Observations & Insight
JLN Bachelier Options Model Virtual Panel Podcast
John Lothian News is presenting the May 14 Bachelier Options Model virtual panel as a podcast. We have edited the content down to maximize the delivery of impactful information from the discussion. We also had a technician problem at the beginning of the recording and did not capture all of what Lee Betsill shared as a recap of the steps the CME Group took leading up to the expiration of the April WTI contract. We also removed a tense moment between Don Wilson and John Lothian over the wording of a question. The big takeaway from the podcast came when Don Wilson talked about ETF investing in crude oil and the risk dynamics to the investors, futures commission merchants and clearing system.
The Spread: Moving Out, Moving Back In
This week on The Spread – the CME Group announces new options products, MSCI moves from Singapore to Hong Kong, and more.
Wall Street shrugs off violent US protests
Philip Georgiadis – Financial Times
Investors appeared willing to look beyond some of the biggest civil disturbances in the US in decades, with stocks on Wall Street little changed on Monday morning.
The S&P 500, Wall Street’s benchmark index, fell less than 0.1 per cent in the opening 15 minutes of trading. The tech-heavy Nasdaq index reversed earlier modest losses to gain 0.1 per cent.
‘Bankrupt in Just Two Weeks’—Individual Investors Get Burned by Collapse of Complex Securities
When William Mark decided to get back into investing after the 2008 financial crisis, he looked past stocks and bonds. Needing to play catch-up with his retirement portfolio, the piping engineer decided to bet on a complicated product he hoped would deliver double-digit annual returns.
It worked so well—earning him 18% a year in dividends, on average—that he eventually poured $800,000 into the investments, called leveraged exchange-traded notes, or ETNs. When the coronavirus pandemic hit, he lost almost every penny.
Why virus stocks are driving market volatility
Jaimy Lee – MarketWatch
The market’s erratic response to lukewarm medical research for COVID-19 treatment and vaccine candidates isn’t expected to slow down as investors pin their hopes for a recovery on the high-risk biotechnology sector.
“In the coming few months, the stock market, especially related to COVID-19, will continue to be volatile,” said Difei Yang, a biotech analyst at Mizuho Securities. “It’s driven by retail investors, rather than institutional investors…they react to headline news, and the market reacts.”
Goldman Says Options Show Top U.S. Bank Dividends May Fall 30%
Gregory Calderone and Felice Maranz – Bloomberg
Options are pricing in odds that the seven top U.S. banks will cut their dividends by an average of 30%, according to an analysis by Goldman Sachs. Analysts led by Richard Ramsden wrote that the options market had been pricing in a 10% increase in bank dividends before the Covid-19 pandemic hit. They say options are now implying Wells Fargo and Citigroup will have the two largest dividend cuts in 2021, at 65% and 44%, respectively. Goldman said options showed Morgan Stanley may cut its dividend by 29%, the smallest in the top seven.
Exchanges and Clearing
Cut U.K. Trading Hours, Survey Respondents Tell LSE
Ksenia Galouchko – Bloomberg
Most U.K. stock market participants want a reduction in the world’s longest trading hours, which they say can improve liquidity and industry diversity, according to the results of a London Stock Exchange survey.
“A significant majority of respondents were sympathetic to the arguments that a reduction of market hours could lead to improvements in diversity and wellbeing,” the LSE said as it released the outcome of its consultation, without disclosing the percentage of those favoring shorter hours.
Options Regulatory Alert #2020 – 19 Nasdaq Phlx to Postpone Reopening of Trading Floor
As the current situation with demonstrations in the city of Philadelphia has escalated significantly, Nasdaq has decided to postpone the reopening of the PHLX Trading Floor, which was scheduled for Monday, June 1, 2020. We will continue to monitor the situation closely and will revisit this decision on a daily basis.
The MIAX Exchange Group Chairman and CEO To Address Piper Sandler Virtual Conference
Miami International Holdings (MIH)
Thomas P. Gallagher, Chairman and CEO of The MIAX Exchange Group will speak at the Piper Sandler Global Exchange & Financial Technology virtual conference on June 4, 2020 at 9:30 a.m.
Regulation & Enforcement
Options Trader Alert #2020 – 15 Nasdaq MRX and GEMX Updated Pricing Effective June 1, 2020
Effective Monday, June 1, 2020, pending filing with the SEC, Nasdaq MRX (MRX) and Nasdaq GEMX (GEMX) amend their pricing as described below
Options Regulatory Alert #2020 – 18 INFORMATION FOR NASDAQ MEMBER FIRMS ABOUT THE IMPACT OF CORONAVIRUS (COVID-19) – As of May 29, 2020
Subject to filing a rule change with the SEC, the Options Exchanges plan to extend filing requirements for written reports pursuant to Rule Options 10, Section 7(g). The Options Exchanges are similarly planning to extend the deadline for submission of the 7(g) report to control persons pursuant to Options 10, Section 7(h). The Options Exchanges anticipate the new filing deadlines for the following requirements will be June 30, 2020. The Exchanges will issue another notice when the required filing is completed.
NOTICE OF DISCIPLINARY ACTION # CBOT 19-1125-BC-1
MEMBER: Central States Enterprises, LLC CBOT RULE VIOLATIONS: Rule 432 (“General Offenses”) (in part) It shall be an offense: W. for any party to fail to diligently supervise its employees and agents in the conduct of their business relating to the Exchange. Rule 534 Wash Trades Prohibited No person shall place or accept buy and sell orders in the same product and expiration month, and, for a put or call option, the same strike price, where the person knows or reasonably should know that the purpose of the orders is to avoid taking a bona fide market position exposed to market risk (transactions commonly known or referred to as wash sales). Buy and sell orders for different accounts with common beneficial ownership that are entered with the intent to negate market risk or price competition shall also be deemed to violate the prohibition on wash trades. Additionally, no person shall knowingly execute or accommodate the execution of such orders by direct or indirect means.
NOTICE OF DISCIPLINARY ACTION # CBOT 19-1125-BC-2
NON-MEMBER: William Zobel CBOT RULE VIOLATIONS: Rule 534 Wash Trades Prohibited No person shall place or accept buy and sell orders in the same product and expiration month, and, for a put or call option, the same strike price, where the person knows or reasonably should know that the purpose of the orders is to avoid taking a bona fide market position exposed to market risk (transactions commonly known or referred to as wash sales). Buy and sell orders for different accounts with common beneficial ownership that are entered with the intent to negate market risk or price competition shall also be deemed to violate the prohibition on wash trades. Additionally, no person shall knowingly execute or accommodate the execution of such orders by direct or indirect means.
Clearing Advisory Notice: Updated implementation schedule for gross customer option value aggregation
As previously published on May 22, 2020 in Clearing Advisory 20-206, starting with the end-of-day clearing cycle today, Monday, June 1, 2020, CME Clearing will begin phasing out of Net Option Value (NOV) net end customer aggregation, and start the process of moving to gross aggregation at the end client level for all clearing members with client accounts.
Implied Dividends: How We Calculate What The Options Market Expects For Future Dividends
With many firms cutting their dividends because of the financial pinch of the virus, implied dividends give a good picture of firms the options market believe might be the next to cut. The report below is our annual implied dividend vs. actual projected dividend report. Firms like Winnebago, Wells Fargo and Disney appear to the options market as having their dividend implied in options prices at lower levels than projected from announced dividends.
Fed Should Resist Market Pressure to Do More
Mohamed A. El-Erian – Bloomberg
In listening to market chatter urging the Federal Reserve to do more, I’m reminded of two simple insights I was exposed to years ago that have stayed with me. They don’t help predict what the Fed will end up doing, but they help shed light on the possible consequences.
Early on in my career at Pimco, I remember Bill Gross, the firm’s founder and legendary investor, reminding portfolio managers that “there are times when the best thing to do is to do nothing.” It’s important advice as most PMs are conditioned to continuously look for opportunities and react accordingly. They naturally get fidgety when market conditions dictate that the best thing to do is simply wait. The cost of ignoring Gross’s advice ranges from unnecessarily wasting money on bid-offer spreads to ending up with less-optimal portfolio positioning.
Chicago-area derivatives firms give more than $4 million to local food bank
Jeff Reeves – FIA.org
The Greater Chicago Food Depository has served the greater Chicago area since 1979. But it’s safe to say that in more than 40 years of operation, the institution has never faced a crisis quite like the coronavirus pandemic. A Federal Reserve survey showed that nearly 1 in 5 working Americans either lost their jobs or were furloughed across March and early April. And digging deeper into the numbers, roughly 39% of those affected were making $40,000 or less annually — meaning those already struggling to get by were the most likely to see their finances disrupted.