As the markets plummeted last week, some Chicago Mercantile traders made around $500 million by making contrarian bets on Powell’s rate-cut announcement. A coincidence? Possibly.
A mid the return of great volatility in the financial markets, comes, once again, the return of very profitable “coincidences” (or so we are led to believe) in the trading of options on the Chicago Mercantile Exchange. Last week, like this week, was a tough one in the equity markets. The Dow Jones Industrial Average fell 12% in five trading days, with long marches down of around 1,000 points a day. One could be charitable and say it was just investors taking profits after an 11-year bull market run that brought the Dow close to 30,000. One could say it was a healthy start to a long-overdue, and much-needed, correction in the financial markets that Donald Trump has made the litmus test of his presidency.
Over at the CME, meanwhile, the volatility, and the Federal Reserve’s reaction to it, was yet another way for lucky, very smart, or very well-informed traders and speculators to make a lot of money buying and selling E-minis, options tied to the movement of the S&P 500 stock index. This time the “coincidences” seemed to start in the hours before 2:30 p.m. last Friday, the time when Jay Powell, the chair of the Federal Reserve, announced, with the markets still open, that the Fed was considering an emergency rate cut. Although the “fundamentals” of the U.S. economy remained “strong,” Powell said, the spread of the “coronavirus poses evolving risks to economic activity.” The DJIA was down around another 1,000 points at that time, the seventh day in a row that the stock markets had tumbled. Of course, Trump couldn’t resist prodding Powell to cut rates, as is his wont. “I hope the Fed gets involved and I hope it gets involved soon,” he told reporters at the White House before heading to South Carolina for a campaign rally, after Powell had given his heads-up.
As Powell spoke on Friday afternoon, the Dow Jones average shot up about 300 points, and the CME traders who’d bought in advance made impressive profits, at least on paper—a fact that raised eyebrows of other observers of the markets. Marc Cohodes, a well-known market short seller, tweeted Tuesday that “The Cut”—the Fed’s 50-basis-point rate cut— “was front run”—meaning that some people seemed to be trading with advanced knowledge that it was coming—“late Friday and all day yesterday.” A longtime CME trader wondered who might have known in advance about Powell’s surprise Friday afternoon statement when the market was down 1,000 points. “Who told Powell to make a positive spin today[?]” he wrote me. “Did Powell just come up with idea when market was down 1000 points?… If someone knew that late in the day [about] a positive announcement, that person or group would buy when others were selling…. If you KNEW that POWELL was going to announce something positive and you wanted him to tell the world late in the day, then wouldn’t you start buying earlier in the day? Of course.”
And that is one hypothesis that appears to track what might have been happening as Friday unfolded on the CME. In the first 90 minutes of trading, the action was all selling—something like 1.3 million March E-mini contracts. During that first 90 minutes, the S&P index fell to its low for the day of around 2,854. For the next few hours, the average volume was a more moderate 200,000 contracts, and the price fluctuated up and down. Following Powell’s announcement, the S&P rallied from 2,878 to a high of 2,996 in post-closing trading, up almost 120 points. In the last 30 minutes of trading, some 500,000 E-mini contracts were bought, and the total volume for the day was about 4.7 million contracts. If someone, or a group of someones, bought just 2% of the E-mini volume last Friday—around 100,000 contracts (to avoid much notice and trading limits)—the profit would have been enormous—some $500 million—following the major move up in the S&P 500 after Powell’s statement that the Fed was considering an emergency rate cut. What’s clear is millions of E-mini contracts were bought on the CME before Powell’s announcement. (In an irony, by the time the cut actually occurred, on Tuesday, the mood around the coronavirus and the Trump administration’s response to it was such that the market actually dropped by about 700 points. But one supposes that by that time, the CME E-mini profits had long since been taken.)