Wednesday, 22 August 2018

Vale Mum

Helene Kaye Hurd, 8.8.1942 - 22.8.2018

Dementia is an insidious beast and worthy of respect and support as I hope this will be a forgetful memory of a disease in twenty years hence. It is, for now, the leading cause of death of Australian women.

Dementia Australia

All the best to those out there still waging the war.


Thursday, 9 August 2018

Further legal exposure exposed in new ITG filing

In addition to employing too many people for the services offered, ITG has added some indication of further legal rumblings it hopes may soon be behind it. Once again, POSIT is the subject of historical meandering over at the SEC. 

A $12M charge has been taken as an expected legal hit, with a little more in fees. The Gasser suits still awaits. A class action was settled but the insurers take the $18M hit with future insurance premiums unlikely to go down. It also seems the IIROC has not connected the dots on the historical games in ITG's Canadian biz which is curious.

ITG chart: yahoo source
(click to enlarge)
GAAP loss of $3M for this filing.


From the 10-Q Edgar filing at the SEC:

(19) Contingencies – Legal Matters
The Company is presently engaged in discussions with the SEC staff regarding a possible resolution of an investigation relating to the operational features of the U.S. POSIT alternative trading system and access to U.S. POSIT data, together with certain related disclosures.
With regard to the operational features of U.S. POSIT, the potential resolution is focused on: (i) the technological infrastructure supporting the matching engine from 2010 through mid-2014, which affected the ability of mainly clients engaged in low-latency trading to interact with other POSIT flow and (ii) a delay feature added in 2014 to ITG’s Liquidity Guard anti-gaming technology designed to prevent latency arbitrage by temporarily preventing day orders submitted by certain clients engaged in low-latency trading from interacting with day orders from other clients.  The potential resolution is also focused on: (i) overbroad internal access to, and internal sharing of, U.S. POSIT data, (ii) between October 2010 and July 2015, the sharing of anonymized lists of the top 100 symbols executed in U.S. POSIT and the top 100 symbols sent to U.S. POSIT as immediate-or-cancel orders on the prior trading day mainly with clients or prospective clients engaged in low-latency trading, (iii) between June 2009 and November 2017, the sharing of a venue analysis report that contained up to 15 symbols (and associated aggregated, anonymized volume) executed in U.S. POSIT on the prior trading day with users of the Company’s algorithms and (iv) instances of sharing of anonymized U.S. POSIT execution information with clients.
The Company has taken meaningful remedial actions during the course of the SEC’s investigation, including imposing additional limitations on access to U.S. POSIT data as well as enhancing POSIT’s Form ATS and other disclosures.
While the Company is engaged in discussions with the SEC staff to resolve the investigation, there can be no assurance that these discussions will be successful. Based on recent discussions, the Company incurred a charge of $12.0 million during the three and six months ended June 30, 2018 to establish an accrual for a potential settlement of this matter. The SEC staff has indicated that they will recommend this penalty amount to the Commission. The Company also incurred approximately $0.2 million in legal fees associated with this matter during the second quarter of 2018.  Resolution of the matter is subject to further discussions with the SEC staff and agreement with the SEC staff on the terms of a settlement, which would be subject to review and approval by the Commission. The Company cannot predict the timing of any settlement or the ultimate resolution of the SEC investigation.  It is possible that a materially higher amount than the amount accrued could be required to achieve a resolution of the matter. In addition, the Company cannot predict the impact that the matter may have on its business going forward.
In addition to the above, the Company’s broker-dealer subsidiaries are subject to, or involved in, investigations and other proceedings by government agencies and self-regulatory organizations, with respect to which the Company is cooperating. Such investigations and other proceedings may result in judgments, settlements, fines, disgorgements, penalties, injunctions or other relief. Given the inherent uncertainties and the current stage of these inquiries, and the Company’s ongoing reviews, the Company is unable to predict the outcome of these matters at this time.
The Company is not a party to any pending material legal proceedings other than claims and lawsuits arising in the ordinary course of business, except a putative class action lawsuit and a derivative action have been filed with respect to the Company and certain of its current and former directors and/or executives in connection with the Company’s announcement of the SEC matter described in the following paragraph (and other related actions could be filed).
On August 12, 2015, the Company reached a final settlement with the SEC in connection with the SEC’s investigation into a proprietary trading pilot operated within AlterNet for sixteen months in 2010 through mid-2011. The investigation was focused on customer disclosures, Form ATS regulatory filings and customer information controls relating to the pilot’s trading activity, which included (a) crossing against sell-side clients in POSIT and (b) violations of Company policy and procedures by a former employee. These violations principally involved information breaches for a period of several months in 2010 regarding sell-side parent orders flowing into ITG’s algorithms and executions by all customers in non-POSIT markets that were not otherwise available to ITG clients.  According to the terms of the settlement, the Company paid an aggregate amount of $20.3 million, representing a civil penalty of $18 million, disgorgement of approximately $2.1 million in trading revenues and prejudgment interest of approximately $0.25 million. 
In connection with the announcement of the SEC investigation regarding AlterNet, two putative class action lawsuits were filed with respect to the Company and certain of its current and former executives, which were consolidated into a single action captioned In re Investment Technology Group, Inc. Securities Litigation before the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants made material misrepresentations or omitted to disclose material facts concerning, among other subjects, the matters that were the subject of the SEC settlement regarding AlterNet and the SEC investigation that led to the SEC settlement. The complaint seeks an unspecified amount of damages under the federal securities laws. On April 26, 2017, the court granted in part and denied in part the Company’s motion to dismiss the complaint and granted the plaintiff leave to file a motion to amend its complaint. On June 12, 2017, the plaintiff filed a motion to amend its complaint against certain of the individual defendants who were dismissed from the case in the court’s April opinion. On March 23, 2018, the court denied plaintiff’s motion to amend, thereby affirming its dismissal of certain of the individual defendants from the case.
On April 19, 2018, the Company reached an agreement in principle to settle the consolidated securities class action lawsuit. In exchange for a release of claims and a dismissal with prejudice, the settlement includes a payment to class members of $18 million, which is well within the policy limits of, and is expected to be paid by, the Company’s insurance carrier. The condensed consolidated statements of financial condition as of June 30, 2018 include a payable to class members of $18.0 million in accounts payable and accrued expenses (also, see Note 11, Accounts Payable and Accrued Expenses) that is fully offset by a receivable from the Company’s insurance carrier in other assets. As a result, the settlement is not expected to impact the Company’s results. The settlement reached is solely to eliminate the uncertainties, burden and expense of further protracted litigation and does not constitute an admission of liability by the Company or its current or former executives or directors.  Specifically, the Company and its current and former executives and directors deny any liability or responsibility for the claims made and make no admission of any wrongdoing. The parties anticipate entering into a final settlement agreement outlining the complete terms of the settlement. The settlement is subject to certain conditions, including, among others, preliminary and final court approval and notice to the class of plaintiffs in the lawsuit. There is no assurance that a final settlement will be completed, court approval will be obtained or that class member participation will be sufficient.
On November 27, 2015, a purported shareholder of the Company filed a shareholder derivative action captioned Watterson v. Gasser et al. against eleven current or former officers and directors of the Company in the Supreme Court for the State of New York. The Company is named as a nominal defendant, and the plaintiff purports to seek recovery on its behalf. The complaint generally alleges that the individual defendants breached their fiduciary duties to the Company in connection with the matters that were the subject of the SEC settlement regarding AlterNet.
While the Company cannot predict the outcome of the derivative lawsuit, the Company intends to defend it as appropriate. No reserve has been established for the derivative lawsuit since the Company is unable to provide a reasonable estimate of any potential liability given the stage of the proceeding. The Company believes, based on information currently available, that the outcome of the derivative lawsuit will not likely have a material adverse effect on its consolidated financial position.  In light of the inherent uncertainties of such proceeding, an adverse outcome may have a material impact on the results of operations for any particular period.

Monday, 6 August 2018

Tempest reminder

Yup, tempest is still a thing, even for LCDs. No, it's not an urban myth. Through walls. Even tens of metres away:

H/T to Mr Newham. It's getting a lot more accessible. Be aware and beware,


Saturday, 4 August 2018

The secrets to OSE option trading and the Canadian interlisted arb

The Kickstarter for "The Accidental HFT firm" closes in twenty-something hours.

The Korean trading will get some more meat on the bone beyond the original piece. We'll have a new meander around how successful trading can work for futures and options at the OSE for the Nikkei-225. This was a feat my old firm failed at after I left. Silly people. It wasn't that hard. We'll talk about the main elements of success for OSE. As a tease, hardware was no help. Tricks were more important than low latency hardware. You'll find out why.

In Canada, the accidental firm struggled to successfully make markets in the first instance. However, a nice solution was dialled in that lead to that accidental 13-and-a-bit per cent of RIM trading in a day from my home office in Duffy's Forest, Sydney. We'll talk about what made the difference. It may be interesting for you.

There will be a few more details on how the implied vol was modelled plus the details on the trading strategy which was used to do over a million index options a day in the KRX. Some people have asked for great technical detail and others have asked to keep it simple, so I'll attempt to break out the technical bits to provide the wanted detail without polluting the stream.

The Zeptonics saga, the development of dedicated hardware, becoming the world's fastest switch, the ATS that nearly was, and the corruption in court we encountered that ultimately sunk it. This includes the drunk appeal judge, the dis-Honourable Judge Gilmour who unusually retired early this year in March 2018. The registrar that refused to step aside and acted in favour of his acquaintances. Judge Michelle Gordon's compromised actions, adultery, political favours, work liaisons, eventual recusal, and then an unjustified appointment to the High Court. An action that was answered before it was served due to the leaking from the court. The court of review that refused to hear about the continual and knowing mendacity from the opposing solicitor Matthew Critchley. Just the tip of the iceberg. Favours, friends, and corruption in the law and the judiciary. No surprises but an interesting, if twisted, tail to the tale. Intriguing for a brief meander, but the book is about trading, not the legal saga.

The good news story about stepping aside from Zeptonics to let an investor take on the old hardware team giving birth to the success of Metamako. We'll hear about the lead-up, but not the details there. That is for others.

We'll hear about risk, strategy adaption and combinations. A brief mention of how to make FPGA market data feeds better, by request, as part of the hardware story. We'll have a fireside chat about market microstructure and what I think makes for a good exchange. It may be worth pointing out some opportunities that still exist in that space.

Life is stranger than fiction sometimes. I hope you will enjoy it.

Happy trading,


Thursday, 2 August 2018

July NMS action - plus IEX lowlights

July 2018 was a meandering month for NMS exchanges. Volume started out pretty low thanks to some thoughts of Independence. I can't imagine why a revolution in government may seem relevant today still.

Average turnover for July from the exchanges was $304.66 billion per day. A bit lower than June's $350.10 billion but still higher than typical. Not quite the ten-year peak we saw on one day in February of $699.83 billion. The tension between trade wars, tech, and summer ho-hum is set to continue.
(click to enlarge)
 You can see in the following leptokurtic chart, showing a normal in red, that volume at over $300 billion per day remains strong despite the feelings of summer and the decay since the February vol explosion:

(click to enlarge)
 We're out around the 80% mark. Above a credit but not quite a high distinction:
(click to enlarge)

IEX's month

IEX continue their noisy irrelevance. 79.9% of handled volume at IEX was not lit. Dark and expensive and still not a restaurant. The usual charts are below.

(click to enlarge)
The Data Core scandal at IEX percolates along. I hear there are some peeps on the IEX Exchange's board that didn't know about it and also don't particularly think it is the wisest move, which is wise.

IEX cloud a few issues in their relations between the group holding company and the exchange, as has been highlighted in the ongoing Nasdaq patent case. That also continues in the operational side of the business with exchange employees soliciting for the Data Core expansion as you may see in the advertisement to the right.

IEX's credibility issues are further highlighted in a recent filing I avoided meandering about. This particular filing attracted a bit of attention after Mr John McCrank was duped a little by the IEX spin in the filing, "Proposed rule change to revise the threshold for imposition of the Crumbling Quote Remove Fee.

IEX claims they're narrowing their crummy Crumbling Quote, that usually means the opposite. Yet the applicability is both a broadening (removes minimum threshold) and a narrowing (specific ports). You could argue about the nett effect in a Liskov substitution principle kind of way but the real arbiter is that it raises more money, expected to be over $80k per month, thanks to removing the 1M share threshold. That would be a broadening then.

Tweet source (click to enlarge)
The filing's dubious spin highlights some of the problems in IEX's approach. Firstly, the overall thing is meh, where they are adding a bit of a mud to their pig and it remains a pig. They are staying true to their dubious principle of preventing people managing risk as prices change by doubling down on the usually wrong and unauditable crumbling quote signal. The larger issue is how IEX bend themselves out of shape, stretch reality, and write such a long filing for such a simple change. I'd like to see the SEC simply turn back a filing one day due to it being too long. 

Mr McCrank's tweet is reasonable as the exchange's filing's notes they receive 18.2 per cent of its marketable orders in brief periods, you know, those periods where prices change. However, it's an unfortunate regurgitation of IEX's weak spin. It's just the way markets work. Activity is centred around those fleeting moments prices change. IEX seems surprised by this as they try to prevent their clients managing risk at those times. Perhaps IEX are in the wrong industry? Overall, this artifice deceives clients by artificially spiking some statistical measures whilst costing those clients money with poor execution at the same time. If best execution was really a thing it seems unlikely IEX would trade at all.

IEX also tripled their spread crossing fee from $0.0003 to $0.0009, "Proposed Rule Change to Increase the Spread-Crossing Eligible Remove Fee to $0.0009 per share for Executions at or Above $1.00 that Remove Non-Displayed Liquidity." Maybe that will lift volumes for them?

In other IEX news, Mr Alexander Osipovich writes in the WSJ, "IEX Exchange Has Wall Street Fame But No Listings". Well, I would suggest infamy, rather than fame, but that's me for you :P Some quotes:
But so far, IEX has failed to list any companies, despite approaching hundreds over the past several years, including household names such as Inc.,  Starbucks Corp. and air carrier United Continental Holdings Inc., people familiar with the listings effort said.
Four years ago, The Wall Street Journal reported that IEX told investors it hoped to list as many as 250 companies by 2017. By last year, IEX was telling some people that it would initially have around a half-dozen. 
“As the ‘Flash Boys’ aura faded, listed companies increased their focus on the details of IEX as a listing venue and they came away unimpressed,” said former NYSE Group President Thomas Farley.
I can't imagine a CFO deciding an IEX listing solves any problems with its rules, risk of rule change, vendor risk, Wynn #metoo aftermath, along with IEX's spin and mendacity problems. A job risk for a CFO. A very dubious proposition. 

Happy trading,


(click to enlarge)

(click to enlarge)
(click to enlarge)

(click to enlarge)