Category Archives: Rogues and Rascals


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.


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.


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.

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.

Nothing To See Here

The dip-buyers and volatility-sellers are quickly reversing the overnight selloff, due to the Korean missile crisis.

These strategies work until they don’t. The absolute lack of fear is totally consistent with market tops.

The good news is that Treasuries are holding on to most of their overnight gains. When the bond and stock markets disagree, the bond market is usually right.

Double Trouble – ICO Fraud

Not only are these schemes inherently traps for the naive and foolish, but they are being ripped off before they can even get their money into the trap.

Indeed, the huge amount of wealth that has fallen prey to cyber criminals is approaching the losses incurred by robberies in the U.S. for the entire year of 2015, which stood at $390 million, according to statistics released by the Federal Bureau of Investigation.

Fascinating in a morbid sort of way, folks bidding for these tokens that depend entirely on the greater fool theory for their value. Of course, the supply of fools is pretty deep but their supply of money is not inexhaustible.

Extreme Crazy

I was going to say Peak Crazy, but we all know things can always get crazier. Some things that spring to mind.

Political craziness: Mob violence on left and right, blatant defiance of federal law by city politicians, attempts to rewrite or at least deny history, demonization of Trump, Putin and anybody associated with them, and so on. Immigration in Europe – it’s that 4.7 kids per woman in Africa that nobody dares to talk about. Not to mention the crazy fat kid.

Fiscal craziness: Federal funding of runaway price increases, notably in university tuition, prescription drugs but also many other subsidized goods and services. Gross under-funding of state and local pension schemes even under ludicrous assumptions about future returns.

Monetary craziness: Central banks threatening to tighten but pumping away, consumer credit at record highs in US and elsewhere (Canada, that’s you I’m talking about with highest household debt in the world), government deficits keep growing. Subprime crdiet still gowing while defaults rise. Most of all, ICOs. People pouring money into blockchain-based tokens. Really?

Market craziness: Housing bubbles in China, Canada, Australia, UK and some US cities. Massive (record) risky speculation in many markets – short vol, long crude for example. Setups (risk parity) similar to portfolio insurance (remember 1987?).

I could go on. But I won’t. I’m just grumbling while I wait.


Just a quick rant about “cryptocurrencies.”

The blockchain architecture is a distributed database. As such, it is slow, because the process of committing a transaction to the database is subject to network delays. The “Bitcoin” system is about to undergo a code fork as a result of disagreements between developers on the proper way to improve performance, which is currently about 6 TPS. Compare to, say, VISA – trundling along at 30K TPS.

Performance improvements are certainly possible, but IMO there is no chance it will ever support the open-ended scalability that conventional high-performance transaction systems provide. Blockchain systems are an interesting innovation for high-value, low rate applications.

As a currency? Not happening.

However, the concept is certainly useful to separate a lot of naive people from their real cash in exchange for ?.

Now as to VISA – it is trying all by itself to eliminate cash by paying merchants to refuse cash. At least it has the infrastructure.

Virtual Folly

The mania goes on. Perhaps the most bizarre and disturbing symptom is the proliferation of so-called digital currencies like Bitcoin and Ethereum.

At best, these are virtual commodities, not currencies. Bitcoin, perhaps the most visible, clearly attempts to emulate gold. New bitcoins are generated by executing a complex computation which requires considerable computer time. This is intended to limit the supply, just as the increase in the supply of gold is limited by mine output. There is also a hard limit on the number of bitcoins that can exist, just as there is with gold (once it has all been dug up, there is no more until we start mining off Earth). Ethereum has something similar, but the limits are weaker.

There is, however, a genuine and valuable innovation here and that is the blockchain. The blockchain is, notionally, the global transaction log of a distributed database that allows multiple un-trusting writers. Unfortunately, AFAIK, all the implementations of this comcept so far are slow and unreliable, as is seen by the various reported (and doubtless un-reported) thefts, frauds, crashes and service outages.

Last I saw, there were some 80 or so competing “digital currencies”. We now see new ICOs (Initial Coin Offerings) on almost a daily basis. Each of these offers some variations on the basic concepts. For example, take Tezos which has raised $200 million in four days. Tezos is run by an ex-Goldman HFT trader. Draw your own conclusions.

So far, the primary applications for these systems are speculation on the money value of the digital commodities and, as a payment system, supporting money transfers by avoiding capital controls and facilitating anonymous commerce, such as in illegal drugs.

I am reminded of the old adage about gold mining; A gold mine is a hole in the ground with a liar on top.

Lasciate ogne speranza, voi ch’intrate” Inferno, Dante Alighieri