Wall Street’s $5.5 Trillion Triple-Witching to Test Market Calm

Jun 20, 2024

Observations & Insight

The role of the FCM: Futures Discovery EP 10
JohnLothianNews.com

Today, we’re immersing ourselves in a detailed exploration of the pivotal Role of Futures Commission Merchants, commonly known as FCMs. These financial intermediaries play a crucial role in facilitating futures and options trading, serving as a linchpin in the complex web of derivative markets. Understanding the intricate responsibilities and functions of FCMs is essential for navigating the dynamic landscape of modern financial systems.

Watch the video »

Lead Stories

Wall Street’s $5.5 Trillion Triple-Witching to Test Market Calm; Index, single-stock and ETF options to expire on Friday; Options expiration also coincides with index rebalancing
Carly Wanna – Bloomberg
Friday’s US options expiration may provide volatility-starved traders with some short-term market swings.
The so-called ‘triple-witching’ will see some $5.5 trillion worth of options tied to indexes, stocks, and exchange-traded funds fall off the board, according to an estimate from options platform SpotGamma. As the contracts disappear, investors will adjust their positions, adding a burst of volume capable of swinging individual holdings.
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Vanishing short-sellers have helped push stocks to record highs. But beware a sharp negative reversal, JPMorgan says.
Filip De Mott – Markets Insider
Nonstop highs in the US stock market have turned short selling into a tough trade, and bets against US indexes have tumbled, JPMorgan said in a note on Thursday.
As the S&P 500 and Nasdaq have hit a streak of record highs this year, short interest in funds that track the indexes has dropped, the bank said.
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Options Contracts Needed in Crypto Markets
Shanny Basar – MarketsMedia
Arnab Sen, chief executive and co-founder at GFO-X, the UK-based digital asset derivatives trading venue, said large institutions need derivatives, and especially options, on a regulated venue to be confident about entering the crypto market.
Sen spoke on a panel at the FIA IDX conference on 18 June in London. In April last year GFO-X announced a strategic partnership with LCH SA, London Stock Exchange Group’s European clearing house to launch a segregated central counterparty clearing service, subject to regulatory approval.
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Taiwan’s central bank warns about systemic risks of rapid ETF growth; Institution says the funds have been pushing up valuations in local stock market
Sinyi Au – Financial Times
Taiwan’s central bank is predicting that the impact of locally listed equities exchange traded funds will “definitely continue to increase” as it issues a new warning to retail investors about the systemic risks associated with the rapid growth of the local ETF market.
Following a meeting of its joint supervisory committee on June 13, the Central Bank of Taiwan has published a report analysing the impact of the ETF boom on the Taiwan stock market during March and April.
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Exchanges

CME Group FX Futures and FX Link Reach All-Time Volume Records
CME Group
CME Group, the world’s leading derivatives marketplace, today announced its foreign exchange (FX) futures reached an all-time single-day volume record of 3.26 million contracts (equivalent to $314B notional) on June 12. The previous record of 3.15 million contracts ($296B notional) was set on March 8, 2023.
In addition, FX Link, CME Group’s anonymous, all-to-all spot-futures spread trading tool reached a single-day volume record of 113,662 contracts ($10.5B notional ) on June 12, which represents a 37% increase over the previous record of 82,900 contracts ($7.2B notional), set on June 16, 2022. Year-to-date, FX Link volumes are up over 52% versus the same period in 2023.
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Technology

Liquidnet to imminently roll out derivatives predicted volume curve and sweep price analytics; New analytics make up the second phase of a three-part roll-out by Liquidnet. The first phase included a set of pre-trade analytics covering volume and liquidity information.
Annabel Smith – The Trade
Liquidnet is set to roll out the second phase of its derivatives analytics suite in the next few weeks, The TRADE can reveal. Aimed at supporting buy-side traders with their derivatives flow by creating an ecosystem of information all in one place, the analytics suite is being rolled out in three phases. Already brought to market, phase one includes volume and liquidity information. Traders can access the user face via GUI or API.
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Strategy

Goldman Team Finds Alternative to Crowded TSMC Arbitrage Trade
Jeanny Yu – Bloomberg
It has become one of the most popular – and more recently, painful – trades among arbitrageurs on Wall Street: buying Taiwan Semiconductor Manufacturing Co.’s lower-valued Taipei shares and shorting the US stock on hopes prices will converge. Investors can use options to bet that the premium on TSMC’s American Depositary Receipts – currently hovering between 20% and 25% – will shrink while capping their potential for losses if markets move the wrong way, according to a note from the bank’s trading desk on Wednesday. It advises buying puts on the US ticker and selling those on the Taiwan shares.
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Long/short options ideas on European banks in June 2024
Cboe
During the year to 3 June 2024, European shares in the financials sector, and the banking industry specifically, have managed to see their prices rise even more than stocks focused on “hotter” themes like artificial intelligence and weight loss drugs. Given the Swiss National Bank has already started rate cuts, and many eyes remain on the European Central Bank and US Federal Reserve to see if they’ll do the same, it is an interesting time to consider exposure to European banks. Options represent an attractive way to gain such exposures, with Cboe Europe Derivatives (CEDX) currently offering options on 14 bank stocks from across Europe.
/jlne.ws/4c4HdMO

CEDX Options Digest
Cboe (Video)
Tariq Dennison looks at how Cboe Europe Derivatives (CEDX) equity options can be used for a long/short strategy with limited risk, when you believe there is a level of correlation in the way the prices of two stocks move.
/jlne.ws/4eA2WOy

Miscellaneous

Hedge Fund Talent Schools Are Looking for the Perfect Trader; Amid a brutal hiring war, Steve Cohen’s Point72, Ken Griffin’s Citadel and other giant hedge funds are going in a radical new direction: Training schemes for in-house superstars.
Nishant Kumar and Liza Tetley – Bloomberg
More than a decade ago, hedge fund titan Steve Cohen and his portfolio manager Harry Schwefel sat huddled on SAC Capital’s busy trading floor. Schwefel was musing on how a run of lucky breaks had powered his rise at the firm. Cohen’s reaction: “We shouldn’t allow it to be luck anymore.” Today he’s enjoying the fruits of that epiphany. The duo went ahead and constructed one of the hedge fund industry’s first assembly lines of top talent – in Cohen’s words by taking people you’d rank as a “nine” and making them perfect 10s. The result is a conveyor belt of polished high-performers who’ve helped him rebuild after a costly insider-trading scandal and to emerge on the other side with an empire whose coffers now boast $34 billion of client cash.
/jlne.ws/3KNGUKq

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