Stocks Drop With Risk Aversion Rising; Oil Falls

May 22, 2020

Observations & Insight

Cboe’s Tilly Outlines Exchange Growth Amid Market Disruption
Suzanne Cosgrove – John Lothian News

In a webinar interview Thursday, Cboe Global Markets’ CEO Ed Tilly said the exchange is contemplating reopening the trading floor next month but will not pull the trigger until all the safety protocols have been signed off on. “We’re taking extra precautions before we reopen,” he said.

He also emphasized the value of the trading floor for Cboe customers.

The exchange temporarily pushed to all-electronic trading in the span of just two days in March, abruptly closing its Chicago trading floor in response to the coronavirus pandemic.

“It was such a short time frame — two days — with so much change,” Cboe Chief Executive Officer Ed Tilly recalled in the interview with Kevin McPartland, managing director at Greenwich Associates.

The Cboe floor closed effective Monday, March 16, and exchange staff switched to remote operations. The Securities and Exchange Commission had announced March 14 that it would facilitate a Cboe rule filing to allow the change.

To read the rest of this article, go HERE.


****JJL: In the JLN Bachelier Options Model virtual panel held a week ago, Don Wilson suggested that clearing firms that clear commodity ETFs have an implicit short put risk at the strike price of zero. The ETF holders’ risk ends at zero for the ETF, but the commodity futures can go below zero and that is the risk of the FCM. That may explain why RBC decided to pull back from clearing the business of leading oil ETF USO.

Lead Stories

Stocks Drop With Risk Aversion Rising; Oil Falls
Vildana Hajric and Claire Ballentine – Bloomberg
U.S. stocks fell for a second day as the volatility that has whipsawed investors all week showed few signs of abating. The dollar strengthened and oil snapped a six-day winning steak.
The S&P 500 index was led lower by declines in the energy, financial and materials sectors. The drop comes as traders brace for tension between Washington and Beijing to escalate after China announced plans to impose a national security law on Hong Kong.

USO: Uncleared and present danger
Izabella Kaminska – FT
The United States Oil Fund, currently the world’s most controversial exchange-traded product, has just filed a staggering update to the SEC. (h/t to the FT’s Phil Stafford.)

It notes (our emphasis):

RBC and other market participants , including other FCMs, have taken risk mitigation measures that constrain USO’s ability to invest in the Benchmark Futures Contract and other Oil Futures Contracts. RBC, currently USO’s only FCM, has expressly informed USO that, until further notice, USO may not hold positions in the Benchmark Futures Oil Futures Contract and that it may not purchase any other Oil Futures Contracts for USO’s portfolio through RBC whether or not such purchases would be within the limits permitted by the exchanges. RBC has indicated that such limitation on USO is a result of RBC’s own internal risk management requirements and directions it has received from other regulators in the United States, Canada and the United Kingdom. USO cannot predict with any certainty when and whether RBC will remove these limitations. USO has been engaging in efforts to enter into additional FCM agreements for the purpose of the purchase and sale of Benchmark Oil Futures Contracts as well as other Oil Futures Contracts. To date, USO has not entered into an agreement with any FCM other than RBC and it cannot predict with any certainty when it will do so.

RBC Capital was the USO’s only clearer. RBC is no longer prepared to clear USO’s portfolio. It is specifically not prepared to clear USO holdings in the benchmark front month but also, rather staggeringly, in any other months either.

*****JJL: Why they did not have two clearing firms is beyond me. But then, their other firm may have come to the same conclusion as RBC.

CBOE’s Tilly Emphasizes Value of Open Outcry Trading
John D’Antona Jr. – Traders Magazine
The more things change, the more they stay the same at Cboe Global Markets. And open outcry trading, long the exchange’s hallmark, is vital and will continue, according to Ed Tilly, chairman, President and Chief Executive Officer at Cboe Global Markets. In a webinar today sponsored by Greenwich Associates, Tilly said the exchange was running very smoothly despite days of extremely volatility, closure of its iconic trading floor and absence of floor brokers and alterations to its business continuity plans. Any changes to the exchange have been more modification and alteration rather than wholesale innovation.

Bored Day Traders Locked at Home Are Now Obsessed With Options
Sarah Ponczek, Elena Popina, and Gregory Calderone – Bloomberg
Forget buy-and hold. Stuck at home and dreaming of a killing, bored retail traders are branching out into all manner of Wall Street exotica. Darting in and out of stock options, dabbling in complicated exchange-traded funds, devouring trading how-to books by the dozen — all have become tools in the self-directed portfolio playbook. Locked down and socially distant with lots of time and (apparently) money to spare, they’re leveraging zero-percent brokerage fees in new and surprising ways.

Exchanges and Clearing

Bitcoin trading by institutions doubled this year on Binance
Will Heasman – Decrypt
Institutional client sign-ups and trading volume in the crypto industry are increasing rapidly in 2020, according to Binance, Houbi, and the Chicago Mercantile Exchange (CME). Widely regarded as a holy grail for the crypto markets, institutional engagement has been slow in coming. However, three exchanges that shared their institutional data with Decrypt have noted a significant uptick in engagement, both on the spot side and the derivatives markets.


As boomers hand over the keys to the stock market, sustainability-minded younger investors let their consciences lead
Andrea Riquier and Rachel Koning Beals – MarketWatch
At age 25, Kevin Guardia has already been investing for nearly half his life. Guardia’s father opened a small brokerage account for his son when Kevin was in junior high, and the young man started to dabble in buying and selling stocks just as the long rebound from the financial crisis got underway.
Now that he’s on his own, Guardia tackles investing more purposefully. “The whole point of buying a stock is the discounted value of future earnings,” he said. “So you want earnings that are going to go up, but you also want earnings that will be good for the future of this world.”

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