Observations & Insight
The Spread – Believe in Ghosts? – 10/26
What’s the deal with October?
Watch the video and see the stories referenced here »
****SD: Mike Forrester, JLN’s jack-of-all-video-trades, got to play with some different effects when producing this episode of “The Spread.”
The Get-Rich-Quick Scheme That Almost Killed a German Soccer Team; An electrician’s odd plot to make $607,933.50.
Thomas Rogers – Bloomberg (SUBSCRIPTION)
The bombs were ready to detonate when the black-and-yellow bus pulled into L’Arrivée Hotel & Spa, on the outskirts of Dortmund, Germany, on April 11, 2017. The driver, Christian Schulz, had arrived to take the players of Borussia Dortmund, one of the country’s best soccer teams, to their Champions League tournament quarterfinal in nearby Signal Iduna Park. Dortmund was set to play AS Monaco and hoped to move a step closer to Europe’s most prestigious club trophy.
****SD: At the center of it all? 60,000 put options.
MIH selects OneTick data processing platform for two new exchange venues
OneMarketData, LLC, the creators of OneTick, the leading solution for event stream processing and Tick Data management, today announced that Miami International Holdings, Inc. (MIH) has chosen OneTick, OneMarketData’s proprietary high-performance tick capture and streaming analytics engine, for two additional exchanges: MIAX Emerald, LLC and the MIAX Equities Exchange.
The Importance of a Systemically Important Financial Market Utility
John Fennell – FOW
Following the global financial crisis in 2008, policy makers identified one of the major risks to the financial system to be contagion with the unregulated over-the-counter (OTC) market. This was caused by the opaqueness associated with the health of one’s counterparties, which ultimately resulted in the freezing up of the OTC market.
At the same time, however, the regulated exchange-listed market functioned in an uninterrupted fashion. This was largely attributable to the performance of central counterparties such as OCC, which is the world’s largest equity derivatives clearing organization. A central counterparty (CCP) interposes itself between counterparties to contracts traded in financial markets, essentially becoming the buyer to every seller and the seller to every buyer and ensuring the performance of open contracts.
****SD: The OCC cleared 31,442,618 options contracts on Friday, October 26. The ADV for 2018 is 20,236,797 options contracts. In case you missed it, we released a video with OCC President and COO John Davidson last week that covered the lessons learned from the financial crisis. The key takeaways from that are never estimate a fat tail and liquidity reigns supreme.
Rates Traders Brace for Chaos as Fed, Libor and IOER All in Play
Edward Bolingbroke – BloombergQuint
As turmoil in U.S. markets shows little sign of abating, rates traders are starting to aggressively position for a wide array of outcomes heading into December’s Federal Reserve meeting.
Robinhood: a cool app and no commission. What can go wrong?; Despite promising ‘no jargon, only the facts’ the trading platform’s 606 filings are unusually sparse
John Dizard – Financial Times (SUBSCRIPTION)
There can be little doubt that mobile devices make us stupid. They make us stupid about personal relationships: count the people you see having dinner à deux while wordlessly peering into tiny screens. They make us stupid about politics: nothing gets deeper than a tweet any more. And they make us stupid about trading shares: I hope that professionals with fiduciary responsibility do not execute equity trades for their clients on mobile screens. Yet intelligent people do stupid things, especially when those are made easy and quick.
****SD: If it’s free to make a trade, it makes sense you might be less inclined to put a lot of thought into it.
Options Suggest Big Moves in Facebook, Apple, Alibaba Stock
Gunjan Banerji – WSJ (SUBSCRIPTION)
Stock investors stung by volatility this earnings season are betting that the tumult in technology shares will continue. Investors are pricing in outsize swings for Facebook Inc., Apple Inc. and Alibaba Group Holding Ltd., when the companies release their quarterly results this week. Options prices forecast a swing of 8.2% in Facebook shares in the days after the social-media company posts earnings on Tuesday after the market close, data from Trade Alert showed as of Friday. That’s much bigger than the average move of 5.5% that Facebook has posted following its last eight quarterly releases, options data from Trade Alert show.
****SD: These are some huge earnings events in an already uncertain trading environment that will have outsize effects on the market. Here’s a link to Cboe’s Nasdaq VIX (VXN).
Exchanges and Clearing
Brokers Scramble to Inform Clients about Euronext Connectivity Issues
Victor Golovtchenko – Finance Magnates
Monday morning started with some market issues as to European equities markets operator Euronext experienced some technical difficulties. The company managed to resolve them as of the time of publication.
The issue affected several broker feeds which have been offering access to European equities markets. Interruptions also affected fixed income, ETFs, funds segments, and derivatives markets.
****SD: Bloomberg’s take here.
Carrots fail to bring FPIs to India’s derivatives markets
Pavan Burugula – Economic Times
Foreign portfolio investors (FPIs) continue to be reluctant participants in the Indian derivatives market despite several measures taken by local exchanges and the market regulator to bring them to Mumbai.
****SD: Sooo, bring in the stick?
Surge in equity futures, options spells trouble for retail investors
Business Line Research Bureau
Heightened volatility in the equity market has resulted in record volumes in equity futures and options traded on the NSE this calendar. This has increased the divergence in turnover between the cash and derivative segments. Retail investors, who account for a chunk of derivative trading, could face higher risks in this situation.
A Missed Opportunity to Enhance US Markets: A Review of Two Days in DC
Stacey Cunningham – President at NYSE via LInkedIn
This week, industry leaders met in Washington for the Securities and Exchange Commission’s roundtable on exchange market data and connectivity. Over the course of two days, some of the brightest minds in the financial services industry went back and forth over the framework and fees associated with accessing equity markets and information.
Regulation & Enforcement
Why we could all pay the price for obscure derivatives rules; An EU-US dispute over financial regulation could determine the price of hedging risk
Patrick Jenkins – Financial Times (SUBSCRIPTION)
In the jargon-filled world of financial regulation, the concept of deference has evolved from a simple expression of respect and courteousness into something far more barbed and Machiavellian.
EU shows no sign of heeding U.S. threat over derivatives clearing
Huw Jones – Reuters
The European Union is proposing to give the European Central Bank sweeping powers over foreign clearing houses in times of market stress, an EU document showed, as the bloc shows little sign of heeding U.S. calls to water down the plans.
OPINION: Principles May Solve Market-Data Woes
Rob Daly – MarketsMedia
Listening to the market data and market access roundtable hosted by the U.S. Securities and Exchange Commission, one thing has become abundantly clear: The equities market structure has become so complicated that regulators cannot pull on a single string like SIP reformation without having to rethink the entire market structure.
London forex traders found not guilty in U.S. rigging case
Brendan Pierson – Reuters
Three former London-based currency traders were found not guilty on Friday of U.S. charges that they schemed to rig benchmark exchange rates, the latest criminal convictions to emerge from a U.S. probe into the multitrillion-dollar foreign exchange market.
U.S.-Japan Tug of War Keeps Yen Traders on Their Toes This Month
Chikako Mogi and Cormac Mullen – Bloomberg (SUBSCRIPTION)
Yen has shown strength in U.S. hours, weakness in Asia trading; Traders see pattern in dollar-yen pair amid stock volatility
A tug-of-war between Japanese and American traders has been keeping yen watchers busy in October, according to a pattern which has emerged in daily price moves for the currency several times this month. On those days, the yen has shown a tendency to strengthen during U.S. trading hours, as stock market volatility sparks a flurry of haven bets, before weakening again in the Asian session as domestic flows take precedence and the bullish traders back off.
Bond Traders, Spooked by Tumult in Stocks, Doubt Fed’s Rate Path
Katherine Greifeld – Bloomberg (SUBSCRIPTION)
Confidence in U.S. central bank’s 2019 tightening plans wanes; Jobs data could prove reality check for rate-hike naysayers
The bond market is losing confidence in the Federal Reserve’s policy tightening projections after a punishing stretch for U.S. stocks.
****SD: “Eurodollar options activity suggests the same, with traders starting to ponder the possibility of a Fed respite at year-end.” From TheStreet.com – Traders and Trump May Wait in Vain for Fed to Execute ‘Powell Put’
Panic has yet to peak in this stock market meltdown — here’s why Wall Street thinks the crash has only just begun
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
The stock market has gotten crushed over the past couple weeks, with the benchmark S&P 500 falling into correction territory and erasing its gains for the year. Despite the damage that’s already spread throughout equities, experts across Wall Street warn that the sell-off has further to run.
Did UVXY Investors Just Get Cold Feet?
Bernie Schaeffer – Schaeffer’s Investment Research
The ProShares Ultra VIX Short-Term Futures ETF (UVXY) was one of many volatility derivatives to get an overhaul after the Cboe Volatility Index (VIX) “explosion” that rattled markets in the early innings of 2018. Now, rather than tracking double the daily return of short-term VIX futures (a weighted mix of first- and second-month futures with an average maturity of one month until expiration), UVXY aims to return 1.5 times the projected volatility in stocks over the next month.
China’s Yuan Nears Decade Low as Brief Period of Calm Ends
Tian Chen and Enda Curran – Bloomberg (SUBSCRIPTION)
Chinese currency has fallen 9 percent in the past six months; Traders boost bearish bets as capital outflows accelerate
After a quiet few weeks, the yuan is center stage again.
Could a Severe Equities Selloff Prolong Economic Expansion?
Erik Norland – CME Group
Could an equity market correction prolong the nearly decade-long U.S. economic expansion, thus delaying the onset of any recession? It seems like an odd, counterintuitive question but the truth is that a sharp pullback in equities might be exactly what is needed to keep the Federal Reserve from inadvertently throttling the economic expansion with one rate hike too many.
Seoul to pour $440m into propping up stock market; Move echoes other Asia efforts and comes as benchmark index faces worst month in a decade
Bryan Harris – Financial Times (SUBSCRIPTION)
South Korea has set up a multimillion dollar fund to prop up local stocks, which have slumped in recent weeks amid concerns about regional geopolitical tensions and the outlook for the global economy. Seoul’s move follows similar attempts at reassurance by Beijing, which this month rolled out a series of stimulus measures after a swingeing sell-off in its key CSI 300 index.