Somebody gave you an insider tip and you want to use options? Think again.
The SEC sees you coming. Good luck justifying yourself to a jury. The stick will hurt.
You remember our cryptocrook? Quant WizKid, market-neutral hedge fund, Cryptocurrency arbitrage great returns, $90m AUM… Except that it was a Ponzi.
His sentence just came out: 7½ years of jail. Here are the explanation & the context.
Virgin Galactic’s successful flight may have brought joy to Mr. Branson, but it will also bring some after-party headaches.
The entrepreneur and space explorer is accused of basic earthly financial misgivings for this same flight – a pretty serious insider trading issue.
UBS got flack for recommending VIX ETFs to its clients. This suitability case has in fact deep roots in a significant ETF classification challenge: many product databases are mishandling the wide diversity of ETNs. Significant litigation is to be expected as a result.
When you are spoofing gold futures, don’t brag about it in chat rooms.
A few gold futures traders got one year in the clink for market manipulation.
The German Supreme Court has made it official; the Cum/Ex was not a loophole but a blatant money grab.
The two Warburg executives can expect jail time, and their firm a bankruptcy.
Many others will follow.
The ARRC has recommended the CME’s methodology to calculate a term structure for SOFR. This is big news.
This article explains SOFR’s weaknesses, what a term structure is, why we need one and how the CME calculates its own.
In a new version of the transfer pricing strategy, Tom Sandell virtually relocated his hedge fund from New York to Florida to avoid NY tax liabilities on his deferred comp.
The story didn’t finish well. A whistleblower and the NY AG forced him to cough up $105m.
LIBOR, the most important number in the world, had a good run for the last 50 years, but it is going away.
SOFR, its replacement, is not subject to manipulations but has a host of problems.
The transition is difficult.
Not all central bankers and diplomats have a good opinion of cryptocurrencies.
They are assessing their costs & benefits through articles in prime newspapers.
One diplomat/economist just called for their outright ban.
A summary of the largest Ponzi schemes in history, with a visualization that is a pleasure to the eyes.
The Momentus / Stable Road merger is the epitome of what can go wrong with SPACs. It is a story of dreams, greed, and lies.
The SEC made an example out of it. The plaintiff law firms are jumping on the bandwagon too.
Guggenheim had restrictive language against whistleblowing in its compliance manual. The SEC reviewed the manual and fined the firm $209,000 – before any whistleblower was silenced.
The message is clear; the SEC will not tolerate any whistleblower muzzle.
FINRA slapped its largest penalty eve, $70m, to Robinhood for numerous and shocking failings.
That fine will raise the firm’s IPO price.
The 2-and-20 are decried as enormous and one-sided fees. Investors are angry at the poor net performances. The press is pointing at large redemptions in a failing industry.
In other news, the weather is beautiful in hedge fund land.
The Biden administration is planning a significant IRS budget increase so that the agency can effectively collect what it is owed. The investment will pay for itself multiple times. The “Tax Gap” now stands at an enormous $1 trillion per year. “Defund the IRS” has been the policy of the decade.
Medallion is Renaissance’s flagship fund. It was up 75% in 2020. Unfortunately, it manages only the employees’ money.
All the other investors were down ~30% during the same period. Not as great.
Redemptions ensued. $11 bn of redemptions now.
Central Bank Digital Currencies are very different from cryptocurrencies. Cryptos will be used by unsavory countries. CBDCs will be used by democracies and bad actors alike.
Here are examples of both types, as well as the challenges the Federal Reserve faces in creating a digital dollar.
The Rosen Law Firm has filed the first NFT class action, which accuses Dapper Labs and the NBA of selling $500m of unregistered securities to US investors, as per the Howey test. The firm is also slow to pay back investors who sell their NFTs.
The case will be followed closely by the new digital litigation industry.
PwC released its annual Crypto Hedge Fund report; it contains many interesting statistics – fees, size, investor source, strategies, liquidity, performance…
Corporate taxes have been decreasing for the last decades, the result of tax competition between countries, tax havens, as well as corporate tax shenanigans. The finance ministers of the G-7 have now agreed to a global minimum rate of 15%. This is big news, with important consequences.
The first jail sentence has been pronounced in the Cum/Ex tax fraud. The fine is a death knell for one of Germany’s oldest private banks. The judgment is causing frights in board rooms and trading floors.
Pump-and-dump are ubiquitous in crypto currencies. The schemes are well organized online groups, acting for the explicit purpose of manipulating currencies.
Organizers are front-running their groups and make great returns for themselves, so why would other participate? For hubris and gambling fever, say academics.
Regulators are absent, and the situation will deteriorate. This is the long-form review of this Far West of modern ages.
The credit card processor was actually a purpose-built money laundering scheme.
Wirecard tricked its auditors, its board, external investigators. It retaliated against whistleblowers. With the support of its regulator.
That wouldn’t happen over here, but could it? Thoughts?
On February 5th, 2018 (Volmageddon) the volatility reverse ETF XIV lost 96% of its value in the space of a few hours. Its iNAV was also miscalculated for an hour.
We have now discovered why: S&P Dow Jones was understaffed and did not release an ‘auto hold’ safety.
This human error contributes to current debate on the need to regulate index providers as investment advisors.
We have all heard that China is a growing economic & military threat to the US and the world order. But is it really?
Michael Beckley’s book ‘Unrivaled: Why America Will Remain the World’s Sole Superpower’ demonstrates it isn’t, says The Atlantic’s David Frum. Here is why.
The risk manager who blew the whistle on Deutsche’s Libor manipulation is entitled to a $100m award.
That’s a problem. It would empty the coffer for the entire program, and block other actions.
The Dogecoin Rap video is funny and right on cue, if you listen carefully. But crypto can only go up via social media advertising, experts say.
We have seen such exuberance in the past. But now the GameStop Redditors who bankrupted hedge funds say that Dogecoin is next.
It very much looks like a “pump”, as in “pump-and-dump”.
Robinhood has demonstrated and deleterious effects on day traders, including enormous tax losses, suicide, anxiety, addiction.
Meanwhile, the firm is the subject of major regulatory and legal procedures, whose outcomes are hidden or unknown.
The firm’s IPO looks very much like passing on the hot potato… again to unsuspecting and inexperienced traders.
Non-Fungible Tokens are the new asset class of digital art, and the spearhead of ‘decentralized finance’. Can with reconcile innovation with good sense? NFTs with regulations?
This article reviews their nature, their legal & regulatory difficulties, pinpoints extreme examples, highlights their volatility and more importantly, asks how a digital economy could be constructed around these loosely regulated assets.
The founder of a Turkish crypto exchange runs away with $2 billion from ~400,000 individuals.
The SEC has hit yet another nail in the binary option coffin, and what a big nail that is. SpotOption was the industrial-size engine behind this global scam.
This article explains binary options, what their true risk really is, how some have weaponized it, the SEC’s actions, as well as shares comments from the investigative press.
SPACs, the new blank check companies are not delivering their unicorn promises. Even the prophet’s recommendations are not performing. Surprisingly, Chamath Palihapitiya is nowhere to be seen.
German prosecutors are taking numerous financial institutions to courts over the Cum/Ex fraud, and the banks are suing each other to escape the dues.
The proceedings show ICAP at the center of this web of frauds.
What happened at Archegos? A lot has been published already, but many critical questions have still not been asked. After a factual summary / press review, this article asks the missing critical questions.
Guy Gentile is a principal with a checkered past: pump-and-dump, lack of registration, soliciting US customers from the Bahamas… He’s not hiding that he went rogue.
He just got sued by the SEC for evading US stock trading regulations. Again.
The cannabis industry is growing up, getting sophisticated. Perceptions are changing, but regulations are inconsistent. The smart money has arrived.
Here are the regulatory, financial, and investment challenges, as well as the opportunities, driving this rapidly evolving market.
Two articles coincide into a disappointing conclusion. The casino markets will lure a chunk of the stimulus money into bad investments.
Buy Now Pay Later (BNPL) is the new form of credit used by 1 in 3 US consumers, and growing at 40% per year. It’s the new payday loan business.
This report explains what BNPL is, who uses it, how much it grows, and what this business really is about. The review asks questions to ponder about this new funding business.
The blank check companies are raising billions in IPOs… but for how long? Here is the SPAC 101 manual: nature, popularity, ego crisis… and even options!
The SEC has released its new sets of priorities for 2021. Here they are. Climate & ESG risks, disclosures and policies will be the focus #1. Retail investors, seniors, retirement savors: Reg BI and Fiduciary Duty compliance Information Security & Operational...
This week saw some really unusual moves, 10Y repo, intraday volatility, stock rotations, A harbinger of more volatility to come?
Should US stocks settle T+1? The current T+2 settlement date is considered antiquated, and the Robinhood affair (gee, them again???) has relaunched the debate. Here is a review of the DTCC’s proposal, as well as an idea for derivatives traders.
The SEC and the NY AG are suing CoinSeed for lack of registrations and multiple other counts. That’s a cold shower for the crypto industry. Spoiler alert: adult supervision is needed.
Geode handles $700 bn of Fidelity’s index tracking assets. Geode Diversified, the much smaller hedge fund business, took a 36% loss on COVID’s volatility rally. It is now getting the axe.
Navesink International is at the interface of two worlds – the financial markets and the legal space. It is a scarcely-populated niche. We are confident that the content of at least one of these two universes will be of interest to you.
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Infinity Q may be the new variance swap skeleton. The New York hedge fund has just been suspended by the SEC pending valuation of its variance swaps and its full liquidation.
The fund’s main investor is handling the fund, while the founder is on administrative leave.
Index providers provide research with some discretion on trillions of assets. They move markets. Their errors are costly.
Should those ‘data providers’ become ‘investment advisors’? The SEC is considering it. Two academics explain why and how this should be implemented.
‘Roaring Kitty’, the rebel redittor behind GameStop, is actually a registered principal. His actions and background will harm him, his employer, and will change the industry.
This post explains Keith Gill’s actions, his investment and his supervisory background, and the responsibility of his employer, as they are stated in the class action lawsuit. We ask questions and ponder the long-term consequences.
The billionaire matriarch of the Schottenstein family was being taken advantage by her own two grandsons. So grandma ate the wolves.
She brought her two JP Morgan bankers to FINRA and obtained the largest award since 2018 – $19 millions.
‘When you combine ignorance and leverage, you get some pretty interesting results.” Warren Buffett
Three good notes from the derivatives research teams of Morgan Stanley, Société Générale, and Nomura point to a potential squeeze in the VIX, as a result of the increasing retail activism. This technical post explains the contents of the research papers. Spoiler alert, yes, the VIX is prone to a squeeze.
Free doesn’t mean without cost. Payment For Order Flow brings benefits to the public, but there are drawbacks to this new execution approach.
This article explains what Payment For Order Flow is, the role of the market-makers, as well as the benefits and the drawbacks of the approach. It highlights the difficulty that SEC will meet in smoothing out those issues.
The first Interpol warrant has been issued in the Cum/Ex tax trading case.
Paul Mora, looked for by Germany, Denmark, and Belgium, is currently in New Zealand. Mr. Mora said that “he would skip his tax fraud trial because of New Zealand’s low Covid-19 infection rate and argued that he wouldn’t get a fair hearing in Germany.”
One of Credit Suisse’s top bankers was up to no good. The firm was warned and did nothing.
This new scandal is unfortunately far from being the first for the Swiss bank. Regulatory investigations (and provisions!) are actually pilling up.
This article explains the last scandal, in the context of the firm’s recent compliance woes.
Cryptocurrencies are new and different. Thieves are not.
A young quant trader who had raised $90m for a market-neutral arbitrage fund has managed to waste most of the money. This article shares the details.
The managers of GPB Capital have been using the life savings of many retirees to fund their lifestyle. They just got charged by the SEC.
From promises to arrests, GPB’s downfall is a textbook case of what can go wrong when investing. This article lists the initial red flags, which any investors should be wary about, as well as the many steps of their downfall.
Robin Hood is alive and well. He has left the dark forest of Sherwood for the spotlights of social media and financial markets.
This short article introduces the actors of the play and shares the most recent acts/scenes.
Is the main theme of the play still relevant today?
GameStop’s rally and its short squeeze are more than just market exuberance. Thanks to low-cost trading, employees working from home, and a Fed-induced market rally, retail traders are pushing the market to new highs and enjoying the excitement of the rally. Worse, social media allow them to focus on a few instruments, with wild rallies.
It is only a matter of time before this party is over, for this stock or the market. We should start thinking of the aftermath.
A good note from Ralph Sueppel on the relationship between market volatility and macroeconomic uncertainty.
The schizophrenic behavior of Mr. Market. A bi-modal view of option-implicit asset return expectations
Skew is well explained by the sum of TWO return expectation Gaussians. The model reviews these distributions and leads to an interesting market structure interpretation, with applications in asset allocation.
Looks like the Square Mile isn’t so sure about Brexit. The Bloomberg editorial board, for some unexplained reasons, is asking Europe to play nice with London.
I beg your pardon?
Brexit is a catastrophe for the fishing industry, despite being a critical issue in the debates. Unfortunately, that 0.2% of the UK’s GDP may only be the tip of the iceberg.
So far, the government is asking for patience.
Jordan A. Thomas, the former whistleblower program manager at the SEC, as well as a leading plaintiff attorney, is suing the SEC for changes to the program.
This article explains what the SEC whistleblowing program is, why it is so successful, and why you should consider it if you see fraud or crime.
The Corporate Transparency Act, enacted in the Defense Appropriation bill of January 2021, is a game-changer for financial investigators. It prevents bad actors from hiding behind anonymous shell companies – right here in the United States.
This short video explains what an expert witness is, and why Navesink International has a unique position in the securities litigation industry.
This second and last short video explains the role of the expert witness, practically speaking.
The fight against one of the largest frauds in banking history (Eur 55 bn and counting) is progressing, with the indictment of Sanjay Shah by SKAT, the Danish Tax Agency.
Our article explains the Cum/Ex fraud, as well as ‘dividend arbitrage’ activities in general.
My grateful appreciation to a new friend/my friend Gary Cohen (https://lnkd.in/gzE3Nvj) for his time, his efforts, as well as his top digital media skills who helped me recreate the Navesink International website and optimized it from an old-world static site into a new world WordPress site. Gary brings together a 1st class financial background, well-honed management skills, professionalism, and true digital optimization/social media know-how. Thanks to his expertise and continued efforts, Navesink International now has a dynamic & flexible website (https://lnkd.in/eq8vGgP), as well as a blog (this post refers to / is on the blog), where I will share my thoughts and observations.
It has been a pleasure to work with him during the many late evenings of this journey, and we both look forward to finally meeting in person when COVID times end. If you are looking for an experienced leader to optimize or digitize your financial services business, reach out to Gary. I am sure you will be happy you did.
Finally, you can subscribe to the Navesink News Blog to receive email notifications of new posts so you never miss out.
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“It ain’t over till it’s over”, said the baseball legend Yogi Berra. And Brexit is surely not over with this Christmas deal. Many issues remain unsolved.
Corruption has a new enforcement agency. The CFTC effectively delivered on its intention to enforce the FCPA. Vitol, the Swiss firm, was just fined $95m for bribery.
While economists and journalists pour into the 1,200+ pages of the Brexit treaty and its long-term impact, the financial services are already seen as the big missing part. The Square Mile is getting worried.
That will not be to everybody’s taste…
A study from the London School of Economics of 18 OECD countries over the last 50 years confirms that reducing taxes only impacts those directly touched by the tax, and has no benefit to anyone else. Tax cuts increase inequality with no impact on economic growth and unemployment.
The British prime minister knows that a “no deal” Brexit would be disastrous for the country.
In game theory, a symmetric game (where both players have equivalent hands and payoffs) has an outcome of zero – nobody wins. But when both players, unfortunately, know who has the upper hand…
More about Robinhood… Massachusetts’ Enforcement Division filed a complaint about
– its aggressive growth tactics,
– the firm’s outages and disruptions, which were well known and ignored while pushing growth,
– its gamification,
– and insufficient supervision for option trading.
Here is an excellent, albeit a bit lengthy, analysis of the history, regulatory and general situation of Robinhood & its Day Trading business by Bill Singer of Broke and Brokers (http://www.rrbdlaw.com/).
Robinhood has just been fined $65m for overcharging its customers, despite trades being free of charge – the company sells its order flow, and the net result is that traders are overcharged $35m/y.
The firm also mislead its clients in its advertising.
But in the back of these already serious issues, is the question of ”gamification’ of trading, where inexperienced individuals actively day-trade on margin. They end-up facing professional investors, who are much better informed and equipped than them. A previous note (https://lnkd.in/gCjKwtM) showed that most if not all end-up losing money.
This five-year-old article below still remains a good analysis of what ‘gamification’ entails. It is probably fine for school teaching and corporate training, but feeding a “high-octane gambling need” is probably not ideal for financial markets.
Robinhood’s documented bubbles, coupled with many new accounts and likely overpriced markets, could turn pretty ugly pretty fast.
Oh, so faking up an initial spread to start a market isn’t allowed? Let me put this one out, it’s not rare… CFTC fines TFS-ICAP and its managers $7m for fake FX option markets.
Interestingly enough, the action comes from a whistleblower (who will be entitled 10-30% of that recovery…)
Goodhart’s Law: When a measure becomes a target, it ceases to be a good measure.
The Sharpe ratio has changed investor behavior. We chase the metric rather than the underlying quality it is trying to assess, and there are plenty of situations where the Sharpe is a poor metric of quality.
And there are unfortunately major losses, which keep on demonstrating the point – LTCM, AIG, Malachite…
Fridges are the new rocket science… IBM’s target of a million-qubit requires the biggest and coolest fridge ever.
The article is also a good overview of where quantum computers are, and where they will be. Quantum computers will be exponentially better at some tasks, but not at all tasks. Excel will still run on your desktop; high-dimensional problems (investments! back-tests! optimizations!) would fit well in quantum computers. The next generation of software will separate tasks and send them to either/or, thanks to cloud-based quantum capacity.
If you are not in the RIA space, you may have missed a profound change in the area. Robo-advisors are taking a solid market share, and their AUMs are now in the multi-billions. The big boys (Fidelity, Vanguard…), were actually forced to create their own such services not to be left out of this new segment.
Robo-advisors are not really growing at the expense of the usual wealth managers (which still better grasp complex situations), but are concentrating on the under-served low AUM investors. Robos charge a fraction of the existing management fees, thanks to artificial intelligence. They only offer the human touch past a certain $ nominal, therefore bringing the number of advisors per client really low. In fact, Robos also help the usual RIAs with the practical aspects of asset management (cash handling, rebalancing…).
Two leaders, Betterment and Wealthfront, are preparing for the next step of their growth. This article gives an idea of how the senior changes should impact their future.
Nope, portfolio managers shouldn’t keep the best trades for themselves (at the expense of other investors).
BlueCrest moved its best traders into a management-owned fund, and used AI to replicate their trades in the main fund. Unfortunately, the replication was poor, and investors redeemed and sued when the intel of the new approach came out.
The SEC is now forcing BlueCrest to compensate investors $130m for the underperformance, with a $37m penalty on top.
Chicken nuggets and fries? To avoid the topic of fishing rights, maybe?
This whole story looks more like Waterloo than anything else…
Jiuzhang, China’s new quantum computer, has leaped forward Google’s and IBM’s quantum computers. It is also based on a different technology (photons, rather than superconductors), which is probably easier to increase the number of qubits.
Although quantum computers are only working on very particular problems now, the technology will eventually be groundbreaking.
While the chances of avoiding a hard Brexit are dwindling under our eyes, this British-written article puts the cause of the divorce on the country’s long-seated culture and its establishment – Labour in particular.
NDAs enforceability is often a tricky issue, and tricky legal issues require qualified legal advice.
Independently of its initial political topic, Dennis Boyle’s article highlights key issues on this type of contract, and whether they should prevent you from speaking to authorities.
Most day traders on Robinhood lose money. Actually, maybe 0.5% of day-traders earned more than the initial salary of a bank teller.
A large body of academic studies going back 20 years consistently shows day traders and other very active traders have difficulty making money over anything more than short periods of time.
Quant hedge funds have had a bad year. One of their core factor, value, a staple of investment for many years, has strongly underperformed.
Quants rely on backtests to see what has performed / is performing well. In a changing universe, models naturally have short lifetimes as a result. In this covid world, the past really doesn’t reflect the future anymore, and many models do not work at all. Some quants have self-doubt on the validity of their approach (see the previous post on Inigo Fraser Jenkins).
It’s probably way too early to call for the demise of quant investing, but COVID surely brings a regime shift.
No benefit in being alarmist, and there are far too many people talking about COVID than needed. But the markets remain ‘truth midwives”, and today’s market fall is explained by these points:
– The resurgence covid resurgence is much larger this Fall than it was in Spring.
– Europe (not just France), needs to re-instore solid prophylactic measures. There are now curfews in large French cities.
– While Europe is in a second wave, whose roots probably come from frustration and the abnormal strength of this virus, the US is still in its first wave. The recent US resurgence is only the virus reaching states, which it had not yet infected. There’s probably worse to come in the US.
Martin Hairer, an Austrian-British researcher at Imperial College London, is the winner of the 2021 Breakthrough prize for mathematics. A paper so good, it must have been ‘written by aliens’. A big step ahead in stochastic PDE.
A good piece on the history of ETNs, who are in period of lackluster growth / demotion / regulatory pressure, unlike ETFs.
ETNs’ complexity makes them interesting for professionals, but unfortunately extremely dangerous for most investors as well. No, XIV is not a company…
If you lose money in trading, your broker can and will go after your assets, including your personal assets. In fast markets, this happens even more often. A glitch at Interactive Brokers may be the rare exception.
Why was the price of the oil futures negative? The explanation is simple – delivery.
Simple and interesting reading. Imagine we all started in life with the same wealth and randomly generated profits by trading with each other. The first winners benefit from diversification, and tend to increase their wealth.
=> A fair economy naturally converges towards an unequal society.
In other words, even with equal skills and no inheritance, some of us will become the 1%. By pure luck.
That would have been a touchy Thanksgiving topic…