Observations & Insight
Mad Morning Sees Half Dozen S&P 500 Flips as Tech Gains, Fades
Sarah Ponczek and Vildana Hajric – Bloomberg
Traders returning dazed from the worst stock selloff in nine months found themselves engulfed in more chaos Thursday as volatility surged and the S&P 500 went from up to down and back half a dozen times.
****SD: Yesterday’s cleared volume at the OCC was 33.9 million contracts, making it the 11th best day ever. That total is more than 66 percent higher than the ADV thus far in 2018. So, to all our market making friends – quit salivating. It’s an unbecoming look in public.
The Complex Realities of a Cybersecurity Program
Mark Morrison – OCC Blog
As October is Cybersecurity Awareness Month, I’d like to share what I believe are some significant cybersecurity issues that don’t always make it into today’s headlines.
****SD: Were you aware that it is Cybersecurity Awareness Month?
Investor Fears Drive Up Hedging Costs; Stock-options bets are priciest in months
Gunjan Banerji – WSJ (SUBSCRIPTION)
Investors are bracing for greater turmoil across markets, increasing hedges on their stock positions after months of calm. They are snapping up options that pay out if the S&P 500 takes a dramatic fall, driving up the cost of hedging stock portfolios to the most in months. The demand comes as the yield on the benchmark 10-year Treasury note, which rises as bond prices fall, has surged to its highest level in more than seven years, stoking volatility across asset classes. An options-based measure of stock volatility has risen for five straight days, hitting its highest level since April on Wednesday.
****SD: In environments like this, does the common premium selling simile become “picking up quarters in front of a steamroller”?
Traders Rekindle Taste for Volatility Trading in Latest VIX Jump
Cecile Vannucci – Bloomberg (SUBSCRIPTION)
The awakening of market turmoil has revived a penchant for volatility trading.
The number of VIX options and futures changing hands hit the highest level since February on Wednesday as the index jumped 44 percent, the most since its record spike on Feb. 5, according to data compiled by Bloomberg. At the same time, an exchange-traded product that gains with the volatility gauge was the second-most active ETP on U.S. exchanges as more than 116 million of its shares traded.
****SD: Welcome to October.
Gmex collaborates with Demand Derivatives on futures exchange and blockchain clearing house
Demand Derivatives Corp., a creator of novel derivative instruments, and GMEX Group (GMEX), a leading provider of exchange and post-trade business technology solutions, will combine forces to launch a U.S.-regulated futures exchange, RealDemand Board of Trade (“RealBOT”), and clearing house, RealDemand Clearing (“RealClear”).
settlement of RealDay Options.” But if Demand Derivatives and GMEX create their own clearinghouse, I figure that solves all the problems. Here’s [[https://goo.gl/GWP9a6|RealDay Options PDF]] on how the instruments (would) work.
Volatility Fear Isn’t Like February’s, With Smaller ETP Presence
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Stock traders are reciting the most ominous mantra in finance — this time it’s different.
As equity volatility surges, one key ingredient that dished up February’s vol-pocalypse is missing: Exchange-traded products that fuelled the record rout are a shell of their former selves.
Leo Chen – Seeking Alpha
VIX, the “fear gauge,” measures S&P 500 near-term volatility by using options that expire in 23-37 days. Therefore, the VIX we often discuss is the 1-month volatility index. However, the Chicago Board Options Exchange (NASDAQ:CBOE) also publishes 3-month (VIX3M) and 6-month (VIX6M) volatility indexes, which are less well known.
What is behind the global stock market sell-off?
Robin Wigglesworth – Financial Times (SUBSCRIPTION)
A sell-off that saw tech stocks drive the S&P 500 on Wednesday to its worst one-day drop since February rippled across global markets on Thursday.
The severe drop on Wall Street carried echoes of February’s “Volmageddon”, when the S&P 500 suffered one of its swiftest 10 per cent corrections and raised questions over whether the almost decade-long bull market was at risk. While there was no immediate trigger for the sell-off, here are some of the forces at play in the current market turmoil.
Exchanges and Clearing
C2 proposes to allow Post Only order instruction on complex orders that route to its electronic book
Maria Nikolova – Finance Feeds
The Securities and Exchange Commission (SEC) has opened a consultation into a proposal by Cboe C2 Exchange, Inc. to amend the Exchange’s rulebook to allow the Post Only order instruction on complex orders that route to its electronic book.
The new proposal is published after C2 recently adopted the Post Only order instruction on simple orders that route to its electronic book.
Robinhood launches its own trade-clearing system as customer growth surges
Kate Rooney – CNBC
Robinhood spent two years quietly building its own clearing system so it wouldn’t have to rely on an external firm to clear and settle transactions or take custody of assets.
The move positions the online brokerage to be able to scale faster and expand into more areas of financial services, its CEO says.
The Menlo Park-based start-up also announces it has 6 million customers, up from 5 million in August, and 4 million in May.
BGC Partners to Relocate UK based Headquarters to 5 Churchill Place, Canary Wharf, E14
BGC Partners, Inc. (NASDAQ: BGCP) (“BGC Partners,” “BGC” or “the Company”), a leading global brokerage and financial technology company, signed leases on approximately 130,000 sq ft at 5 Churchill Place, London, E14. This will see the leading brokerage firm relocate its UK based headquarters in 2019.
Regulation & Enforcement
IRS 871(m) Phase-In Period Extension: Why Banks Need to Prepare for Tomorrow’s Problems Today
Daniel Carpenter, Meritsoft – TabbFORUM
The IRS has delayed the introduction to Jan. 1, 2021, of some aspects of the complex transaction tax legislation on dividend-equivalent payments. With the extension, the IRS has kicked the can further down the road and, in turn, financial institutions are considering pushing their compliance plans out right alongside the delay. But banks must not think of the extension as simply more time to procrastinate.
Opaque markets get a little clearer after EU rule change
Saikat Chatterjee and Simon Jessop – Reuters
Ten months after new European Union rules designed to boost market transparency kicked in, the initiative appears to be working, having fueled a dramatic jump in electronic trading across some of the financial world’s most opaque markets. Long stuck in a time warp, with most deals conducted over the phone and shrouded in secrecy, exchange-based trading has surged in the EU for such instruments as credit and interest rate derivatives.
Broken correlation between stocks and bonds is taking risk to 20-year highs, Nick Colas warns
Stephanie Landsman – CNBC
Stock market investors may be facing a game changer. According to DataTrek co-founder Nick Colas, a key relationship between stocks and bonds has broken down, and it could greatly hurt nest eggs. His latest research shows that the two assets became positively correlated in September, a trend that’s rarely been seen over the past two decades.
These are the stocks that options investors are most worried about
Fear and volatility returned to the U.S. stock market in a big way over the past several sessions, but concerns over bond yields, trade policy and other factors aren’t spread evenly across the economy. Instead, there are a few names that investors see as particularly risky. According to Goldman Sachs, trends in options investing suggest that four companies are the ones that options investors are the “most worried about” going into the end of the year: Google parent Alphabet Inc., Nvidia Corp, Broadcom Inc. and Chipotle Mexican Grill Inc.
Buy Puts for Protection? Not so Fast…
David Borun – Nasdaq
Even though general economic conditions are currently relatively benign, the broad markets have seen some serious selling in the past six days, capped by a dismal day on Wednesday. The Dow and the S&P 500 both fell more than 3% and the Nasdaq shed 4% on the session.
During periods like this, investors who are still bullish about stocks in the long term still sometimes start to think about ways to protect their portfolios from further declines.
Buying put options – either on specific stocks you own or on broad market index ETFs – seems like an obvious way to limit losses while still remaining basically long.
It’s not a good idea.
Let’s examine the nature of long put protection.
Critics of the Federal Reserve Come to Its Defense
Daniel Moss – Bloomberg (SUBSCRIPTION)
Faced with an attack by Donald Trump on one of their brethren, officials at the International Monetary Fund’s annual meeting closed ranks. Elite policy makers’ defense of Federal Reserve Chairman Jerome Powell was certainly justified — though they also have a stake in the issue. The last thing any of them want are leaders poking too deeply into the monetary and regulatory arena. Don’t question the great god of central bank independence.
**** JB: As Bloomberg noted in their Tweet on this, “The first rule of Policy Club is: Don’t talk about Policy Club if you’re not a member of Policy Club.” This is in response to President Trump commenting about interest rates, “The Fed is going loco and there’s no reason for [the Fed] to do it and I’m not happy about it.”
ETFs Stuffed With Chip Stocks Absorb Massive Trading Volume
Kriti Gupta and Carolina Wilson – Bloomberg (SUBSCRIPTION)
Investors have more than doubled this year’s average trading volume for the two largest semiconductor exchange-traded funds, as chip makers extended their worst five-day slump since April and led major indices to the downside Wednesday.
****SD: Ticker for the big chip ETF is SMH – in internet parlance that means “shake my head.”
The Only 17 S&P 500 Stocks That Rose Yesterday
Nicholas Jasinski – Barron’s
There were just 17 – and you know what we mean. Wednesday was the worst day for U.S. markets in several months, with the S&P 500’s 3.3% decline the index’s sharpest drop since Feb. 8, 2018. All 11 sectors declined, led by technology’s 4.9% drop. Not every stock was down, however: Seventeen of the S&P 500’s 505 components (some companies have multiple share classes, such as Alphabet ‘s GOOGL and GOOG) ended the day in the green.