Mad Hedge Technology Letter
September 23, 2022
Fiat Lux
Featured Trade:
(CORPORATE TECH NOTCHES ANOTHER WIN)
(HOOD), (SEC), (VIRT), (SEC), (HFT)
Posts
The US Securities and Exchange Commission (SEC) will stop short of banning payment for order flow, which is essentially high-frequency trading (HFT) firms buying the trading history of retail traders.
I believe this was a huge mistake because it inserts an unneeded middleman between the trader and his profits while raising the costs to the trader.
Why do HFT want the trading history in the first place?
They have algorithms built in place that reveals trends in the data allowing them to profit off it.
I guess one might be able to argue that this could also lead to big losses if algorithms are built wrong.
However, much of the time, the profits are risk free by front running the retail traders’ orders by buying and selling in the microsecond after the retail trader clicks buy and receiving the shares.
The outcome is earning a few pennies.
However, multiply that over million and billions of trades each year and that is why CEO of Citadel Ken Griffin has a net worth of over $30 billion and the Founder and Chairman of Virtu Financial (VIRT) Vincent Viola owns the NHL’s Florida Panthers.
Risk free trades work 100% of the time so their trades are never exposed to losses.
Granted, they had to build out the tech expertise and technological infrastructure to pull it off.
In the end, US regulators have been quite tight lipped on what might actually happen, and any move could make Griffin’s and Viola’s HTF companies less profitable.
It’s still a massive victory for the HFT industry as CEO of the SEC Gary Gensler walked back threats of banning payment of order flow.
That is now off the table.
Funnily enough, HFT firms argue they are delivering “greater liquidity” to the end buyer, but that liquidity is almost always in the form of a higher price.
Cynical and straight forward people would call this a rip off.
The flip side is that platforms can offer commission-free trading in the US.
Since 2019, most major online brokerages haven’t charged retail clients fees for their transactions, following a model made popular by Robinhood.
As for the here and now, Virtu’s stock isn’t a buy because the downdraft in the broader tech market has punished Virtu’s stock.
Remember, HFT firms can only front run orders for market orders and not limit orders that specify a certain price.
As for trading platform Robinhood (HOOD), this means that their stock isn’t a zero either, but they bet big on crypto and that investor base in now impoverished.
Citadel and Griffin announced $4.2 billion in net trading revenue in the first 8 months of the year which is a 23% year-over-year bump.
The outperformance occurred because they have gained market share from bigger investment banks and remember that they earn revenue on sell orders as well as buy orders.
Sadly, for investors, Citadel is a private company.
Ultimately, it’s not a good time to buy Robinhood or Virtu Financial, but strategically, selling any large tech rally makes sense as the macro risks of interest rates still rock the market on a consistent basis as high inflation roars along.
Mad Hedge Bitcoin Letter
September 15, 2022
Fiat Lux
Featured Trade:
(PICKING A FIGHT WITH GARY)
(BTC), (IRS), (SEC), (COIN)
Chairman of the SEC Gary Gensler is not hiring 87,000 new SEC agents who will form the backbone of the SEC and “carry a firearm and be willing to use deadly force, if necessary.”
No, that’s the Internal Revenue Service (IRS) but the SEC is starting to trend in that direction in regard to how it views the crypto industry.
We aren’t at the point of the SEC raiding crypto exchanges. That stuff only happens in places like Palm Beach, Florida.
Gensler’s recent message to crypto has essentially been to get with the program or face a tortuous existence.
His defiant message appears to be falling on deaf ears as the crypto industry has felt they should be entitled to a new set of lenient rules than conventional assets.
I can tell you this has worked out quite poorly for crypto companies who have willfully placed a bullseye squarely on their forehead.
In a recent speech, Gensler criticized the crypto industry, telling an audience of lawyers that the “vast majority” of the nearly 10,000 existing crypto tokens are securities, being issued to the public in violation of federal laws.
He argued that through statements and dozens of enforcement actions, the SEC has made clear how existing law applies to the industry and that no such rules are forthcoming.
Gensler said investors deserve disclosure to help them sort between investments that they think will either flourish or flounder.
The SEC has been adding to its enforcement staff dedicated to protecting investors in the crypto market, announcing in May that it was adding 20 new positions in the newly named Crypto Assets and Cyber Unit, nearly doubling its size.
Crypto infrastructure companies have knowingly avoided the law and SEC as securities exchanges and broker-dealers by failing to properly register while continuing business as usual.
They also believe the products sold aren’t “securities” in the way that the SEC believes they are.
In their world, tokens are like gaming chips or collector’s cards.
We have a word for what they are doing in the English language – illegal.
Coinbase Global Inc. (COIN), the largest publicly traded crypto exchange, said in its most recent quarterly report that the company is under investigation by the SEC, and has received a list of questions about how it chooses which digital assets to list and how it classifies them.
The SEC brought charges in July against a former Coinbase product manager for insider trading, identifying nine tokens it alleges are securities, which were listed on the exchange. Coinbase has said that it disagrees with the SEC’s classification.
In February, the crypto lending platform BlockFI agreed to pay a $100 million for failing to register with the agency.
Gensler said that the SEC will have to come up with new procedures for registering crypto exchanges because they also offer custodial and broker-dealer services, unlike typical stock market exchanges.
I understand that some of these crypto exchanges are a little different from what some of the retail stock exchange platforms are selling, but skirting the law now just means the penalties will be even harsher down the road.
This is not the era of Facebook when the internet police had no idea what was going on with them.
It took decades for sentiment to shift against big tech.
However, from inception, crypto has been unable to shake the stereotype of being a fly-by-night operation and large swaths of it sure appear to be sketchy and they are policed as such.
The brand damage is immense causing the incremental investor to abstain from crypto and the regulators to clamp down even further on crypto companies and products.
We are seeing this in real-time.
The regulation is a footnote on a bull run on the way up, but now crypto has shot itself in the foot and is having a hard time convincing new investors into the asset class precisely because of a loss of trust.
Mad Hedge Bitcoin Letter
June 7, 2022
Fiat Lux
Featured Trade:
OVERSIGHT IS HERE)
(BTC), (FINRA), (CFTC), (DMO), (SEC)
Responsible Financial Innovation Act – that’s what they will call it.
Yeh, the Federal Government has seen enough of the sloppiness that masquerades as crypto infrastructure and they pulled the rug.
As many might know, there has been nothing responsible or innovative about fiscal matters at all lately with the Fed asleep at the wheel with hyperinflation.
Many of the talking heads like Transportation Secretary Pete Buttigieg continue to argue that more government spending doesn’t result in higher inflation.
So just imagine right now that crypto is about to go through the twilight zone of federal regulation where I am sure regulators will argue that layers upon layers of regulation are required to keep this asset safe and secure.
In short, this means higher costs and not just a few pennies.
Let’s get more into the weeds of the proposed crypto bill.
The bill is cornered by oversight from the Commodity Futures Trading Commission (CFTC).
The CFTC is overseen by The Division of Market Oversight (DMO) and I could easily see both of these regulators slapping two sets of their own unique fees for any crypto trade or account.
Next, it also gives “needed legal clarity” in how to handle customer holdings after the recent furor over customers’ tokens getting roped in with an exchange’s assets in the event the company goes bankrupt.
The administration has signaled it wants better custody arrangements in any crypto bills moving through Congress.
This won’t be free either.
Some sort of mechanism or escrow account will need to exist to make sure investors (in an uninsured asset class) doesn’t get dragged into a bankruptcy claim if an unregulated exchange goes under.
Also inserted, is language from a bill last year from Rep. Patrick Henry and others that sought to clarify the meaning of a crypto broker, especially hoping to protect wallet providers, software developers, and others from being snagged by certain tax reporting requirements.
This is the first step that will ultimately give regulatory access to the Financial Industry Regulatory Authority (FINRA) who forces all brokers to pass a series of tests to become licensed brokers.
It usually costs a few thousand dollars to go through these courses and these licenses must be issued by an official bank member and not some random LLC in the Cayman Islands.
There is specific language regarding oversight fees that would incur if the CFTC would monitor this asset class.
It’s anybody’s guess how exploitive these fees will be.
Lastly, comes the “innovation” part of the bill which to the Federal Government specifically means disclosure innovation.
Certain disclosures will be required to the SEC from companies raising funds through digital asset sales.
The approach also specifically gives SEC their chunk of change and a path to levy an SEC fee on the crypto industry.
As one might surmise, in totality, this will cost a lot and these proposals will need to meander through the congressional committees before it coagulates in its final form.
I will honestly say that the aggregation of debacles lately in crypto has shone a bright light on the gaps in the crypto industry.
They didn’t help themselves when they really needed to.
Crypto needs time the most, the time to develop itself as they see fit without 3rd party oversight. That chance has evaporated.
Just as disappointing, crypto has not participated in this latest bear market rally with high growth tech stocks and is down 5% this morning.
Disappointing all around for the crypto industry and this doesn’t help that we are staring at a crypto winter if crypto prices start to decouple with tech stocks.
There is a legitimate chance they might be left out of the recovery stage.
Mad Hedge Technology Letter
May 13, 2022
Fiat Lux
Featured Trade:
(SPAC BUSINESS PULLS BACK)
(GS), (SEC), (SPAC), (SPXZ)
Never waste a crisis.
The SEC sure isn’t.
They are using this stock market meltdown to broaden out the risk to who is liable for special purpose acquisition companies (SPACs).
The new regulation has meant that investment bankers who do the deal then advise the companies post-IPO are bailing on this business in droves.
There have been whispers about this potential regulation for quite a while as many investment advisers were putting through low-quality companies that would never turn a profit in a million years.
Investors would be held with the bag as these SPACs were prone to severely underperforming in the stock market.
Powerful Wall Street banks like Goldman Sachs (GS) are pulling out of working with most SPACs it took public, the second-biggest underwriter of special purpose acquisition companies last year, has been telling sponsors of the vehicles it will be ending its involvement.
A SPAC works with its adviser even after going public to finish its merger with a participating firm, known as the de-SPAC transaction.
If it fails to complete that deal, it’s forced to return capital to investors. In cases where the public company is very close to completing the de-SPAC process, Goldman will fulfill its role.
SPACs were popular on Wall Street over the past couple of years, luring financiers, politicians, and celebrities who were able to profit from investors piling into the investment vehicles.
The SEC is tightening oversight of SPACs including exposing underwriters to greater liability risk.
Lawyer advocates have argued the listings were bypassing rules imposed on traditional initial public offerings and exposing retail shareholders to extra risks.
The SEC’s proposal would require SPACs to disclose more information about potential conflicts of interest and make it easier for investors to sue over false projections.
There is no visibility on what company might be acquired (this is a regulatory requirement). A SPAC’s prospectus often includes some wording about the type of company or industry it intends to focus on, but there’s nothing to stop it from going in a totally different direction.
In many cases, those same sponsors were courted by large banks to put their names behind their SPACs, with the structure allowing them to turn an initial investment of a few million dollars into many multiples of that. And their Wall Street underwriters could make more than 5% in fees for taking a SPAC public, helping the sponsor find a takeover target and complete the de-SPAC.
The SEC's concerns might be warranted just based on how awful SPAC stocks are performing.
Take for example, SPAC ETF Morgan Creek - Exos SPAC Originated ETF (SPXZ) whose shares have gone from $21 in the past year to $11 today.
There have been a few SPACs that are worth investing in partially because once the SPAC goes public, the company can turn its business 180 degrees and do something completely different.
They are not beholden to anything, unlike traditional IPOs which are strict in defining what they do and how they do it.
Naturally, a lot of fraud-type companies can go public quickly with the help of a famous celebrity marketing their SPAC and that’s exactly what has happened.
New York doesn’t need more IPOs, but it needs more high-quality IPOs and this will prevent many investors from losing all their money.
One of the big unintended consequences of this bear market is that regulation is finally focusing on the fringe elements in tech and that should mean a healthier tech sector moving forward.
Mad Hedge Bitcoin Letter
October 12, 2021
Fiat Lux
Featured Trade:
(ON THE WAY TO HIGHER BITCOIN PRICES)
(BTC), (SEC), (CME)
The CEO of JP Morgan Jamie Dimon is being a bit disingenuous by saying that Bitcoin is “worthless.”
He continued to say, “I don’t want to be a spokesperson — I don’t care. It makes no difference to me. Our clients are adults. They disagree. That’s what makes markets. So, if they want to have access to buy yourself bitcoin, we can’t custody it, but we can give them legitimate, as clean as possible, access.”
Dimon strikes me as a very “in the box” type of guy and I understand this mentality makes it hard for his brain to fathom a digital currency run by software that is running simultaneously outside the U.S. financial system.
Yeh — it’s a lot to process Jamie — I get it…the uncertainty and the uncertainty of maybe JP Morgan being adversely affected by this keeps him up at night.
I mean what does Dimon have to gain from this when he has made his career off the backs of American taxpayers paying and depositing into the U.S. financial system propped up by the precipitously devalued U.S. dollar which crypto was borne out of?
Dimon’s risk-reward ratio of getting into crypto ecosystem is mind-numbingly poor at this point, better for him to take the Charlie Munger approach and claim crypto as “snake oil” from his golden perch.
Better for him to retire out to his Colonial Revival mansion in the Hampton’s and sip on mimosas at Sunday brunch.
Dimon also said that bitcoin has “no intrinsic value.”
And although he thinks bitcoin will be around long term, “I’ve always believed it’ll be made illegal someplace, like China made it illegal, so I think it’s a little bit of fool’s gold.
China has also made Amazon and Google de facto illegal by effectively banning them from Mainland Chinese internet, so are we going by Chinese law now?
He says there is no intrinsic value but look at stable coins which are a type of cryptocurrency that offer yields on holding the coin which is highly profitable.
Stable coins are doing WHAT BANKS SHOULD BE DOING.
This whole crypto thing is obviously a little over Dimon’s head which is ok.
And increased regulation will and should happen — it’s in the works and it just doesn’t happen in 6 hours — and yes, it certainly will mean higher Bitcoin prices because of a lower systemic risk after effect.
Federal Reserve Chairman Jerome Powell clarified at the end of September that he has no intention to ban bitcoin in the U.S.
If people want crypto to become more of a mainstream asset, then clearly, regulation is a necessary first step.
Dimon, if like he says — “regulators are going to regulate the hell out of it.” — regulators are doing this because they want to elevate it to a mainstream asset where banks like JP Morgan can charge customers an arm and a leg for custody and levy other fees.
And yes, too much regulation could stifle crypto innovation in the U.S. and push business overseas, this is also certainly another risk.
Ironically enough, the positive shift in sentiment toward Bitcoin can be attributed to recent statements from the United States Securities and Exchange Commission Chairman Gary Gensler suggesting the long-awaited approval of the first Bitcoin exchange-traded fund (ETF) in the U.S. may be just around the corner.
Institutional investors are continuing to pile into Bitcoin as we speak despite prices pushing up to a five-month high.
According to the latest data, more than $226 million in capital flowed to institutional Bitcoin products this past week.
Bitcoin products dominated inflows for the third consecutive week, posting a week-over-week increase of 227%.
Crypto investment products have now posted inflows for eight weeks in a row.
While the SEC has previously shot down every application it has received for physically backed Bitcoin ETFs, the SEC is currently deliberating four applications for exchange-traded funds based on the Chicago Mercantile Exchange’s (CME) regulated futures contracts.
With CME’s futures markets offering a product that is already insured and overseen by U.S. regulators, experts believe that Bitcoin futures ETFs are “likely on schedule” to receive a regulatory green light this month.
This is all highly bullish for Bitcoin and other cryptocurrencies.
