had 400+ trades, yesterday saw only 21 swaps trade. Oh, and the reason attributed to the puking? See Bloomberg’s SEC Postpones Decision on Bitcoin ETF Listing to September

Private Banks Are the New Hedge Funds

Yakob Peterseil – Bloomberg

Who needs hedge funds when a $2.4 trillion private bank is offering global macro trades to navigate late-cycle markets — mimicking fast-money strategies with leverage to boot.

UBS Group AG’s wealth management arm, the world’s largest, is pitching just that to billionaire clients.


John Lothian Newsletter

So you want to know what’s happening in the financial markets?

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 Newsletters

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