Observations & Insight
The Spread: Softbank’s Hard Knocks
This week (and last week) on The Spread – regulators publish their takes on global warming, Softbank gets in deep while Robinhood adds guardrails, and more.
The Wildly Popular Trades Behind the Market’s Swoon and Surge; Record options trading and momentum bets are spurring volatility
Gregory Zuckerman and Gunjan Banerji – WSJ
Investors are trading stock options and chasing fast-rising shares at record rates, activity that’s expected to jolt markets through the coming election. A surge in options trading targeted at giant tech stocks by both small and large investors is magnifying the market’s ups and downs. Investors are also simply buying shares that are going up, a strategy that can create its own wild swings in the market.
Awash In Cash
Anita Hawser – Global Finance
With derivatives contracts soaring due to the pandemic, so did OCC’s cash balance. Many companies have drawn down on revolving bank credit facilities to get their hands on much-needed cash. But Amy Shelly, CFO of the Chicago-based Options Clearing Corporation (the OCC), the world’s largest equity derivatives clearing organization, faced a different problem during the pandemic: She was sitting on too much cash as a result of an explosion in clearing volumes. “What we saw was record volatility and capital flows, which caused our volumes to skyrocket,” she says. “As volumes increased, open positions and margins increased. Our cash balances went up twentyfold in March, which put strain on our banking partners. My treasurer and I were on the phone with our banks every day trying to understand how much cash they could take.”
Brexit risk premium returns to UK markets
Ritvik Carvalho – Reuters
The latest bout of sabre-rattling between Britain and the EU is upping the premium investors demand for holding UK assets for fear of a chaotic Brexit outcome with hugely damaging consequences for the economy.
The pound is down 4% against the dollar this month. Now as the UK parliament starts debating legislation that defies international law by breaching the EU divorce treaty, British shares, option markets and bonds are also swiftly pricing the Brexit premium.
Against the Odds, Some Bitcoin Traders Are Betting on a $36K Price by Year’s End
Omkar Godbole – Coindesk
The Deribit crypto derivatives exchange is seeing increasing investor interest in bitcoin options that would profit from prices rallying as high as $36,000 by the end of 2020. As of Sunday, call options at $36,000 and $32,000 strike prices expiring on Dec. 25 were seeing the most daily positions opened.
How SoftBank and Robinhooders Added Fuel to the Stock Market Boom
Joe Weisenthal and Tracy Alloway – Bloomberg
One of the most intriguing subplots to the 2020 stock market boom has been the speculative fervor with which investors have dived into this market. And it’s not just that participants have bought a lot of stock, but that they’ve been using aggressive options strategies to do so. What’s more, it’s a range of players doing it, from retail traders on Robinhood (and other platforms) to large institutions like SoftBank. On this episode, we speak with Benn Eifert of QVR Advisors, who breaks it all down.
Goldman, Deutsche Say U.S. Stock Selloff May Be Close to an End
Joanna Ossinger – Bloomberg
The recent pullback in U.S. stocks could be close to an end if history is a guide, according to strategists at Goldman Sachs Group Inc. and Deutsche Bank AG.
Its magnitude has matched a “typical” selloff in the S&P 500 since the financial crisis, albeit at a faster pace, wrote a team led by Goldman’s David Kostin in a note Friday. And options positioning — at the core of the weakness — has normalized, noted their counterparts at Deutsche including Srineel Jalagani the same day.
Hedge funds axe their bullish bets on crude oil at the fastest pace in 6 months, and OPEC sees demand taking even longer to recover
Shalini Nagarajan – Markets Insider
Hedge funds are scrapping their bullish bets on crude oil in a sign that earlier optimism on energy is dissipating once again amid the COVID-19 pandemic.
Money managers cut their bullish bets on Brent crude last week at the fastest pace in six months. According to data from the Commodity Futures Trading Commission, the net position held by money managers in the futures market fell by the equivalent of 67.31 million barrels of oil, marking a 36% drop, the largest weekly fall since the depths of the coronavirus crisis in mid-March.
Huobi’s Bitcoin Options offerings leave a mark….. on the CME
Ekta Mourya – AMB Crypto
The first 10 days of September have been eventful, setting the tone for the rest of the month. Huobi Futures, the crypto-derivatives market of the Huobi Group, rolled out BTC Options trading on 1st September, and within 10 days of the launch, BTC Options Open Interest had soared by 110%.
Exchanges and Clearing
MIAX Joins Challengers to Dominant US Exchange Operators
Philip Stafford – Financial Times
UBS, Citadel Securities and Jump Trading are among the investors in Miax Pearl Equities, the new US bourse that aims to break into a market dominated by the New York Stock Exchange, Nasdaq and Cboe Global Markets.
The group’s parent company, Miami International Holdings, will incentivise a group of nine investors, mainly high-speed market makers, to help boost the fledgling exchange’s market share over a 42-month period.
Miami International Holdings Announces Fully Subscribed Strategic Equity Rights Transaction with Leading Equities Firms to Trade on MIAX PEARL Equities Trading to Begin September 25, 2020
Miami International Holdings (press release)
Miami International Holdings, Inc. (MIH), the parent holding company of the MIAX, MIAX PEARL and MIAX Emerald options exchanges (the MIAX Exchange Group), today announced that it has finalized a strategic transaction with industry-leading firms to trade on MIAX PEARL Equities, MIH’s first cash equities exchange. MIAX PEARL Equities will officially join the MIAX Exchange Group on September 25, 2020 when trading begins under MIAX PEARL’s exchange license.
Change to the Market for Underlying Security Used for Openings on MIAX Options, MIAX PEARL and MIAX Emerald for Symbol NMFC Effective Monday, September 14, 2020
New Mountain Finance Corporation (“NMFC”) will transfer primary listing from the New York Stock Exchange to the NASDAQ Global Selected Market (“NASDAQ”) effective Monday, September 14, 2020. MIAX Options, MIAX PEARL and MIAX Emerald will use NASDAQ as the “market for the underlying security” for the purpose of Openings on the Exchange.
Effective September 14, 2020 through September 18, 2020, MIAX Options and MIAX Emerald 2X Opening and Intraday Valid and Priority Quote Spread Relief in All Symbols
Issue Symbol: All Symbols
Reason: In maintenance of a fair and orderly market.
Time: Opening and Intraday
Subject Summary: Please be advised, effective September 14, 2020 through September 18, 2020, the MIAX Regulation Department has granted 2 times opening and intraday quote parameter relief for all symbols on MIAX Options and MIAX Emerald.
MIAX Exchange Group – Options Markets – Corporate Action Alert: Trex Company, Inc. (TREX)
Trex Company, Inc. (TREX) has announced a 2 for 1 stock split. Associated strike price adjustments will become effective on Tuesday, September 15, 2020. TREX options will continue to trade without interruption on the MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange.
All GTC orders resting on the MIAX order books in TREX will be canceled at the close of business on Monday, September 14, 2020.
Additional details about the Trex Company, Inc. (TREX) stock split are provided in the attached OCC Memo.
Options Trader Alert #2020 – 24 Nasdaq Announces Chicago Datacenter Testing Opportunity Saturday September 26,2020
Nasdaq is conducting an important industry test on Saturday September 26, 2020 to ensure readiness for member firms to quickly relocate to our Chicago datacenter if a decision was made to operate that facility as the primary Nasdaq matching engine location. Nasdaq will support a full feature test in order to allow for our members to test their connectivity and functionality in our Chicago datacenter. This test will be held in coordination with other market centers and simulate a normal trading day.
Equity Trader Alert #2020 – 57 Nasdaq Announces Chicago Datacenter Testing Opportunity Saturday September 26,2020
Nasdaq is conducting an important industry test on Saturday September 26, 2020 to ensure readiness for member firms to quickly relocate to our Chicago datacenter if a decision was made to operate that facility as the primary Nasdaq matching engine location. Nasdaq will support a full feature test in order to allow for our members to test their connectivity and functionality in our Chicago datacenter.
Change in Regular Firm’s Clearing Agent
From Registrar’s Office
Notice Date 11 September 2020
Effective Date 11 September 2020
DATE: September 11, 2020
SUBJECT: Change in Regular Firm’s Clearing Agent
The Exchange has been notified that CHS, Inc. has changed its clearing agent to CHS Hedging, LLC for the firm’s Corn, Soybean, Soybean Oil, and Ethanol transactions.
This change is effective immediately.
Regulation & Enforcement
The World Federation of Exchanges issues industry guidance on non-default losses
The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, is today setting out how CCPs ensure that certain non-credit losses that might rarely occur in relation to central clearing are allocated in a transparent, predictable and equitable manner.
Tech Stocks’ Brief Calm May Be Shattered by Options Traders
John Authers – Bloomberg
Is it safe to put a price on technology again? After great excitement, the solemn date of Sept. 11 proved to be the first trading day of the month when the tech-heavy Nasdaq-100 didn’t move by more than 1%, in one direction or another:
The Impending EU CCP Recovery and Resolution Regime and its Impact on EU and non-EU Firms
24 September 2020 • 10:00 AM – 11:00 AM ET • Webinar
On 24 September, representatives from Allen & Overy’s Global Financial Services Regulatory and Bankruptcy practice in London and New York will provide an overview of the EU legislative framework for the recovery and resolution of CCPs operating in the EU, which has now been finalized. The aim of the framework is to reduce the risk of a CCP failing and to establish procedures for the resolution of a CCP that has failed in order to limit impact on the financial system and on public funds. The regime and the changes it will require to EU CCP practices will be relevant to all direct and indirect participants in EU CCPs. The New York team will moderate and draw out the impact of the EU CCP Recovery and Resolution Regime on US clearing members and contrast the EU framework with the US position for CCP bankruptcy and resolution under the CFTC’s proposed Part 190 bankruptcy regulations and other recovery and resolution initiatives for CCPs.”
Newton’s Law of Stock Momentum
Andy Kessler – WSJ
Does this sound familiar: Smart guy owns a stock in March at $200, sells it in June at around $600, but then buys it back in July and August for between $900 and $1,000. By September it’s back at $200. Ouch. Tesla this year? Yahoo in 2000? Nope. That was Sir Isaac Newton getting pulled into the great momentum trade of the South Sea Co., which cratered 300 years ago this month. He lost the equivalent of more than $3 million today. Newton, whose second law of motion is about the momentum of a body equaling the force acting on it, didn’t know that works for stocks too.
(Podcast) Volatility Views 414: Talking VIX, SPIKES, VXX, UVXY and Even Some Whales
Volatility Views – Options Insider