Timber Hill profits soar
Just a couple of months ago we’ve been making fun of Timber Hill. A few Norwegian retail investors fooled the sophisticated automatic trading software and made a few bucks along the way. Both vikings, Svend Egil Larsen and Peder Veiby, were sentenced to suspended jail terms last October. Story isn’t over yet, as they will appeal to the verdict. This fairy tale from the polar circle is a funny anecdote, but more serious was the complaint from Timber Hill’s parent company Interactive Brokers that market making wasn’t worth the risk anymore. Fast trading algoritms shot their quotes from the market beating them on the delta.
Only a few months later things have changed. Timber Hill’s profits soared in Q1 from $6 million to $135 million. That’s a great comeback for the famous worldwide electronic trading system. Discussing the results, chairman Thomas Peterffy has identified three sources for the improved results:
The average effective spread in the first quarter was about 30% wider than a year ago and 9% wider than in the fourth quarter. This is a positive trend that helped fuel our trading gains during the quarter. Also a positive, the ratio of actual to implied volatility has risen from the historically low levels we witnessed at the end of the last year. In the first quarter this ratio increased to 70% from 61% in the prior quarter and stayed on par with the year ago quarter.
However, the average implied volatility level remained surprisingly low despite a chaotic first quarter with the eruption of protest in the Middle East, the disaster in Japan and a shaky West recovery threatened by rising oil prices and stubbornly high unemployment rates. The mix actually fell about 8% from the year ago quarter and 4% from the prior quarter.
Basically, the bid-ask spreads has widened, the trading volume and the realized volatility have increased. Petterffy also notes the low implied volatility in the current option prices. Volatility is sinking, while the world seems to be on fire and a new European debt and/or banking crisis isn’t unthinkable. Greece will have to restructure their debt sooner or later, and with the Landesbanken at stake political mess is guaranteed. Anyway, with a $ 135m profit one thing is clear for all other market makers ; we’re back in the happy days again.
‘ratio of actual to implied volatility has risen from’
implied vols are marked that much higher than realised ?! and then Jack complaints that vols are not high enough ??!!
can i make a guess that Jack is paying too much theta and hoping against hope .. look at Euro .. at 1.45+, i think its a safe to read that market thinks its over .. PIG is either going to take haircut/restructure/kicked out of euro .. spain seems to have been isolated from those 3 .. so thats the end of euro problems .. why do you think the markets are nervous no more !
@ 10:49pm
Ratio Actual to IV has risen: Actual/Impl Vol has gone up, which means IV is marked lower than realised. If you would really be in this business, you would not only understand this but also know this.
It has been eight days since the Optiver CFTC hearing. Does anyone know what the outcome was?
relative performance to peers would be interesting
one data point from one MM .. not so much
‘If you would really be in this business, you would not only understand this but also know this.’
allrighty, another small dick blabbering too much .. not to worry, you can actually write something useful now .. to quote peterffy ‘this ratio increased to 70% from 61% in the prior quarter ‘ .. so the actual vol realised was just 70% of what was implied in option prices .. how do you arrive at ‘IV is marked lower than realised’ ?
This story and its conclusion are very misleading. Timber’s results are notoriously skewed by currency fluctuations and they make no secret about that. When the USD gains, their USD profits go down (2010), when the USD is weak, their USD profits go up (2011), all other things being equal. (Their income and assets are not all hedged into USD, but reporting is done entirely in USD.) This alone accounts for more than USD 100m of the difference between the Q1 2010 and Q1 2011 earnings.
Furthermore, Timber have expanded their brokerage business considerably. By now it is more profitable than their market making. As such, the conclusion that “happy days are here again” for market makers is unwarranted.
If you had listened to the earnings presentation, you would know that Mr Peterffy is quite bearish about the future success of their market making business.
‘this ratio increased to 70% from 61% in the prior quarter ‘
Actual increased relative to implied.
How is this is a good thing for a market maker??
(very small dick here)
So AO can finally hope to make big bucks. I think they are chewing on reopening the foreign branches again. Barely cost them anything cancelling the multi-year lease contracts.
‘Timber’s results are notoriously skewed by currency fluctuations and they make no secret about that.’
Nice !
Optiver is usually very good in hedging USD and AUD profits,
‘Optiver is usually very good in hedging USD and AUD profits,’
Thats because they are usually non-existing,
‘Actual increased relative to implied.
How is this is a good thing for a market maker??’
i’ll try to give my 2c tangentially .. Since all the market makers love volatility, i.e., they all seem to make money in volatility surges, so they are all long volatility essentially, so they could hedge that by selling premium .. but being caught short gamma can get you killed on days of extreme moves, so you could always atleast try be slightly long the premium .. specially if you are Timber Hill where there is not active monitoring of each risk but more of global risk .. so if you are net long pretty much always, you would want the realized to come up more closer to actual priced .. so keep paying theta, so that one extreme move wouldnt close your shop .. thats the arguement i can think of .. feel free to throw in your 2c ..
‘So AO can finally hope to make big bucks. I think they are chewing on reopening the foreign branches again. Barely cost them anything cancelling the multi-year lease contracts.’
Just because Timber Hill had stellar numbers ? man you must be really obsessed with AO .. current or former employee ?
“‘Timber’s results are notoriously skewed by currency fluctuations and they make no secret about that.’
Nice !”
Timber *intentionally* keeps exposure to (accumulated) USD, EUR, CHF, YEN profits and a few other currencies, at least up to a certain level. They are very open about it and they usually tell investors how much it impacted their earnings (+ USD 73m this quarter). The above statement wasn’t veiled sarcasm about lack of hedging or poor cash control as subsequent comments have indicated. Shame on anyone who doesn’t think Timber is run professionally.
‘The above statement wasn’t veiled sarcasm about lack of hedging or poor cash control as subsequent comments have indicated. Shame on anyone who doesn’t think Timber is run professionally.’
man, nobody gives a fuck about shaming Timber !
coming back to point about currency exposure, i agree with the policy of no hedging .. while hedging you are surely loosing bid-offer spread and other settlement related costs .. there might still be basis risk remaining .. also no hedging is not leading to big exposures as such .. i dont know the VAR for it, but surely something which Timber can take a hit on it .. so why pay bid-offer and related costs vs expected zero sum of FX exposure .. Timber is not in FX punting game, so its expected losses from currency exposure is better than for sure hedging expenses ..
so just stay long gamma then right…..that always works…..
11:13pm
You never cease to amaze me with your stupidity. Of course Timber do hedge FX exposure resulting from trades. Profits in EUR, CHF etc however are not always hedged. If you seriously believe the 1 basis point spread in EUR/USD is what is stopping them from hedging everything, I’d like to have some of what you are smoking. BTW, Timber actively make markets in FX, so there goes your theory.
As far as your “zero expectancy” argument against hedging is concerned, by the same rationale, they would not hedge any deltas either.
A word of advice: leave the trading to the pros, you obviously have no clue. Meanwhile you focus on reading more books about VAR and tell yourself you’re a good trader just don’t share your wisdom over here and we’ll all be happy.
@ 9:02 old school trader. Many firms do not hedge their intraday FX and delta exposure untill it reaches a certain treshold. A lot of research has been done on this and all found that it is more costly to hedge small fx and delta exposures than to keep the risk.
Your P&L will be a bit more volatile but over time it will be higher because the saved hedging costs are higher than the risk. Firms employing this hedging strategy include Timber, Susquehanna, Jane Street, IMC, Optiver, Getco, Citadel, and many others. So who is the sucker??? you or all those multi billion $ firms? I suggest you read a bit more about VAR to increase your P&L.
You’re jumping to conclusions. I did not imply Timber (or the other large firms you mentioned) hedge (FX/delta) immediately and in full. In fact I know they don’t. But they will hedge – eventually. I merely argued that 11:13’s alleged “policy of no hedging” (sic!) is moronic.
The FX effect in Timber’s earnings is essentially caused by sitting on 1 billion in equity (trading capital) in non-USD currencies. It has very little to do with how they hedge the next (small) trade. Next quarter, the billion will still be there. Why is this so difficult to comprehend that effing VAR needs to be dragged into the discussion?
‘so just stay long gamma then right…..that always works…..’
yah precisely, thats what i meant to say ..
‘You never cease to amaze me ‘
And you never cease to amaze everyone with your extremely large dick size ..
‘Timber actively make markets in FX, so there goes your theory’
like DB ?
‘what is stopping them from hedging everything’
how do you hedge i.e., does the treasurer hedge, when does he hedge, how much does he hedge, if there are losses, does the hedge get reversed, do you allow the FX trader to give 2c or allow morons like you to keep blabbering about how magnanimous your shit ego is ..
#include “Orc_dick_size_surprise_jump_model.h”;
‘more books about VAR’
VAR is defined as no more losses than x over n days with y confidence interval .. there’s no much more reading required to it .. its just a risk number and not an accurate one .. it was used to give across the idea of how much year end P&L can change if there are large FX movts .. not for a soros level trader like yourself to see and hedge his risk .. if you cant fucking try to understand the point that is being ‘put’ forward, then just go fucking shag yourself and stop torturing with all your melodrama ..
‘“policy of no hedging”
thats not what i was trying to say, you moron.. if your US company with 100 bn Euro in Swiss account, you’ll of course hedge that shit .. stop showing your dick size..
‘VAR needs to be dragged into the discussion?’
go look back at your comments, you were recommending reading books abt it ??!!
say VAR again
@ “Optiver is usually very good in hedging USD and AUD profits,’
Thats because they are usually non-existing ”
All the crap ass partners from Chicago have been flushed out. Hopefully will not be non-existing in the future.
havent traders also been leaving ? i noticed one of them moved from optiver usa to sun trading .. any color on sun trading ?
VaR, thats correcter way to say it,
http://online.wsj.com/article/BT-CO-20110217-711672.html
Sun Trading LLC this week cut its workforce by nearly one-third and wound down its options-trading arm
great move
This week? Strange, the WSJ says February 17..
@ “Sun Trading LLC this week cut its workforce by nearly one-third and wound down its options-trading arm
great move”
Dont worry I got to keep my job…
who were fired, more of IT or more of traders or more of support staff ?
i am speculating they didnt have critical mass in the options mm and so hacked the entire group ?
“who were fired, more of IT or more of traders or more of support staff ?”
all the c++ coders. i mean what do those guys do anyway? should stick with spreadsheet guys. they add value.
talk to dominic connor .. he’ll tell you what geniuses these C++ quant analysts are .. capable of generating money out from anything .. right from high freq upto cutting edge exotic derivatives :))
No possibility to complaint with Interactive brokers Asia and Salvatore Recco
Due to instability of Interactive Brokers systems and incompetence of “Salvatore Recco”, I lost lot of money. It would not have happened with a competent and professional broker. But Salvatore Recco(Head of Institutional Services Asia) was slow, not polite, unprofessional, giving lame excuses and possibly make big money on my back.
0/IB asia has no independent complaint officer(the CEO so wont bother to answer). If a senior IB staff is incompetent, you could not complain.No one is checking what they are doing in Asia, so manipulations of the records/transactions and wrong doing can be done by their staffs in Asia.
1/ zero transparency: you wont get any records ( transaction, transcripts,…). “Salvatore Recco” is blocking my access to any records because he was incompetent.
2/ you will not be able to speak or see face to face, “Salvatore Recco”or a manager or a complaint officer in Asia. They will just hide and send you a small potato guy.Thank to The small potato, I discovered that Salvatore Recco was lying and the staff might know his incompetence.
3/ IB/Salvatore Recco will hide and refer you to a US complaint or any virtual manager in other continents.
4/ their methods in order that you give up your complaints, its their complaints tickets systems, it will take many months/ years instead of a day. They will tell you that they will get back to you within few days but instead give you lame excuses few month later. By that time all records could be modified by IB.
5/they have many others tricks so be careful, they can make you push to accept new rules at their favors when you later login,…
6/ they are not going to compensate you for their staffs mistakes for sure! Because They do not have any compensation fund aside in Asia !
On internet I find others complaints about “Salvatore Recco”, if you have any problems with him or IB, please help me. I spend money on a lawyer and complaint regulators without any answer!!!
Help me because “Salvatore Recco” is blocking my complaint as he was the one incompetent, the head, and possibly make a big money in my back!