The Buffett Put Trade; Hours-Long CME Outage; Making 19,267% in China and Losing It in 24 Hrs

Feb 27, 2019

Observations & Insight

Remarks Of CFTC Commissioner Brian Quintenz At DerivCon 2019
Press Release
The game of Polo was created 2000 to 2500 years ago during the Persian Empire and was first conceived as a training tool for the military cavalry. It quickly developed into a formal competition among nobles, and Persians adopted it as their national sport around 600 AD. Polo spread through various regions in Asia before taking root in India in the 13th century. It wasn’t until the mid-1800s during the Colonial Era when it was embraced there by the British, who brought the sport back to the British Isles, formed clubs, and established rules.

****SD: I’m including this primarily because of the polo anecdote.

Lead Stories

The Buffett Put Trade – Year-End 2018
Russell Rhoads – TABB Forum
Last weekend, Twitter was abuzz with commentary and analysis of Berkshire Hathaway’s 2018 financials, which were shared on Saturday morning. While the majority of the focus is on what stocks Warren Buffett has purchased or sold as well as the performance impact of various Berkshire holdings, my attention is always on what Buffett refers to as his equity put trade. This trade has been around for some time, practically overlapping with the now famous statement in which Buffett referred to derivatives as weapons of mass destruction.

CME Group futures trading resumes after hours-long halt
Saumya Vaishampayan – MarketWatch
Electronic trading across CME Group Inc.’s futures markets resumed late Tuesday after technical problems triggered an hours long trading halt.
The problem started at 7:39 p.m. Eastern time and trading across all markets on CME’s electronic platform was halted about 28 minutes later, according to a CME spokeswoman.

****Other sources: the Financial Times, Bloomberg, Reuters, and the WSJ

How to Make 19,267% in China and Lose It All in 24 Hours
Michael Patterson – Bloomberg via Yahoo Finance
Even by the boom-bust standards of China, the moves are incredible: gains as large as 19,267 percent in one trading session, a near-complete wipeout in the next. Welcome to the country’s options market, where outsized swings are par for the course and trading has never been more feverish. As volatility in Chinese stocks soars, some brave speculators are using options to magnify their bets.

JPMorgan investment bank boss expects steep trading falls
Paul Clarke – Financial News London
The chief executive of JPMorgan’s corporate and investment bank expects first-quarter revenues in its sprawling sales and trading business to be down by “high teen” percentages.
Daniel Pinto’s comments, made at the US bank’s investor day on February 26, will dampen Wall Street hopes of a trading bounce-back after a tough end to 2018.

Sterling 2-mth implied vols tumble, 2-week vols rise as March 12 vote in focus
wo-month sterling/dollar implied volatility tumbled on Wednesday to approach three-month lows as concerns of a no-deal Brexit on the scheduled EU departure date of March 29 eased, while two-week implied volatility nudged higher.

Commodities Are Good News for Banks Again as Revenues Rebound
Nicholas Larkin – Bloomberg (SUBSCRIPTION)
Raw-materials revenue at top banks jumped 45% to $3.6 billion; That follows three years of deteriorating results: Coalition
Commodities revenues at major investment banks have finally picked up.

****SD: Reuters with the news here.

Forex traders hope for March relief from volatility doldrums
Tommy Wilkes – Reuters
Price swings in the world’s most-traded currencies have plummeted as a dovish shift by major central banks reversed a brief revival at the end of 2018, and traders are hoping events such as Brexit will shake up moribund markets next month. Volatility is crucial for traders, who can wring out more profits when prices move wildly. But the euro/dollar exchange rate — the world’s most-traded currency pair — is stuck in its narrowest quarterly trading range since the euro’s inception.

Is the Stock Market More Volatile Now Than Ever Before?
Fisher Investments in Reuters
During periods of heightened stock market volatility, some investors believe “this time around is worse than before.” Sometimes that’s true. For example, 2008-2009 was a volatile period for stocks, but the recent past has been volatile, too. Since 2008 we have had a handful of scary corrections, including a big one between 2015 and 2016. 2017 was a somewhat steady year, but 2018 was more erratic. Markets go through periods of high and low volatility regularly. It’s normal! And higher volatility isn’t necessarily a bad thing. Like so many things, volatility cuts both ways and you generally won’t hear much handwringing when it cuts to the upside.

****SD: Not a newsy story, but some fun data in there. For instance: “The most volatile year in history was 1932—when the standard deviation was 65.4%. But stocks were down just 8.9% for the year” and “the second most volatile year ever was 1933. Standard deviation was 53.9% but stocks rose a massive 52.9%.”

Exchanges and Clearing

Options market is still “opaque” – CCP12
James Thursfield – Global Investor Group (SUBSCRIPTION)
More analysis is required to assess the embedded risk that large uncleared options markets pose, according to the head of CCP12

****SD: The full PDF of the CCP12 report can be found here.

HKEX sets profit record after IPOs and turnover surge
Alun John – Reuters
Hong Kong’s stock exchange operator on Wednesday said 2018 profit surged 26 percent to a record high, meeting expectations, boosted by fees from a number of mega IPOs in the first part of the year as well as clearing fees and strong trading.

Regulation & Enforcement

EU agrees tough post-Brexit financial services rules
Jim Brunsden – Financial Times (SUBSCRIPTION)
The European Union has agreed tough rules for investment firms wanting to operate in the bloc after Brexit, making clear that London’s financial services industry will have to stick closely to EU standards on everything from capital requirements to bonuses in exchange for market access.
The European Parliament and the bloc’s national governments reached a deal on the access rules on Tuesday as part of a broader reform of how the EU regulates firms such as broker-dealer banks, asset management companies and investment advisers.

****SD: Meanwhile, UK financial watchdog warns market at risk from no-deal Brexit (via the FT).

Sebi fines 4 entities Rs 22 lakh for fraudulent trade in BSE stock options
PTI via Economic Times
Markets regulator Sebi has slapped a total fine of Rs 22 lakh on four entities involved in fraudulent trade practices in the illiquid stock options segment on BSE.
In separate orders passed on Wednesday, Sebi levied a fine of Rs 5 lakh each on Sanjay Kumar Mahipal, Ram Avtar Mahipal, Vora Financial Services and Rs 7 lakh on Kishan Gopal Mohta.


Market Rally Means Investors Must Catch Up or Hope It Fails
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
For investors who have missed the epic global stock rally this year, yet worry about jumping on the bandwagon too late, strategies including derivatives, defensive or dividend stocks are being touted as a way out.
Investors have pulled over $30 billion from global equity funds since the start of the year, analysts at Jefferies Financial Group Inc. wrote in a note Friday, citing EPFR Global data. That left them out in the cold as the MSCI AC World Index climbed 11 percent over the same period. With the average equity hedge fund is up only 6 percent this year, according to Goldman Sachs Group Inc., some so-called smart money also underperformed.

Shell-Shocked Stock Investors See No Reason to Trust Asia Rally
Min Jeong Lee, Matthew Burgess and Abhishek Vishnoi – Bloomberg (SUBSCRIPTION)
Asia stocks just notched their best streak in a year, China’s in a bull market and momentum indicators are white hot. But while money managers say they welcome the recovery from last quarter’s pummeling, they have yet to find any good reason to trust it.
Even the ones who avoided selling everything before markets turned around are preaching caution. Andrew Jackson, head of Japanese equities at Soochow CSSD Capital Markets, is long some technology shares but says he will sell at the first sign of trouble. Olivier d’Assier at Axioma Inc. advises buying cheap hedges as the U.S.-China tariff saga drags on.


Citadel’s Ken Griffin forecasts more market volatility in 2019
Lindsay Fortado – Financial Times (SUBSCRIPTION)
Ken Griffin, the billionaire founder of the hedge fund Citadel, says he is optimistic about creating lucrative trading opportunities amid what he expects to be a continuation of the heightened volatility that whipsawed financial markets last year.
“The rapidly changing economic landscape and the fast-evolving business landscape across major sectors such as retail, technology and healthcare should provide many opportunities for us to thoughtfully deploy your capital,” he said in an annual letter to investors.

****SD: This story… maybe don’t bother. TL;DR – Griffin is successful – blah blah blah – his funds are looking to see if trade talks reach “constructive” ends, what goes on with Brexit, and how things will shake out in Italy. That’s it.

What History Says About Where the Stock Market Goes Next
Ben Levisohn – Barron’s
We continue to watch with a fascination as the stock market refuses to sell off—the Dow Jones Industrial Average dipped just 33.97 points, or 0.1% on Tuesday, what counts for a drop these days.

Volatility Spurs Institutions to Beef Up Their Tactical ETF Use
Carolina Wilson – Bloomberg (SUBSCRIPTION)
Exchange-traded funds are getting a boost from market volatility.
Heightened turbulence is spurring greater tactical use of ETFs by institutions, a new study sponsored by BlackRock Inc., the world’s largest asset manager, found. These large users allocated an average 25 percent of their assets to ETFs in 2018, up from 19 percent a year earlier, according to the survey, which was conducted by Greenwich Associates.

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