Timber Hill profits soar

37 comments / April 25, 2011

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.

FOW Options Conference

10 comments / April 5, 2011

This month is busy with events for the Dutch derivative market participants. Of course there’s the annual poker tournament next week, which is a nice mix between playing Texas Hold’em and raising serious money for charity – all the cash will be donated to the Cystic Fibrosis Foundation. The former open outcry traders are welcome this friday in the Escape for meeting with familiar faces from the old days in the pit.

This week however, there’s another event and a special one too. The FOW events is hosting the European Equity Options Trading conference in Amsterdam in the Okura Hotel on April 7th and 8th. The subjects range from volatility trading to the impact of new trading venues. Delta one trading, high frequency trading, market regulations – you name it they got it. To be honest, the name of the conference is slightly misleading, as “equity” and “options” doesn’t cover all of the content. It’s definitely in Europe, though. Confirmed speakers, panellists and moderators are well known and respected market participants. If you want to broaden your view and haven’t registered yet – you can do so until 17:00 CET this wednesday. If you wish to wait for the closing bell at Wallstreet before deciding whether you can be missed at your trading desk you can sign in thursday morning in the Okura.

By the way, Johannes van Dam reviewed the brand new brasserie “Serre” in the Okura and gave it a 10- this weekend. Sounds like a great spot for a lunch to combine it with the conference. When in doubt, order the Tiefenbrunner Gewürztraminer.

Official program for the conference (pdf alert).

One is not a crowd

298 comments / March 27, 2011

Just one market maker signed for quoting options on Brunel and Ten Cate, looks like All Options needs some brownie points at Euronext.

Two is company, three is a crowd. Probably some deep truth in this saying, but one thing is for sure : one is definitely not a crowd. Euronext is launching new option classes often. The market makers will quote all the stuff and guarantee a tight market – those firms take the real risk.

Only one market maker

Euronext wasn’t able to find more than just one liquidity provider for the new options on Brunel (BI) and Ten Cate (TCT) – only All Options subscribed for the role of quoting these options. None of the other firms showed any interest at all in the quoting obligations. One market maker is not a crowd, and the liquidity provider auction doesn’t look very healthy this way.

Not logical

There’s something strange here. There isn’t much money to be made in Brunel and Ten Cate options, and still All Options takes on the quoting responsibility. The firm has seriously axed their trading staff, and won’t have many traders left with the time to quote this deserted options. Second, All Options didn’t sign up for the introduction of the options on AEX component Aperam – which is mainly quoted by Caerus Trading, along with a little 323 and Nino. It doesn’t make sense to sign up for Brunel and skip Aperam.

All Options short on brownie points

Apparently Euronext is able to pull a few strings and make All Options sign up for liquidity provider whenever the exchange needs it. Wasn’t necessary in Aperam, but in Brunel and Ten Cate the exchange would have lost its face. My bet is All Options is a little short on brownie points at Beursplein 5, and shows up as the cavalry when Euronext needs it.

Options on Brunel and Ten Cate

67 comments / March 20, 2011

The tragedy in Japan has sent markets south, but only after the nuclear problems in Fukushima appeared too difficult to handle a few days after the disaster struck. While there isn’t any market maker betting on the occurrence of this kind of misery, most market makers will be hedging their downward risks in any market. The far otm puts weren’t much in demand recently, but this “black swan” must have shaken up the profit and loss accounts of all firms. So far it looks like all market makers with operations in the Nikkei options have survived – but some must have taken hits for sure. Ongoing revolutions and wars in oil-rich autocratic regimes add another layer of uncertainty the coming weeks. Also, Knut passed away in Berlin. When trouble comes, they come not in single spies but in batallions.

Back to small local business

Introducing new option classes is free and easy for the exchange. Liquidity providers are generally happy to commit themselves to send their quotes – and when there’s no volume there aren’t any costs for Euronext and Eurex. It’s just the market maker which is trapped into the quoting obligations and taking risk. Anyway, two more illiquid tiny option classes to be introduced very soon. Brunel International (BI) on April 5th and Koninklijke Ten Cate (KTC) on March 29th. Signing up for primary or competitive market maker licenses ends for KTC this monday the 21st. However, I can’t imagine there will be much apetite for quoting these options so there’s no need to hurry. One can always join in on vacant places afterwards. After all, a primary market maker license (pmm) for Vopak, Nutreco, Aperam, Aalberts and Heijmans to name a few are freely available.

For old times’ sake

46 comments / March 10, 2011

Once upon a time, there was a large trading pit in Amsterdam. Instead of dedicated long distance lines and high frequency trading, market makers could actually see each other. Things have changed, it has been more than eight years now and only folks like Sem van Berkel still resist the change. Anyway, the website optiebeursvloer.nl has a few nice photographs on their site and a large (70 mb) video of the open outcry trading (sorry, dead link). Nice to see your fellow traders in the old days, and even beter ; April 8th there’s a reunion party in the Escape in Amsterdam for (former) option traders, brokers and Euronext staff. Tickets over here, 20 euro with drinks included sounds like a true bargain.

More important, the annual poker tournament for traders is coming up as well. Last year the prestigious title was won by Gunnar Harms from the neat performing hedgefund HiQ. A buy-in of 200 euro isn’t cheap, as there is no price money attached. All proceeds from the poker night are donated to charity, there’s no management fee or any expenses at all – sponsors have arranged free drinks and the location. The charity this year is the Dutch Cystic Fibrosis foundation. Cystic Fibrosis is a genetic and cruel disease, which has impact on the whole body but most notably troubles breathing. Serious progress has been made through research, life expectancy has risen but is still only 40 years and no cure exists.

A group of 30 traders from several firms already confirmed their participation, there’s room for 120 players. Last year was a big succes, mark the date of saturday April 16th in your agenda for some No Limit Texas Hold ’em poker.

Official flyer in English.

Amsterdamtrader