finance

NANEX: Nightmare on Elm Street for HFT Traders

readingbyeugene Leave a comment

A thoughtful headline and a very good article about the small firm NANEX in this week’s Bloomberg piece:

Staring at four computer monitors, Eric Scott Hunsader, the founder of market-data provider Nanex LLC, looks for hints of illicit trading hidden in psychedelic images of triangles dancing with dots that represent quotes to buy and sell U.S. stocks broken down by the millisecond.

Charts of trading produced by Hunsader’s eight-person firm have captivated everyone from regulators to art gallery owners. One stunt involved a computerized piano piece mimicking quotes for an exchange-traded fund. He infuriates some traders, who say Nanex draws unwarranted conclusions and spreads conspiracy theories.

To Hunsader, the images created from market feeds are evidence of high-frequency trading firms exploiting market rules to turn a profit in a lawless environment. Though others in the industry see his reports and charts as propaganda, Nanex’s interpretations are helping to drive the public debate about the fundamental fairness of the modern stock market.

I’ve blogged about the importance of NANEX’s post on the blog in the past, particularly this excellent post titled “Einstein and The Great Fed Robbery.”

Why care about NANEX is doing? Because:

To illustrate computerized trading to the general public, Nanex has turned trading data into animated videos, with triangles and dots representing tens of thousands of orders dashing between exchanges. One video he posted on YouTube showed a 50-millisecond period in which quotes for Nokia Oyj dashed around the market at a rate of 22,000 per second. The video, published on Oct. 9, has been viewed more than 6,400 times.

He programmed a computer to play piano notes corresponding to different bids and offers for a popular exchange-traded fund, resulting in a manic staccato composition even when slowed down. It was meant to highlight what Hunsader says is the absurdity of modern computerized trading.

Worth reading the entire piece here.

Sergey Kolesnikov and Igor Rybakov: Russia’s Roofing Billionaires

readingbyeugene Leave a comment

Often you hear of the Russian “new rich” who’ve accumulated wealth through corruption or usurping some power. So it was refreshing to read this Bloomberg piece on Sergey Kolesnikov and Igor Rybakov, who built a multi-billion dollar roofing business in Russia. What’s amazing is that they were actually enrolled at the Moscow Institute of Physics and Technology, one of Russia’s top research universities, and worked in roofing as a side business/project.

The roofing degree paid off. Closely held Technonicol, the company they founded while in college, is now the country’s largest roofing-supply company, with a network of 700 distribution outlets across the country, 180 of them wholly-owned. The business had revenue of 59.4 billion rubles ($1.9 billion) in 2012, up 25 percent from the prior year, according to financial statements provided by Kolesnikov.

The company is valued at $2.8 billion, according to data compiled by Bloomberg, making the equal partners two of the youngest billionaires in Russia. Neither has appeared on an international wealth ranking.

“I always liked to solve puzzles, and to me business is a kind of puzzle,” Kolesnikov said. “Neither of us ever thought about earning money of such scale.”

The billionaires, both 41, had a well-timed entry into the market, catching the start of a wave of private homeownership and government upgrades to Soviet-era housing. The number of newly built private homes in Russia almost doubled to 205,000 from 2002 to 2012, according to data from the Federal State Statistics Service, and new apartment units increased more than two times during the past decade to 838,000.

Here’s how they got their business off the ground:

In 1995, four years after the fall of the Soviet Union, Kolesnikov and Rybakov used $40,000 in savings and debt to buy their first plant, a roofing factory complex constructed in 1918 in Vyborg, a city 75 miles northwest of St. Petersburg. They spent $15 million modernizing the facility, and have since built 36 more plants — 30 in Russia, three in Ukraine, and one in Belarus, Lithuania and the Czech Republic.

Important to note their casual culture:

Kolesnikov adheres to western and Japanese management philosophies and quotes management consultant William Edwards Deming, whose statistical theories are credited with inspiring the economic growth surge in Japan after World War II. When Kolesnikov visits Technonicol’s plants, he hands out copies of “The Toyota Way,” a book about the Tokyo-based carmaker’s principles for continuous improvement and respect for workers.

Rybakov, who declined to be interviewed for this story, uses a YouTube channel to post videos of his family on yachting and skiing excursions.

The company maintains an informal corporate culture. It publishes an annual swimsuit calendar featuring female workers. To celebrate the company’s 20th anniversary last December, the billionaires hired a heavy-metal band to record a rock song and created a music video starring Technonicol employees singing in the studio after a day of answering phones and eyeing the clock before grabbing their coats and dashing from the office…

Great story.

On the Wealth Disparity in Russia

readingbyeugene Leave a comment

The Wall Street Journal highlights the incredible wealth disparity in Russia:

In the days of the Soviet Union, the country boasted that all its citizens shared the wealth equally, but a new report has found that a mere 20 years after the end of Communism, wealth disparity has soared with 35% of the country’s entire wealth now in the hands of just 110 people.

This is a wild statistic:

The study discovered that in Russia there is one billionaire for every $11 billion in household wealth. In the rest of the world, there is one for every $170 billion.

And so is this comparison with the United States:

Overall, 93.7% of Russia’s adult population has less than $10,000 in wealth, according to the report; 5.6% has between $10,000 and $100,000; 0.6% has between $100,000 and $1 million; and 0.1% — or about 84,000 people — has over $1 million. In the U.S., according to the report, 30.7% of the adult population has less than $10,000; 33% has between $10,000 and $100,000; 30.7% has between $100,000 and $1 million; and 5.5% — or 1.3 million people — has over $1 million.

###

(hat tip: Annie Lowrey)

Why Not to Invest in Futures Funds

readingbyeugene Leave a comment

If you or your family has investments in so-called futures funds, you might want to pull out your money out of them immediately. David Evans, writing in Bloomberg, has a big piece on how these futures funds have been a complete cash drain on those who unwisely chose to invest in them. While traditional hedge funds charge a 2 and 20 fee (2% fees, 20% of profits), these futures funds charge as as much as 9 percent in total fees each year (which is astronomical):

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns — not one penny. Every bit of those profits — and more — was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.

After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.’s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period.

The “powerful argument” for managed futures turned out to be good for brokers and fund managers but not so good for investors.

In the $337 billion managed-futures market, return-robbing fees like those are common. According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.

Fees: $1.5 Billion

The funds held $13.65 billion of investor money at the end of last year, according to SEC filings. Twenty-nine of those funds left investors with losses.

What’s more, it seems many of these futures funds escape transparency:

Like hedge funds, managed-futures funds haven’t been required to file with the SEC as a matter of course. However, an SEC rule has mandated that any partnership with more than 500 investors and $10 million in assets — even a hedge fund — must file quarterly and annual reports.

The SEC has no category listing managed-futures funds, as it does for mutual funds or corporate filings. Bloomberg Markets culled through thousands of filings in several categories, including one called “SIC 6221 Unknown,” to identify 63 managed-futures funds that reported to the SEC.

Even sophisticated investors should stay away from these managed funds.

The Stock-Trading Platform in Grand Theft Auto V

readingbyeugene Leave a comment

Two interesting posts by Kevin Roose on a mini-game within Grand Theft Auto V: description of the stock trading platform there (which allows the buying and selling of individual stocks in fake companies) and how some fans have decided to manipulate the virtual markets in the game:

To understand what’s happening, a few background data points might be necessary:

• There are two playable stock exchanges inside GTA V: LCN and BAWSAQ. On each of these exchanges, you can buy and sell stocks using the virtual cash you amass during the course of the game. (This cash has no real-world value, but it can be used to buy houses, airplane hangars, and other cool things inside the game.)

• Most of the time, these stock prices appear to move randomly. But in certain missions, your character is given a tip that, due to an in-game event (usually, an assassination of a CEO), a company’s stock is about to rise or fall precipitously. When this happens, you’re supposed to load up on the stock (or its competitor’s stock), kill the CEO, then profit from your trades.

• Rockstar Games, the makers of GTA V, have hinted (but never confirmed) that BAWSAQ, the second exchange, might be dynamic — in other words, it might move in response to the actions of other GTA V players, whose trades feed into a central online database. If thousands of players around the world happen to buy a bunch of guns simultaneously, the theory went, the BAWSAQ might reflect that activity by raising the price of Ammu-Nation stock (Ammu-Nation being the store where guns are purchased).

• There is no penalty for insider trading or securities fraud in Grand Theft Auto.

Neat. Too bad it’s not possible to short stocks in the two markets of GTA V.

The Forever Stamps Arbitrage

readingbyeugene Leave a comment

The United States Postal Service wants to increase the price of the first-class stamp from 46 cents to 49 cents early next year. Most of the stamps I own are the so-called “Forever” stamps so the price increase won’t affect me. But I’ve always wondered whether there exists a market to purchase these “Forever” stamps in bulk and re-sell them at a tiny discount (of present first-class stamp price) to consumers. Allison Schrager and Ritchie King explore this potential arbitrage opportunity:

Our plan is to buy 10 million stamps at $0.46 each and sell them at $0.48. The margins, of course, are small. If we buy 10 million stamps, spending $4.6 million, we’ll earn $200,000—a 4.3% profit.

The good news is that you can buy up to 1 million stamps in a single order from the USPS, and pay a mere $1.75 in shipping (shipping is their business, after all).

But $4.6 million (or $4,600,017.50 with shipping) is a lot of money, especially for folks like us (an economist and a journalist) who’ve never raised money before and don’t have many assets. Ideally we’d borrow it all at once, but given our limited financial means, securing a $4.6 million loan would be tough, at least at an interest rate that would still leave room for us to make money.

We’d get better terms on the loan if we had some collateral. But all we can offer is the stamps we plan to buy. So the trick is to get our seed funding by selling equity (we’d like to start with $250,000) and then securing loans for the rest using the stamps as collateral. It may seem a little far-fetched, but it’s not all that different from the kind of leveraged trading that goes on in the financial world.

In the past, our journey would probably end here. There’s no way we could convince our friends and family or millionaires to invest a total of $100,000 in this hare-brained scheme. But thanks to the recent US JOBS Act, we don’t need them. We can crowd-fund all of our equity from the general public on sites such as Crowdfunder. This would be our offer: We’ll split the profits 50/50, with half going to our shareholders and the other half to us.

The Big If: ability to move all those stamps (either independently or via a distributor). I think it’s highly unlikely, and the interest on outlaying loans will exceed the income generated from selling the stamps at a tiny profit. Still, it’s a cool thought experiment!

The Hedge Fund Manager Who Loves Losing Money

readingbyeugene Leave a comment

“You’ve got to love to lose money, hate to make money.”

That’s a direct quote from Mark Spitznagel, an unusual hedge fund manager who is betting on a huge decline in the markets when the Fed stops its quantitative easing program. Needless to say, investors aren’t exactly lining up to invest with him. The Dealbook blog profiles his fund:

Still, Mr. Spitznagel’s approach is unusual for a money manager. To invest with him, you have to believe in a philosophy that is grounded in the Austrian school of economics (which originated in the late 19th century in Vienna). The Austrian school does not like government to meddle with any part of the economy: when it does, adherents argue, market distortions abound, creating opportunities for investors who can see them.

When those distortions are present, Austrian-school investors will position themselves to wait out any artificial effect on the market, ready to take advantage when prices readjust.

Mr. Spitznagel began his career buying and selling bonds in the trading pit at the Chicago Board of Trade in the 1980s. Everett Klipp, his boss and mentor at the time, encouraged him to take a “one-tick” loss to step out of a trade, rather than risking a 10-tick loss in hopes of a bigger profit.

On Crowdfunding in Start-Ups

readingbyeugene Leave a comment

Yesterday, federal legislation went into effect to allow small start-ups to ask for equity investments publicly, such as through social media sites or elsewhere on the Internet, without having to register the shares for public trading. Business owners will now be able to raise any amount, though only, at this point, from accredited investors—those individuals deemed wealthy and sophisticated enough to understand and withstand (tremendous) risk (basically, if you make $200,000 in income per year or have more than $1 million in assets, excluding your primary residence).

I was thinking about this for some time, but I’m glad I read Felix Salmon’s piece “The Idiocy of Crowds” about this latest news. Basically, he thinks it’s a terrible, terrible idea and an easy way to part with your money:

Today’s a big, exciting day for anybody who has found it simply too difficult, to date, to throw their money away on idiotic gambles. Are you bored with Las Vegas? Have you become disillusioned with lottery tickets? Do micro caps leave you lukewarm? Does the very idea of a 3X ETF fill you with nothing but ennui? Well in that case today you must rejoice, because the ban on general solicitation has been abolished, and the web is now being overrun with companies like Crowdfunder and RockThePost and CircleUp which offer a whole new world of opportunity when it comes to separating fools from their money. You can even lose your money ethically, now, if that’s your particular bag. The highest-profile such platform is probably AngelList: as of today, founders like Paul Carr (alongside, according to Dan Primack, over 1,000 others) are out there tweeting at the world in an attempt to drum up new investors.

It is conceivable that over time, these equity crowdfunding platforms will learn from their inevitable mistakes, and the few which survive will learn how to be something other than a hole in which to pour millions of dollars…

I thought the email that Felix received from an anonymous angel investor was particularly wise:

These guys are building their business on the notion/dream that somehow the internet can disintermediate social and relationship capital. I’d argue that this is precisely what the internet can not do: if you’re going to invest in a startup, you’d better know the founders, and you’d better know something that most people do not know. Information asymmetry is the only way to lower the risk profile on such crazy risky investments.

Disclosure: I am staying on the sidelines; I just thought the news was interesting.

What Happened in the Markets on September 18, 2013 at 2PM?

readingbyeugene Leave a comment

This is an intriguing analysis at Nanex of what happened in the financial markets (equities and futures) on September 18, 2013 milliseconds before the FED announcement of “no taper” at precisely 2:00PM.

One of Einstein’s great contributions to mankind was the theory of relativity, which is based on the fact that there is a real limit on the speed of light. Information doesn’t travel instantly, it is limited by the speed of light, which in a perfect setting is 186 miles (300km) per millisecond. This has been proven in countless scientific experiments over nearly a century of time. Light, or anything else, has never been found to go faster than 186 miles per millisecond. It is simply impossible to transmit information faster.

Too bad that the bad guys on Wall Street who pulled off The Great Fed Robbery didn’t pay attention in science class. Because hard evidence, along with the speed of light, proves that someone got the Fed announcement news before everyone else. There is simply no way for Wall Street to squirm its way out of this one.

Before 2pm, the Fed news was given to a group of reporters under embargo – which means in a secured lock-up room. This is done so reporters have time to write their stories and publish when the Fed releases its statement at 2pm. The lock-up room is in Washington DC. Stocks are traded in New York (New Jersey really), and many financial futures are traded in Chicago. The distances between these 3 cities and the speed of light is key to proving the theft of public information (early, tradeable access to Fed news).

We’ve learned that the speed of light (information), takes 1 millisecond to travel 186 miles (300km). Therefore, the amount of time it takes to transmit information between two points is limited by distance and how fast computers can encode and decode the information on both sides.

Our experience analyzing the impact of hundreds of news events at the millisecond level tells us that it takes at least 5 milliseconds for information to travel between Chicago and New York. Even though Chicago is closer to Washington DC than New York, the path between the two cities is not straight or optimized: so it takes information a bit longer, about 7 milliseconds, to travel between Chicago and Washington. It takes little under 2 milliseconds between Washington and New York.

Therefore, when the information was officially released in Washington, New York should see it 2 milliseconds later, and Chicago should see it 7 milliseconds later. Which means we should see a reaction in stocks (which trade in New York) about 5 milliseconds before a reaction in financial futures (which trade in Chicago). And this is in fact what we normally see when news is released from Washington.

However, upon close analysis of millisecond time-stamps of trades in stocks and futures (and options, and futures options, and anything else publicly traded), we find that activity in stocks and futures exploded in the same millisecond. This is a physical impossibility. Also, the reaction was within 1 millisecond, meaning it couldn’t have reached Chicago (or New York): another physical possibility. Then there is the case that the information on the Fed Website was not readily understandable for a machine – less than a thousandth of a second is not enough time for someone to commit well over a billion dollars that effectively bought all stocks, futures and options.

The conclusions the authors draw? The announcement was leaked:

The Fed news was leaked to, or known by, a large Wall Street Firm who made the decision to pre-program their trading machines in both New York and Chicago and wait until precisely 2pm when they would buy everything available. It is somewhat fascinating that they tried to be “honest” by waiting until 2pm, but not a thousandth of a second longer. What makes this a more likely explanation is this: we’ve found that news organizations providing timed release services aren’t so good about synchronizing their master clock – and often release plus or minus 15 milliseconds from actual time. Their news machines in New York and Chicago still release the data at the exact same millisecond, but with the same drift in time as the master clock. That is, we’ll see an immediate market reaction at say, 15 milliseconds before the official scheduled time, but in the same millisecond of time in both New York and Chicago. Historically, these news services have shown a time drift of about 30 milliseconds (+/- 15ms), which places the odds that this event was from a timed news service at about 10%. 

Something does sound fishy based on the charts provided by Nanex. I’ve read some of their analyses before and they have been overwhelmingly convincing. We’ll see how this one unfolds pretty soon, I think.

When Gucci and Louis Vuitton Handbags Serve as Collateral for Loans

readingbyeugene Leave a comment

Say hello to the handbag-backed loan. A company in Hong Kong, Yes Lady Finance Co., provides loans to customers if they’re able to bring in their beloved handbags as collateral.

Yes Lady provides a loan within half an hour at 80% of the bag’s value—as long as it is from Gucci, Chanel, Hermès or Louis Vuitton. Occasionally, a Prada purse will do the trick. Secondhand classic purses and special-edition handbags often retain much of their retail prices.

A customer gets her bag back by repaying the loan at 4% monthly interest within four months. Yes Lady says almost all its clients quickly pay off their loans and reclaim their bags.

The company recently lent about US$20,600 in exchange for a Hermès Birkin bag, but Yes Lady’s purse-backed loans start at about US$200.

This is bizarre, and one of those “markets in everything” phenomena. The best part? Some people try to get away with bringing in fake luxury handbags. You should read the article on how Yes Lady handles those scenarios…