Observations & Insight
STAC Options Notes
Spencer Doar – JLN
It was a lively options market structure panel at STAC’s Mid-Winter Meeting in Chicago Wednesday. Moderated by OCC’s Chief Risk Officer John Fennell, the panelists were BOX CEO Ed Boyle, Dash Financial CEO Peter Maragos, CTC’s Head of Market Structure Steve Crutchfield, and IMC Managing Director Paul Jiganti. Here are some takeaways.
Crutchfield gave an example, provided by Trade Alert President Henry Schwartz, of how burdensome bank capital rules can be on big bank clearers (there are pretty much only three) of options liquidity providers. In a very tight put spread where there is defined risk of $1, banks would be required to hold $10 or in some cases even $30 under current regulatory requirements. Oof. Given how long it can take for new regulations to be implemented, in the interim, maybe someone could come up with a creative interpretation of the existing regs to ease this burden?
Another burden on liquidity providers comes on the technology side. A broad example given: if a new entrant into the market making space were to somehow capture 1 percent of all options order flow with average profit around a cent and a half – the firm would pull in about $50 million with nothing else taken into consideration. But, $50 million is in the range of how much the big market makers pay for market data.
In the coming year, there is agreement that there are some “low hanging fruit” type of improvements that can be accomplished. One such fruit brought up by Jiganti was revamping the strike listing and delisting process, although it will involve getting all the SROs together…
Unique problems for options inclusion in the Consolidated Audit Trail: 1) quote data is probably two orders of magnitude greater than equities, 2) this is a new frontier and 3) from the regulators perspective, it is difficult to “link” complex orders with their multiple legs to a strategy or opinion.
Two other issues moving forward: Rethinking the use of auctions and the efficacy of speed bumps to keep the pros from nailing each other.
While there are plenty of issues in the options market, the silver lining is despite regulatory headwinds, market structure kinks and a low volatility, low interest rate environment, OCC’s cleared volume was up 4 percent in 2017. Moreover, options are still viewed as an underutilized tool in investor portfolios, providing tremendous upside.
A Huge Player in VIX Options Just Changed Its Buying Behavior
Luke Kawa – Bloomberg
Trading patterns associated with the new kingpin in volatility options resurfaced on Wednesday, hours before concerns about trade protectionism roiled markets.
The so-called “VIX Elephant” — the moniker bestowed upon the options giant by Macro Risk Advisors head of derivatives strategy Pravit Chintawongvanich — traded more than 2 million contracts, closing out positions in January VIX options and rolling the trade over to same-strike options that mature the following month.
****SD: Kawa closes with “In other words, this Elephant might soon be seeing a new animal on safari: copycats.” He’s also the only one I know of who makes good rap jokes about “50 Cent” options trader.
Stocks Are Priced for Perfection
Michael Kahn – Barron’s
This year started where last year left off. Before Wednesday’s hiccup, the Standard & Poor’s 500 index and the Nasdaq Composite had both gone six for six in hitting record highs this year.
Indeed, this is a strong trend that is backed up by strong technical indicators. And there is no reason to believe the great bull market that began in 2009 cannot give us one more positive year.
6 Signs of Extreme Stock Market Optimism
Karee Venema – Schaeffer’s Investment Research
Coming off a historical 2017, the U.S. stock market has started 2018 with a bang. In fact, the Dow, S&P 500 Index (SPX), and Nasdaq Composite (IXIC) each hit new record highs in each of the first six trading sessions of the year — a first-time feat for the major benchmarks. Against this backdrop, several sentiment indicators are pointing to levels of extreme optimism in the stock market. However, there are still pockets of pessimism to be found, suggesting investors are not yet displaying the euphoria that often defines a market top.
Citadel hedge funds 2017 returns at 13 percent
Lynne Marek – Crain’s Chicago Business
Citadel, the biggest hedge fund company in Chicago, delivered returns of about 13 percent to investors in its flagship funds last year—not bad by hedge fund standards, though still short of the S&P 500 Index’s explosive 19 percent gain for 2017.
Bitcoin prices drop as South Korea considers banning cryptocurrency exchanges
Eric Lam, Shinhye Kang and Todd White – Los Angeles Times
Bitcoin slumped to its lowest level since Christmas Day as South Korea’s justice minister reiterated his proposal to ban local cryptocurrency exchanges, fueling concern that a crackdown will erode demand for digital coins in one of the world’s biggest markets.
The End of the Road For Bitcoin ETFs?
Avi Salzman – Barron’s
The introduction of bitcoin futures was supposed to smooth the way for bitcoin exchange-traded funds. But companies trying to launch those funds suddenly pulled the plug this week, with some saying that the SEC has been resistant to their efforts.
Exchanges and Clearing
NASDAQ’s Growth In Equity Options Trading Volumes Should Propel Its Q4 Earnings
After a strong performance in the previous three quarters, NASDAQ sustained its growth trend in equity options trading volumes in Q4, with around 399 million contracts traded in the U.S. market, about 12% more than the prior year period and 10% ahead of the previous quarter. This was primarily due to a substantial gain in market share to over 41%, driven by the acquisition of ISE in 2016. Moreover, we believe the strengthening of the U.S. dollar and other macro factors contributed to increased volatility in the market, and consequently drove trading volumes.
London loses oil futures listings as Mifid bites; ICE shifts 245 North American contracts to US in response to customer demand
Gregory Meyer in New York and Philip Stafford in London – FT
Intercontinental Exchange plans to transfer trading in hundreds of energy futures contracts from London to the US, as customers seek to escape new Mifid II rules governing European financial markets.
****SD: Futures and their related options.
Is central clearing vindicated? Let the market be the judge!
Deutsche Börse’s second breakfast briefing in London brought together panellists from both sides of the transaction chain for a discussion on where the central clearing odyssey is headed. Read the comprehensive report in CCP update and draw your own conclusions.
Cboe Global Markets’ Exchanges Trading Schedule for Martin Luther King, Jr. Holiday
Cboe Global Markets, Inc. (Cboe: CBOE | Nasdaq: CBOE), one of the world’s largest exchange holding companies, today announced the following trading schedule for the company’s options, futures, equities and FX trading venues in observance of the Martin Luther King, Jr. holiday.
Regulation & Enforcement
Transneft quits OTC market after settling $1bn swaps case
Chris Davis and Olesya Dmitracova – Risk.net (SUBSCRIPTION)
Russian oil transportation monopoly Transneft will not enter into new derivatives transactions for the foreseeable future, just weeks after agreeing a settlement with state-owned Sberbank on a billion-dollar claim arising from disputed foreign exchange options transactions.
Thomson Reuters goes live with key MiFID II services
Institutional Asset Manager
The new services are part of Thomson Reuters’ commitment to providing a comprehensive suite of solutions to assist the financial services industry with ensuring ongoing compliance with MiFID II requirements.
Services with major updates since 3 January include: updated MiFID II compliant data already available to clients from 57 global exchanges, and eight new MiFID II trading and reporting venues, including Tradeweb’s Approved Publication Arrangement (APA) and MTS BondVision’s Multilateral Trading Facility (MTF); an enhanced Multilateral Trading Facility, which went live on schedule with trading and MiFID II compliant trade reporting taking place as required from the morning of 3 January.
Bloomberg terminal alternatives popular with advisers
When YCharts debuted in 2009, the cloud-based financial portal billed itself as a potential threat to the Bloomberg terminal’s dominance over real-time market data. Bloomberg remains a powerhouse eight years later, but YCharts, and other startups with similar products, have found success with financial advisers, a segment of financial services that traditionally eschewed high-priced finance terminals.
Record Volume for SPXW Weekly Options, Products That Facilitate Targeted Strategies
Matt Moran – Cboe
In 2017 the average daily volume for the S&P 500 Weekly options (SPXW) rose to a record 523,170 contracts (35% above the 2016 figure). The year 2017 was the tenth year in a row that the SPXW Weekly options set a new volume record.
Pro Tips for Buying Options Premium
Emma Duncan and Elizabeth Harrow – Schaeffer’s Investment Research
The final stretch of 2017 started with a bang for our Weekend Trader options recommendation services, as traders closed out three winners in three days. First, our Dollar Tree (DLTR) call option was closed out at a 102% gain on Nov. 29, less than two months after it was initially recommended. Then, on Nov. 30, a Kroger (KR) call option hit its target for a 104% return in a little over two weeks, while a Progressive (PGR) call rounded out the trifecta on Dec. 1 by doubling in value in just under six weeks.