Amen

Thomas Peterffy
Chairman
November 14, 2017

J. Christopher Giancarlo
Chairman, Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581

Re: Dangers of Clearing Bitcoin and Cryptocurrency Derivatives in Same Clearing Organization as Other Products

Dear Chairman Giancarlo:

I am the Chairman and founder of Interactive Brokers LLC, a futures commission merchant and broker-dealer with over $ 3.8 billion in regulatory net capital and over $1.2 billion in client margin funds (Interactive Brokers Group is publicly traded on Nasdaq with a market cap of over $22 billion).

As a CME clearing member, we are deeply concerned with proposals that would allow Bitcoin and other cryptocurrency derivatives to be cleared in the same clearing organization as other products. This letter is to request that the Commission require that any clearing organization that wishes to clear any cryptocurrency or derivative of a cryptocurrency do so in a separate clearing system isolated from other products. There is no fundamental basis for valuation of Bitcoin and other cryptocurrencies, and they may assume any price from one day to the next. This has been illustrated quite clearly in 2017 as the price of Bitcoin has increased by nearly 1000%. Cryptocurrencies do not have a mature, regulated and tested underlying market. The products and their markets have existed for fewer than 10 years and bear little if any relationship to any economic circumstance or reality in the real world.

Margining such a product in a reasonable manner is impossible. While the buyer (the long side) of a cryptocurrency futures contract or call option could be required to put up 100% of the value to ensure safety, determining the margin requirement for the seller (the short side) is impossible. Instituting daily price move limits on cryptocurrency derivatives does not solve the problem. In a runaway upward market for example (like the silver market in the 1980’s caused by the Hunt brothers), the futures price gets locked limit-up day after day with little or no trading and the short sellers are unable to cover, leading them (and potentially their clearing firms) to ruin. If the Chicago Mercantile Exchange or any other clearing organization clears a cryptocurrency together with other products, then a large cryptocurrency price move that destabilizes members that clear cryptocurrencies will destabilize the clearing organization itself and its ability to satisfy its fundamental obligation to pay the winners and collect from the losers on the other products in the same clearing pool. Accordingly, even clearing members who do not wish to clear cryptocurrencies because they judge the risk to be too great cannot isolate themselves and their customers from a potentially catastrophic loss from cryptocurrency risk at the clearing organization. Thus, it is no answer for the proponents of clearing these products to suggest that objecting clearing members can simply charge very large margins or not offer cryptocurrencies at all. In a central clearing organization, all members are at risk for the activities of any member (and of the clearing organization itself).

Unless the risk of clearing cryptocurrency is isolated and segregated from other products, a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy, as critical equity index and commodity markets cleared in the same clearing organization become infected. The only way to protect clearing organizations and their members (and the financial system as a whole) from the unique risks inherent in clearing cryptocurrencies is to require that they be cleared in a separate clearing system, isolated from other products.

We would be happy to discuss this with you or to provide any further information at your convenience.

Sincerely,
Chairman

Two Easy Pieces

Another excellent piece by Matt Tabibi – The Great College Loan Swindle.

The education industry as a whole is a con. In fact, since the mortgage business blew up in 2008, education and student debt is probably our reigning unexposed nation-wide scam.

One for the history file from zero hedge – The ‘Hyper-Crash’ Is Coming – It’s Not The Everything Bubble, It’s The Global Short Volatility Bubble

  • Instead of being an external measure of risk, volatility has become a tradeable input – making it reflexive in nature;
  • As volatility falls, investors (using leverage) take bigger bets in the same direction, so lower volatility begets lower volatility.
  • The global short volatility trade is more than $2 trillion;

Making volatility easily tradeable will, IMO, turn out to have been the biggest regulatory error in history. It has long been possible to trade volatility by the use of long out-of-the-money put options, but this trading was never large and does not seem to have been pernicious.

Risk and volatility are equated in the algorithmic trader’s lexicon. But risk never goes away – it can be moved around but not eliminated. Tradeable volatility is giving the illusion that this axiom is false, that risk can be eliminated with a few taps of a magic wand on the VIX futures. I don’t think so.

The Bitcoin Market

A Bitcoin token now trades for about $7,000. In 2009, 10,000 bitcoins bought two Papa John’s pizzas. It has no value in any investment sense – it has no utility, cash flow or intrinsic value. The only reason for buying a token is the Greater Fool Theory, the notion that one can always find someone else who also believes in the theory who will pay you more for your token than you paid the lesser fool who sold it to you. Obviously belief in this theory has taken on manic proportions. Tulips, bah! What pikers.

This theory is generally falsified by a panic, which is characterized by the sudden disappearance of Greater Fools – and of course liquidity.

Unfortunately the stock market has become infected with this same notion, although the tokens in this case are a small number of ludicrously overpriced stocks. For example, the NASDAQ 100 index has been leading the market higher, but the index is driven by just 5 stocks that make up 45% of the index’s market capitalization. At the same time, 40% of NASDAQ stocks are below their 200-day moving averages.

This kind of situation has happened before. It has never ended well.

Don’t Look Now

Of course this one is familiar:

But this one is back too:

From zero hedge, of course. Just for the record.

Inconceivable

Apparently there is even a cryptocurrency futures market (BitMex).

You really can’t make this stuff up.

Oh, and that $240 million ICO? Principals are squabbling, no “coins” forthcoming.

A Disturbance In The Force

Overnight the news came out that Apple had cut its parts orders for the iPhone 8 by 50%. While it has been obvious for a while that this iteration of the iPhone was being greeted with a yawn, I think nobody realized that it was a disaster in the making. So now the Apple boosters are saying that the iPhone X, rumored to be priced at $1,000 or more, will bring redemption. Really.

Anyway, we finally see a little selling as one of the major generals of this market has been wounded.

Adam Smith

“We are at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know at some moment the black horsemen will come shattering through the terrace doors wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time. So everybody keeps asking–what time is it? But none of the clocks have hands.”
— “Adam Smith” (George Goodman) The Money Game

No Comment Needed

Penrose Was Right

Roger Penrose has long suspected that quantum gravity would not be computable. Looks like he is right.

No, not financial. But huge. Huuuuge.

Self-Driving Cars

Probably the most dramatic innovation in transportation since 1885 (the first car, Daimler-Benz Patent Motor Car, Model 1) is the self-driving car.

But what does self-driving really mean? These are the SAE levels:

Level 0: Automated system issues warnings but has no vehicle control.

Level 1 (”hands on”): Driver and automated system shares control over the vehicle. An example would be Adaptive Cruise Control (ACC) where the driver controls steering and the automated system controls speed. Using Parking Assistance, steering is automated while speed is manual. The driver must be ready to retake full control at any time. Lane Keeping Assistance (LKA) Type II is a further example of level 1 self driving.

Level 2 (”hands off”): The automated system takes full control of the vehicle (accelerating, braking, and steering). The driver must monitor the driving and be prepared to immediately intervene at any time if the automated system fails to respond properly. The shorthand ”hands off” is not meant to be taken literally. In fact, contact between hand and wheel is often mandatory during SAE 2 driving, to confirm that the driver is ready to intervene.

Level 3 (”eyes off”): The driver can safely turn their attention away from the driving tasks, e.g. the driver can text or watch a movie. The vehicle will handle situations that call for an immediate response, like emergency braking. The driver must still be prepared to intervene within some limited time, specified by the manufacturer, when called upon by the vehicle to do so.

Level 4 (”mind off”): As level 3, but no driver attention is ever required for safety, i.e. the driver may safely go to sleep or leave the driver’s seat. Self driving is supported only in limited areas (geofenced) or under special circumstances, like traffic jams. Outside of these areas or circumstances, the vehicle must be able to safely abort the trip, i.e. park the car, if the driver does not retake control.

Level 5 (”wheel optional”): No human intervention is required. An example would be a robot taxi

Levels 0 and 1 are widely available today. Tesla is at level 2. The new Audi A8 is available with level 3 (up to 37 mph.). It appears that level 3 will be widely available in 2018-2019 when level 4 will be on a few models. By 2020, level 5 will be available.

Here is the 2017 CES presentation from Toyota that covers this issue. Their concept is 9 minutes in, discussion of safety and levels 19 minutes or so. It even explains why the Audi is limited to 37 mph.

This is a revolution, folks, that will change all our lives. Pay attention.