Friday, 8 February 2019

Random meandering catch-up

Virtu / ITG


A few things interesting things have been happening why things have been busy/quiet here.

I see the Virtu / ITG deal has the regs done and is likely to close Q1, "Virtu Provides Update Regarding Acquisition of ITG."

This is a good out for both ITG and their customers. I doubt ITG was going to hit the plan numbers Mr Troise was espousing on each earnings call, so now they don't have to. It's good for most ITG customers as Virtu is an impressive outfit. They have much better tech than ITG which may help you'd hope. It's bad for ITG staff as their payroll has been bloated for years. It is at least 50% overstuffed with staff who may soon be stuffed. Virtu is an aggressively lean organisation, as KCG staffers will attest to, so perhaps only a quarter of staff are really needed? How deep to cut? Losing some ultrasensitive agency-only clients would then be much more palatable with a lower cost base.

The firewall between the prop biz and the broking should be safer with Virtu. In the old daze of ITG they just lied to their customers about their own trading and pretended it was an agency only business. I wrote about this a few years ago, "ITG continues to deceive customers." ITG's Frank Troise sensibly closed their prop business down, "ITG shutters prop trading business." The hits kept coming for ITG, from the $20M Project Omega mess, to $12M for the POSIT confidentiality leaks and misinformation, with the $24M for improper ADR handling in between.

ITG and their shareholders may have actually dodged a bullet. ITG prop traded for many years and lied to their customers about being agency only brokers. If the SEC had been wiser and a slightly more adept regulator they would have disgorged those tens of millions and put a juicy fine in their pocket too.

ITG was an ATS and algo pioneer. They did some exceptional work in the early daze. It aged. ITG became clunky. Their tech didn't work so well, but many of the buy-side remained. Sticky clients. Sub-standard tech and ridden by scandals. People were all too attached to their Triton terminals.

Virtu is buying those sticky clients. Some clients may run away, but they shouldn't. Virtu is sharper and should provide a better future. Many possible acquirers have run the ruler over ITG for many years. I've talked to a few. The danger of catching a falling knife has kept many away. The deal should work for Virtu as it can aggressively pare costs (aka staff), they seem a little smarter, certainly have much better tech to integrate, and thus Virtu's outcomes should be a better business. It is ironic that the buy-side seemed to trust the dodgy ITG and be wary of the Virtu HFT machine. It will be a leap for the buy-side to trust an HFT. The truth of the matter is different. Virtu's reputation is strong and ITG's was kind of sucky until Mr Troise started cleaning shop. New customers may actually find a reason to call on the embedded ITG again. That would be a change to just sticking around.

I suspect a win for Virtu.

DRW


As a bookend to the CFTC critical meandering, "CFTC vs DRW: regulator's ego explodes" I should note the conclusion. Mr Don Wilson scored a big win when US District Judge Sullivan wrote,
"It is not illegal to be smarter than your counterparties in a swap transaction."
Crain's covered it here, "DRW's Wilson scores big win in market-manipulation case." It took an inordinate time to conclude, as is the want of courts. The judge had a new job confirmed by the Senate so he had to clear the decks of what he could.

The CFTC does so much good work and then let some legal eagle's ego run away and allow a train wreck such as this. Even with such an obvious case, DRW had to risk much to litigate this to the mat. Good on them for not folding and holding the CFTC to account. There was a change in legal personnel at the CFTC. Heads should have rolled and they did. I doubt Mr Wilson got the apology he deserved.


Volatility is your friend


Around December there was much talk of computers exacerbating volatility on the downside. Very little talk about algorithms with upside volatility. That is the press norm.

What many people miss is that better information and models should lead to a more aggressive view of valuation from a bottom-up perspective. Think of the sum of discounted cash flows point of view. Share price should be very sensitive to initial conditions, i.e. today, whether that be earnings or new insight, macro or micro. We had the crazy volatility doldrums where any dope could make money selling vol until February 2018. Then we start blaming algorithms and computers.

The real story may just be that we are getting better at working out value. Thus prices incorporate information more efficiently. Sharper price changes result. That is, efficiency may just be volatility. Welcome to the new world.

I'm not convinced but it is interesting. I suspect noisy crap is just noisy crap. Signal is hard to diagnose.


Arista bought Metamako


I had a few beers with Charles and Scott after they baled with the sale back in September last year. Scott had just bought a new toy.
Scott Newham (left) and Charles "First time" Thomas (right)
Scott's new toy with two wheels.

Dave Snowdon and the rest of the team stayed on to play with their new Arista toys and teammates. This is significant in the HFT world as most profitable firms use their equipment. The newly named Arista 7130 is the go-to device for layer one.

It is a good deal for Arista. They get back to their financial service roots. I remember meeting Andy Bechtolsheim at the Roosevelt in NY many moons ago when Arista had a simple trestle table and a few pamphlets. I felt giddy shaking his hand. Geek I am. The crude marketing setup belied the $100M Andy personally sunk into the venture. It was the fastest switch at the time with Fulcrum's asynchronous wonder chip. Arista did well. They started by displacing Cisco with fast Fulcrum based switches that only did layer two. It was a while before Arista got to layer 3. Now they are getting into big iron routing which looks more like a huge switch in the 21st century.

Metamako displaced some Arista gear from financial services with clever layer one and some faster layer two, borrowing from the same Arista playbook.  The same plot worked well with new actors.

The Metamako deal opens some doors for Arista. Metamako's plans have a great enabler in Arista with their super-sized resources. The tango looks sweet. I suspect a happy ending. Well done all.


Personal note


Not the best year last year. Not sure where it went. Marriage nailed shut. Aged mum has lurched from stroke, recovery, cancer, recovery, to death by dementia over the last couple of years. Not a great route but an all too familiar sadness for so many. Dementia became the largest killer of women in Australia in 2018. We should do something about that.

An old high school friend, Mardi Dungey, who was a Professor of Economics for a while at Cambridge before coming home to a Professorship at the University of Tasmania got a shock diagnosis late last year and a sad memorial last Friday. She was one of the good ones. Fiftyish is way too young. Life is fragile.

My old father survived his carotid artery surgery three weeks ago and recovers slowly. Then the fires came to the Huon Valley just as the flood renovations were completing.
A firestorm brewing beyond the front yard.
Lucky with winds at the end of the day.
Death threats make for a welcome sunrise

Relying on high latency canaries for fire signalling
Roads opened up again today. An inch of rain yesterday may have had something to do with that. A few houses were lost but the impressive fire-fighters largely won their battle.
Smokey river. The old man has steroids for an asthmatic cough now.
I'm waiting for the 'roid rage to kick in.
A bit less smoke
All clear again
The canaries were stood down from alert duty today. Sadly, one juvenile was lost.
Though it was nastier when the tiger snake took three young ones a couple of months
ago. Stupid tiger snake died a death of gluttony as he couldn't escape the cage.
He met a garden implement.

Normality instead of this shitty leptokurtosis would be nice for five minutes. I guess things are different here: our black swans have white wing tips:

What distribution can be derived from black swans with white wing tips?


Happy trading and let's all have a good 2019,


--Matt.

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