How Natixis Lost $300 Million on Options “Lizards”; Sniper in Mahwah Returns; HFT Fragility?

Mar 27, 2019

Observations & Insight

Brexit: Fine in Five Years, but a Mess Right Now – Garry Jones
At the 2019 FIA conference in Boca Raton, Fla., Garry Jones was inducted into the Futures Hall of Fame. In this video from JLN’s annual Industry Leader Series, Jones runs through how Brexit will impact the political sphere, capital markets in general, and then derivatives markets in particular. Jones believes that in the end London will remain a financial capital, but will take a while to recover in the near term.
Watch the video »

****SD: As someone who struggles to keep up with Brexit, I appreciate how Jones presents a clear and concise framework for understanding the problems with and scope of Brexit proceedings. (He’s also super easy to talk to.)


Midweek Spoofing Update
John Lothian

Software developer Jitesh Thakkar has made moves to dismiss his indictment with prejudice, exclude untimely jury instruction and provided a response in opposition to the government’s motion

The briefs from his lawyer Renato Mariotti are well worth reading, as this is an issue not just for Jitesh, but for any software developer in the financial markets. This is a classic case of trying to pick off a smaller member of the herd first by the prosecution taking aim at developers of financial software.

Lead Stories

How Almost $300 Million Vanished in a Black Hole for Deals in Asia
Donal Griffin, Fabio Benedetti Valentini and Viren Vaghela – Bloomberg (SUBSCRIPTION)
It’s the black hole of Asian finance: a business with so much gravitational pull that it has swallowed up European and U.S. traders for more than a decade. The latest victim was France’s Natixis SA, which took a 259 million-euro ($292 million) fourth-quarter hit. The lender found the profits irresistible even after executives got internal warnings that they were taking on too much risk, according to people familiar with the situation who asked not to be named to discuss internal matters.

****SD: The pitfalls of unchecked faith in your structured products. Matt Levine dives into what Natixis marketed as the “flash lizard” and “triple lizard” in his column today. The nutshell of his point, other than to be wary of reptiles, is that sometimes “you build a complicated thing, you sell it to customers with a charming name and a breezy story while distracting them from the complicated guts that only you understand and the large profits that you plan to make. And then the simple breezy story is true, the clients are thrilled, and it turns out that you didn’t understand the complicated guts either and the large profits were actually large losses.”

4 – Les Moeres – English version
Alexandre Laumonier – Sniper In Mahwah and Friends
On 19 September 2018, I wrote that I would be back here 2592000000000 microseconds later, but as always I’m late. Whatever… For human beings microseconds, nanoseconds, or attoseconds, are of no importance. I even forgot to write a short blog post to announce that my new book on high-frequency trading , “4,” dedicated to the recent radio/wireless networks built for HFTs (a extended version of the now-famous HFT in my backyard series I wrote here), was released in January, but I assume most of the readers of this blog follow me on Twitter. Anyway, I was quite busy with the book launch (which is quite impressive, more than expected—check out some of the press reviews compiled here, thanks Marcos for that), interviews, a film shooting for German/French TV Arte (about HFT), etc., and above all my own business (a book company) I have to run (success is nice, but time-consuming). I wanted to write a post about my previous books on HFT, and why I’m trying to work on/understand the small world of HFT and market microstructure, but that will come later.

****SD: He’s baaaaack! According to Laumonier, “an English translation [of “4”] should be published at some time.”

How Fragile Is Competition in High-Frequency Trading?
Donald MacKenzie, University of Edinburgh – Tabb Forum
The past few years have seen much consolidation in the HFT business. Is that simply the result of the sector’s maturity, along with generally low volatility and often stagnant overall volumes of trading? Or is something more profound happening? ‘Jitter’ (random fluctuations in processing time) in exchanges’ systems has been falling, making small advantages in speed in HFT much more salient, while the costs of setting up and running an HFT firm – especially one trading US equities – are now very daunting.

****SD: No real “news” in here per se, but it’s a nice recap of jitter in exchange systems and its impact on speedy traders.

SEC Addresses Cybersecurity Concerns About Stock-Investor Data; Agency considers incentives and concessions to move the Consolidated Audit Trail toward completion
Gabriel T. Rubin – WSJ (SUBSCRIPTION)
A data repository for all U.S. stock-market activity won’t store some personal information from individual investors, a concession to brokers and traders who worried their data would be a prime target for hackers, a top regulator said Tuesday. The decision by the Securities and Exchange Commission and the stock exchanges that are building the repository, known as the Consolidated Audit Trail, comes as regulators try to get the ambitious project back on track after years of delays and setbacks.

****SD: From the story: “Manisha Kimmel…who is the SEC’s point person for the database endeavor, explained in an interview that the agency was considering a number of other incentives and concessions to ensure that the project moves swiftly toward completion. One such concession is the exclusion of certain personally identifiable information, such as social security numbers.” For added color, see Tabb’s The CAT Saga Continues from March 22.

Here’s Why U.S. Bond Yields Plunged So Much Over the Past Week
Stephen Spratt, Edward Bolingbroke, and Liz McCormick – Bloomberg (SUBSCRIPTION)
The Federal Reserve’s surprise policy shift last week shook markets, but, even still, the intensity of the ensuing drop in U.S. bond yields has puzzled many observers. A massive wave of hedging in the swaps market helps explain the scale of the eye-catching move.

****SD: Oooh, I don’t know the last time (if ever?) I saw a swaptions implied vol grid in a mainstream story.

CFTC Staff Issues Research Report On Impact Of Automated Orders In Futures Markets
The Commodity Futures Trading Commission’s (CFTC) Market Intelligence Branch in the Division of Market Oversight (DMO) issued a report today that analyzed the entering of orders manually and automatically in commodity futures markets in the United States to determine how technological change is affecting futures trading. DMO staff used internal CFTC transactional data for 30 futures contracts during the period January 2013 – December 2018, and examined what effects, if any, the manual and automated order placement mechanisms had on these markets.

****SD: A healthy futures complex is essential for healthy options market maker hedging activity. PDF of study here – a fitting complement to the story this week about liquidity concerns in the E-mini S&P. One of the CFTC’s takeaways was that “although the level of automation increased steadily each year, historical volatility of end-of-day prices did not exhibit the same trend.”

Exchanges and Clearing

Cboe RMC Day One Recap
The 35th annual Cboe RMC kicked off in Carlsbad, California, yesterday with one keynote and two panels. After attendees checked in, they were encouraged to pick up some Cboe swag, including phone accessories, baseball caps and Cboe RMC vests (yes, we know they run big). Our team also provided copies of new white papers at the Cboe booth. After a morning in the sunshine, conference attendees shuffled into the Grand Ballroom at the Park Hyatt Aviara for David Blitzer’s keynote speech, “Less Growth, More Uncertainty – Is Volatility Here to Stay?”

Eurex to introduce Brexit-orientated MSCI derivs
James Thursfield – Global Investor Group (SUBSCRIPTION)
Eurex will introduce three derivatives contracts that enable Brexit-orientated trading

Singapore Exchange buys 20 percent stake in forex trading platform for $25 million
Anshuman Daga – Reuters
Singapore Exchange Ltd, which is positioning itself as a multi-asset bourse, acquired a 20 percent stake in an upstart foreign exchange trading platform, BidFX, for $25 million, with an option to take a majority interest in the company.

****SD: The multi-asset firm offers, per its website, “Futures and Spreads; Options on equities and futures; Equities; Fixed Income; Other OTC products; Dynamic hedging of FX exposure.” SGX press release on the deal here.

CME Group Foundation Awards $1.88 Million to Support Early Math Education in Disadvantaged Communities Across Illinois
CME Group
CME Group Foundation will award $1.88 million in new grants to support early math education programs for young children from low-income communities in Illinois. These grants will be used for programs throughout the next two school years.

Cboe Global Markets Announces Date of First-Quarter 2019 Earnings Release and Conference Call
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today said it will announce its financial results for the first quarter of 2019 before the market opens on Friday, May 3, 2019. A conference call with remarks by the company’s senior management will begin at 7:30 a.m. Central Time (CT), 8:30 a.m. Eastern Time (ET).

NYSE and Nasdaq lock horns over 2019 IPO rush; There is more at stake than bragging rights
Philip Stafford – Financial Times (SUBSCRIPTION)
A rush of US technology companies preparing to list in coming months has highlighted a battle between the New York Stock Exchange and Nasdaq to be the listing venue of choice for one of the most vital segments of the US economy.

NSE revises initial margins for Bank Nifty contracts
Economic Times
National Stock Exchange of India on Tuesday revised initial margins on the Bank Nifty contracts. The exchange also detailed the price scan range applicable for computation of initial margins for the futures and options on the Bank Nifty contracts.

Regulation & Enforcement

Software developer accused of spoofing seeks to nix “ostrich” jury instruction
Maria Nikolova – Financefeeds
Jitesh Thakkar opposes the theory that he deliberately avoided learning that London-based trader Navinder Sarao would use Edge Financial’s program to spoof.
As the start of the trial against Jitesh Thakkar, the founder and principal of Edge Financial Technologies Inc., gets closer, the legal battle concerning evidence and jury instructions intensifies. Jitesh Thakkar is charged with spoofing and conspiracy to commit spoofing for trades made by London-based trader Navinder Sarao using Thakkar’s company software.

Financial Transaction Taxes – the ghost in the machine
Not many believe in the existence of an FTT. It’s the ghost FTT question. Does it exist or not? Should it?
The existing Financial Transaction Tax on publicly traded US equities raised a little under two billion US dollars last year.

****SD: I missed this Meanderful post from last week.


Forget Python, you need to learn to code in Cython
Saeed Amen – efinancialcareers
There are many reasons why Python is gaining traction to solve problems in finance. Firstly, it’s relatively easy to learn. It’s also generally quicker to write programs in Python. There are also many Python libraries which are suited to analysing financial markets, such as pandas, for dealing with time series. However, one major drawback of Python is that it’ll typically run much slower than code written in languages like C. Python has the GIL (global interpreter lock), which means at any one time, just one thing can be executed at a time. The question I always get asked is how can we make Python quicker and what skills do I need to learn to do this? One solution is Cython. In practice, Cython code is actually very similar to Python albeit with a few bells and whistles.

Bloomberg maintains dominance of OMS and EMS space, analysis finds; Research says that buy-side firms spent over $1 billion on OMS and EMS last year, as Bloomberg leads list of primary platforms.
Hayley McDowell – The Trade
Bloomberg has dominated an analysis of order management systems (OMS) and execution management systems (EMS) used by asset managers, who spent $1.4 billion on deploying such systems in 2018.


Small Cap Volatility Risk
Sage Anderson – tastytrade blog
Trading options in single stocks isn’t for everyone. Compared to indices and ETFs, there’s more absolute risk – which may not fit your strategic approach and risk profile. Having said that, many derivatives traders embrace single stocks, and couldn’t execute their strategies without them. The reason that risks are heightened when trading single stocks is that they can go bankrupt (i.e stock goes to zero), or they can be taken over (i.e. stock rockets higher). For premium sellers, either of these two scenarios is generally disastrous. Options sellers usually prefer little to no movement, or at least sideways movement in the underlying.

Seasonality and The Variance Premium
Talton Capital Management
The idea of “sell in May and go away” isn’t new. It is pretty much the opposite of new. It is an anomaly that has persisted for 322 years (the UK market since 1693).

One expert thinks tech stocks are doomed to plunge 14% into another correction. Here’s how he says traders can protect themselves.
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
No area of the stock landscape has enjoyed a bigger recovery following December’s bear-market scare than the tech-heavy Nasdaq Composite index.
While the benchmark S&P 500 has climbed 20% since December 24, the Nasdaq has outdone it by surging more than 24%. Considering tech has been one of the top contributors to the 10-year bull market, the Nasdaq’s recovery suggests equities have reverted back to their long-standing status quo.


Crackdown on short selling roils Turkish money markets; Cost to borrow lira overnight more than triples to 1,200 percent
Adam Samson in London and Laura Pitel – Financial Times (SUBSCRIPTION)
The cost to borrow Turkish liras overnight more than tripled to above 1,000 per cent on Wednesday in a sign of how money markets have seized up after an apparent bid to stymie foreign short sellers.

****SD: For more on how previous Turkish action went south, see the below Citi story.

This Hedge Fund Lost $139 Million Last Year and Citigroup is Feeling the Pain
Bloomberg News (SUBSCRIPTION)
GTEC Pandion fund started unraveling in August on FX trades; Parent GF Securities is now coming under regulatory scrutiny
Three months after news first emerged of a hedge fund blowup that threatens to saddle Citigroup Inc. with millions of dollars in losses, details of the fund’s implosion are becoming clearer. GF Securities Co. said Wednesday its GTEC Pandion Multi-Strategy Fund SP lost $139 million in 2018 primarily on foreign exchange trades, leaving it with negative capital. As the fund’s losses spiraled last year, it faced margin calls from Citigroup, its prime broker, according to the GF statement and people with knowledge of the matter.

Three Pioneers in Artificial Intelligence Win Turing Award
Cade Metz – NY Times
In 2004, Geoffrey Hinton doubled down on his pursuit of a technological idea called a neural network. It was a way for machines to see the world around them, recognize sounds and even understand natural language. But scientists had spent more than 50 years working on the concept of neural networks, and machines couldn’t really do any of that.

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Spencer Doar

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