Wall Street Says a Volatility Doom Loop Is Gripping Markets; Fear Grips Markets Again. The Only Safe Place Is Cash.

Mar 18, 2020

Lead Stories

Wall Street Says a Volatility Doom Loop Is Gripping Markets
Yakob Peterseil – Bloomberg
There have been plenty of scares in the market horror show of recent weeks, but one idea in particular is increasingly sending shivers around Wall Street: that extreme stock turbulence may now be feeding itself.
The fear is that recent epic swings could be happening because volatility-sensitive players like risk-parity strategies and fast-money funds are aggressively deleveraging, exacerbating moves and sapping liquidity.

Fear Grips Markets Again. The Only Safe Place Is Cash.
Nicholas Jasinski – Barron’s
11 a.m.: Another day, another wild swing in global markets. The dash for cash is continuing as risky and haven assets sell off in unison. The U.S. dollar is gaining and oil is plunging.
The Dow Jones Industrial Average fell 1,199 points, or 5.7%. The S&P 500 lost 5%, and the Nasdaq Composite dropped 3.9%. All three indexes were near their lows of the day, which came shortly after the opening bell. Should the S&P 500 fall 7%, it will trigger an automatic 15-minute trading halt for the fourth time since last Monday.

Traders Bet on Falling ‘Fear Gauge’
Gunjan Banerji – WSJ
The Cboe Volatility Index, or VIX, closed at its highest level in history Monday when U.S. shares recorded the steepest decline since the Black Monday stock-market crash of 1987. Some investors are already betting on its rapid fall.
The volatility gauge tends to rise when markets fall and investors reach for stock protection through the options market.

Tencent Options Signal Biggest Post-Results Move in 11 Years
Hong Kong’s equity traders haven’t been this nervous over Tencent Holdings Ltd.’s earnings in more than a decade.
They’ve been buying derivatives to protect against losses, with bearish puts now costing the most in four years relative to bullish contracts. With the Internet giant reporting fourth-quarter results after Wednesday’s close, the options market is now pricing in a massive 7.1% move either way for the shares when trading reopens. That would be the biggest move since at least 2009, according to data compiled by Bloomberg.

Pound Traders Bet Against U.K. ‘Laissez-Faire’ Response to Virus
Vassilis Karamanis – Bloomberg
Currency slumps to $1.20 as U.K. action overtaken by peers; Options bets turn more negative on sterling’s prospects
Currency traders aren’t buying the U.K. government’s efforts to tackle the coronavirus. The pound has slumped more than 8% in the past six days and sentiment in the options market has turned the most negative on its prospects this year. Gauges of volatility have surged, as the U.K. looks slow in following other countries in limiting travel and social gatherings.

Ex-Goldman Duo’s Fund to Shut After Volatility Bets Go Awry
Donal Griffin – Bloomberg
A hedge fund founded by former Goldman Sachs Group Inc. traders to wager on volatility in stock prices is winding down after the recent market turmoil.
Malachite Capital Management, a New York-based firm that oversees about $600 million, plans to dissolve its funds, the firm said in a statement Tuesday, citing extreme adverse market conditions of recent weeks. The firm, founded by ex-Goldman Sachs traders Jacob Weinig and Joe Aiken, had received margin calls from counterparties including BNP Paribas SA after its trades went awry, people familiar with the matter said.

Gold Volatility Surges to Most Since 2008 on Global Market Spasm
Justina Vasquez, Elena Mazneva, and David Stringer – Bloomberg
Gold is going through the wildest price swings since the 2008 financial crisis as global markets convulse on fears over the coronavirus.
The CBOE Gold ETF Volatility Index, a measure of expectations for price swings tracked through exchange-traded fund moves, has more than doubled over the past six sessions to the highest since November 2008. That’s as policy makers worldwide tried to introduce stimulus measures to counter the economic impact of the outbreak.

Extreme market stress puts $6.4tn ETF sector under acute pressure
Chris Flood and Attracta Mooney – Financial Times
Legendary corporate raider Carl Icahn warned that trouble was brewing in the fast-growing exchange traded fund industry when he locked horns with BlackRock chief Larry Fink in 2015.
The world’s largest asset manager had created an illusion of liquidity in high-yield bond ETFs that would lead to a destructive “blow up” for investors, the billionaire claimed.

Against the short-selling ban
Jamie Powell – Financial Times
During the extreme stock market volatility of the past month, financial regulators have largely kept mum when it’s come to taking actions to stem the selling.
Well they did until last week. In the past seven days, various bans on short-selling — the practice of betting on a stock falling in price — have come into effect across Italy, France, Belgium, Spain and Greece. The reason? In Italian regulator Consob’s own words: “these measures were made necessary by the strong turbulences triggered in the last days by the Covid-19 pandemic”.
But there’s a small wrinkle here: it doesn’t work.

Here’s How the Oil Crash Is Hitting Emerging-Market Currencies
Paul Wallace – Bloomberg
Oil’s plunge has stung currencies across emerging markets, and there’s probably worse to come. For oil and gas exporters, the impact has been immediate. Even Gulf states with long-standing pegs to the dollar, such as Saudi Arabia, are coming under pressure. Importers like South Africa and Turkey, whose currencies are close to record lows, haven’t been spared either. Brent crude prices fell to barely $27 a barrel on Wednesday — their lowest in almost 17 years and bringing their drop this year to 60% — as the coronavirus curbs global demand for energy. The rout accelerated this month when Saudi Arabia triggered a price war after failing to convince Russia to accept coordinated production cuts.

Exchanges and Clearing

CME Group Statement on U.S. Treasury Secretary Mnuchin Proposal to Shorten Trading Hours
Press Release – Markets Insider
In response to U.S. Treasury Secretary Mnuchin’s comments today regarding the possibility of shortening financial market hours to address high volatility due to the coronavirus outbreak, CME Group Chairman and CEO Terry Duffy issued the following statement:
“We were quite surprised to hear Secretary Mnuchin say he is coordinating with the New York Stock Exchange on possible shortened trading hours, even though he has not reached out to all cash equity and futures markets including CME Group and Nasdaq. Shorter hours make no sense. Financial markets are critical to managing risk and ensuring the resilience of the U.S. and global economies. Therefore, they must remain open, especially during this unprecedented crisis when news, information and events are changing at such a rapid pace. Markets are global, so shortening U.S. hours would not decrease volatility. Rather, it could actually increase as investors turn to other venues outside the U.S. when developments occur.”

Cboe Global Markets Announces Date of First-Quarter 2020 Earnings Release and Conference Call
Cboe (press release)
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today said it will announce its financial results for the first quarter of 2020 before the market opens on Friday, May 1, 2020. A conference call with remarks from the company’s senior management will begin at 7:30 a.m. Central Time (CT), 8:30 a.m. Eastern Time (ET).

FIA praises CFTC’s quick response amid global pandemic
FIA.org (press release)
Today, FIA President and CEO Walt Lukken made the following statement after the CFTC issued several no-action letters that give the derivatives industry flexibility to deal with the ongoing global pandemic. “I applaud the CFTC’s responsiveness in issuing several no-action relief letters today that will help our member companies keep the markets functioning during this global pandemic. These actions by the CFTC demonstrate that Chairman Tarbert, and Commissioners Behnam, Berkovitz, Quintenz and Stump, understand the challenges companies face with a dispersed and remote workforce. We also appreciate the Chairman’s willingness to listen to industry concerns and to adjust as necessary during this ongoing situation.”

COVID-19: How we handle the situation
Eurex (press release)
We at Deutsche Börse create trust in the markets of today and tomorrow. As reliable market infrastructure provider, trusted partner and caring employer, we take the global COVID-19 situation very seriously. While so far our business has not been critically impacted, we continue to monitor the situation at all company locations and worldwide very closely and remain in close contact with our customers, suppliers, our regulators and the competent bodies to assess the situation at hand on a daily basis.

ICE: Operational Update
Shanny Basar – Trader’s Magazine
Intercontinental Exchange, Inc., a leading operator of global exchanges and clearing houses and provider of data and listings services, is sharing this operational update for customers and other constituents as global financial systems manage through extraordinary volatility amid the spread of COVID-19.

Update: MIAX Options and MIAX Emerald Exchanges Trading Issue on 3/16/2020
MIAX Options and MIAX Emerald
On March 16, 2020, a conflict with multiple system configuration messages caused the MIAX Options and MIAX Emerald Exchanges to send Done-for-Day messages to FIX customers at 1:26 PM ET. For firms that were configured to receive Done-for-Day messages, the Exchanges were unable to send updates through the FIX system for orders that were open at the time of the errant Done-for-Day messages. To minimize the risk to FIX trading participants, the MIAX Options and MIAX Emerald Exchanges halted trading at 1:50 PM ET.


‘Sit tight and stay away from the options market,’ says options strategist
Lizzy Gurdus – CNBC
Sit tight and steer clear of options. That is one options strategist’s advice to individual investors as U.S. stocks see unprecedented levels of volatility, with the Cboe Volatility Index, also known as the VIX or the market’s fear gauge, sitting near all-time highs. “My advice would be … for a retail investor, to sit tight and stay away from the options market,” Garrett DeSimone, head of quantitative strategy at analytics firm OptionMetrics, told CNBC’s “Trading Nation” on Tuesday.


Weeklys, Monthlys and LEAPS
OIC (webinar)
If you’re ready to learn about non-standard option expirations, The Options Industry Council has the ideal webinar for you to attend. On March 18, our special presentation – Weeklys, Monthlys and LEAPS – will tell you about: The differences in these special expirations Delta, gamma and theta Options skew Sign up today for this free OIC webinar! When you do, you’ll also have guaranteed access to replay, any time.


Derivatives Forum 2020 in Frankfurt: a day full of highlights
The third Derivatives Forum in Frankfurt, held on 27 February in the beautiful surroundings of the “Gesellschaftshaus Palmengarten”, was a huge success. It was organised by Eurex, featuring eleven renowned co-sponsors and 550 participants from more than 180 buy- and sell-side firms, regulators and associations.


Markets Better Off Open, Even in Times Like These: Taking Stock
Michael Msika and Jan-Patrick Barnert – Bloomberg
In these times of soaring volatility, record drops and short-selling bans, investors are riding a roller coaster. While some might debate the benefits of closing dealing venues and the U.S. is mulling shorter trading hours, in times like these markets matter more than ever.

Is Stocks’ Plunge Affecting Your Mood? It Could Be ‘Dow Affective Disorder.’
Al Root – Barron’s
Money can’t buy happiness, but, apparently, it helps.
People’s moods can suffer as the stock market declines. Anyone with significant experience in the market can attest to that fact: No one likes losing money, and everyone likes making it. But in the most extreme cases, stock-market gyrations can lead to Dow Affective Disorder, or DAD.
Investors shouldn’t dismiss the idea out of hand. Staying happy in this market is hard.

‘We may get to a point where we shorten’ stock-market trading hours,’ says Mnuchin
Mark DeCambre – MarketWatch
Treasury Secretary Steven Mnuchin on Tuesday midday said that he believed it was crucial to keep the markets open during the COVID-19 outbreak that has infected more than 180,000 people and had far-reaching effects in disrupting business and personal live. However, he noted that shortening trading days may also be needed. “We absolutely believe in keeping the markets open,” Mnuchin said during a news conference in Washington, D.C., with President Donald Trump to update the public on the efforts to combat the pandemic and limit the damage to the U.S. economy.

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