The Stealthy Bear Stalking the Dow; The Short-Volatility Trade Is Now So Big It’s Starting to Break

Oct 22, 2019

Observations & Insight

Correction on my earlier comment in today’s JLN Newsletter: the OCC’s proposed new regulatory committee was not purely a “good faith” gesture towards the SEC. It was actually part of the OCC’s settlement with the SEC on October 4. The “good faith” aspect of this committee’s inception comes from the fact that, although the OCC was not required to act on the settlement until 2020, they chose to be proactive by initiating it before the month was out.~MR

Lead Stories

The Stealthy Bear Stalking the Dow
James Mackintosh – WSJ
Could we be in a stealth bear market? On the face of it, the question is bizarre: a bear market is usually defined as a 20% fall from a peak, but the S&P 500 is just over 1% off its all-time high. If you hold the index, you’d laugh at the idea that this is anything other than a bull market, albeit a rather slow one. Yet almost every other measure suggests a bear market started last year. Dig into the S&P and it is sending a deeply downbeat message, too.

The Short-Volatility Trade Is Now So Big It’s Starting to Break
Luke Kawa and Yakob Peterseil – Bloomberg
One of the hottest strategies of the bull market for stocks may be getting too popular for its own good, placing billions of dollars and a slew of money managers at risk of being burned.
The short-volatility trade, where investors sell options to bet against equity price swings, is becoming less profitable. The strategy has in theory made no money for investors 42% of the time since 2018, according to new research, compared with a recent average of about 30%.

Remarks of FIA’s Head of Europe Bruce Savage on European Engagement
FIA’s Head of Europe Bruce Savage gave remarks recently on FIA’s European engagement, cross border and MiFID at the QED event in Brussels. This represents Mr. Savage’s first formal remarks as FIA’s Head of Europe. (as prepared) Good afternoon. My name is Bruce Savage and I am Head of FIA in Europe. I thank Adam Lindmark and QED for providing me with the opportunity to present FIA’s views on the current status and upcoming challenges for European Financial Markets Infrastructure.

The Essential Components of The Risk Management Framework for CCPs
Dale Michaels – CIO Applications Europe
Central counterparties (CCPs) like OCC have performed extraordinarily well during many stressful periods due to innovations such as market-to-market settlements, initial margin models, and default management processes. As the only CCP for al U.S. exchange-listed options trades, OCC manages risk for those involved in options trading by being the buyer to every seller and the seller to every buyer.

Bitcoin Speculators Gain Upper Hand as Derivative Trading Surges
Olga Kharif – Bloomberg
As Bitcoin becomes boring for many in the get-rich-quick crowd with volatility ebbing, trading in derivatives of the largest cryptocurrency is exploding.
At $5 billion to $10 billion a day, the amount of derivatives traded globally exceeds Bitcoin spot volume by 10 to 18 times, according to estimates from data trackers Skew and The volumes were about equal at the start of the year, through definitive figures for both are hard to come by from exchanges.

****JB: Speaking of “boring,” Bitcoin Volatility Set for Comeback After Trading Turned Boring

Clearing reforms set to ‘disrupt’ asset management
Eva Szalay – The Financial Times
Global regulators might have delayed completion of a major reform of derivatives trading rules by a year, but currency markets are already changing in anticipation. One aspect of the reform that investors and dealers can agree on is that trading costs will rise — the question is only how much, and who will pay.

Exchanges and Clearing

Decommission of Legacy Physical Connectivity to Cboe Options Exchange and Cboe Futures Exchange
Applicable Cboe Exchanges: Cboe Options, CFE Effective January 31, 2020, Cboe will decommission legacy physical port connectivity to Cboe Options Exchange (Cboe Options) and Cboe Futures Exchange (CFE) in the Equinix NY4 data center, Secaucus, New Jersey. Connectivity to Cboe Options and CFE will remain available from Equinix NY4 through latency equalized physical connections.

Regulation & Enforcement

OCC revamps regulatory oversight committee following SEC fine
Maddie Saghir – Securities Lending Times
The Options Clearing Corporation (OCC) is seeking to establish a new regulatory board-level committee in order to demonstrate its commitment to regulatory compliance in the wake of its recent run-in with the US Securities and Exchange Commission (SEC) for risk management failures. The new committee, which will meet quarterly, will replace the OCC’s current regulatory oversight working group and will offer guidance in relation to the conduct of OCC’s core clearance and settlement activities. The working group will be disbanded once the new group is in place.


Managing Vendor Consolidation – Decoupling your OMS and Client Connectivity
George Rosenberger – Traders Magazine
With the continued evolution of capital markets, market consolidation is the commonplace order. Smaller technology vendors are being acquired by larger vendors at an alarming rate. The latter are also expanding their offerings through mergers and acquisitions to reduce time-to-market for new solutions and features. Over the course of the past 24 months, we’ve seen billions and billions of dollars change hands, not just from the mergers of tech companies, but financial firms recognizing the need to become more technology-focused—I can think of eight off the top of my head.


How an ‘astonishing’ decline in S&P 500 trading volume could pose risks for investors
Chris Matthews – MarketWatch
As the major equity benchmarks hover close to all-time highs, enthusiasm for the ongoing bull market appears to be mild, based on trading volume. Some analysts fear dwindling volume could spell trouble for investors during the next selloff, setting equity investors up for a repeat of last year’s fourth-quarter swoon of nearly 20%.


This Year’s Hottest Trade: Buying Everything
Gunjan Banerji – WSJ
Stocks and bonds have staged a rare simultaneous ascent, logging the best performance in a quarter-century.
The S&P 500 has advanced 20% in 2019, while Treasurys have rallied. The last time the benchmark stock index rose more than 10% while the Treasury yield fell more than a percentage point in the first three quarters of the year was in 1995, according to Dow Jones Market Data.

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