Tower Battle Beside World’s Biggest Exchange Ends in Settlement; Look Who’s Sitting Out the Latest VIX Rally

May 14, 2019

Lead Stories

Tower Battle Beside World’s Biggest Exchange Ends in Settlement
Nick Baker – Bloomberg (SUBSCRIPTION)
The court battle has ended over a controversial communications tower near the suburban Chicago data center that houses the world’s largest exchange.
CyrusOne Inc. last year sued the city of Aurora, Illinois, and a company called Scientel Solutions LLC to block Scientel from erecting the structure. The parties settled the dispute through mediation, according to a Friday update to the case’s docket in federal court in Chicago. There were no details of the settlement.

****SD: For some of the background on this case, see this episode of The Spread – The Colo Down-low.

Look Who’s Sitting Out the Latest VIX Rally
Crystal Kim – Barron’s
Trade-war terrors have pushed the fear gauge – formally known as the Cboe Volatility Index, or VIX – to highs not seen since January. That kind of spike usually attracts investors betting that the VIX will fall, per the “What goes up must come down” maxim.
Yet the recent spikes in the VIX – on Monday and the night of the Christmas Eve Massacre – haven’t drawn the short-selling crowd. And that could mean investors expect volatility to remain at elevated levels.

****SD: More on recent VIX action from the WSJ – Fear Flares Up as Investors Brace for More Market Volatility.

Hedge Fund Led by Ex-Goldman Star Trader Seeks ETF Reinvention
Ksenia Galouchko – Bloomberg (SUBSCRIPTION)
Nancy Davis rode the boom in prop trading at Goldman Sachs Group Inc. until the financial crisis hit. A decade later, she’s pivoting from hedge funds to the red-hot ETF industry, as shifting investor appetite changes the game for fast-money traders. The founder of Quadratic Capital Management LLC, which specializes in options-based macro strategies, is listing her first ETF on Tuesday — as active managers battle pressures on fees and costs and struggle to outperform passive peers.

****SD: The active versus passive debate is dated. ETPs aren’t solely mainstream index replicators anymore. They can be a wrapper for more exotic, managed strategies. The nice thing is that investors without the capital to invest in a managed fund with a high minimum investment have the opportunity to get a piece of the action. Press release regarding the launch of Quadratic’s IVOL ETF can be found here.

Judges mulling challenges to commodity spoofing trading cases
Dan Mangan and Dawn Giel – CNBC
Decisions expected soon by two judges could restrict federal prosecutors’ ability to criminally charge people for the futures trading tactic known as spoofing.
Spoofing is placing an order for a commodities trade with the intent to cancel that order before it is actually executed. The goal is to affect the price of the commodity and benefit from a preexisting trading position.

U.S. Stock Trading Hasn’t Spiked. That Could Fuel a Bigger Rout
Rachel Evans – Bloomberg (SUBSCRIPTION)
The S&P 500 Index has fallen more than 4% during the last six days, but you wouldn’t know it from trading volume.
An average $352 billion has crossed U.S. exchanges each day this month through May 10, according to data compiled by Bloomberg. That might sound like a lot, but activity is still far lower than in October, November or December.

****SD: Yet options volumes continued to boom during the tweet rout. (I don’t know what this period of market moves will be called but that’s my working title.) Yesterday’s cleared volume was 25.4 million contracts, well above the YTD ADV of 19.5 million. Also from Bloomberg: Markets Say Most of the Bad News on Trade Is Already Out There.

In Rattled Stocks, Hedge Funds Sticking to Time-Tested Blueprint
Lu Wang and Melissa Karsh – Bloomberg (SUBSCRIPTION)
Goldman clients buying more single stocks than they’re selling; Most-crowded stocks holding up well during market sell-off
The minute-to-minute news cycle inaugurated two Sundays ago with President Donald Trump’s trade salvos hasn’t chased hedge funds from the market. But it has prompted them to redouble defensive measures.
Gross leverage, a measure of industry risk appetite, rose last week to the highest level since early October as hedge funds boosted bets against stocks through vehicles such as index options, data compiled by Morgan Stanley’s prime brokerage unit showed. At Goldman Sachs, fund clients increased short sales through exchange-traded funds while snapping up single stocks.

Hedge funds cautious on oil as economic outlook darkens
John Kemp – Reuters
Hedge fund managers have started to turn more bearish on oil as concerns about a slowing global economy and an over-extended price rally outweigh fears about sanctions and supply disruptions.

Exchanges and Clearing

Cboe Global Markets Welcomes 16 Barclays iPath ETNs to its Listings Marketplace
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today welcomed 16 iPath Exchange Traded Notes (ETNs) from Barclays to the Cboe Listed Marketplace – one of the single largest transfers the exchange has handled to date. With the addition of the se ETNs, Cboe is now the primary listing venue for an expanded suite of iPath ETNs, including Barclays’ entire set of volatility ETNs. There are currently a total of 18 Barclays ETNs, with approximately $ 1.62 billion dollars in consolidated assets under management, listed on Cboe

****SD: Nice little coup for Cboe to the detriment of NYSE Arca and the NASDAQ Stock Market.

AdvisorShares Pure Cannabis ETF (Ticker: YOLO) Lists Options on CBOE
PRNewswire via Yahoo
AdvisorShares, a leading sponsor of actively managed exchange-traded funds (ETFs), announced today that the AdvisorShares Pure Cannabis ETF (YOLO) has met listing requirements of the Chicago Board Options Exchange (CBOE) and that YOLO options are now listed for trading on the CBOE.

****SD: It doesn’t seem like Cboe’s DPM list is updated with this info, so I’m not sure who has the privilege of making markets in YOLO. For some context, the other weed ETF in the U.S. is the ETFMG Alternative Harvest ETF, ticker MJ. (Sumo Capital is the DPM at Cboe for MJ.) MJ has some $1.1 billion in assets, while YOLO’s AUM is approaching $50 million. I’ve heard $50 million in AUM is the ballpark threshold for an ETF to be a profitable business endeavor by the issuer. (Millennial editor’s note: I am long YOLO.)

Nasdaq questions Euronext Oslo Bors approval
James Thursfield – Global Investor Group (SUBSCRIPTION)
Nasdaq questions the Norwegian Ministry of Finance’s decision, saying it is not consistent with European practice

Bacon is Back: CME Group Launches New, Fresh Bacon Index
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it has begun publishing a new CME Fresh Bacon Index to establish a transparent price reference for fresh pork bellies used to make bacon. This new index comes amid significant bacon price volatility driven by rapidly growing consumer demand, global trade disputes and disease. Prices for pork bellies are the most volatile of all the pork primal cuts, with volatility peaking at over 40% in 2018.

****JB: From the press release, “The CME Fresh Bacon Index will complement CME Group’s existing risk management tools and reference index prices for pork and hog industry participants, including Lean Hog futures and options, the CME Lean Hog Index and the CME Pork Cutout Index.”

MCX crude oil options register turnover of Rs 716 crore
PTI via MoneyControl
Leading commodity bourse MCX said on May 14 its crude oil options have completed one year and registered a record turnover of Rs 716 crore on May 13.

Regulation & Enforcement

Keynote Address Of CFTC Commissioner Dan M. Berkovitz At Energy Risk 2019, Houston, Texas, Improving Energy Derivatives Markets For A Changing Energy Industry
Press Release
I’m very pleased to be here at Energy Risk in my capacity as a CFTC Commissioner. I first attended this conference in May 2008, when I was working on energy issues as a staffer in the United States Senate. We have seen some remarkable changes in the energy sector since then. Today I will talk about how our derivatives markets have responded to these changes. I’ll also talk about the improvements that we have made in the regulation of our financial and commodity derivative markets. These developments in our physical and financial markets demonstrate that a vibrant energy sector and strong market regulation go hand-in-hand to benefit American businesses and consumers. However, our work is not done. I will also outline for you the policies I believe the Commission should adopt to increase competition in, and access to, the energy derivative markets.


Beeks Financial Cloud grows portfolio of datacentre locations
Cloud computing and connectivity provider for financial markets Beeks Financial Cloud Group PLC (LON:BKS) today announces that it is growing its portfolio of datacentre locations by deploying in the NY5 New York datacentre of global interconnection and data centre provider Equinix. On top of this, Beeks has extended its current rackspace in Equinix’s LD4 datacentre in London by taking a third cage.

UBS looks to machine learning to plug FX liquidity gaps
Brenna Hughes Neghaiwi – Reuters
As global currency markets grapple with a growing number of flash crashes triggered by shutdowns in algorithmic trading systems when volatility spikes, UBS is utilizing machine learning technology to carry on dealing.
While algorithmic trading has played a growing role in the $5.1 trillion-a-day global foreign exchange market, accounting for up to a fifth of all trading and about 70 percent of all orders placed on multi-dealer currency platform EBS, machine learning is still relatively new.

Refinitiv currency trading and data terminals face ‘major incident’; Products used by investors and news organisations suffer glitch ahead of London open
Adam Samson and Michael Hunter – Financial Times (SUBSCRIPTION)
Refinitiv’s foreign currency trading platform and financial data terminal both suffered a serious incident on Tuesday morning, a day after volatility swept across worldwide asset markets.

****SD: Frenzied market activity provides a different type of stress test.


New Research Shows Options-Based Strategies Can Generate Higher Gross Premiums with Less Volatility Over Traditional Asset Classes
Matt Moran – Cboe Blog
A new white paper finds SPXW Index that sells SPXW puts generated average annual gross premiums of 37%, with less volatility compared to stocks and bonds.

The Trade War Is Roiling Markets. Buy Stocks Anyway.
Steven M. Sears – Barron’s
For the first time in a decade, the all-powerful financial markets have lost control of the world’s narrative.
Investors expected the governments of China and the U.S. to amicably settle trade negotiations, and instead a trade war has developed that threatens corporate earnings, economic growth and all the other ingredients necessary for the financial market’s well-being.

Backtest Basics: Spread Yield to Define Amount Paid or Received on a Trade
The backtest entry criteria called Spread Yield is a powerful parameter that controls the relative price of the trade to the stock price (spread yield = price paid / stock price). A negative price paid or receiving a credit, produces a negative spread yield.


MSCI adds Saudi Arabia, Argentina indexes to emerging markets index
MSCI Inc, the world’s largest index provider, said on Monday it would include the MSCI Saudi Arabia and MSCI Argentina indexes in its closely watched and widely duplicated emerging-markets index, in a move that could draw billions of dollars into the stocks.

S&P 500 Companies with More Global Exposure Reported Double-Digit Earnings Decline in Q1
John Butters – FactSet
Coming into the Q1 earnings season, there were concerns in the market about the impact of the stronger U.S. dollar, slower global economic growth, and trade tensions on companies in the S&P 500 with higher international revenue exposure. Now that 90% of the companies in the index have reported actual results for Q1, did S&P 500 companies with higher global revenue exposure underperform S&P 500 companies with lower global revenue exposure in terms of earnings growth and revenue growth for Q1 2019? The answer is yes.

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