Wall Street’s favorite volatility index is the latest stock-market bubble, JPMorgan’s quant guru says; Structured Notes Saw Record Demand in a Volatile 2020. Investors Should Mind the Fine Print.

Feb 24, 2021

$29,776/$300,000 (9.9%)
Thomas Krabbe

Observations & Insight

MR: The internet data firm Invisibly posted on their blog that after polling 1,352 Americans, they found that 77 percent of respondents believe that Robinhood’s shutdown during the GameStop trading frenzy was market manipulation on the part of Robinhood. When asked if they thought Robinhood shut down to “protect hedge funds,” 45 percent answered “No,” and 55 percent answered “Yes.” When asked what they thought about the GME stock frenzy, an average of 42 percent said they thought it was a good thing for the markets and for investors; this was the case for respondents regardless of whether they reported being actively involved in the stock markets or not.

Lead Stories

Wall Street’s favorite volatility index is the latest stock-market bubble, JPMorgan’s quant guru says
Ben Winck – Markets Insider
The latest bubble in the stock market isn’t a stock at all, but Wall Street’s favorite volatility metric, Marko Kolanovic, global head of macro quantitative and derivatives strategy at JPMorgan, said Wednesday.
Stocks’ climb to record highs earlier in February triggered speculation around whether some sectors had grown overstretched. Elation over tech stocks, SPACs, and cryptocurrencies all prompted calls that the market was rife with bubbles.

Structured Notes Saw Record Demand in a Volatile 2020. Investors Should Mind the Fine Print.
Evie Liu – Barron’s
The stock market has kept rallying over the past few months, yet talk about a potential bubble is on the rise as well. At the same time, historically low interest rates have pushed income-seeking investors to look elsewhere for higher yields. All this has helped fuel the increasing popularity of structured notes, or debt securities linked to complicated derivatives trades that offer higher returns and some level of protection.

BOE Rate-Hike Bets Pick Up Leaving Option Traders Wanting More
James Hirai – Bloomberg
Unimaginable just six months ago, investors are piling in to bets that will pay out if the Bank of England raises interest rates for the first time since 2018.
The central bank sparked the game-changing moment earlier this month, after policy makers signaled optimism that the U.K.’s vaccine push would see growth rebound from the worst recession in more than 300 years. Officials further emphasized that sub-zero rates weren’t an imminent prospect, even as a report on their feasibility encouraged preparation for such a scenario.

Two Telecom Lines Fail to Protect World’s Top Derivative Bourse
Nupur Acharya and Siddhartha Singh – Bloomberg
Less than an hour into trading in India’s $2.7 trillion stock market on Wednesday, dealers saw index levels on the National Stock Exchange’s cash segment had stopped updating. By 11:40 a.m., the world’s biggest derivatives bourse halted trading in all segments. The incident prompted the markets regulator to ask the NSE to investigate why trading didn’t migrate to its disaster-recovery site to prevent the longest-ever trading outage the country has seen. The exchange handles the globe’s highest number of futures and options contracts, and with expiry looming Thursday, business was humming.

Are Interest Rates the New Crypto?!
Frank Kaberna – tastytrade
Interest rate markets aren’t “new” or “in vogue” or “what Elon Musk is tweeting about,” but they are moving. Just two months into 2021, ephemeral infatuations with Shiba Inu-based cryptocurrencies and video game retailers have subsided, but yields have continued to keep pace with more enduring trends like the bullish run in Bitcoin. What is new? Small Yield Curve futures that provide three flavors and an overall simpler experience when trading interest rates. The Small Exchange has launched Small 2YR, 10YR, and 30YR Treasury Yield futures that give the everyday trader easier access to an oldie but a goodie in interest rates.

Whispers of $100 Oil Return as Crude Shakes Off Covid’s Clasp
Ben Sharples – Bloomberg
While oil’s dizzying collapse is still fresh for many traders, rumblings are starting to emerge that by the end of next year prices could once again top $100 a barrel. Azerbaijan’s Socar Trading SA predicts global benchmark Brent could hit triple digits in the next 18 to 24 months, and Bank of America sees potential spikes above $100 over the next few years on improving fundamentals and global stimulus. Speculators are also getting in on the action, increasing bets in the options market that oil will reach the vaunted level by December 2022.

Pound Rises ‘Like a Phoenix’ in Longest Rally in Half a Decade
William Shaw and Greg Ritchie – Bloomberg
Sterling’s vaccine-fueled rally against the euro is beginning to look relentless. The pound extended its longest winning streak in five-and-a-half years, rising for a ninth straight day, after the Telegraph reported the U.K.’s exit from lockdown could be accelerated if data on the effect of vaccines prove better than expected. That’s adding to optimism that Britain will bounce back faster than its European peers.

Exchanges and Clearing

U.S. Stock Trades to Clear in a Day Under Clearinghouse Proposal
Annie Massa – Bloomberg
The clearinghouse that played a role in last month’s Reddit-fueled market frenzy is proposing that settlement times for U.S. stock trades be cut in half — from two days to one — by 2023.
Depository Trust & Clearing Corp. offered a blueprint for speeding up the process in a white paper published Wednesday. The behind-the-scenes system underlying any trade — where buyers and sellers exchange cash for securities — was thrust into the spotlight after retail investors coordinated on Reddit to bid up GameStop Corp. and other stocks.

Longest NSE Outage Spurs India Exchanges to Extend Trading
Nupur Acharya and Ronojoy Mazumdar – Bloomberg
India’s two national equity bourses in a rare move extended trading hours for Wednesday after the National Stock Exchange of India Ltd. had to shut its cash and derivative segments due to “issues” with telecom links of its two service providers.
The joint decision came after the NSE, the world’s biggest derivatives exchange by number of contracts, halted trading for more than three hours in what was its longest-ever outage. Marker regulator Securities and Exchange Board of India has asked the exchange to carry out a detailed root-cause analysis of the halt and explain why trading didn’t migrate to its disaster recovery site.

Hong Kong Exchange Looks for Next Act After Record Year
Kiuyan Wong – Bloomberg
A year anticipated to be full of headwinds for Hong Kong’s stock exchange turned euphoric instead. The challenge is now to add to the momentum. Hong Kong Exchanges & Clearing Ltd. on Wednesday reported that profit rose 23% to a record HK$11.5 billion ($1.48 billion) in 2020. Incoming Chief Executive Officer Nicolas Aguzin is preparing to take the helm after a year when trading jumped 60%, the bourse saw the biggest initial public offering flood in a decade and inflows of cash through links to Shanghai and Shenzhen doubled. Political tension drove a bevy of high-profile Chinese firms to find a new home in Hong Kong on concern they would be booted off U.S. exchanges, their long-time source for funding.

CCP12 First 2020 Newsletter
Dear Reader, Welcome to the First 2020 Newsletter of the Global Association of Central Counterparties, also known as “CCP12”. 2020 is a challenging year for all of us. The CCP12 team hopes that you and your family and colleagues are safe and in good health. The global pandemic affected all kinds of industries as well as the CCP industry. But once again, CCPs showed their resilience and that they are a safe haven for market participants during extreme periods of stress.

Regulation & Enforcement

SOFR adoption stalls after US Libor delay; Stay of execution, RFR illiquidity and fallback reliance slow SOFR adoption
Robert Mackenzie Smith – Risk.net
The derivatives market’s transition to the secured overnight financing rate (SOFR) has stalled since regulators granted US dollar Libor an 18-month reprieve, with traders blaming poor liquidity and the industry’s reliance on new fallback language for a dearth of new swaps linked to the successor rate since November.


OptionMetrics Announces Version 5.0 of IvyDB US Options Database with Enhancements to Dividend Data for Academia and Institutional Investors
OptionMetrics, an options database and analytics provider for institutional investors and academic researchers worldwide, is announcing updates to its flagship options database with the release of IvyDB US 5.0. IvyDB US 5.0 builds on OptionMetrics’ heritage of providing the most comprehensive database of historical options data, offering complete end-of-day data on all U.S. exchange-traded equity and index options from January 1996 onward. It makes a greater amount of data available to academic researchers and also leverages updated methodologies to more precisely account for dividends and dividend projections in the calculation of implied volatilities and greeks.


Cboe Global Markets to Present at the Raymond James Institutional Investor Virtual Conference on Tuesday, March 2
Cboe Global Markets, Inc., a market operator and global trading solutions provider, announced today that Ed Tilly, Chairman, President and Chief Executive Officer, Chris Isaacson, Executive Vice President and Chief Operating Officer, and Brian Schell, Executive Vice President, Chief Financial Officer and Treasurer, will present at the Raymond James Institutional Investor Virtual Conference on Tuesday, March 2 at 8:20 a.m. ET. The webcast and replay of the virtual presentation will be accessible at www.cboe.com in the Investor Relations section, under Events and Presentations. The archived webcast is expected to be available within an hour of the presentation.

Registration is open! – FIA Boca 2021

The SEC’s new derivatives rule: practical implications for funds
25 February 2021 • 10:00 AM – 11:00 AM EST
The SEC recently adopted Rule 18f-4 under the 1940 Act, which will establish a comprehensive framework for the use of derivatives transactions by registered funds. The rule will replace SEC guidance and staff no-action letters that together have governed the use of derivatives by registered funds for over 40 years with an expansive regulatory framework. Funds will not need to come into compliance with the rule until the summer of 2022, but most fund families will need to devote significant time and resources to prepare for the new regulatory framework in advance of the compliance date.

A New Virtual Experience
The Options Industry Conference is Going Virtual in 2021. Join OCC and the options exchanges for the 39th annual Options Industry Conference, April 28-29, 2021. While the conference will be held virtually for the first time in history, the focus will continue to be the key topics facing the options industry today, from the regulatory shifts in the U.S. and Europe to the technological developments that are driving monumental change in markets around the globe.

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