We’re now seeing the sharp edge of market volatility’s sword and it cuts deep; Coronavirus Shutdown Casts Doubt on Value of Exchange Trading Floors

May 21, 2020

Observations & Insight

SC: For novice constituents who need volatility basics, as well as for the veterans who might want some bedside reading, the CFA Institute Research Foundation recently published “The VIX Index and Volatility-Based Global Indexes and Trading Instruments: A Guide to Investment Trading Features,” co-authored by Matt Moran and Berlinda Liu. The CFA, which claims more than 150,000 charterholders worldwide, issued the study April 30, just under the wire for the VIX’s 27th birthday last month.
During April 2020, the VIX Index ranged between a session high of 60.59 on April 1 and a session low of 30.54 on April 28. That compares with a long-term VIX Index average of 19.1 through 2019.

Lead Stories

We’re now seeing the sharp edge of market volatility’s sword and it cuts deep
Satyajit Das – MarketWatch
Central bank actions have for the most part suppressed market volatility since the financial crisis of 2008. This is part of a deliberate strategy to lower risk, which is measured by volatility. Reduced risk, it’s hoped, will facilitate borrowing to boost growth. Yet these measures have failed in their primary objective, instead encouraging speculation — which now exerts significant influence over markets and prices.

Coronavirus Shutdown Casts Doubt on Value of Exchange Trading Floors; NYSE’s 4 p.m. auctions run more smoothly, study finds; investors get better prices for S&P 500 options
Alexander Osipovich – WSJ
Investors won’t necessarily benefit when the New York Stock Exchange and other market operators welcome traders back to their closed floors, new research suggests. An academic study released Thursday found that NYSE’s crucial 4 p.m. auctions, which determine end-of-day prices for thousands of stocks, ran more smoothly after the Big Board closed its floor to curtail the spread of the coronavirus. NYSE has questioned the study’s conclusions.

Federal Reserve FOMC April meeting minutes show 2nd virus wave risks
Ben Winck – Business Insider
Minutes from the Federal Reserve’s April meeting released Wednesday highlighted key risks emerging throughout the US as lockdowns pushed forward.
Members of the Federal Open Market Committee noted that “extremely elevated” uncertainty surrounding the outbreak rendered previous downturns far less helpful in modeling for the future. The central bank judged that a “more pessimistic projection was no less plausible” than a base case that featured a recovery taking place through the second half of 2020.

Taleb and Asness feud on Twitter over tail-risk hedging
Steve Goldstein – MarketWatch
There’s nothing like a very public spat between two titans of the financial world. In the one corner, “Black Swan” author Nassim Nicholas Taleb; in the other, Cliff Asness, the founder of AQR Capital Management. The two took to Twitter with each using unprintable words about whether it’s worth the cost to insure against extreme events, or what’s called tail-risk hedging. Taleb criticized AQR’s performance, which Asness acknowledges but says is due to the market’s current punishment of value stocks.

Exchanges and Clearing

Five block trades made up 81% of CME’s recent bitcoin options contract volume
Celia Wan – The Block
Derivatives exchange CME Group has seen a significant pickup of its bitcoin options contract volume over the past week, although five trades accounted for around 81% of these contracts. From May 12 to May 19, a total of 3,059 bitcoin options contracts traded hands, marking May the most active month in CME’s history of bitcoin options trading. Among them, 2,490 contracts can be attributed to five block trades, which are transactions conducted off the public exchange order book due to their large quantities.

CME Globex Notices: May 18, 2020
CME Group

Transfer of Eight (8) NYMEX Metals Futures and Option Contracts to COMEX – New Effective Date of Trade Date Monday, July 13, 2020
CME Group
On December 30, 2019 via SER 8507, New York Mercantile Exchange, Inc. (“NYMEX”) and Commodity Exchange, Inc. (“COMEX”) (collectively, the “Exchanges”) advised that they intend to transfer the listing of eight (8) metals futures and option contracts (the “Contracts”) set forth in the table below from NYMEX to COMEX. The Exchanges advised of the postponement of this initiative on March 17, 2020 via SER 8535R.

Regulation & Enforcement

Traders Beware: U.S. taps new tools to find fraud in volatile commodities market
Chris Prentice – Reuters
When the U.S. Department of Justice charged a handful of JP Morgan Chase & Co (JPM.N) traders in 2018 and 2019 with alleged commodities futures manipulation, it wasn’t the first time the government had probed the bank’s metals trading activities. The Commodity Futures Trading Commission (CFTC) investigated the same business as part of a similar probe of the silver market years earlier, but it was not able to build a case with the data it had at the time, according to U.S. court filings and a person with knowledge of the aborted probe.


FIA welcomes six new associate members
Jeff Reeves – FIA.org
FIA welcomes six new associate members who recently joined the trade organization.


Slack Stock Is a Bet on the Future of Work. How to Play It With Options.
Steven M. Sears – Barron’s
Slack me.
This phrase has become increasingly widespread, as Covid-19 has changed how people communicate with colleagues and friends.
In the absence of face-to-face conversations, people are using Slack Technologies (ticker: WORK) to converse in a virtual world that is organized around subjects.

How to Enhance Order Execution During High Volatility
Asad Bhatti – Cboe blog
As volatility increases in the broader equity markets, market experts have opined that the average cost of trading has also pushed higher. Using a simple trade impact model, this observation can be dissected into two main drivers: the appearance of wider spreads and an increased exposure to higher price volatility. Just by its nature, volatility can be expected to fluctuate over time and also during the course of the trading day. For example, the first hour of the trading day is typically associated with wider than normal spreads and higher than average volatility.


2020 Educational Series: Bullish, Bearish and Neutral Strategies
A new quarter is here, and that means it’s time for a brand new round of educational events from The Options Industry Council (OIC). All throughout the second quarter of 2020, OIC’s industry professionals will be hosting sessions that promise something for investors of all levels, with detailed overviews of bullish, bearish and neutral option strategies.

Vertical Spreads
Professional traders commonly implement options strategies that can afford defined risk and defined reward. This is why spread trading is so popular. If you’re new to options or have never traded a spread, the first step begins with understanding the Vertical Spread strategy.


Cboe Global Markets to Present at Deutsche Bank Global Financial Services Virtual Conference Wednesday, May 27
Cboe (press release)
– Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, announced today that Ed Tilly, Chairman, President and Chief Executive Officer and Brian Schell, Executive Vice President, Chief Financial Officer and Treasurer, will present at Deutsche Bank’s 10th Annual Global Financial Services Conference, to be held virtually, on Wednesday, May 27 at 1:45 p.m. (Eastern Time).


Stock Pickers Exposed In Volatile Markets
Mark Gilbert – Bloomberg
Active equity investors, they tell us, are far better stewards of our savings when markets are volatile. Their underperformance compared with passive investment products in recent years, they explain, is down to ever-rising stock markets flattering the returns available from index trackers. So the recent surge in volatility, with equity prices exhibiting unprecedented short-term swings, would have been their time to shine, right?

Wishful Thinking Makes This a Tough Market to Beat
Investors are just as prone to wishful thinking as anyone else, but this week’s wild stock swings showed that even unwarranted hope can be applied entirely rationally.
Monday brought news everyone wants, of progress toward a vaccine. The progress reported by Moderna was small, but it was enough to prompt a big shift in the market as investors bought into the idea that perhaps there could be a V-shaped recovery after all.

How coronavirus turned the business of trading at banks on its head
Philip Stafford, Stephen Morris and Eva Szalay – Financial Times
Traders have long lived by a mantra famed for its masochism: be at your desk at 6:45am, come hell or high water.
But the tens of thousands of traders who buy and sell everything from currencies to convertible bonds across the world’s financial hubs did not count on coronavirus. In a few short weeks, the pandemic has ripped up every established convention about the business.

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