Thinning Liquidity Adds to Headaches for Traders; Rebate Wars Pit Everyone Against Everyone Else

Sep 3, 2019

Observations & Insight

The Spread – Banking On It
JohnLothianNews.com
Activities in big bank options market making, Boris Johnson’s surprise announcement, and James Harden’s offensive basketball acumen are all covered in this week’s episode of “The Spread.”
Watch the video »

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OCC August Cleared Volume Up 10.3 Percent
OCC
-Futures Cleared Volume Up 23.7 Percent from a Year Ago
-Index Options Up 19.6 Percent from August 2018
-ETF Options Up 31.5 Percent from August 2018
OCC, the world’s largest equity derivatives clearing organization, announced today that total cleared contract volume in August reached 478,561,649 contracts, a 10.3 percent increase compared to last August, and the highest total volume for August since 2011. OCC’s year-to-date average daily cleared contract volume is 19,672,145, down 3.2 percent compared to 2018’s record-breaking pace.
/jlne.ws/2UpvZLX

Lead Stories

Thinning Liquidity Adds to Headaches for Traders
As summer wanes, assets from stocks and bonds to currencies and derivatives are hard to trade
Gunjan Banerji and Amrith Ramkumar – WSJ (SUBSCRIPTION)
Investors already preoccupied with the trade battle between the U.S. and China and the prospect of a recession have another frustration: thinning liquidity.
/jlne.ws/2Us23P2

****SD: Per the story: “The number of options available to buy or sell on one of the biggest exchange-traded funds tracking the S&P 500, used to hedge portfolios, fell to the lowest level of the year, Option Research & Technology Services data show.” I do find that phrasing odd though. If it’s SPY – which it has to be – just say SPY, right?

Stock Market Wars in U.S. Pit Everyone Against Everyone Else
Lananh Nguyen – Bloomberg (SUBSCRIPTION)
It’s an arcane, technical part of stock-trading, part of the hidden plumbing behind every click to buy or sell.
But for those who run, regulate and trade in U.S. equity markets, it’s become a battlefield.
At issue are rebates — the payments that exchanges make to top traders and brokers for sending them their business. The point of contention is a two-year government pilot program — a Securities and Exchange Commission experiment — designed to determine whether rebates influence the locations where trades are made.
/jlne.ws/32rb5yJ

What to Dread and Love in Stocks During ‘Bad News’ September
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Nomura expects stocks to climb into mid-month before dropping; LPL says after August declines, S&P 500 ends the year higher
Everything from history to options expiration and buyback calendars may come into play in a September that’s expected to be volatile for U.S. stocks, strategists say.
/jlne.ws/2UsNvi9

The Market Forces That Propelled a Massive Rally in Long Bonds; Recession signals flashed by the bond market may have been exaggerated
Paul J. Davis – WSJ (SUBSCRIPTION)
Long-term bonds have been on a tear in recent weeks with yields tumbling enough to heighten fears of a possible recession ahead. But the bond market’s closely watched signals may have become exaggerated. That is because part of the recent fall in bond yieldsówhich drives bond prices higheróhas been caused by banks, insurers and other investors essentially buying on autopilot, scooping up more bonds because that’s what their pre-existing risk models and investment-hedging strategies tell them to do.
/jlne.ws/2zKh9pV

****SD: Per the article: “‘The lower we go in long-term bond yields, the more demand starts to increase for certain products: gamma hedging, convexity hedging and closing duration gaps,’ said Mr. McAlevey. “You end up with a market that is all buyers and no sellers.” None of these activities kick off a market move, but they can help it gather pace, said [James McAlevey, head of rates at Aviva Investors in London]. Hedging activity linked to volatility strategies can also create forced sellers when yields start to rise. ‘Gamma hedging works both ways,’ he said. ‘A lot of what’s going on is just going to lead to higher volatility.'”

One Obscure Reason for August’s Big Bond Rally: Negative Convexity
A look at the phenomenon in the mortgage market and how it likely exacerbated the slide in Treasury yields
Akane Otani – WSJ (SUBSCRIPTION)
Analysts trying to make sense of the steep slide in bond yields around the world in August are pointing fingers at many things, including slowing global growth and a prolonged trade war. Some are also attributing the push lower in yields to a less easily explained phenomenon: hedging against negative convexity in the mortgage market. We take a look at this obscure finance term and its ripple effect across the bond market.
/jlne.ws/2Urmf3H

Pound slides below $1.20 as election threat adds to Brexit jeopardy
Tommy Wilkes – Reuters
Sterling sunk to a three-year low below $1.20 on Tuesday, as Prime Minister Boris Johnson’s implicit threat to lawmakers to back him on Brexit or face an election sent investors scrambling to dump British assets.
/jlne.ws/2Up91od

****SD: Via FXStreet – Sterling risk premium tracker.

Hedge funds cautious on oil, wait for economy
John Kemp – Reuters
Hedge funds are becoming slightly more pessimistic about the outlook for oil and the economy, though position changes remain small owing to the holiday season in North America and Europe.
Hedge funds and other money managers were small net sellers of petroleum futures and options last week for the third time in the last four weeks, according to an analysis of data published by regulators and exchanges.
/jlne.ws/2MUFAcv

Funds sell more CBOT corn, unfazed by crop concerns and trade deals
Karen Braun – Reuters
Chicago-traded corn futures have largely traded sideways ever since the U.S. government stunned the market on Aug. 12 with a lofty forecast for the domestic corn crop, but speculators have turned sharply bearish on the yellow grain since then.
/jlne.ws/2MS846O

Exchanges and Clearing

Cboe readies Amsterdam hub despite Brexit uncertainty; Trading venue will allow investors across the EU to trade shares of companies based in the bloc
Philip Stafford – Financial Times (SUBSCRIPTION)
Cboe Europe is to set to open an Amsterdam hub that will allow investors across the EU to trade shares of companies based in the bloc, whether or not Brexit happens as planned at the end of October. The stock exchange group, which has an established London operation, will go ahead with its planned launch date of October 1 for a parallel Netherlands operation, even as some UK legislators this week try to prevent their country from leaving the EU without a deal.
/jlne.ws/2PBxvvC

Stockbrokers are bullish low investment threshold for HKEX’s short-term options contracts will attract retail traders
Enoch Yiu – South China Morning Post
Hong Kong Exchanges and Clearing is introducing weekly options contracts from September 16 based on the Hang Seng Index and the Hang Seng China Enterprises Index
The products have a shorter settlement time and low investment barrier, but and can offer higher returns and also come with higher risks.
/jlne.ws/34hf5U9

CME to launch real-time cloud data services
James Thursfield – Global Investor Group (SUBSCRIPTION)
CME Group is to launch real-time cloud data services by mid-October
/jlne.ws/2UrkFPj

Binance acquires crypto derivatives exchange to offer options, futures and perpetual contracts
Steven Zheng and Celia Wan – The Block
Binance is breaking into the futures market following the acquisition of a little-known derivatives platform.
/jlne.ws/2UvSHlx

Eurex incentivizes Eurex Enlight with temporary fee waiver
Eurex Exchange
To foster transparency and to improve efficiency around the negotiation of off-book transactions, Eurex has introduced a fee waiver for its fully integrated RFQ platform Eurex EnLight which will be effective until 31 December 2019.
The temporary fee waiver will apply to Requesters for Eurex EnLight trades.
/jlne.ws/2PAB4C9

Regulation & Enforcement

Filling the LIBOR Vacuum
Levi J. Smith and Aaron Z. Stenz – Lexology
The likely end of the London Interbank Offered Rate (LIBOR) is coming soon, but many banks have not taken adequate steps to protect themselves and their clients from a seismic shift that some have labeled “the next Y2K.”
/jlne.ws/32rfqlv

Technology

Trading firm turns to sports science for a bit of extra pace; OSTC is trying to combat burnout among young traders with wearable tech, an app and fresh insights from sports science
Ben Stokes – Financial News (SUBSCRIPTION)
When one commodities trading outfit realised it needed to fight burnout among its young market whizzes, it turned to the high-tech world of sports science. Star traders who bet on everything from stocks and interest rates to oil and currencies are taking their lead from top athletes, whose psychology is increasingly becoming a source of insights for high-performers looking to win big on the markets.
/jlne.ws/34o7LpN

Zerodha glitch hampers trading on expiry day Clients of Zerodha also faced issues while rolling over their existing positions.
Pavan Burugula – Economic Times
Several clients of discount brokerage Zerodha were unable to execute their trades for large part of Thursday, as the broker’s website faced technical glitch. According to some of the brokerage firm’s clients, the traders were unable to place orders and also faced additional margin blocks. The development assumes significance since Thursday was the expiry for the August series contracts in the futures and options market. They were unable to square-off their positions in time leading to not just financial losses but were forced to take physical delivery of shares on some trades.
/jlne.ws/2UA2Dux

Strategy

Bunds Can Get Richer, So Maneuvering for a Selloff Needs Options
Tanvir Sandhu – Bloomberg (SUBSCRIPTION)
Bunds are trading rich against macro fundamentals, though fading the rally is not compelling in a world of trade uncertainty and bimodal nature of Brexit risk.
Any tactical sell-off in bunds on profit-taking of the extreme ECB easing expectations priced by markets may be captured by put spreads rather than outright short duration.
/jlne.ws/2MOULUV

S&P Stares Down the Rally-Killer
Todd Salamone – Schaeffer’s Investment Research
Last week, market participants ignored headlines pointing to a growing likelihood of a no-deal Brexit, and instead continued to be glued to U.S.-China trade talks. The first of which rallied on Monday morning on unconfirmed reports that Chinese officials had called President Trump showing interest in continuing talks, and then sharply rallied on Thursday when a spokesman for China’s Commerce Ministry commented on the direction of trade talks.
/jlne.ws/32mS8NJ

Miscellaneous

Laid-off bankers abandon bikes worth thousands in car parks; In the heat of the mass lay-offs sweeping the City, bankers and traders are abandoning pricey bikes
Nell Mackenzie – Financial News (SUBSCRIPTION)
The mass lay-offs hitting the City have an unexpected casualty: pricey bikes abandoned in office car parks by fleeing bankers and traders. Financial News has spoken to several City workers at large investment banks who say dozens of bikes, some worth as much as GBP10,000, are rusting at the bottom of skyscrapers in the Square Mile and Canary Wharf. In one case, the bikes were raided for parts by colleagues of the departed executives, said one banker. In some instances, those made redundant walked away from their kit. In other scenarios, people who had left their bicycles in bank car parks, forgot about them and could not be bothered to retrieve them, according to a number of different accounts.
/jlne.ws/34ndiNg

Look Who’s Buying This Dip. Do They Know Better?
Michael Msika – Bloomberg (SUBSCRIPTION)
When equity markets tumbled in August, one group of investors showed unshakable confidence: company insiders. So much that the buy-to-sell ratio of corporate executives in Europe reached its highest level since December, according to data compiled by 2iQ Research.
/jlne.ws/32uR6PP

Recessions have become rarer and more scary
Robin Harding – Financial Times (SUBSCRIPTION)
The world has seldom been worse-equipped to fight a recession. Yet it has never had fewer recessions to fight. That makes the next global downturn difficult to imagine but it will most likely be a traumatic and unlooked-for event, more like the sudden outbreak of a new disease than the annual onset of flu.
/jlne.ws/2MSXsEF

Negative Interest Rates Threaten the Financial System
Jim Bianco – Bloomberg (SUBSCRIPTION)
Former Federal Reserve Chairman Alan Greenspan recently said he wouldn’t be surprised if yields on U.S. bonds turned negative and if they do, it wouldn’t be “that big a of a deal [sic].” That seems to be a sentiment widely held in central banking circles these days, but it’s wrong. Negative interest rates represent a threat to the financial system.
/jlne.ws/2MSGzds

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