Category Archives: Government


Thomas Peterffy
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.


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.

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.

No Comment Needed

Back Of The Envelope

I saw this post on zero hedge. It has obvious weaknesses – it confuses flows and levels, and ignores the change in private sector debt which is no different than public debt.

So with the help of FRED, I did a few numbers on the period 1/1/1997 to 1/1/2017. For that period, the increase in debt level contributed about 26% of the increase in GDP. I included consumer debt, corporate debt and government debt. I simplified to a linear increase in GDP. Bottom line, if debt had held steady, GDP would be reduced by about 15%.

All this says is yup, government deficit spending and easy credit pump up the economy. Until the defaults start, anyway.


It appears that Obamacare reform is now dead. No surprise, the insurance industry spent huge sums to get it passed in the first place. It is fair to assume that they are strategically spending more to ensure that their investment is not wasted. There is no such thing as principle in the US legislature, it is all about the money.

The only question now is whether or not Trump will continue to subsidize it by diverting the profits from Fannie and Freddie to the insurers.

Quantitative Tightening

The Fed announced that it intends to normalize its balance sheet at the rate of $10 billion per month. Will only take a little less than 40 years.

Stocks flat, bonds down. VIX 9.9. Seriously?

Nothing Unusual Here

Zero hedge of course. Just for the record.

Universal Basic Income

The left continues to be fascinated with the idea of re-distribution. It believes that the whole notion of some people being paid more than others is fundamentally unfair, that they must have had some advantage – skin color, parents, brains, whatever – which was just a matter of luck. “You didn’t build that,” as Obama famously said.

So the latest brainchild of this idea is the notion of a monthly check from the government that is sufficient to provide a comfortable lifestyle regardless of whether or not the recipient chooses to work.

A single program that replaced the myriad of transfer payment programs, from welfare through Social Security, would save an enormous amount of administration costs at all levels of government and help to pay for the program. The “poverty trap” would be eliminated as the payment could be “universal” that is, not means tested. Minimum wage laws would need to be abolished, of course, since the “living wage” would be redundant. Might not work, but there seems to be some potential anyway.

But that is not what is proposed. In general, it seems that this would be yet another program which would be funded by even more government borrowing. This, it is claimed, would “grow the economy by $2 trillion.” Please.

There are only two ways to grow the economy. One of these is to increase labor utilization, the number of hours worked in a given period. The other is to increase the productivity of that labor, that is the amount of output produced for each hour of labor. That’s it.

Existing programs already provide a major disincentive for work – the “poverty trap.” This would add another. Productivity is improved by investment – in technology, skills, infrastructure, etc. More spending on consumption would not help this, but would certainly provide more inflation, which would act to deter investment. If you want to see the outcome of this kinf of program, just check the news from Venezuela.



To Hear Is To Obey

Hillary Clinton’s take-away from George Orwell’s 1984 is that we should all respect authority more. Of course we should, because she is smarter and more capable than us. Unless the authority is someone named Trump, of course.

Here is a good example of the contrary view, an analysis of Baltimore’s education system, which is entrusted with the responsibility of giving children the basic skills they need to have good lives. Big government simply sees this trust as an opportunity for looting taxpayer money.

Those of us of the libertarian view (that would be me) view government in general as large scale theft. In the USA, 42% of GDP (and rising) goes down that black hole. That’s why real incomes are declining. That’s why inner-city kids can’t read.