Stocks Have Rarely Been This Quiet in the Past 50 Years; Fed’s Kaplan Warns Central Bank Actions Are Driving Up Risk Taking

Jan 16, 2020

Lead Stories

Stocks Have Rarely Been This Quiet in the Past 50 Years
Amrith Ramkumar – WSJ
The S&P 500 is in one of its longest streaks without a 1% daily move in the past five decades, highlighting how the latest leg of the stock-market rally has been a gradual climb rather than a euphoric surge.
The broad equity gauge hasn’t moved 1% or more in either direction since mid-October, its sixth-longest streak since the end of 1969 and third-longest since the end of 1995, according to Dow Jones Market Data.

Fed’s Kaplan Warns Central Bank Actions Are Driving Up Risk Taking
Michael S. Derby – WSJ
Federal Reserve Bank of Dallas leader Robert Kaplan said Wednesday central bank actions, most notably its injections of liquidity into financial markets, are boosting investors’ risk taking, adding he would like to find a way soon to pare back the expansion of the Fed’s balance sheet.

Highlights from ORC19 Options Conference
John D’Antona Jr. – Trader’s Magazine
The Eighth Annual OptionMetrics Research Conference (ORC19) recently brought together international academia and financial professionals from around the globe on October 28, 2019 at Fordham University in New York City, to share ideas and increase understanding of the options markets. Dean Curnutt, Founder and CEO of Macro Risk Advisors, offered perspective on the current market in his keynote called “Steroids, Credit Growth and the Derivatives Blow Up Hall of Fame.” In his talk, Curnutt detailed retrospective blow-ups in the derivatives market—from energy future losses in 1993, to credit default swaps in 2012—what happened, and why.

Russell Rhoads’ Derivatives Look Forward: New Options-on-Futures Markets
Russell Rhoads – TABB Forum
2019 saw a slight decline in exchange-traded options volume following 2018’s record year. But average daily volume for options on futures, led by the interest rate complex, was up year over year, and CME Group enjoyed a record year, with more than 4 million options-on-futures contracts traded daily on average. Looking to capitalize on the momentum, CME is starting off 2020 with the launch of both options on SOFR futures and options on Bitcoin futures contract, reports TABB Group head of derivatives research Russell Rhoads. In his first look forward for the new year, Rhoads discusses the success of the underlying futures as well as how the introduction of options on futures should improve the liquidity and information flow with respect to both underlying markets.

Investors see smoother path for U.S. stocks as Warren’s election odds slip
April Joyner – Reuters
Traders are less worried about political uncertainty in the run-up to the U.S. presidential election, with former Vice President Joe Biden remaining strong in the polls while Senator Elizabeth Warren has lost ground.
Implied volatility, which measures expectations for outsized equity price moves, has fallen significantly in the past few months for healthcare, financials and energy – sectors considered at risk of disruption or increased regulation under a Democratic president.

Exchanges and Clearing

Equity Index Highlights – January 2020 edition
2019 can be described as an impressive assault on the wall of fear. Sure, there was some stuttering along the way but nearly all broad equity market benchmarks finished 2019 with strong double-digit growth and were the strong outperformer across the major asset classes after dividends reinvested. Even against the backdrop of a low to negative yield environment, it looks difficult to see a repeat for 2020. Traders and investors already had to digest the latest U.S.-Iran tensions and evaluate if it may develop into a more serious conflict. Meanwhile, last year’s on-going story, escalating and de-escalating trade tensions between the U.S. and China. seems likely to continue through 2020 and we’re also entering the final chapter of the Brexit saga. And, there is of course no small matter of the U.S. elections in November with the Democratic primaries beginning next month. A whole new wall needs to be assaulted again.

Regulation & Enforcement

UK regulators launch fresh push to switch away from Libor
Financial Times
UK financial regulators have stepped up warnings to major banks and insurers to sever their links with Libor, as part of a growing push to meet a 2021 deadline for moving away from the notorious benchmark.
The Bank of England and Financial Conduct Authority put senior managers of firms on notice on Thursday that it is demanding to see “clear evidence of engagement” from next month that they are ending their Libor addiction, to make sure the switch from the scandal-tainted rate happens by the end of next year, when the benchmark should cease to exist. Regulators told firms that cash products linked to sterling-denominated Libor must cease by September.


DASH launches new trading system for US listed options smart routing
Joe Parsons – The Trade
US agency brokerage DASH Financial Systems has launched an enhanced liquidity solution within its listed options routing service, SENSOR. DASH ATS is an alternative trading system designed to meet certain liquidity sourcing challenges that have become inherent in the US listed options market. Through DASH ATS’ automated request for quote (RFQ) process, market makers and liquidity providers can respond to client orders with their quotes.


The Stock Market May Be About To See A Sudden Surge In Volatility
Seeking Alpha
Volatility in the stock market may be poised to rise in the days ahead, at least based on some options that have recently traded for the VIX. There have been two particularly noticeable trades in recent days that seem to suggest a sudden spike in volatility.


Implications: 2019 Payments For Order Flow Flat vs. 2018
With three quarters worth of financial reports for calendar 2019 long in the bag, it is not much of a courageous leap for us to deliver an estimate for order routing revenue – otherwise more notoriously known as payment for order flow (PFOF) – for the full year. And, with the quarterly earnings season coming in the month ahead, it won’t be long before we are able to test the accuracy of this estimate. In the chart below, Alphacution extends our prior analysis not only to include 2011 and 2012 but also, more relevantly, to include the year just completed; thereby extending to nine years from six our focus on five of the primary players in retail order flow for US equity markets who also disclose order routing data: TD Ameritrade (soon to be acquired by Charles Schwab); E*Trade; the aforementioned Charles Schwab; the disruptive upstart, Robinhood; and Interactive Brokers. Here, we note that the year-over-year comparison – 2018 to 2019 – is essentially estimated to be flat.

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