Short Volatility Trade’s Best Friend Is Now Its Biggest Enemy; Traders betting on stock declines made $344 billion in just one month as coronavirus ravaged the market

Mar 23, 2020

Observations & Insight

The Spread: Quarantined

This week on The Spread, bitcoin option volume spikes as bitcoin craters, the VIX closes at an all-time high due to coronavirus concerns, the NYSE closes its doors as two traders test positive for COVID-19, and more.

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Lead Stories

Short Volatility Trade’s Best Friend Is Now Its Biggest Enemy
Luke Kawa – Bloomberg
An about-face in derivatives positioning has turned a powerful source of market calm into a contributor to the chaos.
The coronavirus rout is igniting demand for hedges and unwinding option-selling strategies that proliferated in formerly placid markets. Dealers, once a buffer to volatility, have morphed into short-term momentum traders, amplifying swings. Experts hope the dynamic has reached its zenith, however, pointing to the expiration of options and futures on Friday as a potential catalyst for a shift that could re-establish a semblance of calm.

Traders betting on stock declines made $344 billion in just one month as coronavirus ravaged the market
Ben Winck – Markets Insider
Investors betting on US stocks to tumble profited billions as the S&P 500 slid from its record high to a 29% decline in a single month.
Short-sellers saw roughly $344 billion in mark-to-market gains in the period from the S&P 500’s February 19 peak to March 19, according to financial analytics firm S3 Partners. The month also saw the total amount of shares sold short jump by about $41 billion as market volatility surged and fueled the biggest single-day losses since 1987.

Wall Street money manager says the stock market won’t hit bottom until investors throw in the towel — and we’re not there yet
Mark DeCambre – MarketWatch
It’s going to get worse before it gets better — a lot worse, according to Scott Minerd.The global chief investment officer at Guggenheim Partners says that investors are still holding out hope in many sectors, and that may be a sign that the worst isn’t over for a market that has taken a beating over the past month.

Restraints on Short Selling Wouldn’t Calm Markets
Bryan Corbett – WSJ
As the securities markets gyrate daily, some call again for a ban on short selling. Six European countries have imposed such bans in recent days. While it’s natural for policy makers to try to protect investors and markets, a ban on short selling is a terrible idea.

Globe-Spanning Volatility Trade Is Hit Hard by Market Slump
Julia-Ambra Verlaine – WSJ
The global market rout has dealt a particular blow to a trade that intertwines Silicon Valley stock-market favorites with cautious Asian savers and European asset managers. Designed to boost returns during the 11-year bull market, Wall Street’s hunt for yield hatched a multibillion-dollar business betting on volatility itself. The idea functioned well, until the coronavirus pandemic blindsided investors and sent markets swinging at levels unseen since the financial crisis.

Exchanges and Clearing

Factbox: Stock exchanges revise trading rules, circuit breakers as volatility surges
Nikhil Kurian Nainan – Reuters
Global stock exchanges are changing trading rules to protect their markets from intense volatility and speculative trading as the coronavirus pandemic hammers equities and threatens the world economy.
There have also been calls to shorten trading hours or for shut downs for a time to help calm stock markets rocked by outbreak.

FACTBOX-China commodity exchanges act to contain virus-driven volatility
Min Zhang, Tom Daly, Emily Chow and Muyu Xu – Reuters
China’s commodity exchanges have rolled out a series of measures – from raising margin requirements and trading limits to halting trade completely – to help maintain market stability as coronavirus panic spreads across the globe.

CME Group Statement on Ronin, LLC
CME Group
CME Group today confirmed that, pursuant to its rules, CME Clearing auctioned off portfolios of Ronin, LLC. The auction process was completed this morning, March 20, 2020. Though Ronin is a direct clearing member, it does not handle customer business; and no clients were impacted by the auction. The firm was unable to meet its capital requirements going forward.

Costs to borrow ETFs jumps as volatility spikes
Chris Flood – FT
The spike in volatility across financial markets due to the coronavirus pandemic has sparked a surge in the use of exchange traded funds by market makers and other institutional investors that want to protect their positions from wild price swings. ETFs regularly account for a quarter of daily trading activity on the US stock market and this has risen to about 40 per cent on some of the most volatile days on Wall Street in March.

Regulation & Enforcement

European traders press for looser rules to ease options trading
Philip Stafford – FT
Market makers in Europe are urging regulators to bring forward new rules that could relax rules on the capital banks must allocate to derivatives trades, amid concerns that current standards are intensifying the volatility caused by the coronavirus crisis. FIA Epta, an industry group representing about 30 of Europe’s proprietary traders — firms that trade with their own money — said market making in options was being seriously affected by banks’ risk models.


NYSE Prepares for First All-Computer Trading Day in History as Coronavirus Closes Iconic Wall Street Floor
Martin Baccardax – The Street
The New York Stock Exchange will conduct all of its business electronically Monday, marking the first time traders will be absent from the floor in its 117 year history. The Intercontinental Exchange (ICE) – Get Report, which owns the NYSE, said last week it would close the trading floor after one of its employees tested positive for the coronavirus. Trading hours will remain the same, the NYSE said, with circuit breakers halting activity if markets fall more than 7% on the session, and again in the event of a 13% slump, during most of the trading day.


Coronavirus fears spark surge in a volatility-focused ETN, but with a downside
Saqib Iqbal Ahmed – Reuters
A product that traders use to profit from surges in volatility has soared as coronavirus fears ravaged stocks, prompting concern about a plunge if the market’s wild swings subside. The VelocityShares Daily 2x VIX Short-Term ETN (TVIX.O) started the year at just short of $49 a share and shot as high as $1,000 a share as markets plunged and volatility exploded. The exchange-traded product (ETP), issued by Credit Suisse, last traded at $532.03 on Monday.


Investor interest in ESG spurs rating agency acquisitions
Bennett Voyles – Market Voice
Even as politicians debate how or even whether to incorporate the costs of carbon into the economy, three of the biggest rating agencies – S&P Global, Moody’s, and MSCI – made deals in 2019 that make it easier for investors to factor environmental risk into their strategies. The three firms snapped up specialist providers of information used to assess corporate performance on Environmental, Social, and Governance factors. The sudden surge in acquisitions was a response to growing interest in using ESG factors in investment strategies, index providers say.

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