Traders exit complex oil options as Cushing supplies tighten; Can Direct CCP Clearing Address Concentration Challenges?

Aug 22, 2019

Observations & Insight

Fifth Annual Wall Street Rides FAR Event Approaches
Is there a chance you’ll be in New York during the first week of October? If so, you’ll want to check out the fifth annual Wall Street Rides FAR bike ride event, which raises money for the Autism Science Foundation. In this video, event founder Bryan Harkins, Cboe executive vice president and co-head of markets division, talks about how the event has evolved and grown over the years.
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Lead Stories

Traders exit complex bearish U.S. oil options as Cushing supplies tighten
Devika Krishna Kumar – Reuters
Oil traders raced to abandon complex, bearish options trades in U.S. crude this week, after the market rapidly shifted to reflect tighter supplies at the key Oklahoma storage hub over the past month, leading to a surge of activity in a typically illiquid corner of the market.

****SD: From the story: “Volumes in [calendar-spread options] have surged, according to data from CME Group’s daily bulletin and brokers executing the deals, with about 12,500 lots of put options on the October/November U.S. crude spread unwound on Monday. What is unusual about that activity is that these option contracts sometimes go days without a single trade, unlike underlying futures contracts, which trade actively.”

The Concentration of Cleared Derivatives: Can Access to Direct CCP Clearing for End-Users Address the Challenge?
Nahiomy Alvarez, John W. McPartland – Chicago Federal Reserve
Cleared derivatives contracts are now concentrated among a small and dwindling number of institutions. Many policymakers and regulators have argued that this concentration has adverse consequences, some of which may have systemic risk implications. The authors explore the benefits and challenges of encouraging major end-users of derivatives to become direct clearing members of central counterparties (CCPs). If done prudently, increasing and diversifying the pool of clearing members and redistributing outstanding derivatives contracts across them may help CCPs become more resilient.

****SD: The paper posits that more direct clearing would redistribute positions across more participants (spread out OI), allow for more potential bidders on a defaulting member’s portfolio (and/or simplify porting), decrease costs of client clearing for bank-affiliated clearing members, and decrease FCM liquidity requirements.

ASIC cites ‘regulatory arbitrage’ in $2b derivative ban
James Eyers – Australian Financial Review
The corporate regulator has accused global financial companies of flogging billions of dollars of risky derivatives via Australia, in a “regulatory arbitrage” that has caused $2 billion in losses to a million investors, mostly in Asia.
A whopping $22 trillion of “contracts for difference” and “binary options” has flooded through 65 Australian licensees in the past year, the Australian Securities and Investments Commission said on Thursday, as it moved to restrict the products.

****SD: Other sources: Reuters, The Sydney Morning Herald, and ASIC’s paper on the ban. Also from Reuters: CMC Markets confident on outlook even as it braces for Australia clampdown.

China to speed up launch of coking coal and coke options – report
China will accelerate the launch of coking coal, coke and iron ore options on the Dalian Commodity Exchange (DCE) in an effort to further enrich hedging tools, the state-backed Securities Times reported on Thursday.

****SD: The commodities with options on futures contracts currently listed on Chinese exchanges are white sugar, soybean meal, copper, corn, cotton and rubber. Other commodities with options contracts in the pipeline include palm oil and soybean oil.

There’s a New Volcker Rule Now
Matt Levine – Bloomberg (SUBSCRIPTION)
In some broad sense, the only thing that a bank could ever do is “proprietary trading.” The bank has some money—from shareholders, from depositors, etc.—and it uses that money to buy stuff. The stuff all comes with some risk, 1 so in some sense everything a bank does is making risky bets with its depositors’ money. The old-timey bank that takes deposits and looks borrowers in the eye before giving them mortgages is making a bet, with its depositors’ money, that the borrowers will pay back their mortgages.

****SD: For more on how the rule’s “prongs” are being revamped as pertaining to proprietary trading, skip to page 37 of the 301 page doc.

Markets Should Be Worried About the Music Stopping; A structural decline in trading liquidity could make things very uncomfortable for investors in the next downturn.
Satyajit Das – Bloomberg (SUBSCRIPTION)
Several factors are roiling world markets right now, from fears of a possible U.S. recession to erratic policymaking, trade tensions and general uncertainty. But the unusual size of the moves — regularly on the order of 1% to 3% — is being heightened by something else: the struggle to find someone with whom to trade.

Virtu Financial: The Frying Pan and the Fire
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Paul Rowady – Alphacution Research Conservatory
On August 8, Virtu reported Q2 earnings and the stock (VIRT) fell 18%. Non-GAAP EPS came in lower than Street estimates. In addition to the costs of integrating the ITG acquisition, disappointing results in the market making segment were blamed on lower volatility and trading volumes.

Exchanges and Clearing

Cryptocurrency Exchange Introduces Block Trading for Derivatives
Alastair Marsh – Bloomberg (SUBSCRIPTION)
A venture between an exchange and a messaging service is introducing block trades to cryptocurrency derivatives, seeking to drive the market closer to the mainstream.
Deribit, an exchange for futures and options on Bitcoin and Ethereum, is partnering with Paradigm, a messaging service for institutional traders, for what it says is the first such offering from a crypto exchange. Contracts can be entered into bilaterally and then settled and cleared at Deribit, which has an insurance fund designed to cover losses from bankrupt traders

JP Morgan, NSE partner on derivatives trading
The Punch
The Nigerian Stock Exchange has partnered JP Morgan Chase to facilitate in-depth capacity building programme on derivatives market.

MIAX to offer a chip off the old office block
GlobalCapital (SUBSCRIPTION)
Miami International Holdings, the owner of the MIAX, MIAX PEARL, and MIAX Emerald options exchanges has struck a partnership with Advanced Fundamentals to develop a suite of proprietary derivatives products based on the index specialist’s commercial real estate indices.


Goldman Plans Hiring Spree in Trading (Only Coders Need Apply)
Sridhar Natarajan – Bloomberg (SUBSCRIPTION)
More than 100 engineers will be added in tech-related roles; ‘The firm is putting money where its mouth is,’ executive says
Goldman Sachs Group Inc.’s trading division is planning its biggest hiring spree in years. The catch? The entire effort is focused on coders, a sign of where Wall Street is headed.


Wall Street Swaps Steepening for Inversion in a Yield-Curve Bet
Yakob Peterseil and Luke Kawa – Bloomberg (SUBSCRIPTION)
Barclays issues $2 million of ‘flattener’ structured notes; Holders can earn 10% return if curve remains flat or inverts

A different angle to the China story
RCM Alternatives Blog
While everyone is talking about the risks in China, with them ratcheting up stakes in the trade war with a Yuan devaluation, and threatening troops in Hong Kong to squash protests, many in the quant space are busy analyzing the Chinese markets for investment opportunities.

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