Monday, 16 May 2016

Fairfax versus Westpac

Some fanciful meanderings appeared in the press today:

Australian Financial Review: ASIC backs Westpac rate rigging claim with explosive recordings
Sydney Morning Herald: ASIC backs Westpac rate rigging claim with explosive recordings
The Age: Rate rigging scandal: ASIC set to dish more dirt on the banks

Fairfax, the owner of those mastheads, are certainly gunning for Westpac in a powder-keg charged, pre-election, roll your own Royal Commission atmosphere.

Here is the graphic Fairfax has "objectively" constructed to show both sides of the story:

Balanced reporting?
Graphic used by Fairfax in their articles today. (click to enlarge)

Fairfax continue by closing out their piece comparing this matter to the LIBOR scandal in London:
"These [the potential fines] pale in comparison to banks in the northern hemisphere that have paid around $US235 billion in fines since 2008 for widespread manipulation of the Libor rate by banks in Europe and the United States. In 2014, three foreign banks - UBS, BNP Paribas and Royal Bank of Scotland - admitted to submitting false bids to try to influence the BBSW rate. They all chose to enter enforceable undertakings and paid voluntary contributions totalling $3.6 million to fund financial literacy programs."
Now, I'm no great fan of the banks. It is hard to be a fan with the Macquarie Bank financial planning scandals, and the CommBank planning & CommInsure scandals. There is much to be concerned about. Not all Fairfax reporters are bad. Fairfax had some excellent reporting around the CommInsure scandal.

Every swallow does not a summer make.

Interest rate trading

Today, interest rates remain largely traded over the phone. Yieldbroker and ASX IR futures provide some electronic marketplaces but the majority of physical IR trading is still the variety where you pick up the phone and call another institution. Old fashioned and somewhat quaint.

Watching a desk load or unload a large line is still an interesting spectator sport. Even close to a work of art. No matter what you trade, moving large amounts is difficult. You show size, the market learns, and the price moves. Like Thor in Flash Boys, you have to co-ordinate your timing to try to hit as many bids or offers as you can simultaneously.

There will be a book runner, with a notebook or spreadsheet on hand, ready to record the trades as they come. The word will go out that the colt from old Regret should not get away. People rally. Often even the economists and analysts on the desk, who don't normally trade, gather from stations near and far. Every one is briefed and has a short call list. The desk gets crowded. Some people have two or more handsets pinned to hands, necks, shoulders, elbows, or underarms. Hand signals at the ready and every one calls and gets quotes. The book-runner writes or types as fast as they can accepting or rejecting deals quoted from the desk. It starts off pretty quiet as you try not to let the other side hear the action. Then it becomes a vocal frenzy as the calls continue. Quickly the market starts to move away from you. Eventually the cascade reaches a crescendo and the deal is done with as little impact as possible which usually translates to quite a bit after the initial pounce. This is how IR shit happens, even in the 21st century.

Moving big blocks of shares used to be the same until algos came to take the jobs and push the disenfranchised into being complainants in the media.

In Sydney there are not more than a couple of dozen significant players in this market. Only 14 institutions used to set the BBSW rate under the supervision of AFMA. It is a very competitive marketplace with locker room language and bravado being the traditional staple of the banking industry. There is not much love lost between the desks with everyone always trying to get size away without the other party knowing. This is done so they can get the best possibile price for their book or their client. The other side of this will often be as angry as a cut snake. They just bought or sold into a wind blowing against them. That is, when the counterpart sees the price has moved against them, as it will with a large order, they will feel aggrieved and out for revenge. This is how the enmities, rivalries, and bloodsport analogies come to be. Being a price maker is necessary to earn the spread but you will occasionally get flattened by Mr Market's steamroller. In a dealt market, such as physical IR, it is easy to blame and identify the causal party. Hence, it is also easy to seek revenge. Queue gladiator cue.

Fairfax refers to a $460M size as if that is something big and scary. It is to me as a I struggle to eat and find somewhere to sleep. To a large Australian bank like Westpac, with a balance sheet having assets of $812,156M, it doesn't even get to 0.001 of assets. It is less than 0.057%


Now, there may yet be a substantial case for Westpac yet to answer, as alluded to by Elizabeth Knight, "there's more to come on Tuesday."  Presently, I don't see it in the horrendously biased and defamatory reporting from Fairfax.

If you look at all the quotes from audio or correspondence published so far, exactly none of them point to any particular failing. Indeed, if you consider alternate contexts you could even argue they support the argument that the market for interest rates (IR) is highly competitive and far from rigged.

For Fairfax to juxtapose the Westpac case against the LIBOR rigging scandal is especially problematic. In the LIBOR case, institutions were colluding to rig rates with inter-company co-ordination that was plainly illegal. There is no collusion suggested by ASIC in this matter. Fairfax's unfair juxtaposition is simply defamatory and they should know it.

Unfortunately in Australia there is a little law that says a company cannot be defamed if it has over around 10 employees (update: correction from 15). My limited, very limited, understanding of this law was that it was brought in by a deal with the Greens as part of the argy bargy of legislative passage so that people could criticise things, like a Big Mac, without fear of retribution. From memory I think there was some funk around the beef in Big Macs that was untrue that the Greens thought should be fair game for protest. There is some merit to being allowed to protest as a citizen without being sued, given the power imbalances often at play, but the current legal balance seems all wrong. There clearly needs to be legal reform, especially with respect to sophisticated media organisations.

I don't think the current laws support Westpac suing for defamation but perhaps Mr Colin Roden could. If I was Westpac for a day, not only would I be pulling all Westpac, St George, and related corporates' advertising from all Fairfax media; I think I'd be providing litigation funding to Mr Roden to enable him to file suit. It would not really be in Colin's interest to file suit, as defamation is pretty futile in Australia with almost no upside for the defamed, but Westpac may get some related benefit by forcing Fairfax to clean up their act.

Selective quotes

"I'm going to f--- the rate set on the 10th..." is kind of a 'so what' statement. Clearly if the bank has a position in a competitive market place a bit of bravado locker room talk is hardly evidence of a manipulation. In the hard ass game of IR trading you have to "Ride boldly, lad, and never fear the spills." The distinction between courageous trading at scale and manipulation is going to be difficult to discern, especially for external third parties who lack real world trading expertise. Who knows the context for this excerpt? It could mean virtually anything and lots of those are completely within the bounds of reasonable behaviour.

Shock. Horror. Traders swear. Get over it.

Fairfax seems particularly enamoured with these pieces of conversation from Colin Roden quoted as, 
"Some end users who you don't know, you know, corporates and people who don't know who get stiffed by people. ... And then in two years time there's some enquiry (sic) that you have been f------ with the rate set that's cost them all of 10 basis points and you know what, leave me alone, it's got nothing to do with me, right. That's my biggest fear and that's what I will express to them..."
That could be equally Machiavellian or just a smart observation. A bank is an IR market maker. They will have a hurt in a positive or negative direction but will generally try to stay hedged. If rates or a rate reset is up or down, some customers will gain and some will lose. That is the nature of being in the middle. A natural conclusion when considering the impact of your rate trading would be that customers that are hurt may complain leading to close examination and any rate impacts are then seen in a manipulative way rather than the impactful conclusion of day to day trading.

Colin Roden

Colin Roden was the joint head of the Bankers Trust Money Market (MM) business I joined as a young, greenish IT tech in 1992. He wasn't my direct boss as I was way too junior. Both MM business heads were highly intelligent, street smart, and had good vision. Colin was perhaps the more trade focused of the pair with his co-head being being a bit more visionary, as far as I could tell. It was a good team. I doubt Colin even remembers who I am, but I fondly remember this business as a good warrior organisation. It was an 'us against the world' kind of a biz. I did get a bit of a shock at the Fairfax photo of Colin as he has certainly aged a bit in over twenty plus years.

One of the great things Colin did in our business was change the team building stuff from the normal corporate teamwork gigs to focused charitable works, such as weekends building structures for charities out of donated materials. It was a better use of money and time with good team building or morale returns. Colin is one of the few people I know who sacrificed his own Christmas Day to deliver gifts to those short of bounty without fanfare. There are many bankers that pay lip service to charity but few who actually make real sacrifice as Colin did. This is part of the reason why I find the attacks by Fairfax particularly galling. Journalists besmirch the reputation of good citizens all too easily. If Fairfax is wrong, they should be held to account.

Where is the truth?

It's certainly impossible to say from the scurrilous reporting so far from Fairfax. Maybe it will be clearer tomorrow when Fairfax reports on further "explosive recordings" as intimated.

Presently the quotes such as, "f---ing NAB", "deadshits", "I hate those f---ers as well," just point to a competitive marketplace and not any malfeasance or collusion. An objective news service should form a balanced view rather than forming a baying lynch mob out to kill a mockingbird.

Fairfax also points to the loading up of paper heading into a rate set war as a malfeasance. Yes, you would do that if you had ill intentions. However, you would also load up on paper heading into an IR battle if you had good intentions. It's the obvious thing to do. You don't head into a period of heavy trading with your hands tied behind your back. You need capabilities. It's not like an equity market where you can short with no stock and buy back later, you have to have assets ready to trade when you need to make markets, hedge, thrust, and parry.

The setting of the rate reference BBSW is not similar to LIBOR. It is based on real trades in the market, not a generic opinion. There is no sense of collusion in this matter as you can see from the banter being quoted regarding "f---ing" competitors in the market.

Was Westpac manipulating rates? The information Fairfax via The Age, SMH, and AFR have not pointed to any particular smoking gun yet. It smacks of a lack of objectivity and poor reporting. 

ASIC believe they have a case and Westpac oppose. There is a court case. This means a contest of ideas. Fairfax's biased reporting gives you no idea of the contest. I'm no reporter but it smells a little of over reach by ASIC but perhaps the case will crystallise. Presently you have to have some sympathy for Westpac and Colin Roden as Fairfax have provided no substantial justification at all for the lambasting handed out.

You'd certainly hope in the climate of a federal election, Fairfax's anti-conservative stance (remember Mr Hockey) along with their support for a Royal Commission and punitive action against the banks has not coloured their reporting. I too can reach for conclusions not fully justified.

Where is the media regulator?

Happy trading,


Sunday, 15 May 2016

To spoof, or not to spoof, that is the question

I have had some meanderings published on spoofing in Automated Trader, Issue 39, Spring 2016. [Full read is subscriber only sorry.]

The article includes a short overview on the KOSPI 200 "shake and bake" spoof.


Saturday, 7 May 2016

Solarflare versus Exablaze / Zomojo complaint update

Solarflare (good guys) have filed their complaint against Exablaze (bad guys) with the New Jersey District Court. The complaint's patent information I've previously linked here.

Here is a link to a pdf copy of the 29 page complaint for those interested in such things.

Solarflare is indeed asking for triple damages as is normal for willful infringement. I suggested this may be an appropriate penalty in the previous blog. Solarflare is obviously seeking to enjoin, as is necessary, the distributors and resellers in the action such as CDW, Synnex, Tecnologika USA, and Info-X.

Will Exablaze (bad guys) get their patent troll #karma served?
It seems to me a pretty clear cut case for the assertion of Solarflare's rights though trials can be a lottery at times. After the litigation threats Exablaze has made in the USA themselves, let's hope Exablaze gets the penalty they deserve.



Relief requested

Plaintiff requests that this Court: 
A. Enter judgment that Exablaze has directly and indirectly infringed one or more claims of the Asserted Solarflare Patents. 
B. Preliminarily and permanently enjoin Exablaze, and its officers, agents, servants, employees, representatives, distributers, resellers, and all persons acting in concert or participation with any of them, from committing further infringement of the Asserted Solarflare Patents.
C. Award Solarflare damages in accordance with 35 U.S.C. § 284, including all damages adequate to compensate it for Exablaze’s infringement, in no event less than a reasonable royalty, such damages to be determined by a jury, and additionally an accounting sufficient to adequately compensate Solarflare, and that such damages be awarded Solarflare, together with interest, including prejudgment and post-judgment interest, and costs; 
D. Enter judgment that Exablaze has willfully and deliberately committed acts of patent infringement, and award Solarflare treble damages in light of Exablaze’s willful infringement of the Asserted Solarflare Patents pursuant to 35 U.S.C. § 284; 
E. Determine that this is an “exceptional case” pursuant to 35 U.S.C. §285 and award Solarflare its reasonable legal fees, costs, and expenses that it incurs in prosecuting this action; 
F. Award Solarflare its costs, pre-judgment interest and post-judgment interest; 
G. Award such other and further relief as the Court deems just and proper. 

Jury Demand

Plaintiff demands a trial by jury of all issues so triable.

Friday, 6 May 2016

ITG shutters prop trading business

I just listened to the live $ITG conference call.

ITG changes its spots
ITG announced they are shuttering their Cad/US interlisted stock arb business. They are expecting to drop around $8M per year from their operating profit as a result.

This is the business I've written about previously here. Also announced was the closure of their US matched book securities lending. This is as from May 2016. It's a fresh decision.

In this 10-Q, on page 23, Canadian "other revenue" was $1.918M for the quarter.  On page 24 ITG wrote,
"Other revenues were relatively unchanged as increases in our principal trading gains on inter-listed arbitrage trading were offset by lower foreign exchange trading gains and higher client trade accommodations."
The next 10-Q should be the last ITG report with prop trading for a while you'd think.

ITG indicated they have some regulatory queries or issues that have increased expenses related to those shuttered businesses. The scope was unclear. I wonder if they'll have to pay some of the $70-$100M in prop trading profit back along with penalties? Agency-only should be agency-only after all.

It suggests there will finally be some honesty in representing an agency-only business to their clients. This newly found integrity is obviously good for clients, but perhaps it is more important ITG's staff now have some confidence that they are no longer misleading their clients.

Perhaps ITG's US POSIT ATS business may improve too?

Can ITG's POSIT come back from over 50% down and rise from #14?
(click to enlarge)
OTC Transparency data is provided via and is copyrighted by FINRA 2016

Happy trading,


PS: I do wonder if my meanderings from the other side of the world had any effect? Probably not, but it's nice to pretend there is a purpose to it all...

Tuesday, 3 May 2016

Craig Wright - Bitcon #noi

Craig Wright is a desperate man trying to avoid gaol time. He has committed fraud. The Australian Tax Office (ATO) is after him. He has received millions of dollars in unworthy tax rebates from the Australian government. He may be liable for sentencing of up to ten years in gaol for his fraud.

Part of the back-story is telling the ATO he had invested millions of dollars via Bitcoin into R&D and, consequently, receiving cash rebates from the ATO. Wright lied to the tax office. 

Two friends of mine, former employees, worked in Craig Wright's companies here in Sydney. One bailed quickly shaking his head in disbelief. The other decided the ride was too bizarre and scenic to miss out on, at least until the employees had to sue for wages and entitlements. Wright's personality has best been described as hubristic, untrustworthy, and a little nuts. False qualifications, fake blog entries backdating claims, grandiose hyperbole, and numerous unsupported claims relating to skill and resources.

At least the Economist came to the story with some scepticism and back pedalled shortly after. The BBC went out too supportively but has now published on the scepticism. A lot of media picked up the original supportive BBC story without caveat. The global media should be back pedalling hard. 

Wright could easily, in a short amount of text, less than I've typed here, provide uncontroversial and incontrovertible cryptographic proof he had the appropriate ID. Simply provide a properly authenticated current Satoshi Nakamoto message. 

Even moving Satoshi loot would not mean Wright is Satoshi. He may have stolen the ID from Dave Kleiman, now sadly deceased, who many suspect as being Satoshi or a key part of the group that was Satoshi. It has been written that Wright spent some time skulking around Klieman's estate and met with his father. Perhaps that was an effort to leech the IDs Wright needed? 

The bottom line is that Wright's blogged "proof" was a scam and quickly jumped on by Redditors as summarily pointed out by the well regarded Dan Kaminsky. Rob Graham has a nice readable step by step guide to Wright's replay authentication scam. The bottom line from Dan Kaminsky's blog, 

"Yes, this is a scam.  Not maybe.  Not possibly."

Not since the Adam's Compression scam has Australia been so embarrassed by tech fraud. Fortunately, there are plenty of good Australian tech companies doing great work that Australian techs' reputations should easily see off this mad Madoff. There is great tech down under.

Cryptography has a purpose. You don't need interviews, videos, nor personality tests. You don't even need to like Satoshi and should be accepting of a less than god-like status if you believe the cryptography. As Bloomberg's Matt Levine succinctly tweeted:

Enough said.