JLN Options: Tales from 'Volmageddon'; MIAX's SPIKES to Launch Feb 19; Donald R. Wilson's Book

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February 06, 2019
Spencer Doar
John Lothian News
Observations & Insight
Dash Financial Technologies Eyes Equities and Buy-Side Growth
Glenn Lesko came on board as Dash Financial Technologies' chief growth officer in summer 2018. In this video from STAC's 93rd Annual Midwinter Meeting, Lesko talks about the buy-side demand for deploying more options strategies, the potential for Dash to apply its expertise in complex market structure to other asset classes, and Dash's December acquisition of eRoom Securities.
Watch the video »
Options Etymology: The Evolution of "Volatility"
Spencer Doar - JLN
One year after the vol-pocalypse, let's look at volatility
Do you know the history of the word volatility? It comes from the French verb "voler," meaning to fly. (Interestingly, voler has a lesser used definition, "to steal.")
****SD: In case you missed the language lesson in yesterday's newsletter.
Lead Stories
The Day The Vix Doubled: Tales of 'Volmageddon'
Luke Kawa - Bloomberg (SUBSCRIPTION)
On Feb. 5, 2018, traders stood transfixed as the Cboe Volatility Index - a measure of expected volatility in the S&P 500 Index that is sometimes called Wall Street's "fear gauge" - jumped by a record 20 points to a level that hadn't been seen in years.
The Volatility Index's sudden spike brought an end to one of the calmest chapters in U.S. equities - a years-long stretch in which equity turbulence was stuck at about half its historical average. And the episode, which would eventually be dubbed 'Volmageddon,' came with a messy side-effect: the collapse of one of the most pervasive and popular trades in financial market history.
****SD: Who doesn't like a greatest hits playlist? This oral history recaps the classics: short vol Target manager's (Seth Golden's) story, the misguided Uber driver XIV recommendation, and Artemis Capital Founder Chris Cole's prescient research on the implicit/explicit short vol trade. That being said, much of the tale is left out. It doesn't touch on the ongoing litigation pertaining to the volatility complex (multiple ETPs, providers, the Cboe, etc.), it doesn't mention the big fund that went under (LJM Preservation & Growth) and it doesn't mention the momentary pain that FCMs experienced as clients' positions went to h-e-double-hockey-sticks. Check out Jim Kharouf's awesome piece in the wake of Feb 5 for more - FCMs Big And Small Suffer Major Losses On Latest Black Monday
Volatility Trading to Launch on SPIKES Index; MIAX Options Exchange Begins Trading February 19, Opening Volatility Market to Competition for First Time in History
MIAX Options is scheduled to launch volatility trading on the SPIKES Index February 19, marking the end of exclusivity in the volatility market. For more information on SPIKES, visit: https://www.miaxoptions.com/spikes. MIAX Options will list and trade cash-settled options on SPIKES, a measure of the expected 30-day volatility in the SPDR S&P 500 ETF (SPY), the most actively-traded exchange traded fund in the world.
****SD: Bloomberg Businessweek's Podcast features Simon Ho, Executive Director at T3 Index, talking about the SPIKES Index.
Hiding in Plain Sight: Donald R. Wilson Jr's Book
Alphacution Research Conservatory
Taken out of context, one might legitimately jump to the conclusion that today's installment on the Feed is about 11-time kickboxing champion, Don "The Dragon" Wilson. Or, better yet, that the initials "DRW" represent the greatest hockey team of all time, the Detroit Red Wings...
However, unfortunately for Mr. Dragon and my Wings - and given the context of the mythological trading landscape we have been exploring lately - this post can only be referring to Chicago's very own Don Wilson and his eponymous proprietary trading firm, DRW Holdings, LLC (DRW).
****SD: Missed this fun piece from Paul Rowady last week! He's doing a bunch of blogs on the big players — if you missed his last piece about Jump Trading, catch that HERE.
Trend-Following CTAs vs Alternative Risk-Premia (ARP) products: crisis beta vs risk-premia alpha
Artur Sepp Research Blog
Year 2018 was eye-opener for investors in alternative risk-premia products. A lot of these products have been sold as market-neutral but they did not live up to expectations... I think, the reason is simple: most of ARP products have been driven by marketing with nice looking back-tested results obtained by over-fitted models. I made a presentation on this topic back in early November 2018. Yet, traditional alternatives had a bad year too.
BNP Lowers Targets After Derivatives Loss Jolts Trading Arm
Fabio Benedetti Valentini - Bloomberg (SUBSCRIPTION)
Further 600 million euros of cuts to focus on investment bank; Fourth-quarter trading income shrinks 40%; equities down 70%
BNP Paribas SA cut revenue and profitability targets after the French bank was among the hardest hit by a stock market rout at the end of last year.
****SD: Reprinted by Yahoo Finance without a paywall here.
Oil: Are Options Signaling Long-Term Uncertainty?
Erik Norland - CME Group
Off The Charts! examines the pertinent economic issues of the day, providing a deeper dive into complex topics and framing the issues in a way that can lead to a better understanding of the financial and commodities markets.
****SD: Content starts at ~1:05. TL;DR - Yes, oil options are signaling long-term uncertainty.
Coffee With Cott
Welcome to Coffee With Cott, a new blog from The Options Industry Council's Financial Advisor Division that is focused on the advisor space.
Taking the Gold Out of Goldman Sachs
Matt Levine - Bloomberg (SUBSCRIPTION)
The main thing about big banks' commodity trading businesses is not that they're particularly risky, or use a lot of capital, or create unusual conflicts of interest between the bank and its clients. What makes the commodity business special is that, if you really dedicate yourself to commodity trading, you end up owning a fleet of oil tankers. Or a network of mysterious aluminum warehouses. A big bank that wants to be a serious player in commodities will find itself drawn to trading "physical commodities," rather than just contenting itself with derivatives, and physical commodities trading requires a certain physical commitment. You can trade stocks or bonds or loans or currencies or interest-rate swaps or exotic equity options or Bitcoins on a computer in your office, but if you are trading metals at some point you are going to want a forklift.
Regulation & Enforcement
Brexit: An Uneasy Truce in $400 Trillion Derivatives Fight
Lionel Laurent - Bloomberg (SUBSCRIPTION)
The EU will cooperate with the City of London on derivatives clearing in the event of a no-deal departure. Don't mistake this for a lasting global peace.
EU agrees deal to ease derivatives rules for smaller firms
Huw Jones - Reuters
Smaller firms will not have to clear their derivatives trades under changes to European Union rules agreed by the bloc's lawmakers and member states on Tuesday to cut red tape.
Federal Reserve Board Finalizes Set Of Changes That Will Increase The Transparency Of Its Stress Testing Program For Nation's Largest And Most Complex Banks
The Federal Reserve Board on Tuesday finalized a set of changes that will increase the transparency of its stress testing program for the nation's largest and most complex banks. The changes are intended to improve public understanding of the program while maintaining its ability to independently test large banks' resilience.
Eighteenth Amendment to the National Market System Plan to Address Extraordinary Market Volatility (Limit Up-Limit Down)
Comment Letter to SEC
We are writing in regards to the Commission's ongoing efforts to improve the resiliency of the equity market. We represent a diverse cross-section of market participants who are committed to ensuring that equity market structure fosters fair and efficient markets and adequately supports the needs of investors and issuers.
Sebi asks exchanges to step up intra-day surveillance in wake of major volatility in few stocks
PTI via Business Today
Capital markets regulator Sebi has asked exchanges to step up their surveillance of intra-day trading in the wake of significant volatility in a few stocks, sources said. The stocks already under the scanner of the leading exchanges BSE and NSE include those of a troubled airline, a media conglomerate facing liquidity crunch, a finance company under lens for alleged payment defaults, a pharma major being probed for insider trading and other violations as also a mining-to-infrastructure major.
Budget 2019: New Stamp Duty Proposal May Land A Hard Blow To Proprietary Trading
Sajeet Manghat - BloombergQuint
The union budget for financial year 2019-20 has ushered in a paradigm shift in how stamp duty is levied on transactions involving financial instruments such as equity shares and derivatives. A shift that may curb avoidance but will also add to trading costs and one that may be debilitating to proprietary trades by brokerages.
SEC Reporting Obligations Under Section 13 and Section 16 of the Exchange Act
Paul Hastings - Lexology
This legal update summarizes (1) the reporting requirements under Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are generally applicable to persons that own, or exercise investment discretion over accounts that own, publicly traded or exchange listed equity securities,[1] and (2) the reporting requirements under Section 16 of the Exchange Act, which are applicable to persons considered to be "insiders" of public companies. While the persons subject to the reporting requirements under Section 13 and Section 16 (each, a "reporting person") generally include both individuals and entities, this legal update focuses on the application of the reporting requirements to investment advisers and broker-dealers (each, a "securities firm"). This legal update concludes with a schedule of the filing deadlines under Sections 13 and 16 for 2019.
Exchanges and Clearing
Record Level Exchange-Traded Derivatives Volumes Were Led By Asia-Pacific and South America
Mayra Rodriguez Valladares - Forbes
The number of futures and options traded on exchanges around the world rose 20.2% to 30.28 billion contracts in 2018. This record high was primarily driven by exchange-traded derivatives transactions in Asia-Pacific and South America. Since the financial crisis, exchange-traded derivatives volumes have risen 71%.
Saffron options contracts to be launched by March 20
Tehran Times
Tehran - Given the widespread welcoming by market participants for launching futures and certificates of deposit for saffron trade at Iran Mercantile Exchange (IME) and its positive impact on transparency of the price of saffron and the elimination of intermediaries, IME will launch saffron options contracts by the end of current Iranian calendar year (March 20, 2019), IME's managing director announced.
****SD: Given it is Iran, I doubt very many people will be able to gain access to the market for this contract, but I love esoteric product debuts.
A Top Dark Pool Draws Takeover Interest From Cboe
Nick Baker - Bloomberg (SUBSCRIPTION)
Cboe Global Markets Inc. is exploring buying Bids Trading LP, which runs one of the largest U.S. dark pools, according to people familiar with the matter.
****SD: Reprinted sans paywall on Crain's Chicago Business.
US Trading Platform LedgerX Introduces Binary Wager on Bitcoin Halving
Ana Alexandre - CoinTelegraph
United States-regulated trading and clearing platform LedgerX has released a new type of derivative contract unique to Bitcoin (BTC), according to a blog post published on Feb. 5. The new product called LedgerX Halving Contract (LXHC) represents a binary option — an option where the payoff is either a fixed monetary amount or nothing — that settles to the estimated next time that Bitcoin halves.
Intercontinental Exchange Announces Further Record Trading in TTF Natural Gas and JKM LNG (Platts) Contracts
Intercontinental Exchange
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced further record trading in TTF Natural Gas and JKM LNG (Platts) contracts.
On January 30, 2019, TTF futures hit an open interest (OI) record of 1.04m lots. TTF futures and options combined achieved monthly volume of 952.4 TWh in January. Average daily volume (ADV) and OI in TTF futures and options combined are up 103% and 64%, respectively, in January 2019, versus January 2018.
ASX Group Monthly Activity Report - January 2019
...In January 2019, single stock options average daily contracts traded were down 10% and index options average daily contracts traded were down 13% on the pcp.
Bloomberg Fixed-Income ETF Tracker
A volatile stock market prompted another flight to safety for bond investors closing out a rocky 2018.
****SD: I listened in on the FIA's 2018 Volume and OI Trend Recap webinar this morning (more to come on that) and it made mention of the epic growth in options on HYG (the iShares iBoxx High Yield Corporate Bond ETF).
Wall Street Banks Reckon Dollar Must Fall. Traders Disagree
Todd White and Eddie van der Walt - Bloomberg (SUBSCRIPTION)
As a growing chorus of analysts from the likes of Morgan Stanley and Nomura predict dark days for the dollar, the market is telling a different story.
The U.S. currency has rallied almost 1 percent since the day of the surprisingly dovish Federal Reserve meeting in January, erasing all of its 2019 loss. And the outlook is actually getting stronger, based on the options market. Contracts that appreciate if the dollar rises versus its major peers over the next three months are near their most expensive level since mid-December relative to hedges guarding against a drop.
JPMorgan Asset Likes Yen as Hedge in Tough Market Environment
Andreea Papuc - Bloomberg (SUBSCRIPTION)
Japanese currency is cheap and can strengthen further - JPMAM; Other hedging tools like VIX, stock options seen expensive
As investors adjust to the prospect of a slowing global economy, JPMorgan Asset Management is turning to the yen for protection from an uncertain outlook.
China's currency is heading for a volatile year - and that may be a good thing
David Brown - South China Morning Post
The renminbi's recent roller-coaster ride is not over yet. China's currency is adrift in a sea of global uncertainty - and there's not much Beijing can do to stop it. The renminbi is pitching about on huge swells of economic and political risk which have little chance of easing in the coming months. This means tough times ahead for investors trying to get a better handle on the currency's outlook this year. Increased volatility and risk are likely to mark 2019 for the renminbi.
Cboe Global Markets to Present at the Credit Suisse 2019 Financial Services Forum on Tuesday, February 12
Cboe Global Markets, Inc., one of the world's largest exchange holding companies, announced today that Chris Isaacson, Executive Vice President and Chief Operating Officer, will present at the Credit Suisse 2019 Financial Services Forum on Tuesday, February 12, at 1:00 p.m. (Eastern Time).
Davos 2019: the biggest risks this year
Eurex Exchange
The new 14th Global Risk Report deals with macro risks now developing and highlights the main dangers that could cause upheavals in world affairs in 2019 and over the next ten years. More than 90% of respondents expect economic confrontation/tension between major economic powers to increase further in 2019, and about the same number also expect multilateral trade rules and agreements to erode.
****SD: Is the biggest risk billionaires getting called billionaires?
'This One Here Is Gonna Kick My Butt' - Farm Belt Bankruptcies Are Soaring
Jesse Newman and Jacob Bunge - WSJ (SUBSCRIPTION)
A wave of bankruptcies is sweeping the U.S. Farm Belt as trade disputes add pain to the low commodity prices that have been grinding down American farmers for years.
Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade, a Wall Street Journal review of federal data shows.
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Managing Editor
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Spencer Doar
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