Stock and Bond Market Volatility Diverges on ‘Blue Wave’ Bets; Joseph Sullivan III Helped Create Chicago Options Exchange

Oct 16, 2020

Observations & Insight

Joe Sullivan’s Influence and Success, Part 2
John Lothian – JLN

Wayne Luthringshausen is another person whose career was influenced by the arc of Joseph Sullivan’s option exchange startup crusade to create the Chicago Board Options Exchange.

Luthringshausen was working for a brokerage firm in New Orleans that traded fifty percent stocks and fifty percent commodities futures. In 1970, the firm was being sold and Luthringshausen was looking for a better opportunity. He was an operations specialist in settling over the counter options for the firm.

He wanted to go to Chicago and find a bigger opportunity, and Joe Sullivan was one of the people Luthringshausen was introduced to by people in the Chicago office of the firm.

After the first meeting with Sullvan over lunch on a snowy February day at a Holiday Inn in the north shore suburbs of Chicago, Luthringshausen knew he had a job and he started in June.

Luthringshausen was a member of a six-person team of people who worked on the options exchange project for the Chicago Board of Trade. There was a lawyer, a couple of guys who would go to the floor and trade options after the launch, a woman who ran operations, Luthringshausen and Sullivan. Luthringshausen described his job title as “peon” when he started.

To read the rest of this commentary, go here.

Lead Stories

Stock and Bond Market Volatility Diverges on ‘Blue Wave’ Bets
Katherine Greifeld – Bloomberg
With 18 days to go until the U.S. election, growing odds that Democrats will take control of the White House and the Senate is sending volatility gauges for stocks and bonds in opposite directions.
The Cboe Volatility Index — known as the equity market’s “fear gauge” — has been relatively subdued this month. That’s at odds with the U.S. Treasury market’s equivalent measure: The ICE BofA MOVE Index jumped by the most since March last week after languishing near record-low levels.

Joseph Sullivan III Helped Create Chicago Options Exchange; Former journalist sold Wall Street on a new market and wore down stiff opposition from the SEC
James R. Hagerty – WSJ
The Chicago Board of Trade was in a slump in 1968 when Joseph Sullivan III joined as an assistant to the president. Worried about sluggish trading in grain futures, exchange officials wanted to diversify. Mr. Sullivan, who was a Wall Street Journal reporter before moving to the Chicago exchange, was assigned to look into the feasibility of plywood futures. That idea flopped, but he embarked on a much more promising project: creating a new exchange to trade stock options, then an obscure corner of the financial markets.

Equity Traders are Preparing for Prolonged Volatility. Here’s Why.
Jim Iuorio – CME Group
Since 1950, September has tended to be the stock market’s worst month of the year with an average loss of .57% for the S&P 500. The only other month that has posted negative returns is August with an average loss of .26%.

Robinhood tells users to raise their cash buffers on several popular stocks hours before the market open
Shalini Nagarajan – Markets Insider
Robinhood told its users on Thursday, hours before the market open, to raise their cash reserves on several widely held stocks.
The retail-trading platform, which has spearheaded commission-free stock and ETF trading, said it would increase the margin-maintenance requirements for stocks affected by election-related volatility to “help protect” customers.

Cboe Global Markets to Acquire BIDS Trading
Traders Magazine
Cboe Global Markets Agrees to Acquire BIDS Trading, the Largest Independent Block Trading ATS in the U.S. – Planned transaction provides Cboe with a meaningful presence in the substantial off-exchange segment of the U.S. equities market – Complements and expands spectrum of equity trading products, services and solutions available from Cboe’s businesses to enhance customers’ trading experience

Exchanges and Clearing

Correction – Pork Cutout Futures and Options
CME Group
The CME Globex Notice published this morning included an incorrect launch date for the Pork Cutout Futures and Options. The correct notice is available below: Pork Cutout Futures and Options; Effective Sunday, November 8 (trade date Monday, November 9), pending completion of all regulatory review periods, Pork Cutout futures and options will be listed for trading on CME Globex and for submission for clearing via CME ClearPort.

Equity Derivatives: Introduction of Single Stock Futures and equity options; Equity Derivatives: Introduction of Single Stock Futures and equity options
The Management Board of Eurex Deutschland took the following decisions with effect from 26 October 2020:

Cboe Global Markets Agrees to Acquire BIDS Trading, the Largest Independent Block Trading ATS in the U.S.
Cboe Global Markets, Inc., a market operator and global trading solutions provider, today announced that it has entered into a definitive agreement to acquire BIDS Trading, a registered brokerdealer and the operator of the BIDS Alternative Trading System (ATS), the largest block-trading ATS by volume1 in the U.S., subject to regulatory review and other customary closing conditions.

MIAX Exchange Group – Options Markets – Series in RM Made Non-Tradeable
MIAX Options
The following series in Regional Management Corp. (RM) have been made non-tradeable on the MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange effective for today, Friday, October 16, 2020:
Option Expiration Strike Price
RM 06/18/2021 35.00
RM 06/18/2021 40.00

MIAX Exchange Group – Options Markets – Corporate Action Alert: iShares S&P Small-Cap 600 Value ETF (IJS) and iShares S&P 500 Growth ETF (IVW)
MIAX Options
iShares S&P Small-Cap 600 Value ETF (IJS) and iShares S&P 500 Growth ETF (IVW) have both announced stock splits. Associated strike price adjustments will become effective on Monday, October 19, 2020. IJS and IVW options will continue to trade without interruption on the MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange.
All GTC orders resting on the MIAX order books in IJS and IVW will be canceled at the close of business on Friday, October 16, 2020.

Proposal to extend the pilot related to the market-wide circuit breaker in Rule 4121

Regulation & Enforcement

CFTC Votes to Pass Final Rule on Position Limits
Paul Kiernan – WSJ
The nation’s top derivatives regulator voted Thursday to establish limits on the size of speculators’ bets in markets for commodities including gold, cattle and crude oil, completing a long-delayed effort to enact a provision of the 2010 Dodd-Frank Act.

Credit exposure under the new standardized approach for counterparty credit risk: fixing the treatment of equity options
Michael Kratochwil –
The paper addresses issues of the new standardized approach for Counterparty Credit Risk (SA-CCR) regarding the treatment of equity options and explores measures for improvement. We show that the calibration of the SA-CCR for equities is overly conservative and does not align with historically observed volatilities. A recalibration and alignment of the SA-CCR supervisory parameters for equity derivatives with the standardized approach for market risk (SA-TB) improves risk sensitivity. We provide empirical evidence, that the incorporation of economic delta adjustments for path-dependent options should be considered by regulators.


How to Play the Surge in Gun and Ammo Sales Using Options
Steven M. Sears – Barron’s
Gun sales are surging, and so are the stock prices of major gun and ammunition companies.
The demonstrations and looting in Portland, Ore.; New York City; and elsewhere have scared people. Ammunition, rifles, shotguns, and pistols are now hard to buy, according to numerous reports. Tactical gear like chest rigs that carry extra magazines and battle equipment are also hard to find.


Save the Date for the Annual Chicago Conference on Futures and Derivatives
Thompson Coburn LLP
Between the pandemic and the resulting financial devastation, the futures and derivatives markets have displayed unprecedented volatility. Add working from home to the mix and compliance has never been more challenging.
In response, we are offering a two-hour webinar on the current state of regulation and enforcement in our industry. At no cost, you can hear from regulators and enforcement attorneys about the latest developments and earn two hours of CLE.
Tuesday, October 20, 2020
1:00 PM – 3:00 PM CST

FIA Disaster Recovery Test
The 17th Annual Industry-Wide Disaster Recovery Test
24 October 2020 • 9:00 AM – 5:00 PM EST
On October 24, 2020, the futures industry will conduct its 17th annual FIA Disaster Recovery Test.
The annual exercise, an initiative of the FIA Market Technology division, is a coordinated industry effort to test business continuance, process recovery, connectivity and functionality between exchanges, clearinghouses and their member firms. Participants are provided with an opportunity to test the resiliency of their trading systems by conducting order entry from alternate recovery sites and verifying connectivity with exchanges and clearinghouses.
The test remains a valuable apparatus for the industry to assess its response to potential disaster scenarios and is an extraordinary example of a collaborative effort across the futures industry.


‘Big Bang’ Shift to SOFR Away From Libor Shouldn’t Scare Anyone
Brian Chappatta – Bloomberg
If everyone across global financial markets is prepared for a “big bang,” will it truly be a big bang?
That, in a nutshell, is what banks and other institutions exposed to interest-rate swaps on more than $80 trillion in notional debt are about to find out starting this weekend. The secured overnight financing rate, or SOFR, will suddenly replace the effective federal funds rate in valuing these derivatives in what’s seen as a big step forward to leading the financial system away from the London interbank offered rate benchmark that has dominated the lending world for about five decades.

‘Young and dumb’ traders have created a ‘total nightmare’ in the stock market, fund manager warns
Shawn Langlois – MarketWatch
That’s Cole Smead, president of Smead Capital Management, explaining in a CNBC interview on Thursday how “young, dumb” investors have created a “total nightmare” in the current climate.
Smead went on to say that these nosebleed valuation levels are an example of a “stock market failure” at the hands of these inexperienced millennials who have gotten lured in to taking oversized risks in equities for the first time in their lives.

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Past Options Newsletters

The Spread – July 30, 2021

The Spread – July 30, 2021

Earnings season in full bloom; Options lead year-to-date derivatives volume; Robinhood’s IPO; John gets real with Get Real VR: Conflicting factors underpin volatility; Cboe cleared for fall European competition; and the Cboe Options Institute’s Kevin Davitt talks about vega in this week’s “Term of the Week.”

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