Observations & Insight
For 2018 monthly exchange market share information, click here.
New Research Shows European Demand For U.S. Equity Options Remains Strong
The Options Industry Council (OIC), an industry resource funded and managed by OCC, the world’s largest equity derivatives clearing organization, today announced the results of the study, European Demand for U.S. Exchange-Listed Equity Options 2018, conducted by Burton-Taylor International Consulting and commissioned by OIC.
The Burton-Taylor study found that European investors account for approximately nine percent of total U.S. exchange-listed equity option order flow and that the magnitude of their U.S. equity holdings has increased 52 percent since 2013 to a total of $461 billion in 2017, continuing to drive the demand for risk management strategies for portfolio protection. Additionally, European investors focus on income generation, capital appreciation and volatility strategies. Hedge funds comprised the largest category of European users, accounting for an estimated 53 percent of total European order flow. Private wealth management accounted for 21 percent, proprietary trading firms accounted for 12 percent, and investment managers eight percent.
Volatility: friend turns to foe as markets lose their crutch
Amin Rajan – Financial Times
When Wall Street’s fear gauge, the Vix index, shot up 116 per cent in one day in early February, the S&P 500 duly fell 4.1 per cent. It has since recovered, as it did after similar rollercoaster rides in the first half of this decade — except for one difference.
Such volatility then did not cause so much fear. Defined as a measure of dispersion of returns of a given security (or index) around their long run average, it provided an ideal opportunity for exploiting temporary price dislocations, according to 71 per cent of investors in a survey published at the time.
It’s the Volatility (of Volatility), Stupid!
Bill Kelly – AllAboutAlpha
Just about 25 years ago a political strategist named James Carville brought this phrase into the common lexicon when he used the “Economy” as the initial punchline. The resonation of that simple phrase is arguably what got Bill Clinton into the White House. At just about that same time and a short 1,000 miles away from Hope, Ark., Professor Robert Whaley was busily creating the CBOE Volatility Index, commonly known as the VIX, or the more foreboding Fear Index or Fear Gauge. There is no reason to believe that these events are at all connected, but history might show that this derivative phrase might be an excellent platform for the savvy investor seeking the best risk-adjusted returns, rather than the highest office in the land.
Exchanges and Clearing
‘They are pulling things out of thin air:’ The war tearing apart Wall Street has reached a fever pitch
Frank Chaparro – Business Insider
A proposal to shake up stock trading in the US has been tearing apart Wall Street, and now the infighting has reached a fever pitch.
The Securities and Exchange Commission in March proposed a pilot program that would the impact of examine rebates [sic], a type of incentive some stock exchanges pay out to traders to lure them to their venues. The pilot would eliminate rebates in certain cases in order to analyze how the practice impacts the markets.
Why Is Cboe Global (CBOE) Down 7.5% Since its Last Earnings Report?
It has been about a month since the last earnings report for Cboe Global Markets, Inc. CBOE . Shares have lost about 7.5% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is CBOE due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
OCC Cleared Contract Volume Increased Eight Percent in May
OCC, the world’s largest equity derivatives clearing organization, announced today that total cleared contract volume in May reached 411,264,931 contracts, an eight percent increase from May 2017 volume of 380,010,098. OCC’s year-to-date average daily cleared contract volume is up 25 percent from 2017 with 21,321,765 contracts compared to 17,079,884 contracts in 2017.
Options: Overall exchange-listed options volume reached 403,748,267 contracts in May, up 10 percent from May 2017. Equity options volume reached a total of 366,176,065 contracts, a 12 percent increase from May 2017. This includes cleared ETF options volume of 150,994,638 contracts last month, a 12 percent increase over May 2017 volume of 134,835,545 contracts. Index options volume was down four percent with 37,572,202 contracts in May.
CME Group Reached Average Daily Volume of 20.1 Million Contracts in May 2018, Up 22 Percent from May 2017
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it reached average daily volume (ADV) of 20.1 million contracts during May 2018, up 22 percent from May 2017. Open interest at the end of May was 126 million contracts, an increase of 2 percent from the end of May 2017, and up 16 percent from year-end 2017.
May volume was buoyed by an all-time daily volume record of 51.9 million contracts traded on May 29.
Options volume averaged 3.6 million contracts per day in May 2018, up 5 percent from May 2017. Highlights include:
Interest Rate options ADV increased 12 percent to 2.3 million contracts
Weekly Treasury options ADV rose 27 percent to 142,000 contracts
Agricultural options ADV grew 27 percent to 303,000 contracts, including a 28 percent increase in electronic options to 229,000 contracts
FX options ADV rose 12 percent to 83,000 contracts
Metals options ADV grew 12 percent to 54,000 contracts
“Record volumes across the board.”
The Italian BTP segment has seen record volumes across the board, both in terms of open interest and traded volumes. I expect this to continue as the new balance of power in the Italian parliament promises further uncertainty for end investors and the markets. Having said this, the pickup in realized volatility has seen volumes in all of Eurex’s fixed income products reach record levels. What is encouraging is the breadth of volume increase in BTP both in futures and options. Having this breadth of product coverage has allowed investors to hedge and position their portfolio’s accordingly. All this wouldn’t have been possible without the support of our members, who have provided liquidity in choppy markets.
Does Anyone Else See A Giant Bear Flag In The S&P 500?
Charles Hugh Smith – Seeking Alpha
“Reality” is in the eye of the beholder, especially when it comes to technical analysis and economic tea leaves. It seems most stock market soothsayers are seeing a breakout of the downtrend that erupted in early February, and so the path to new all-time highs is clear.
Does anyone else see a giant bear flag pattern in the daily chart of the S&P 500? Maybe I’m the only one who sees a bearish signal instead of a bullish breakout.
The mystery trader who roiled Wall Street
Miles Johnson and Robert Smith – Financial Times
For hedge funds that make their money gambling on whether companies will go bust, it was an opportunity too tempting to ignore. In 2015, brokers working on behalf of a mystery client in London, offered these funds the chance to make a trade they thought was impossible to lose: betting that a teetering Norwegian paper company would imminently default on its debt. The hedge funds snapped up hundreds of millions of dollars of the derivatives contracts that would pay out in the event of a default.
By the time the buyers realised who was on the other side of the trade it was too late: they had been trapped. One hedge fund manager recalls receiving a call from a sympathetic contact pleading with him to exit a trade. “It was an off-the-record warning in order to protect me,” he says. “He basically told me who was on the other side. It was him.”