Volatility Explosion May Lurk Around Corner as FX Traders Lulled; Treasury Options Skew

Apr 16, 2019

Observations & Insight

More Cloud, More Services – Lars Ottersgard, Nasdaq

Nasdaq has been in the process of migrating all of its technology into one holistic tech stack called the Nasdaq Financial Framework. In this video, Nasdaq’s Executive Vice President and Head of Market Technology Lars Ottersgard provides an update and talks about the essential role cloud computing plays in the revamp.

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Lead Stories

Volatility Explosion May Lurk Around Corner as FX Traders Lulled
Liz McCormick – Bloomberg (SUBSCRIPTION)
JPMorgan’s currency volatility gauge has tumbled this year; ‘Markets will need to reassess their assumptions,’ CIBC says
There is a complacency haunting foreign-exchange markets.
Measures of how much traders expect currencies to gyrate over the coming months have plunged amid apparent assurances from central banks that they aren’t going to create major waves with further policy normalization anytime soon. But some observers, including strategists at Canadian Imperial Bank of Commerce, Morgan Stanley and Scotiabank are raising warning flags about the lack of volatility.

Treasury Options Skews: Investment Signals or Noise?
Erik Norland – CME Group
Nearly all options markets exhibit some kind of natural skewness. For example, out-of-the-money (OTM) put options on equity index futures are typically cost more than OTM call options as investors typically fear a sudden fall in stock prices more than a sudden rise and, hence, are willing to pay more for protection to the downside than upside. In agricultural markets, skew tends to work the opposite way. On corn, soy and wheat options, for example, OTM call options are usually more expensive than OTM puts. Food buyers fear a sudden spike in the price of these goods in the event of a bad harvest more than farmers fear a sudden price decline in the event of an exceptionally good harvest.

Marko Kolanovic’s process: How he analyzes markets and makes his calls
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
Long before Marko Kolanovic became JPMorgan’s global quant mastermind, he earned a Ph.D in theoretical physics.
He credits that math and science background for giving him the skill set he’d need to eventually revolutionize the field of quantitative market analysis.

How to Prepare for Inevitable Moment When Volatility Explodes
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Price swings tend to spike quickly, not increase gradually; SocGen seeks relative value trades; straddles for Schaeffer’s
Low volatility sounds like a good thing in markets. And it can be, unless it’s masking or ignoring problems. The real trick is preparing for an end that can be quick and unpleasant.

Citi calls for cost of managing risky trades to be shared more widely
Eva Szalay and Philip Stafford – Financial Times (SUBSCRIPTION)
Citigroup, one of the biggest middlemen facilitating currencies trading, is trying to engineer a radical shift in the $5.1tn-a-day market by asking trading platforms and rival dealers to share the costs of managing risky derivatives trades for its clients.

Exchanges and Clearing

CME unveils benchmarking tool ENSDO Data Insights; Benchmarking tool for hedge funds aims to help with best execution and decision-making.
John Brazier – The Trade
CME Group has launched a new benchmarking tool designed to aid hedge funds with best execution financing through its alternatives investment data service ENSO.

Topic of the week: How to tackle risk?
Eurex Exchange
Risk management is all about identification, assessment and prioritization of risks, followed by a coordinated, economic use of resources to develop and execute the strategies to manage the risks i.e. control the probabilities and impact of losses. It is also about continuous re-assessment and improvement of risk management capabilities to cope with new emerging risks. So much for the definition. But what specifics risks is Eurex facing, how do we prepare for them and what risk management solutions do we have in place? We asked Thomas Laux, Chief Risk Officer of Eurex Clearing and Dmitrij Senko, his designated successor.


Treasury Market Is Driving the New Hot Trade in U.S. Equities
Luke Kawa – Bloomberg (SUBSCRIPTION)
Equity strategists on Wall Street are all rates traders now.
As earnings from America’s biggest banks continue to roll in, a macro backdrop favoring global growth and higher rates — not the bottom-line results — is inspiring analysts to amp up bullish calls on financial stocks and suggest caution on utilities.

****JB: Options are part of this.


Netflix options show prospect for full reversal of Disney+ rout
Gregory Calderone – Bloomberg (SUBSCRIPTION)
Options investors are positioning for a post-earnings move in Netflix Inc. shares that could more than recoup the US$9 billion in market value wiped out since Walt Disney Co. took the wraps off its streaming-video service. More than a quarter of Netflix open interest is due to expire in the wake of Tuesday afternoon’s first-quarter release, with bullish calls outweighing bearish puts. Prices imply a 7.3 per cent post-earnings move in the shares. A gain of that much would land the stock price about 1 per cent above where it was before last week’s Disney+ announcement.

Splintered Libor transition raises risks for banks
Philip Stafford – Financial Times (SUBSCRIPTION)
Global regulators reminded the world last week that they would like to see the Libor lending benchmark all but gone by 2022, and they will be watching banks’ progress carefully. Figuring out how to replace the London interbank offered rate, however, is fast becoming one of the prickliest issues in global markets.

QQQ Turns 20: How The Nasdaq-100 Investment Landscape Has Grown Over The Years
Seeking Alpha
The $70 billion Invesco QQQ ETF, tracking the Nasdaq-100 Index, turned 20 years old in early March. The Nasdaq-100 Index, which includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market cap, provides exposure to some of the most innovative companies in the world. Since QQQ launched in March 1999, a year before the dot-com bubble, the Nasdaq-100 Index has outperformed the S&P 500 by 1.35% annualized (7.37% vs. 6.02%). Not surprisingly, the interest and investment options in the Nasdaq-100 have grown significantly over the past 20 years.

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