Observations & Insight
Chicago Pit Traders Have Weathered Worse Than an Arctic Freeze
Lydia Mulvany – Bloomberg (SUBSCRIPTION)
Scott Shellady, known in the trading pits of Chicago for his trademark “cow jacket,” isn’t going to let a historic blast of Arctic freeze on Wednesday keep him away from the options pits at the world’s largest derivatives exchange, even though many of the city’s workers are planning to hunker down at home.
“I come from a family of farmers,” said Shellady, who commutes into the city from northwest Indiana. “And there’s a word in English that describes the weather we’re having. Winter.”
****SD: Tomorrow might set the record for coldest day in Chicago history — stay safe everyone.
Sterling volatility jumps before UK parliament Brexit votes
Sujata Rao – Reuters
Sterling fell from recent multi-month highs on Tuesday and volatility rose in derivative markets as traders weighed whether lawmakers would back a parliamentary amendment that would effectively take a no-deal Brexit off the table.
****SD: Also see the Financial Times’ Investors prepare for UK pound tumult ahead of Commons vote.
China adds more commodity options to hedge price risks
China on Monday launched options for natural rubber, cotton and corn, adding to the tools available to hedge price risks in the world’s major commodity market.
A Stock Market Volatility Play Is Going Away Tomorrow
Crystal Kim – Barron’s
Sharp spikes in volatility, like ones caused by the big drops in the S&P 500 and the Dow Jones Industrial Average last year, killed one exchange-traded product—and left a lasting mark on another. Now, one of the oldest ETPs to allow investors to make bets on the Cboe Volatility Index, or VIX, is about to expire, but this time of natural causes.
The iPath S&P 500 VIX Short-Term Futures ETN (VXX), a debt obligation underwritten by Barclays, will cease to exist after Tuesday not because of an unfortunate event, but because it is maturing on Jan. 30.
****SD: In case you forgot, VXX expires on January 30 (tomorrow). VXXB is attracting some decent trading activity. We’ll be keeping an eye on its volume totals. VXXB currently has ~$350m AUM while VXX has ~$730m AUM.
Apple Options Show Earnings Surprises Are Unlikely After Warning
Gregory Calderone – Bloomberg (SUBSCRIPTION)
With Apple Inc. trading more than 30 percent below last October’s record high heading into its earnings report, options investors appear to be unenthused about the pending results, especially after the iPhone maker already warned they’ll fall short of previous estimates.
Equities: Six Ways to Spot a Flagging Bull Market
Erik Norland – CME Group
….6) Like credit spreads, volatility appears to move in cycles related to monetary policy. Also, very much in the same vein as widening credit spreads, increases in the cost of equity options (rising implied volatility) often presage eventual equity bear markets. Broadly speaking, the equity index options market has two states: a low-volatility state (1993-1996, 2004-2006 and 2011-2018) that is often associated with the mid-stages of economic expansions and equity bull markets. It also has a high- volatility state (1989-91, 1997-2003 and 2007-2011) that is associated with the end of bull markets and subsequent equity bear markets/economic recessions.
On Nat Gas, Hedge Fund Blowouts, and Risk Algorithms
RCM Alternatives Blog
Well, that was quick. We were hailing natural gas futures as the return of the widow maker just before Thanksgiving as it headed up close to $5 per MMBtu.
Fed Balance-Sheet Fracas Highlights Confusion Over Market Impact
Alex Harris and Emily Barrett – Bloomberg (SUBSCRIPTION)
Decline in reserves is starting to distort funding rates; But link to equity-market moves is less clear, strategists say
Wall Street has become obsessed with the Federal Reserve’s balance-sheet runoff, as investors debate why it’s suddenly roiling markets more than a year after it began.
****Also see Forbes’ Fed Needs To Avoid Bout Of Volatility
Exchanges and Clearing
Eurex reaches global pole position
Eurex is the world’s largest derivatives exchange based on Open Interest. In 2018, Open Interest rose by 18 percent to 120,467,829 contracts. According to the Futures Industry Association (FIA), this puts Eurex in the pole position. It underlines the success of Eurex’s buy side initiatives. Asset managers, pension funds and others tend to hold their risk positions, thus increasing Open Interest at Eurex.
Will you support a tax on financial transactions conducted by asset exchanges in Chicago, such as the Chicago Mercantile Exchange and the Cboe?
Chicago Mayoral Election Candidate Questionnaire – WBEZ Chicago
Yes: Amara Enyia, LaShawn Ford, Garry McCarthy
No: Gery Chico, Bill Daley, Bob Fioretti, Jerry Joyce, John Kozlar, Susana Mendoza, Paul Vallas, Willi Wilson
N/A: Lori Lightfoot, Toni Preckwinkle
****JB: Chicago Mayoral Election Candidate Questionnaire from WBEZ radio: This is one of twenty questions answered.
SEC Names Manisha Kimmel As Senior Policy Advisor To The Chairman On The Consolidated Audit Trail
The Securities and Exchange Commission today announced that Manisha Kimmel will serve as Senior Policy Advisor for Regulatory Reporting to Chairman Jay Clayton. In this new role, Ms. Kimmel will coordinate the SEC’s oversight of the self-regulatory organizations’ (SROs) creation and implementation of the Consolidated Audit Trail (CAT). Ms. Kimmel will work closely with the Division of Trading and Markets and other divisions and offices on the CAT and other regulatory reporting matters.
Regulation & Enforcement
Cboe Says New Suit Belongs In VIX Manipulation MDL
Darcy Reddan – Law360 (SUBSCRIPTION)
Cboe Global Markets Inc. and related entities in the multidistrict litigation accusing it of permitting manipulation of the Chicago Board Options Exchange’s volatility index, or VIX, asked an Illinois federal court…
Sebi’s commodity index plans welcome
Capital markets regulator Sebi has put out a consultation paper on commodity index design, to boost derivative markets in such indices. Index-based commodity products should shore up institutional participation and raise liquidity in futures and options, for instance, to arbitrage across index products, and use one product to hedge their position in another. However, there remain a panoply of rigidities in the commodity derivatives market, which preclude thriving forward markets and gainful price discovery in, say, agricultural commodities.
U.S.-China Trade Talks Won’t Be Affected by Huawei Charges, Says Treasury Secretary Steven Mnuchin
Kate Davidson – WSJ (SUBSCRIPTION)
Treasury Secretary Steven Mnuchin said Tuesday a sweeping set of criminal charges against China’s Huawei Technologies Co. unsealed Monday will not complicate U.S.-China trade talks set to resume in Washington this week.
It’s a Big Week for Funds That Are Ready to Buy $45 Billion of Stocks
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Volatility-control strategies stand ready to snap up equities; Earnings, trade, data and Fed meeting could upend market calm
A big week for the global economy may prove make or break for investors acutely sensitive to market volatility. If benign conditions endure, these funds could start sinking as much as $45 billion into stocks, adding juice to the new year rally.
Bitcoin’s Not a Great Hedge Against U.S. Stock Losses Either
Eric Lam and Matt Turner – Bloomberg (SUBSCRIPTION)
One of the most common investment arguments for Bitcoin — that it’s a superior store of value to traditional hedges such as gold — doesn’t actually hold up that well, according to an analysis from John Normand, head of cross-asset strategy with JPMorgan Chase & Co.