To Thrive in This Turbulent Market, It Pays to Be the Market

Dec 3, 2018

Observations & Insight

Market Closure for Mourning Day and Other Monday Notes
Spencer Doar – JLN

Due to the death of President George H.W. Bush on Friday, U.S. equity and options markets will be closed. CME Group U.S.-based equity and interest rate futures and options will be closed, but all of CME’s other markets will be open.

As there are weekly Wednesday expirations, the OCC “will allow options exercises and expiration processing as OCC will produce all customary output.” Check out the OCC information memo page for those updates.

Meanwhile, another VIX-linked ETP bit the dust. The last day of trading for the REX VolMAXX Short VIX Futures Strategy ETF (VMIN) was November 26. REX’s non-inverse VIX ETP (VMAX) was liquidated over the summer.

REX Shares is run by Greg King, who has had a part in the creation of a number of ETPs during his time with Barclays and VelocityShares, including the popular ETN VXX and the now infamous XIV.

Bitcoin is continuing its meltdown south of $4,000.


The Spread – “Florida Man” Edition – 11/30

Sadly, it appears no one had a funny VIX-related sign at a sporting event this week, but never fear, there’s plenty of content in this edition of “The Spread” – the Florida options trading firm blow-up, volatility products in Israel, (non-Keanu) Matrix news, and more!

The Spread is sponsored by MIAX.

Watch the video and see the stories referenced here »

Lead Stories

To Thrive in This Turbulent Market, It Pays to Be the Market
Steven Russolillo – WSJ (SUBSCRIPTION)
In a year of battered global markets, one group is proving to be a big winner: stock exchanges and trading firms. U.S. exchange operators such as New York Stock Exchange parent Intercontinental Exchange Inc., Nasdaq Inc. and CME Group Inc. are up by double-digit percentages this year. Internationally, the same goes for Germany’s Deutsche Boerse AG and Australia’s ASX Ltd.

****SD: Cboe is just about the only one down on the year (by about 14 percent), attributable to concerns about allegations of VIX manipulation

Good News for Stocks? Options Investors Eye December Rally
Gunjan Banerji – WSJ (SUBSCRIPTION)
Stocks have swooned the past three turbulent months, but options investors are betting on a rebound through the remainder of the year.
The S&P 500 has tumbled 5.8% from its September peak on worries about global growth and trade. But last week, the benchmark gauge gained 4.8%—its biggest one-week rally since December 2011.

Pound vigilantes short on firepower to force parliament’s hand
Bloomberg via Gulf Times
Pound vigilantes may not have enough ammunition to force parliament to pass Prime Minister Theresa May’s Brexit deal even in a second vote, influential investors say. Speculation has been growing that sterling will plummet if parliament were to reject the divorce pact on December 11. This, the theory goes, would heap pressure on lawmakers to look for a way out, ensuring the deal is cleared eventually.

Hedge funds finish selling crude but increasingly bearish on diesel
John Kemp – Reuters
Hedge fund managers had largely completed the recent wave of selling in crude oil futures and options by the middle of last week but there were heavy sales of derivatives linked to middle distillates.

With ‘biggest wildcard’ off the table, a Santa rally could stuff investor stockings
Shawn Langlois – MarketWatch
For investors, Christmas just might have come early.
The U.S. and the China called a truce in their testy trade war over the weekend, and while the impact of such a cease-fire may ultimately prove temporary, the bulls have to like what it means for the short term. Just one look at the futures market, and it’s pretty clear one big worry has been shelved.

Hedge Funds Exposed: Volatility Is Only Making Matters Worse
Saijel Kishan and Nishant Kumar – BloombergQuint
This was meant to be Deepak Gulati’s moment.
The hedge fund manager has been waiting for the return of market volatility to help him recover losses after years of calm markets hurt his $955 million firm. Yet even with the recent whipsaw in stocks, Gulati hasn’t made any money through the first 10 months of the year.
Wide swings in prices, a waning bull market and rising rates were seen as the elixir that the $3.2 trillion industry needed to overcome years of subpar performance. But hedge funds got pummeled in last month’s market swoon and are headed for their worst year since 2011.

Three Minutes With John Fennell, Chief Risk Officer At OCC
Jessica Darmoni – Hehmeyer Trading + Investments Blog
Hehmeyer Trading + Investments sat down with OCC’s John Fennell to talk about how OCC supports market innovations, manages industry risk and addresses advancements in the derivatives space.

Podcast: Dominique Bang on his stochastic local vol model; New approach delivers quick and accurate computation of prices
Dominique Bang, head of interest rate vanilla analytics at Bank of America Merrill Lynch in London, joined us in our studio to talk about his work on a local stochastic volatility model.

Exchanges and Clearing

OCC Surpasses Annual Cleared Contract Record With 4.81 Billion YTD
OCC, the world’s largest equity derivatives clearing organization, announced today that total cleared contract volume in November reached 438,027,585 contracts, up 10.4 percent compared to November 2017 volume of 396,779,462. Year-to-date, OCC has cleared 4.71 billion options contracts and 4.81 billion total contracts, with both reaching new annual cleared contract volume records for the U.S. exchange-listed options industry. The previous records, set in 2011, were 4.56 billion options contracts and 4.60 billion total contracts.

HKEX to Add Mini-HSCEI Options to After-Hours Trading from Tonight; Addition of Mini-HSCEI Options will complete roll-out of eight major stock index products in AHT; Index futures and options’ average daily AHT volumes are up sharply from their initial levels
Hong Kong Exchanges and Clearing Limited (HKEX) is adding Mini-Hang Seng China Enterprises Index (HSCEI) Options to its after-hours trading (AHT) from this evening.

Eurex plans to appeal CME antitrust case ruling
Philip Stafford – FT (SUBSCRIPTION)
Eurex plans to appeal against the loss of a 15-year old lawsuit it brought against CME Group alleging the Chicago exchange had violated US antitrust laws to stop a rival venture from getting off the ground. The group, the derivatives bourse of Deutsche Boerse, filed a notice confirming its intention in an Illinois district court late on Friday.

Japan Exchange Group: Trading Overview In November 2018
Press Release
In November 2018, total derivatives trading volume was 31,173,138 contracts.

Trading Statistics November 2018
Nasdaq (Nasdaq:NDAQ) today publishes monthly trade statistics for the Nordic and Baltic markets.

BOX Exchange Fee Change – PIP and COPIP Transaction Fees
Effective December 1, 2018, BOX Exchange LLC (“BOX”) is making the following changes to the BOX Fee Schedule.

Regulation & Enforcement

DRW’s Wilson scores a big win in federal court in CFTC case
Lynne Marek – Crain’s Chicago Business
A New York federal judge has ruled in favor of DRW Trading in a case brought against the big Chicago trading firm and its owner, Don Wilson, by the Commodity Futures Trading Commission in 2013.

****SD: Not options, but this is a fun bit of legal writing from Judge Richard Sullivan: “It is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented that product.”

Justices Seem Likely to Reinforce U.S. Securities-Fraud Laws
Greg Stohr and Benjamin Bain – Bloomberg (SUBSCRIPTION)
U.S. Supreme Court justices seemed likely to reinforce the Securities and Exchange Commission’s powers, hearing the case of an investment banker accused of duping investors about a startup company’s financial condition.
The banker, Francis V. Lorenzo, says the SEC didn’t have enough proof to hold him liable for taking part in a scheme to defraud investors.


Sell-Side Desires Variety in its Surveillance Offerings
John D’Antona Jr. – Traders News (Sponsored by S3)
The sell-side wants change in the options currently open to them when it comes to trade surveillance.
Market surveillance has been one of the newer catch phrases to hit the financial and equities marketplace. Being on the lookout and able to snuff out nefarious or problematic trading behavior before it occurs and preventing adverse price selection or worse is forefront on the minds of the sell-side and the institutional trading clients they service.


VIX Trading Patterns To Watch Closely Through The Fed’s Asset Unwind Into 2019
JD Henning – Seeking Alpha
On Sep 20, 2017 the Fed announced a balance sheet normalization program to reduce some of $4.5T in holdings mainly acquired during quantitative easing programs from 2008 onward.


What Do We Mean By Risk-On and Risk-Off ?
Scott Bauer – CME Group
Much of 2018 has experienced market sentiment flip flopping back and forth daily between “Risk On” and “Risk Off.” There is daily headline risk, geopolitical risk and economic risk, not to mention the ongoing political rumor mill. This type of action can take a toll on a trader or investor’s emotions, and can also provide opportunity. But what exactly does “risk on” and “risk off” mean?


Nikkei 225 Beats Topix by Most in 20 Years on ‘Abnormal’ Move
Min Jeong Lee – Bloomberg
Blue-chip stock gauge is outperforming due to certain stocks; Nikkei 225 seen as flawed because it is price-weighted
In Japanese equities, a gauge of the country’s biggest shares is beating the general market by the most in two decades.

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