Traders Wager on Calm as Volatility Evaporates; No Volatility, No Problem

Apr 22, 2019

Observations & Insight

An Operating System for Capital Markets – Mazy Dar, OpenFin\

When Mazy Dar worked for a firm in the credit default swap trading space, he became familiar with the challenges posed by application deployment in financial services. It was his experience then that made him realize capital markets could take a page from mobile phone app stores. In this video, Dar talks about the core issues he addresses as CEO of OpenFin, a company that built an operating system for finance that is used by more than 1,500 buy- and sell-side firms to rapidly deploy applications.

Watch the video »

****SD: Business Insider had a story about OpenFin that goes well with our video we released today – OpenFin is unveiling an app store for old-school Wall Street traders in a bid to become the iCloud of banking.


Industry-Driven Derivatives Insights
Thom Thompson – John Lothian News

The following is a discussion of the inaugural quarterly edition of “Derivatives Insight Report” published on April 14, 2019, by Acuiti Business Intelligence, a platform for insights and analytics in the derivatives market. The company was launched by William Mitting in February of this year. Mitting was previously editor and publisher of FOW until it was acquired by Global Investor, where Mitting served as a managing director.

Acuiti published its first quarterly derivatives report about a week ago and it is filled with fascinating insights about developments over the last year and especially the last three months in the world derivatives business. The focus of the report is squarely on how the individual buy- and sell-side businesses see themselves doing rather than providing an industry overview.

To read the rest of this article, go here.

Lead Stories

Traders Wager on Calm as Volatility Evaporates
Gunjan Banerji – WSJ (SUBSCRIPTION)
Volatility in the stock market has continued to evaporate in 2019, a sign that some investors are embracing riskier assets again.
The Cboe Volatility Index – a yardstick for expected swings in equities – has fallen 12% this month after recording one of the biggest declines in history to start the year. The gauge measures the speed and severity of the stock market’s moves and tends to fall when equities are rising and demand for hedges on the S&P 500 slips. Volatility measures tracking currencies, bonds and oil have also retreated.

****SD: I guess it’s time for another round of “calm before the storm” headlines…

No Volatility, No Problem: How BlackRock, Amundi Are Beating It
Charlotte Ryan – Bloomberg (SUBSCRIPTION)
Delve into emerging markets, options and carry, funds say; Take risks as cost of being wrong is low: State Street
A collapse in volatility across currencies is leading fund managers to scour every corner of the market for profit opportunities.
Central bank inaction has helped push measures of price swings to the lowest in years. Fund managers from Amundi Asset Management to Allianz Global Investors say this is causing them to turn away from traditional bets on the dollar and euro and toward emerging markets, carry trades and taking cheap punts in options.
You’ve reached your fr

The Market Knew About the Press Release Hackers Before the Cops
Sarah Ponczek – Bloomberg (SUBSCRIPTION)
Can stock traders tell when something fishy is going on in the market? Researchers who studied scandals in which hackers used inside information to profit from earnings announcements say: yes.

****SD: Much can be gleaned from examining options order flow. “Criminals trade on stolen data and are able to sway a price — so what? But for researchers peering deeply into the market’s electronic innards, the episode was a laboratory to examine a question that has occurred to anyone who has watched a single fat-finger trade ignite a volume frenzy in which hundreds of thousands more shares change hands. How much trading does it take to convince others something is going on?” Also from the piece, “besides measuring the accuracy of the pre-release drift, the researchers tested to see if hacked stocks moved less once the earnings results officially came out. They did: post-release moves were about 15 percent smaller when the information had been stolen.”

Investors See Oil Rally Continuing With Most Bets Since October
Alex Nussbaum and David Caleb Mutua – Bloomberg (SUBSCRIPTION)
Hedge funds are betting rising tensions around the globe will keep fueling oil’s rebound this year.
Money managers boosted optimistic wagers on West Texas Intermediate crude to the highest since October in the week ended April 16, according to government data released Friday. Total long and short positions swelled to the most in six months, a sign the rally is luring back investors after 2018’s late-year crash. The U.S. benchmark has jumped about 40 percent this year.

****SD: From the story: “The net-long WTI position – the difference between bets on higher prices and wagers on a decline – rose 10 percent to 303,366 futures and options contracts, the U.S. Commodity Futures Trading Commission said. Long positions climbed 8.4 percent, while shorts declined 6.5 percent.”

Risk premia – The alternative investments savior?
RCM Alternatives
We half-jokingly asked in our Managed Futures/Global Macro 2019 Outlook, “Is this asset class working for you?” following a year in which managed futures didn’t deliver the crisis period performance they’ve become known for. But a recent piece in the hedge fund journal shows it wasn’t just trend following type CTAs that under performed in 2018.

****SD: In case you missed Artur Sepp’s blog from a few weeks back, check it out – Tail risk of systematic investment strategies and risk-premia alpha.

Swedroe: Variance Risk Premium Evidence
Larry Swedroe –
An insurance policy is a means of risk transfer in which a buyer pays to eliminate the possibility of an extreme, rare, downside event—such as premature death, destruction from an earthquake or hurricane, or in the case of financial assets (including stocks, bonds, currencies and commodities), a sharp increase or decrease in the price.

****SD: Historical variance risk premium from 2008 to present for equities was 15%, for FX was 13%, for commodities was 9% and for interest rates was 14%.

Global X Expands its Suite of Covered Call Strategies with the Launch of the Russell 2000 Covered Call ETF
Global X ETFs, the New York based provider of exchange traded funds, today announced that it has launched the Global X Russell 2000 Covered Call ETF (Cboe: RYLD), designed to track the Cboe Russell 2000 BuyWrite Index. The fund gains exposure to the stocks in the Russell 2000 Index and writes at-the-money monthly call options on the same index. The fund receives a premium from writing the call options, which can help increase the fund’s distributions and potentially mitigate downside risks.

Macro hedge funds hopeful the good times are back
Laurence Fletcher – Financial Times (SUBSCRIPTION)
Life has not been good for many macro hedge funds in recent years — but the green shoots of recovery are beginning to appear.
Quantitative easing has been a big drag for traders by pushing bond yields lower and for longer than many had expected, distorting fund managers’ fundamental analysis of markets and suppressing the volatility they like to trade.

Exchanges and Clearing

A Closer Look At Intercontinental Exchange’s Trading Revenues
Intercontinental Exchange is one of the largest exchange operators in the world, and runs seven cash exchanges and five futures exchanges across the globe. Since its establishment in 2000, ICE has evolved from a primary focus on energy trading to acquiring the world’s largest stock exchange in 2013, and finally to a focus on its data services business more recently. The company’s stock has seen a steady increase in the last decade, growing consistently at a CAGR of 6%.

Chairman of the bourse; Stephane Boujnah’s unorthodox approach gave Euronext an edge in the Irish Stock Exchange sale
Niall Brady – The Sunday Times
Stéphane Boujnah has some offbeat advice for foreigners thinking of buying a business in Ireland: take time out to visit the National Museum.

Regulation & Enforcement

Tell Me Some More Bad News: Encouraging The Internal Reporting Of Compliance Failures
Julie Myers Wood – Forbes
Last May, the U.K. Financial Conduct Authority and the Prudential Regulation Authority fined Barclays CEO Jes Staley over GBP600,000 for non-compliance with U.K. laws aimed at protecting whistleblowers. Then, in December, New York’s banking regulator fined Barclays another $15 million for its CEO’s wrongdoing. Mr. Staley had attempted to improperly identify a whistleblower employee who had written anonymous letters to the bank’s board and senior management raising concerns about a fellow employee. And just recently, Duke University settled with the government over allegations that it violated the False Claims Act. The whistleblower in that matter was awarded $33.75 million and the school was fined $112.5 million.


A new machine-learning tool used by hedge funds to rank their brokers hopes to put an end to the ‘old boys network’
Bradley Saacks – Business Insider Prime (SUBSCRIPTION)
Communications analytics company Behavox is rolling out Broker Vote, a machine-learning tool that ranks hedge funds’ relationships with banks and brokers, at the end of May.
The program tracks the communication hedge funds have with the teams at banks and broker-dealers and uses natural-language processing to determine which broker was the most helpful to the fund — and funds pay them accordingly.
The tool may exacerbate the problem many of the largest banks have with shrinking commissions in their equity broker units.


Wall Street firms are being taken over by 22-year-olds — here are the big banks that rely on junior talent the most
Alex Morrell – Business Insider
As Wall Street banks spend billions to upgrade technology and automate tasks, the mundane and tedious work that used to define the early years of a career at an investment bank is increasingly disappearing, with bots and algorithms springing into action to take over.

****SD: As measured by FINRA-registered employees with one year of experience or less, the three banks with the most junior staff are Barclays (22.6% of applicable employees), Credit Suisse (21.7%) and Goldman (21.2%).


Morgan Stanley Pinpoints Hedges for Potential Trade Turmoil
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Investors should use hedges to mitigate the effect of several trade-event risks, according to Morgan Stanley.
Trade worries have largely gone into the rear-view mirror this year as stocks have soared and the Federal Reserve turned more dovish. They still can’t be entirely ignored, as U.S.-China talks continue, the approval process for USMCA (the new trade accord between the U.S., Mexico and Canada) gets going and the U.S. contemplates implementing auto tariffs.

****SD: TL;DR – Own Euro Stoxx 50 versus S&P 500 variance; short the euro/yen cross; hedge dollar/peso as peso longs positioning looks “stretched.”

Amazon, Tesla, and more: Here are the 5 single-stock trades Goldman Sachs says can make you a killing this earnings season
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
Stock-market price swings have been subdued leading up to earnings season, but Goldman Sachs has still identified a handful of mispriced market opportunities.
The firm offers specific options-trading recommendations for five single stocks as their earnings approach: Amazon, Arista Networks, Caterpillar, ConocoPhillips, and Tesla.

****SD: TL;DR – Buy AMZN April 26 weekly calls; buy ANET May 3 weekly calls; buy CAT May 3 weekly calls; buy COP May 3 weekly calls; and buy TSLA straddles.

How to play Amazon and Facebook stocks into earnings
Keris Lahiff – CNBC
Half of the FANG trade goes under the microscope this week.
Facebook and Amazon, worth $1.4 trillion combined, will report on earnings on Wednesday and Thursday, respectively.
The options market is not pricing in how volatile trading could get in the wake of those releases, according to Stephen Mathai-Davis of research site Quantamize. He’s positioning trades into the reports to take advantage of bigger moves than investors expect.

****TL;DR – Buy FB and AMZN straddles.

Goldman Says Health-Care Options Showing Little Fear Amid Rout
Tatiana Darie and Gregory Calderone – Bloomberg (SUBSCRIPTION)
Given the health-care rout that’s wiped out $234 billion of market value in April, you’d be forgiven for thinking investors are panicking. Options prices show they aren’t, according to Goldman Sachs & Co.
The S&P 500 Health Care Index fell 0.4 percent on Monday, pushing its decline in April to 6.8 percent. It’s the only major industry group that has fallen this year as concerns deepen about disruptive policy proposals in Congress, including “Medicare-for-All” legislation that would replace private medical insurance with a government-run system.


Why Use Options Overlays On ETFs?
Eric Cott –
Investing strategies based on fundamental analysis have been popular for decades, because poring over fundamentals to support buying and selling decisions makes perfect sense. ETFs have allowed fundamentals-minded investors a simple way to gain exposure to narrow industries and broad indexes, and they’ve grown in adoption.


Economy: The Missing Elements for a Market ‘Melt Up’
Mohamed A. El-Erian – Bloomberg (SUBSCRIPTION)
It is no surprise that the possibility of a market “melt up” for the rest of 2019 is becoming a more common refrain among investors. After all, the unsettling volatility of the fourth quarter of 2018 is well within the rear-view mirror, and the first four months of this year have delivered ample gains with declining volatility. Although there are understandable reasons for this optimism about the future, two uncertainties risk being assumed away in this melt-up scenario, and they don’t relate to the trade and political issues that have persisted for so long and that investors feel comfortable sidelining.

The Market Knew About the Press Release Hackers Before the Cops
Sarah Ponczek – Bloomberg (SUBSCRIPTION)
Can stock traders tell when something fishy is going on in the market? Researchers who studied scandals in which hackers used inside information to profit from earnings announcements say: yes.
To see how sensitive markets are to hidden influences, three professors set out to measure how quickly traders picked up on the activity of crooks who used stolen data to front-run earnings releases in about 800 companies. Very quickly, was their conclusion, published in an April 3 paper, “Retail Insider Trading and Market Price Efficiency: Evidence from Hacked Earnings News.”

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