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.

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.

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.

VIX suggests little Fear as Markets Fall

Wednesday saw quite a substantial sell off in the US markets with the Dow down almost 300 points and the ES and Nasdaq down similar percentages. Thursday saw some further selling pressure pre cash open, with the Nasdaq printing down over 50 dollars and the ES down 20 points. At that moment you begin to think will the buy the dip pattern hold, or is this the time when it is just going to go.
One clue was the VIX, with the move up in the UVXY only 8% which isn't much considering it has lost 60% plus of its value in the past month or so. It was interesting watching the VXX and UVXY trade as it would reluctantly go up as the market was going down, but on any up tick it would be smashed back down.
All the VIX futures are trading in Contango meaning there is less near term fear in the markets, and hence the bounce was to be expected as the 20 point pre market down move was made back up by the end of the session.
It seems buy the dip is here to stay for a while, as long as easy money is available.

My long VIX plays are not playing out as I hoped so I have just continued to roll them in order to give me duration, however I have lightened my deltas slightly so not to leave me too exposed. Next week is a short week for many of us, although NFP will still be traded on the Friday with most of Europe shut. This is likely to mean the markets will likely be far more illiquid around the time of the release. However the number will likely have a greater impact on the markets as the FED is indicating raising rates at some point this year.

Worsening Macro Environment Lifts Stocks

The FED downgraded the Economic Outlook yesterday despite removing the "Patient" wording.

For the past few months, worsening outlook and worse data is stock market positive.

SPX regained 2100. Bonds rallied over a point, and as expected there was a dollar sell off. One of the more notable moves was in the Eur/Usd, which moved up over 400 pips on the announcement only for it to pare the whole move by today.

Euro fundamentals haven’t changed, so the big move up was exaggerated by stops before coming back to pre-announced levels.

This is the type of move which has made it harder to keep a position on. Since the swings are very big , deep pockets are required to withstand the moves.

As far as the FED decision goes, it wasn't surprising. Like I've been tweeting, they don't have the conviction to move forward with monetary policy. Since there is such a divergence with Europe in terms of economic progress.  Given the strong Dollar, it is unlikely they will pull the trigger, which is going to leave easy money stimulus on the table for even longer, which may or may not have big repercussions in the future, with the main threat  being the inflated stock market.

As far as interest rate Spreads go, shorting Short Sterling was the play as the Spreads have all come back down after a 10 tick move up. I was short 11s in the Mar17Jun17 to take a tick. It is close to trading 9s now, I will look to initiate a long position at 8s if it gets there. I prefer playing the back months as the range is much tighter, so makes picking the levels much more predictable.

 I'm still a buyer of volatility, although I’m feeling the heat on those positions. There seems to be no fear, and at this rate it looks like volatility ETFs will go to zero as drag weighs on the products, but I still believe there will be a meaningful sell off some point soon, which will push volatility up.

Volatility dragging despite Sell off

In the past few weeks the rampant upside in the market has understandably left those thinking that markets never go down. The VIX is representing this as it is trading back into the 13s last week and despite the big sell off on Friday the Volatility indexes still seem to be under pressure on every up tick in the market.

The DAX is experiencing the biggest gains on the back of the ECB QE programme. There seems to be such strong support despite the lofty price rises over the past month, its as if the ECB are buying DAX futures as part of the programme. The consequence of this programme is likely to be the same as it is in the US. Companies will borrow at ultra-low rates and instead of feeding it back into the economy through investment and jobs it will just repurchase stock  (which will prop up earnings per share), which are already at record highs continuing the buy at any price strategy.

But we can see how this can go wrong as was the case with Oil companies who repurchased alot of stock when Oil was in the 80s and 90s, and now with the fall in Oil prices stock buy backs have been suspended.

However as it stands, it seems there is no follow through to any downward move so you assume the market will continue its current pattern which is to buy into any dip.

Strategy wise I have been accumulating long Vol Positions,  as I'm looking for that contrarian play. I'm also looking to short the Short Sterling curve on the back of the big rise in the past week, with Dec15Mar16 trading 10 ticks above where it was a couple of weeks back, a short here seems like a good risk/reward play. I continue to hold my Dax short option play, and have rolled it onto April Expiry now, so hoping for a 5% correction at least in this index. Finally I have gone long some Gold in small size on the back of the big drop after Non Farm Payrolls.  

Is nothing priced in anymore?

The rampant up moves in Equities beggars the question whether any news is priced in anymore. In the past month, with markets and Stocks being at all time highs, any news that's slightly positive is met with the type of buying you would expect when stocks are at lows. You would have thought the DAX move from 9600 to 11200 would be pricing in something, but German acceptance of the Greek bailout extension for example propels the market up like there is no tomorrow and without sucking out all the volatility in this market. You know things are bad when the markets rally close to all time highs today on the back of a rumor denial of a Greek Bank running out of cash. I mean there was no real sell off on the rumor in the first place, which just shows the Algos wired into trade headlines are pushing this thin markets to more stretched valuations on a daily basis.

The words sluggish, tough, tepid are the words of choice for this market to continue its march higher. As long as the market remains this way rates will stay low and that's all it takes. A massive miss in Chicago PMI data, briefly lead to a dip in this market, for it then to rally all the way back up, because it was probably a buy the dip opportunity. There is no such things as fundamentals mattering to this market any more, its just demand and supply. Too much cash and no where else for it to go. Eventually there has to be some kind of re balance and when that will be who knows, but when it does happen, its going to be a wild ride.