Thursday, January 28, 2021

If You're Not the Hunter, Are You the Hunted?

I’ve always had a morbid fascination with systemic faults and those that game them. LOR and portfolio insurance. BARRA risk models. Valeant/Shkreli in pharma. SOES bandits, Enron, Worldcom, Madoff, investing in the GSCI as an asset class. Things that seem to be, and ultimately are, too good to be true.

“Market impact” has long been misunderstood by the many. For there is the fiction in the popular mythology deifying the market. This conception imagines financial markets as infinitely diverse where untold numbers of faceless small participants meet to trade in bottomless pools of liquidity (think Eddie Murphy & trading places). In this fantasy, price movements result from a combination of being right or wrong and the thundering herd that moves price towards that efficiency.

Fantasy indeed. The major FX markets are perhaps the closest to this ideal though nation-states still seem to have something to say about that. But most other markets are flawed – either by participant size, information asymmetries, availability and cost of leverage, technical mechanisms of trading and settlement etc. And here they range from the more perfect (think US large cap tech), to the very flawed - like cheese and lumber abused by dominants to manipulate benchmarks for the benefit of cash market extraction. In between, we enter the realm of stock orders where large fund managers may buy a quarter of a stock’s volume on a daily basis for several months running. Such a stock’s resulting relative performance is not random. When Janus Twenty was rocking with inflows, there was no deep market. There was their own purchases moving and pushing the prices of portfolio stocks higher and higher every day (helped by an army of front-runners, specialists, and yes – option specs). While the inflows could stop (and eventually did – and reverse), impact and i'ts positive feedback loop continually drove prices higher. Sure, they could have renamed it Janus 50 and broadened their portfolio, but where’s the fun (or advantage) in that? Janus used their impact to create their own performance and build their business. Today we have ARK in a veritable re-enactment of the Janus folly.

Market impact “strategies” are everywhere. In his heyday, the tall Chicagoan Monroe Trout was known to drop hundreds or 1000+ cars during lunchtime when the markets were notoriously thin in order to trigger stops. TTMC catalogued the impact of size and time across instruments to search for setups where low hanging fruit potentially could be shaken from the tree. This, while clever, was not really kosher. Impact is also the essence for calendar marks that crystallize HF performance fees and move a manager’s fund to the desired quintile in MF performance tables. They are surreptitiously used to skew profitability in principal portfolio trades, MF inflow and outflow prices, momentum and index-related manipulation strategies, for margin and financing benefit, and for setting strikes and expiration values on large derivative contracts (which Luke Ellis can tell you about in great detail). 

Moving closer to the core of my missive, market impact is central to the options market - just as the options market is central to market impact – both in entry and exit. I was present in the mid 80s, to see the first electronic market-maker appear on the floor of the COMEX. It was a touchscreen, adjacent to the gold pit (which incidentally was mis-portrayed for dramatic effect as the Cotton pit in “Trading Places”). The machine, (an IBM PC-AT running Xenix with a early generation Micros CRT touch-screen) driven by a well-coded market-making algo parameterized upstairs, presented floor traders and brokers firm two-way options markets in strikes and months for them to trade against, and would move quotes according to trading activity clocked and underlying prices. Clever as this was, it failed abysmally. Why? Because before a broker would walk into the ring to work a large order, He (and it always was a He), would walk over to the screen and buy some calls or puts for himself (or his brokerage firm’s prop desk) before unleashing his impact upon the market. This adverse selection risk is the same thing that caused Tom Petterfy to get rid of Timber Hill (merging it with Two Sigma) and focus on IBKR. This, and all manner of predatory behaviour related to someone else’s impact, is not without risk. There could be an opposing force of similar or even large size on the other side (such Tiger Mgmt found out when Soros relentlessly took the other side of their end-of-97 Japan high ROE nifty ramp).  Or, exogenuous/idiosyncratic events could make it go in your face (earthquake, pandemic, terrorist attack etc). Even with an information edge, one needs to respect the market and the possibility of the unexpected. 

I’d long ruminated about how – to the largest (mostly momentum) medium-frame marginal buyers/sellers of individual stocks – the options market offered a symbiotic ally, and a potential exit or exit-cost reducer as option market-makers are by definition information-less vol traders. Their negative gamma will accompany and accentuate one’s market impact. Yes, MMs want to avoid adverse selection, but this cuts both ways. For rather than stop making prices if they keep getting carried out by their customer, they can over-hedge, or even go pari-passu (apparently the preferred option in FX trading rooms) in a real life enactment of Mr Burns  “keep your friends close and enemies closer”. Why not profit off of a good thing? 

The curious uncertainty about trading market impact (from POV of one of the anonymous crowd) is that while one can infer the 4-W’s of a move, the only one who can be really sure of the 4-Ws is/are the largest marginal buyers/sellers  responsible for making the market impact in the underlying. And THAT is precisely the asymmetry needed to give confidence to use the options market to one’s gamma advantage. What better information can there be than "I KNOW I am going to be buying 25% of the daily volume relentlessly for the next three months (or six?)? Yes, it helps to have the proverbial wind in your sails if you’re buying. Revisions. Some momentum. Some growth. Not TOO large-cap. There are index angles here too that become self-fulfilling: it’s possible that stocks can be pushed into and out of indices with useful feedback loops. But that’s bonus. 

In my mind’s construction of this strategy, I imagined it would require the utmost careful preparation and research to choose and cycle the best candidates (under-owned, with room to run on long side and over-owned with little short interest on short side). It would require infrastructure both electronic and human – and lots of brokers counterparties (and OTC lines) with multiple PBs to avoid being sniffed and gunned (like GS/Eifuku or LTCM Hillenbrand feared)  (  and the ability to cross and move positions between primes to insure counterparties are always guessing, else the hunter will become the hunted. And lots of capital, because shit happens. And good risk management – for one would want to operate on multiple names without too much bias and have multiple long and short ops in progress. Finally, despite the best laid plans and preparations, it will take balls of steel and private speculative capital with an iron constitution necessary to keep buying and buying something well past the point of divergence or stomach losses when “shit happens”.

Now, if you're looking at me - don't! I’m a pussy - an arb with a modest risk-appetite, and despite having managed sizeable capital in multiple venues with decent results, I never had the mandate nor boasted the psychological make-up to engineer and pursue what long *seemed* possible given market structures and incentives – and increasingly probable given the growing size, concentration, leverage available and mimetic behaviour to the largest and most sophisticated and private participants. Yet no one wrote triumphantly about the possibility. But no one else either told a tale of their blow-up pursuing it. 

In the early noughties, long before Madoff blew up, I advised a large family office who had a decently-sized legacy Madoff position. In the post-mortem (written here I told the story of not being able to ascertain what precisely Madoff did. While my advice to “get out” was correct in hindsight, my best guess of what Madoff might have been doing (relative impact strategies with options) was, in fact, far off the mark. In some ways, I wish they were pursuing something as evil and elegant as that – if only see a real-world validation - a proof of concept.  

Yet the notion that a large operator could acquire sizable lines of stock, then stealthily acquire large low-delta OTM option positions, then buy more stock, unleashing the MM’s short gamma creating a relentless squeeze up, peppered with opportunities to periodically reduce risk at advantageous prices with tactical trades towards expiries was on my mind. Was Rentec’s Medallion using RIEF for this purpose? The wall of money, and size of positions – even in large cap – were of the correct magnitude. The strategy could be hidden in the diversity and turnover of positions without raising alarm. They were the ideal shop – thoughtful, deliberate, quantitative, with infrastructure and savvy - all the tools. Did they ever play around with it? I’ll probably never know...

When the eye-popping moves of this past summer were revealed by the outting of Softbank as the goliath buyer of gamma and subsequent ramper of the stocks, you can imagine my surprise. At first sight, they were the last one’s I’d expect. But shit corporate governance, a bunch of young and fearless yes-boys, and a $100bn of capital in Masa’s Vision Fund can compensate for other shortcomings. Did Masa conceive of it himself? Was it pitched to him by Goldman Sachs? I do wonder what the end-of-trade P&L looks like, or present all-in mark-to-market on rumps of positions.  

Even more unexpected (by yours truly), and ironic given my wrongness about Madoff, was that it would be the rubes of reddit and r/wsb who would figure out the way to game market’s flawed structure, and would be the ones to use the sheer brute tribal force to squeeze, corner and maul the shorts (without seeming undue defection) in a gruesomely perfect market ballet unseen since Volkswagen. Unlike the MAGA losers who stormed the capital, these guys won the battle, and have planted their flag under the Rotunda, effecting a near-perfect squeeze and corner. It is (three days-in at least), a sight of awe and wonderment to behold. For the record, I have little sympathy for the shorts. They played the game poorly. And were intellectually lazy (and cheap) which in all respects made it easier because they too were gaming with OPM.  But make no mistake: this symbolic occupation is a battle victory - not the war. It will be short-lived. Human nature will see to that. And the forces of broader market interest are massing for a siege, such that the 'bros annhilation – whether self-inflicted by over-zealousness or by new extension of the rule of law, will be gruesome. 

Thursday, September 19, 2019

Bear Market in Integrity Continues (2019 Update)

Things, people, and/or ideas believed to have integrity, now seemingly compromised...(the second third  fourth latest updated and expanded version). The bear market in integrity continues unrelentingly…2013, 2014, 2015, 2019 edition.

Carlos Ghosn
Sheryl Sandberg
Quantitative Easing 
Boeing Corp
Generic Pharma
Justin Trudeau
James Dyson
Kayne West
US Immigration Policy
Alan Dershowitz
Patisserie Valerie
Defined Benefit Pensions
Grant Thornton
John Humphrys
Susan Collins 
Ben Sasse
Lisa Murkowski
Tom Brady
Roger Daltry
Deutsche Bank
Danish Banking 
Elon Musk
Australian Cricket
US Gymnastic Trainers
UK Football Coaches
SAT Tests
US University Admissions
Louis CK
Al Franken
Wells Fargo
Anthony Weiner
Intel CPUs
Kobe Steel
Mitsubishi Materials
Johnson & Johnson Corp

Fantasy Sports
Mt Gox
NFL Football Air-Pressure
Bill Cosby
Pot Noodles
Michel Platini
"Kids Company" Charity
Student Loans
US Secret Service
Energy MLPs
Whole Foods Market
Bruce Jenner
American Police Conduct
Rachel Dolezal
Red Meat

Jimmy Savile (tnx Anon)
Rolf Harris (tnx Anon)
US Veterans Administration
The Red Cross
Justin Bieber
The London Gold Fix
Chris Christie

US Govt Agency Data Release
The UK National Health Service
Swiss Train Safety
Nick Clegg
IM Confidentiality 
BBC Management & Oversight
Risk Parity
Segregated Customer Accounts
Investment Consultants
Bloomberg Privacy
Dark Pools
London FX PM Closing Prices
Meredith Whitney

Reinhart & Rogoff
Jérôme Cahuzac
Japanese Yen
Jamie Dimon/JP Morgan
Banca Monte dei Paschi di Siena 
IKEA Meatballs

Wen Jiabao as "Humble Servant of The People
Lance Armstrong
Top Ten Lists
Austerity as an Economic Panacea
Harvard Students' Academic Honesty
BLS Statistics
Cyclical Recovery
Book Reviews
Strong Computer Passwords
'Organic' Food
Money Velocity
Undecided Voters
The Food Pyramid
Purity of '.999 Fine Gold Bars
Penn State Football
"Top of the Pops" 
Fareed Zakaria
The "risk-free" rate
LIBOR as a Benchmark
Public Sector Pensions
HFT as a Beneficial Provider of liquidity
Diversifying properties of Hedge Fund's
Einstein's Theory of Special Relativity 
Celtic Rangers
Macroeconomic Forecasts
John Paulson
FRB Open Market Operations
Standardized Educational Testing
Swiss National Bank
A Relaxing Cruise
WTI as Oil Benchmark 
Olympus Corp.
Payment Protection Insurance
HM Revenue & Customs
Sony Playstation Network
Social Mobility
Actuarial Return Assumptions for Pension Funds
Ryan Giggs
France   AAA
Boob Jobs
David Einhorn
Nuclear Power
Deepwater Drilling
Tiger Woods
Professional Cricket
Professional Cycling
High-Frequency Trading
Professional Baseball
Professional Tennis
Municipal Bond Underwriting
The Catholic Church 
Track & Field Athletics
NCAA Sports
US Congress
UK Parliament
Analyst Research
Credit Ratings
Newtonian Physics
The Stock Market
The Food Pyramid
Incentive Stock Options
Reinsurance Brokerage 
Lou Dobbs
The Mortgage-Backed Securities Market
Hedge Funds
Social Security
Government Balance Sheets
Tooth Fairy

Errr ummm Professional Wrestling is starting to look good by comparison - at least it makes no pretensions to be anything other than it is. What's left?

Wednesday, March 06, 2019

Could Progressives Have Done More to Prevent Nasty Populism?

The rise of populism has caused both left and right to indict centrist’s seeming embrace of “neo-liberalism”, to further their own agendas, or to forensically assign blame for the current blight of Trump, Brexit, Five Star, Gilets Jaunes, Orban, etc. While neo-liberalism has always been multi-dimensionally-flawed I believe these indictments of Centrists are mostly unfair, and fall prey to the cardinal sin of revisionsm by ignoring the context of centrists’ appeasement with neo-liberalism across most western democracies.

Neo-liberalism means many different things to different people. While it’s history is long, it’s come to mean “laissez-faire” government, coupled with monetarist, supply-side orientation, restraint of social policies, and generally free trade in goods and cross-border movement of capital. It rose with popular support from the embers of 70s inflation, bloated states, and Volcker’s massacre, championed first by Thatcher and then by Reagan in a re-play of Weimar disorientation and Brunning’s smackdown. It has accompanied four decades of economic growth, laid the foundations for globalization, trade liberalisation and, subsequently, prepared the world for re-entry of China, Eastern-Europe, and India. It’s helped draw billions of people out of most extreme poverty, while also fostering rising inequality in industrialized nations (especially US/UK), industrial concentration, industrial hollowing, corporate rent-seeking, and with these, market-failures across many sectors.

Economic growth and transformation in the 1980s led to general popular acceptance in the public psyche on grounds of economic efficiency and positive externalities. Some see this resulting from policy success, and while some is, I view it through an “Iceland analogy” where (like Iceland’s meltdown) the Volcker induced pain was so deep and thorough, that when authorities removed their foot from the economy’s head, and loosened fiscal policy, there was only one direction for things to go – both for the economy and the national zeitgeist.

Neo-liberalism is, was, and always will be, far from perfect. Humans have spent the better part of our modern history tinkering with “what works” and what doesn’t in social and business organization, and the limitations of policy and structure. In the process, we’ve discovered what are likely the effective (pragmatic) boundaries of taxation, regulation, fiscal, and monetary policies, as well as nuances of democracy, and human rights. As a result, we know that: Government is not universally bad, inept or inefficient (but certainly has the capacity to be); both fiscal and monetary policy have roles to play and differ according to circumstance and regime; we ignore the social impacts of economic policy and income/wealth distribution at our peril (ask Nicholas II!); trade is good, and unfettered globalization can hollow-out industries; immigration has strong economic benefits but also has social consequences; that mobile capital is pre-disposed to rent-seek and arbitrage both regulation and tax; and that markets often fail – whether from privatised monopolies, natural monopolies, or collusive oligopoly. But don’t always use this knowledge, and since it’s emergence in 1981, forces who gain parochially from “purer” policy (be it tax, regulation, environment) have organized to prevent The State from using and applying this hard-won knowledge.

Clinton and New Labour, and then Obama thereafter, are accused mostly by the more ambitious left - both academics and politicians – of embracing neo-liberalism and thereby neglecting the social consequences thereby creating the present populist backlash. I’ve also heard it from think-tankers, writers/journalists and academics blithely blaming the failure of centrists. And I have a problem with this. Not a problem with the fact that neo-liberalism has contributed to the populist backlash (I agree to some extent), but rather that Centrists should shoulder the blame for this.

Both history and policy analysis are contextual and incremental. In all but the most extraordinary times, we are bounded by prevailing sentiments. Progressives, Democrats, Liberals, Social Democrats have been in ideological opposition to the prevailing societal narrative since Reagan/Thatcher’s success and popular pursuit of neo-liberal agenda(s). Legislative majorities and electoral considerations in this environment further constrain policy options. Consider Walter Mondale in 1984, which was a defining electoral moment. Mondale, a Minesota Democrat, a sensible pragmatic progressive suggested: “We might have to raise taxes”, in a debate, and was requited with one of the most resounding defeats in electoral history. Ditto for Dukakis in 1988 whose opponent GHW Bush’s catchphrase “Read my lips – No new taxes” produced an equally decisive result. Would a more radical left have fared better? Hardly. Would a harder left manifesto by Kinnock have led to a labour victory with similar constraints? No.

By 1992, in the US, Clinton and the progressives understood the impediments. Ditto Labour/Blair in ‘97. Claim more of the center, assuage fears on the economy. One can wish all one wants for a pure and fanciful but unpopular manifesto, but in the end nothing gets done if you don’t have power. And even if legislatively, it proves difficult, you will have prevented the worst-case erosion from more conservative agendas. Now that you had power – albeit with slim and fickle popular vote majorities, what could you do. As said, you could prevent further erosion, tinker on the edges of social policy, but giving is easy – taking away is hard. Ambitious social agendas require spending, and the lessons from Mondale remain. And legislative majorities short-lived and easily obliterated by an economic mis-step, and constatntly shifting and challenged at State levels. Their best hope was go with flow, expand the economy and opportunity. Their achievement was continuing to foster growth, pursuing sounder social and environmental policies, and being less mean-spirited than the conservatives. Is that something to be proud of? Were they unwitting stooges of global capital, manipulated by industrialists to shaft The People? Not in the main. Both Clinton & Obama arrived with ambitious plans to tackle healthcare and failed. The failure resulted from broken democratic process, cynical lobbying and media distortion, and corrupt subterfuge across party lines, but not an embracement of neo-liberalism by the center. This is indicative of being in power, but remaining in opposition to the prevailing (probably contentious and often wrong) economic narrative. But one thing is certain: social policies, and economic policies with the most negative negative externalities upon The People, were less bad, and illiberal social agendas delayed or stymied during progressive rule.
That alone made would have made co-opting neo-liberalism worth it.

It’s useful to denigrate one’s predecessors in order to set oneself apart and cut a new path. But this carries dangers as zealots are everywhere (on both sides). Impugn the historical reality of pragmatic centrism, and one may open the path to von Hindenberg-National Socialist coalitions in response. By all means, I believe journalists, activists, academics, think-tankers and politicians, should make the case for reducing inequality, increasing opportunites, crackdowns on crony-capitalism and corporate rent-seeking, better education, transport, housing, regional policies for changing economic geographies, and more humane immigration policies. But do not destroy the efforts of pragmatists who’ve throttled the corrosive effects of ideologically-driven neo-liberalism. There is too much at stake.

Friday, November 30, 2018

James Fields, Jr. is a Coward

I sent my middle child to a boarding school, deep in the bowels of the English countryside, when she was of a tender single-digit age. One doesn’t make such a decision without carefully consideration, but the reasons, while complicated, were compelling and I have no regrets. She will have her whole life to ruminate upon it, and blame me. But what doesn’t kill you, often makes you stronger, and as a result of her experience, she has become very strong indeed.

Most parents blithely have positively distorted images of their children. I’m no exception, but I won’t digress further because I have a point to make. This child was wilful, playful, and mischievous. Boarding schools for adolescents necessarily have lots of rules, for more or less everything, and children have equally numerous ways to break them. Sweets. Phones. Reading time. Bedtime. Evening movements. Study time. Music Practice. Treatment of others, all have rules. For whatever reason, mine was involved in almost every transgression, and prank. They got away with lots: hiding prohibited sweets in the ceiling tiles, using night lights under their covers to read when lights were out, or pranking overly-severe matrons . But clever and precocious as they are, experienced minders don’t miss much, so she was caught. Frequently. Sometimes as inspired leader, but most often as co-conspirator. And we’d get the inevitable call from her, or the school, that she’s been caught (again) doing ABC and as a result will be punished by XYZ. Here is my point, and one that expresses my strong admiration of her: whenever she was “caught” and was guilty, in whatever capacity – either as leader or co-conspirator – while her mates typically denied responsibility, she quite courageously and stoically accepted responsibility and subsequent punishment. No whining or whingeing. Not defiant, not overly contrite. She knew the rules. She knew she was breaking them. She knew the consequences. Just courageous mature admission - an integrity that earned not just my respect, but that of her interlocutors, and gave her a legendary reputation amongst her more cowardly peers. Greasy readers might think her stupid, but despite her frequent mischief, she had the strongest sense of justice and fairness (unsurprising raised as she was in a Rawlsian household). When, from time to time, she was unjustly accused or punished, or witnessed others similarly suffering, she became fearsome and would march into the Head’s office (or the Head’s wife) and passionately plead her case, or those of others. So strong was her character and sense of justice, that when she saw others being bullied – whether or not her friends were the bullies or irrespective of whether she disliked the bullied, she would intervene. She has retained this courageous awesomeness into university, yet this trait sits in a blind spot of her consciousness. She doesn’t try to be this way – she just IS this way.

This brings me to the “Alt-Right”, exemplified presently by James Alex Fields, Jr. now infamous for ploughing his vehicle into a crowd of counter-protestors, injuring many and killing a young woman. He has pleaded “not guilty” and disingenuously claims to have driven over counter-protesters “in fear” (or so is the absurd claim of his defense strategy). For on that day in Charlottesville, the facts are indisputable as to who arrived with their own heavily armed militia. There is no revisionist version of this history. Fields, Jr. is a coward. Fields Jr. is pussy. He is a coward and a pussy because he refuses to accept responsibility for actions, or acknowledge – without weasel words – the beliefs that drove him to his actions. Deeds without consequences. He epitomizes the cowardliness of the alt-right, and both their apologists and sympathizers who, to avoid the moral revulsion of the overwhelming majority of fellow citizens and its practical consequences – both in the marketplace and under the law - also refuse to explicitly, wholly, own their own dogma and sentiments. There are few other words for it.

And when I see this fully grown, mature man, with strong ideas and beliefs, make a plea of “not guilty” for an undeniably objective action seen by all, that had mortal consequence, I think back to my daughter, who at age nine, standing accused, for something she knew she was guilty of, had the integrity NOT to lie in order to avoid culpability. Her morals and integrity were clear. Fields, Jr. and the Alt-Right? Not so much.

Wednesday, September 05, 2018

Elizabethan Verse

So farewell then
inventor of
that weren't.

You fooled
some of the people
all of the time,
but not enough
of the people
some of the time.

You were like
the "Roy Batty"
of start-ups -
shining multiples
as bright
for fractions
as long".

Your name
was an amalgalm
of "Therapy"
and "Diagnosis,
your investors
will need

(apologies to EJ THribb & PrivateEye)

Thursday, March 15, 2018

Farewell Then Toys"Я"Us

Farewell then
America's Halfway house
to Barbie, Ken,
G.I. Joe and
"Rock-'em Sock-'em 

You were 
the first company 
to crucify
the English Language 
for the sake of 
a memorable 

Upon your shelves,
aptly-named board games 
like "Risk", 
"Chutes & Ladders"
"The Game of Life" 
and "Trouble - 
foretold your

Category Killers
rose by roll-up 
like Lazarus (not your founder);
but neither Jesus (nor Kravis)
could resurrect
you now.

You put  
the Big Box
into Retail.
But now,
KKR will solemnly
bury their retail 
in a
Big Box.

Thursday, March 02, 2017

Bitcoin Haiku

It's been more than three years since I first posted these. So on the day when the value of 1 Bitcoin surpassed that of 1 oz of Gold, I thought it'd be fun to see how they have aged.  For the sake of FD, I can re-affirm that I own no Bitcoin (as if you had to wonder).


Up Up and Away
The sun feels good up yon-der
"Relax!" said Hamlet


Pop some Bitcoin tags?
'Mother Mary & Joseph' !!!!
Napoleon's Waterloo

Left Of the Curtain

The Wizard told him
"Rub two Bitcoins together"
What is 'kurtosis'?


ya-da ya-da ya
Where's my USB?

Not the Monkey King

'That's a nice robe'
Exclaimed she to the vain king
Eat more bananas.

Giapetto's Nightmare

Pinocchio dreamed
When you wish upon a star
Jiminy Bitcoins!

(with apologies to Bashō; As usual, all contributions are most welcome)