Speculative Fervor in U.S. Stocks Surges to ‘Stunning’ Levels; Dow slumps 240 points on concerns that the market’s rally has gotten overextended

Jun 9, 2020

Observations & Insight

Unsung Heroes: OCC’s Dan Busby
By Sarah Rudolph – John Lothian News

Dan Busby has his hands full as head of operations at OCC, but he insists he is having fun.

He and his team are responsible for the back office operations for the world’s biggest equity derivatives clearing organization. OCC provides clearance, settlement and completes the life cycle of the trade for 16 options exchanges and four futures exchanges (they just added The Small Exchange on Monday) and is “really a 24×6 operation,” Busby said. And they are dealing with extraordinarily high volumes now, because of the coronavirus pandemic, while at the same time working on the Renaissance technology modernization project, which OCC has been “redoing from the ground up.”

The Renaissance project is “a massive effort” and the biggest initiative for the OCC in a long time, Busby said. They have been hiring recently for the project and are planning for as early as 2022 as the launch date.

Back office operations at OCC start Sunday night because some of the futures markets open at 5:00 pm. There are six teams in operations: the market operations team interfaces with exchanges and monitors new listings and trade activity. Member Services is primarily about relationship management with OCC’s clearing member firms, Busby said. The collateral services team does morning settlement and collects what the member firms owe. The corporate actions team monitors options underlyings for any upcoming corporate actions such as dividends and provides investors with guidance. The external testing team responds to member requests for testing capabilities.

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Lead Stories

Speculative Fervor in U.S. Stocks Surges to ‘Stunning’ Levels
Cormac Mullen – Bloomberg
Speculative excess has surged to the highest in at least 20 years among U.S. options traders — and that’s a negative for stocks over the medium term, according to Sundial Capital Research Inc.
Traders established fresh bullish positions last week by buying 35.6 million new call options on equities, according to Sundial founder Jason Goepfert. That’s up from a peak of 28.7 million in February, when speculative activity was rampant, he wrote in a note Monday.

Dow slumps 240 points on concerns that the market’s rally has gotten overextended
Ben Winck – Markets Insider
The stock market’s triumphant rally into positive year-to-date territory retreated on Tuesday as investors took profits and weighed whether recent gains matched the pace of the economic recovery.
Stocks that led recent sessions’ upswings — including Carnival Cruises, United Airlines, and Simon Property Group — declined. Travel and retail stocks tore higher on Monday as investors bet on smooth reopenings throughout the US and a pickup in consumer demand.

Bitcoin Options Growth Outpaces Futures, Swaps
Zack Voell – Coindesk
Bitcoin options trading is growing faster than the futures and swaps market, according to data from Skew. Measured by the ratio of aggregate open interest in the bitcoin options market to open interest for bitcoin futures and swaps, a clear upward trend is observable from January 2020 to date. A historical trend of a higher ratio signals a rate of growth in options open interest that exceeds growth in that of bitcoin futures and swaps. Open interest is defined as the outstanding contracts, measured here in dollars.

Collapsing rates leave investors dangerously exposed to equity risk
Paul Britton – Financial Times
Covid-19 has brought us to a historic turning point in financial markets. A fundamental investment strategy that has protected institutional and retail investors alike for decades — balancing equity risk by holding high-quality government bonds — has finally run its course. When the Fed lowered short-term rates to zero in response to the pandemic, the last shoe dropped.

Short-Sellers Set Their Sights on Surging Asia Biotech Stocks
Jackie Edwards and Ishika Mookerjee – Bloomberg
Short sellers across Asia are being drawn to the health care sector, betting the region’s best-performing industry this year is poised for a retreat.
The daily average amount of short interest among 324 biotechnology and pharmaceutical stocks across Asia’s major equity benchmarks has more than doubled so far this year from 2019, according to data compiled by Bloomberg. Australian firms account for almost half of the top 10 most shorted ones as they reset operations and seek to win regulatory approval for products in some of the world’s most lucrative markets.

Prepping portfolios for next market storm? Not just gold and govvies
Saikat Chatterjee and Dhara Ranasinghe – Reuters
G7 government bonds? Check. Gold? Check. But that may not be enough as the coronavirus crisis accelerates a hunt for a wider pool of assets to better balance investment portfolios during stressful times. Corporate and Chinese government debt are among alternatives being explored by multi-asset portfolio managers with mandates to invest across sectors, currencies and countries.

Hedge fund buying dries up after oil prices double
John Kemp – Reuters
Hedge funds have started to temper their bullishness towards oil after crude futures prices have doubled since late April.
Crude prices are nearing levels expected to see some shale production restart and there are concerns the rally is outrunning the recovery in demand.

Strategist who predicted the U.S. would ‘see a revolt of some kind by the 2020 election’ says U.S. in ‘danger zone’ and stocks will suffer
Andrea Riquier – MarketWatch
America has lurched from one crisis to the next in 2020, knocking many people, even professional forecasters, off their feet. But not Matt Gertken, geopolitical strategist for BCA Research.
“Unrest was an easy prediction even before the pandemic and recession, which made matters worse,” wrote Gertken in a note out Friday. With odds in favor of President Donald Trump continuing to fall in the aftermath of the recent riots protesting the death of a black man, George Floyd, at the hands of white police officers, Gertken expects more market volatility as investors attempt to handicap the eventual outcome of the November presidential election.

Robinhood traders cash in on the market comeback that billionaire investors missed
Maggie Fitzgerald – CNBC
Retail investors capitalized on the market comeback, unlike the billionaire hedge fund managers who said stocks would retest their lows. Millennial-favored stock trading app Robinhood saw new investors piling into stay-at-home stocks and those most beaten down by the economic shutdown, like airlines, casinos and hotels.

Exchanges and Clearing

Cboe benefits from appellate ruling
Lynne Marek – Crain’s (subscription required)
Disputed stock market data fees were given leeway to remain, thanks to a federal appellate decision that has implications for Chicago exchange operator Cboe Global Markets. The U.S. Court of Appeals for the District of Columbia Circuit shot down a Securities & Exchange Commission challenge to exchange data fees imposed by the Nasdaq Stock Market and Intercontinental Exchange’s NYSE Arca, saying the SEC didn’t have authority under the Securities Exchange Act to thwart the fees. The exchanges had sued to vacate the SEC’s decision, and the court granted their request on June 5.

Cboe Global Markets to Observe Moment of Silence on Tuesday, June 9 in Remembrance of George Floyd and in Support of Equality, Inclusion and Social Justice
PR Newswire
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today will observe eight minutes and forty-six seconds of silence beginning at 11:00 am CT / 12:00 pm ET to coincide with the memorial service and funeral for George Floyd in Houston, Texas as Cboe pays its respects to Mr. Floyd and his family and loved ones, and expresses its support of diversity, inclusion and social justice.

Equity Index Highlights – June 2020 edition
Market briefing Equity market strength continued in May on the back of aggressive central bank stimulus. Also, a lack of choice -between negative yielding German government debt and equity risk premiums- remains when it comes to asset allocation. This left investors in a quandary; while not wanting to miss out on positive momentum, they also question the divergence and disconnect to economic fundamentals. Despite markets posting another positive month, implied volatility remained comparatively well supported. A likely driver is the net short positioning by some hedge funds either through outright short index futures or long put options.

New “Available Net Option Value” Reports Available in EREP
CME Group
Beginning with the end-of-day settlement cycle for Friday, June 5, 2020, CME Clearing is making available four new reports to clearing firms via the EREP report distribution system. The reports illustrate the effect of a 10% haircut on the excess positive Net Option Value (NOV) over the Risk at each client account, as announced in Clearing Advisory 20-221, published June 1, 2020, at https://www.cmegroup.com/notices/clearing/2020/06/Chadv20-221.html

New Product Summary for Clearing Firms, Bookkeeping Software Providers, ISVs
CME Group


Sterling Trading Tech Certified for CAT Production by FINRA
Traders Magazine (press release)
Sterling Trading Tech (STT), a leader in compliance, risk and infrastructure solutions for equity, options and futures trading, today announced they have been certified by FINRA as an authorized CAT (Consolidated Audit Trail) Reporting Agent. After completing rigorous CAT beta-testing in FINRA’s test environment, STT has successfully completed file submissions in the production environment for all clients that have been FINRA approved for production reporting. “Our team has dedicated hours of time and resources toward receiving this certification from FINRA,” states Erik Schmidt, Sterling Trading Tech Managing Director of Client Services. “We’ve stayed ahead of the FINRA implementation schedule in order to be as prepared as possible to serve as the designated CAT reporting agent for our clients.”


How to Ride This Bull Market and Limit Your Losses
Steven M. Sears – Barron’s
It turns out that there really is such a thing as being too smart.
Just take a look at the legions of sophisticated, successful investors who thought the coronavirus would decimate the stock market. These investors, some of whom were smart enough to sell stock at the first whiff of the virus, are still holding loads of cash and watching the stock market defy gravity.


As many as 36% of large investors own crypto assets, and bitcoin is the most popular, Fidelity says
Carmen Reinicke – Markets Insider
More than one-third of large institutional investors hold crypto assets, and the most popular one is bitcoin, a recent survey showed.
As many as 36% of institutional investors in the US and Europe own crypto assets, according to a survey of 774 firms released Tuesday by Fidelity Investments. Institutional investors include pension funds, family offices, financial advisers, and hedge funds.

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