Monday, 27 April 2015

My take on Navinder Sarao "Rogue Trader"

This whole week has given the media a lot to write about. The idea that a single proprietary trader from Hounslow can bring down the most actively traded futures market by Spoofing has really captured the imagination of the media and people a like. I have actually seen a lot of support for Nav as it has become totally clear that the allegations are ludicrous.
Firstly anyone who actually observes the markets can see that Spoofing is still alive and kicking today. It is a widely used strategy and the front running on those Spoof orders by the HFT algos are as quick as ever. You see that a lot of the time if you put any half decent size into the book you will get the front runners out in force, and it is so fast that manually you have no chance of mimicking the action. Often once the front runners have done their thing the size disappears. So although Nav is technically guilty for deploying the strategy he used, it is not an isolated technique and if they go after him then they need to go after everyone who deploys the strategy.
Secondly to then accuse him to be responsible for the flash crash is an insult to the financial system as a whole. The market is like a battle field, we are all trying to predict human behavior to make money. So why do support and resistance levels work well, cause you know that historically around those levels you have other traders thinking the same thing and you can use that to your advantage to make a high probability trade. So in today's markets its not much human behavior, but it is computerized behavior which drives the market.
So to try and read the Algos is the goal. Nav had found a way to do this, beat the Algos at their own game. Now there are good Algos and bad ones, and some of these Algos in the market that day weren't programmed to deal with the lack of liquidity at the time and misread the order book(most likely), which lets face it is never really real. Reading level 2 these days especially in the futures side is very unreliable. So these bad Algos were intensifying the selling which then caused the flash crash. As we know Nav's Algos were switched off two minutes before the plunge so he may have contributed to them getting into a proper mess. Now is this his fault, NO. Its like saying its Floyd Mayweathers fault for knocking out someone in a boxing match. This market is a big arena with many players, Nav was a big player who played the game well but should not be blamed for the bad players who as a result caused in my opinion the panic selling.
Nav was quoted as saying on the night of the Flash Crash that "I Beat the Algos". This is what he done, he did not bring down the market, nor did he plan to do so. These strategies have been adopted many times, and it just happened that on this occasion there was an adverse reaction.
Nav consistently did 1 to 2% of the volume on the ES, which considering the size of that contract, is huge! So clearly there was a lot of trading going on, the CME loved him just like all the exchanges love the HFTs cause they bring in a lot of business to the exchanges. But it seems Nav as a sole entity is easily dispensable, an easy target. The big firms have wealthy clients, and much more influential people behind their funds. So messing with them is messing with the wealthy elite.
Now of course this is just conspiracy, but its totally plausible. The only way prosecutors can have credibility with this claim is to go after all the firms which engage regularly in similar practices, and this way there is genuine legitimacy to what they are trying to do.
However this is incredibly unlikely since HFTs provide alot of the trading volumes on all the exchanges.
The whole saga in parts is comical, I was reading a piece in the paper claiming Nav traded in Hounslow so he can have a faster connection to those in the city and have an edge on them. When I read that I didn't know whether to laugh or cry. As most traders know, when trading US products on US exchanges, independent traders are always at a disadvantage cause you are at least 60 to 70 ms behind in speed (which is light years in HFT world), purely because of location. Most of the sophisticated Algos running in the ES have co located servers at the exchange giving them almost zero latency. So at best if he had his orders running on a co-lo server he would be on a level playing field. Second the big players in the city dont have normal internet, they have high bandwidth unshared lines, so it seems like the papers are just coming up with anything for a story.

I sincerely hope he is exonerated of the charges, but one thing is for sure, his life will be totally different after this. He is likely to be a hero in the trading world, it will be interesting to see whether he will be able to trade again, but either way lets hope common sense prevails.

Tuesday, 21 April 2015

They Bought the Dip...No Surprise

After what has seemed like a never ending sequence of up days the market has come down with a bang on Friday only for it to make it all back over the past two days. Volatility products continue to struggle to contain any move higher as the market rally continues. Taking UVXY for example, it has lost over 50% of its value in the last month and a bit, as the roll cost are quite high as the futures are in contango, meaning that near term there is little fear , with expectation for more volatility later on in the year.
In Europe the DAX has taken a big hit the past few days, after hitting highs at 12400. Since then it has come off over 5% trading to a low of 11700 before bouncing back above 12000 two days later. Such a move isn't surprising given that QE still underpins the market. I have maintained my short for the past 3 months rolling up and extending duration, waiting for the inevitable correction. I initially had a 10500/10350 put spread in Feb which I rolled to 10550/10400, and now today I rolled my May Options over to June with a 11000/10850 put spread whilst selling a put at 9000 to cover the roll cost. With IV relatively low, playing the debit spread worked out to be the better play in my opinion.
I continue to be long Volatility as well, and this is the biggest drag on my portfolio as drag has pushed this contract down further, as the effect of the roll is embedded in the ETF. UVXY is trading around 11.50 right now however it was trading at 37 earlier in the year. I'm hoping for at least a 50% retracement in this ETF.
I'm currently looking into shorting Oil if strength continues as it looks like there is not much more room to go and as for Equities, I don't see no reason why the buy the dip mentality will change so expecting more upside after every pullback.

Wednesday, 8 April 2015

Swiss issues negative Yielding as 10 Year Bond

As volatility continues to drag, and volumes subside, the market clearly is well supported as any downside action is just met with buy the dippers as worse economic data and easy money continue to support the markets.
Last Fridays NFP number was a bit of a shocker coming in at 126000 against an expectation of 200K plus, the initial reaction was a sell of in Equities and Bond Yields dropping, however we have seen time and time again that bad news is good news and this resulted in a massive reversal on Monday as all was ok again.  The move up has also pushed up European stocks to highs.
Bunds are above 159 again as Yields near negative territory and the Swiss Bank just issued the first negative Yielding 10 Year Bond which was over subscribed.
What is this world coming to, investing in an asset which they are charged to borrow to the government. In my opinion any fund manager buying this debt isn't doing his job correctly. However this is becoming normal as negative yielding bonds have become the worlds fastest growing asset class accounting for a quarter of the Euro Government Debt Market.
We now live in a world where people are happy to pay the government to lend them money, and one where Equities cannot go down cause we have low inflation and a sub standard economy. Yield curve plays are non existent, which leaves most of the opportunity in Energy related products.
With Oil and Nat Gas moving and providing opportunities. I'm looking to short any rally in Oil as we remain oversupplied, and we remain in a 45  to 53 trading range for the past few weeks, and until this breaks one way or the other, I will continue to play this range.
In Agriculture, the dip below 400 has got me interested in Corn again. looking to the July Future, I would be looking to go long on another pullback, but buying a put against it as a hedge.

Short Sterling spreads nudge higher on hawkish Fed; Walmart blowout

As most must know trading Short Sterling is a bit of a bore, and has been for a while. Having managed to get out of my 2 month hold before,...