U.S. Options Market Makers Report Good June; Wall Street Desks Endure Worst H1 in a Decade

Jul 19, 2019

Observations & Insight

More on Yesterday’s SPIKES Options Trade
(Click for larger image)
****SD: Above is a chart of yesterday’s most active index options. Trade Alert’s Henry Schwartz provided this background on the SPIKES ratio call spread trader:

After a brief climb to 14.40 yesterday, the SPIKES index was near 13.30 in the afternoon with 30K contracts trading in a single four-way spread at 11:19 a.m. ET, when the index was near 14.07. The package involved 1×2 call spreads in August and September terms, likely rolling what remains of the August 1×2 call spread bought 5k x 10k last month into a similar structure in September. Data shows the trader bought 5K Aug 18 calls for $1 to sell 10K Aug 26 calls at 20c (likely closing) and sold 5K Sep 17 calls for $1.95 to buy 10K Sep 25 calls for 62c. The September spread nets a $350K credit, while the unwind in August for a net 60c debit appears to be take a dime loss based on the entry levels of $2 vs 75c on June 12th when the index (and August synthetic future) was about 1 point higher. (Lightly edited for clarity.)

At some point later in the day another 10 contracts traded, bringing the total volume on 7/18 to 30,010 SPIKES options contracts. It’s a notable day for SPIKES as that is some 9% of the day’s VIX options volume.

Global Investor Group’s James Thursfield recently reported that the OCC offers risk offsets between VIX and SPIKES.

Lead Stories

Acuiti Derivatives Insight Report: Revenues Up But Confidence Declines Across The Global Derivatives Market
Proprietary trading groups across Europe experienced strong revenue growth contributing to a continued improvement of performance in the derivatives market in June, the latest Acuiti Derivatives Insight Report found.
Algorithmic options market makers in the US also reported a good month propelling proprietary trading groups to the top performing company type in June.

Wall Street’s Trading Desks Endure Worst First Half in a Decade
Michael J Moore and Elizabeth Rembert – Bloomberg (SUBSCRIPTION)
Bank investors could be forgiven for mistaking executives on recent earnings calls for sports commentators. Their new favorite way to describe trading clients: “on the sidelines.”
Goldman Sachs Group Inc. CEO David Solomon led his analysis for the past two quarters with that phrase, which has caught on with top executives at JPMorgan Chase & Co., Citigroup Inc. and Morgan Stanley as well. Benchwarming by hedge funds and other investors is taking the blame for global banks’ worst first-half trading revenue in more than a decade.

Euro Seen Resilient to a Dovish ECB Amid Policy Divergence Bets
Anooja Debnath – Bloomberg (SUBSCRIPTION)
Risk reversals signal most bullish euro sentiment in 15 months; ECB dovish tone imminent but markets split on timing of easing

Wall Street Trading Costs to Surge as New Rules Hit Derivatives
Jennifer Surane – Bloomberg (SUBSCRIPTION)
Wall Street’s heavyweights are prepping their clients for bad news: Some trades are about to get a lot more expensive.
Firms including Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. are warning customers to get ready for new rules that require more collateral for certain trades. The regulations take effect for some clients in September, but the snare gets even tighter in 2020, when more than 1,000 hedge funds, asset managers and insurers will get caught for the first time.

****SD: More on uncleared margin rules.

Traders Stuck Between Two Fed Options After Williams Kerfuffle
Benjamin Purvis, Liz McCormick and John Ainger – Bloomberg (SUBSCRIPTION)
The rollercoaster-ride in markets spurred by comments from Federal Reserve Bank of New York President John Williams has revved up the debate about how big the central bank’s widely expected rate cut this month may be, even as futures are once again leaning slightly toward the smaller option.

Regulation & Enforcement

CME Group Filing
Pursuant to an offer of settlement in which SG Americas Securities, LLC (“SGAS”) (as successor to Newedge USA, LLC) neither admitted nor denied the rule violations upon which the penalty is based, on July 17, 2019, a Panel of the New York Mercantile Exchange Business Conduct Committee (“Panel”) found that on multiple occasions between January 14, 2014, and January 26, 2016, SGAS had a riskless principal mandate in effect. Three traders employed by SGAG’s Canadian affiliate entered into separate transactions with third parties prior to consummating the block trades with customers and despite having previously received nonpublic information attendant to the customers’ requested block trades. Specifically, in each instance, after receiving a solicitation from a customer to participate in a block trade in various energy futures and options on futures contracts, but prior to consummating the block trade with the customer, the traders executed a separate block trade with a liquidity provider in the same product and on the same side of the market as the customer’s proposed block trade in order to hedge the block trade subsequently executed opposite the customer.

****SD: “In accordance with the settlement offer, the Panel ordered SGAS to pay a fine in the amount of $350,000 ($300,000 of which is allocated to NYMEX) and to disgorge profits in the amount of $142,910.”

CME Group Filing
Pursuant to an offer of settlement in which Peter James Douglass neither admitted nor denied the rule violations or factual findings upon which the penalty is based, on July 17, 2019, a Panel of the Chicago Board of Trade (“CBOT”) Business Conduct Committee (“Panel”) found that on September 29, 2015, Douglass received a customer order to purchase 4,000 November 2015 10-Year option spread contracts. Subsequent to receiving a market from the brokers in the trading pit, and prior to placing the order in the pit for execution, Douglass informed the customer that the order had been filled. Douglass next called the order in to the pit for execution only after he guaranteed the fill to the customer. When informed by the brokers that only 1,700 contracts of the order had been filled, Douglass nonetheless informed the customer that 2,000 contracts had been filled, all at a single price. The Panel therefore found that Douglass guaranteed the execution of the order.

****SD: The result is a five-day suspension and $20,000 fine.

CME Group Filing
Pursuant to an offer of settlement in which Larry C. Johnson (“Johnson”) neither admitted nor denied the rule violation upon which the penalty is based, on July 17, 2019, a Panel of the Chicago Mercantile Exchange (“CME”) Business Conduct Committee (“Panel”) found that on February 5, 2018, Johnson prearranged the execution of transactions in the February 6, 2018 S&P 500 Flex 2000 Puts for the purpose of transferring equity between accounts he controlled in order to reduce maintenance margin requirements. The Panel concluded that Johnson thereby violated CME Rule 432.G.

****SD: The result is a $50,000 fine and 10-day suspension.

File No. USE-1693 – Star No. 20160487695, Jefferies LLC
Cboe Regulatory Filing

****SD: Jefferies was fined $20,000 and censured for supervisory issues pertaining to “options orders handled by its ‘Derivatives Trading Desk.'”


China’s New Nasdaq-Style Venue Set for Monday Trading Start
Less than a year after President Xi Jinping first touted the project, China’s new stock venue designed for technology startups will start trading on Monday.
Twenty-five companies will be part of the launch in Shanghai, out of the more than 100 hopefuls that applied to go public on the platform. Endorsement from top officials helped generate such enthusiasm that the firms raised a combined $5.4 billion, about 20% more than planned. Demand from retail investors has outstripped supply by an average 1,800 times, even as some analysts voiced concern over lofty valuations. One company priced its shares at 171 times earnings.

Inappropriate Staring, Video Spying Leads to Pension Chief’s Firing
Alicia McElhaney – Institutional Investor
The board at Arizona’s Public Safety Personnel Retirement System voted unanimously to oust its chief administrator Wednesday following a state investigation that found he allegedly sexually harassed and spied on employees.

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