Where finance and media intersect with reality


In the Blind Spot (Initial Margins, Algos and Commodity Volatility)


The Blind Spot Wrap returns to a Friday publishing/Saturday mailing schedule this week. This edition of the Blind Spot Wrap was compiled by Izabella Kaminska.

Business, Econ, Finance etc:

  • Every 2023 investment outlook in one handy location. Base case: Western recession incoming.
  • Work from home may be undermining wage growth.
  • Citadel posts record revenues for hedge fund, securities ops in 2022, with the market-making arm making $7.5bn last year.
  • Larry Summers addresses the neo Malthusian revival by suggesting 60 minutes/CBS News should be embarrassed by their highlighting of doom-monger Paul Ehrlich’s apocalyptic views. He says his past and unrepentant support for coercive fertility control, predictions that a billion people would starve to death and acceptance of triaging whole nations by cutting off food aid should mark him as a dangerous extremist.
  • But some people don’t like the optics of Larry Summers arguing we need higher unemployment to contain inflation while being interviewed in tropical settings.
  • Blackrock suspends withdrawal requests from a £3.5bn UK property fund.
  • Tesla promotes China boss Tom Zhu to the second most powerful executive position at the electric car maker.
  • Coinbase agrees to pay $100 million as part of a settlement with New York regulators who alleged the firm violated anti-money-laundering laws.
  • Chinese regulators okayed a 10bn yuan ($1.5bn) capital raise for Jack Ma’s Ant Group, but the billionaire will be relinquishing his control of the group as a result. Under the new structure, Ant will have no ultimate controller.

WW3 Watch:

  • A Russian warship armed with ‘unstoppable’ Zircon hypersonic missiles is reportedly heading towards UK waters.
  • Russia claims it shot down a UFO.
  • ICYMI in November 2022, here’s Philip Pilkington and Robert Skidelsky arguing that Britain may be “too poor for war”.

    “Until recently, the British formula had been to finance its external deficit by attracting speculative capital into London via the financial industry, which had been deregulated by the “big bang” of 1986. This was brilliant but unstable financial engineering: foreigners sent the UK goods that it otherwise could not afford, Britain sent them sterling in return, and foreigners used the pound to buy British-domiciled assets. But this was a short-term fix for the long-term decline of manufacturing, enabling the UK to live beyond its means without improving its productivity.”

  • An underground resistance focused on sabotage is taking shape inside Russia.
  • Edward Snowden implies the practice of air-gapping facilities in the intel world has created a culture of lazy passwords.
  • Former German Chancellor Merkel supposedly admitted the Minsk agreement was merely to buy time for Ukraine’s arms build-up.

    The story is from December, but it has recently had the Zerohedge treatment so is doing the rounds again.


  • Salesforce, San Francisco’s largest private employer, lays off 10 per cent of staff.
  • Amazon CEO Adam Jassy reveals another 18,000 corporate layoffs. Hints strongly that the group needs a “stronger cost structure” to deal with the uncertain and difficult economy. Date for the diary: Amazon’s next earnings release on Feb 2.


  • Sinaloa cartel launches violent response as Mexico recaptures El Chapo’s son.
  • Multiple airports in Sinaloa state are closed after an Aeromexico flight was reportedly hit by gunfire.
  • Rushes from the cartel siege of Culiacan International airport.
  • Michael Shellenberg says “experts promised that ‘supervised drug-use sites’ would reduce open-air drug dealing & drug use. But every time they’ve been tried in North America they have had the opposite effect.”The whole thread is worth a read. As Shellenberger also notes: “That’s what happened when SF opened its supervised drug site. Drug dealers — almost all of them from Honduras, working for the Sinaloa cartel, and in the U.S. illegally — set up shop directly across the street. All around them were hundreds of people smoking fentanyl and meth.”

Media Matters:

  • Marshall McLuhan predicts our modern obsession with identity politics (and more) in 1977.
  • Matt Taibbi sums up the Twitter files to date.

Commodity Corner:

  • The BoE’s blog, Bank Underground, looks at how financial stress was caused in commodity markets due to the timing mismatch between the margin calls required to pay derivative positions, and the time required to sell actual physical products.
  • China extended its gold buying in December.
  • Energy Intelligence explains how in contrast to the relatively minor share of Russian crude in Europe’s overall import slate, Russia plays an outsized role in European diesel markets. It adds that Europe has also done little to reduce its dependence on Russian diesel, which still accounted for 43 per cent of Europe’s imports in the first nine months of 2022, according to latest data from the International Energy Agency (IEA). That’s down from a 52 per cent share in 2021.
  • Chinese traders are snapping up Kazakh CPC blend oil just as Europe needs to offset Russian imports following their ban on December 5.
  • In the UK, households are burning cat litter amid a wood pellet shortage.
  • The Blind Spot’s Discord Channel plays host to an extended and informed debate about rising commodity volatility and its connection to algo trading, initial margin demands, and the unexpected ways traders might be gaming the system to maximise risk on an undercapitalised basis. [To join the Blind Spot Discord, click here.]

    SecretCeller: Algos probably generate additional intraday volatility that forces positioning to become disrupted, sometimes violently. However, if you pull back from tick-by-tick charts to weekly and monthly views, the price tends to end up as the fundamentally correct one I think.

    SecretCeller: There are also plenty of liquidity in swap-type markets, dominated by physical-type players…where the likes of Jump Trading etc do not participate at all…they suffer similar volatility issues because commodities are just pretty volatile in their seasonal temporal market construction.

    Izzy: But why has this got worse?

    Secretceller: The link above is wrong btw…if you look at the forties grades it collapsed into contango. The physical market AND the physical market on Brent both fell. If anything futures market where a bit slow to react.

    So it’s not the algos. Algos get a bad rap. And the blame every time something random occurs… but because they respond to news faster than the human (often incorrectly) they get accused of being bad agents. Truth is that they are split into two categories. Algos that run trading strategies devised by a human and algos that run scalping/market making strategies. The first would exist no matter what…algos or not, people love to simplify and systematically employ a trading strategy….the scalping and market-making side however is where the mad vol probably comes from…and arguably without these folks, who always provide a bid/offer on futures exchanges for everything volatility would be worse as participants seek liquidity to exit positions.

    cr1: But is not one part of the problem that more volatility causes initial margins to go up, and then some traders to drop out, which in turn makes the pricing even more volatile?

    Secretceller: Absolutely. And the CME’s handling of IM [initial margin] is poor. It rises after the event and takes ages to come back down (even when volatility has collapsed). Plus the way they calculate IM with the various offsets is plain stupid.

    Cr1: But could this not distort physical price discovery, for a time?

    Maxrobot: Whatever the case IM is pretty pro-cyclical in a crisis, but what can you do – direct clearing?

    Secretceller: The issue tends to be that exchanges maintain elevated IM requirements for longer than is necessary/justified out of caution…however, they fail to recognise that the way they calculate IM means it is quite possible to be continually undercapitalised and within limits.

    Cr1: Are you sure? In some instances IM is more than 100% I read somewhere.

    Secretceller: Yes. It’s to do with offsets. i.e. long times spreads Vs short RV [relative value]. Where you can increase your VaR whilst reducing you IM simultaneously. As a result it’s quite easy to have an IM that is way less than the VaR. The cynic would assume that this is done by the exchange on purpose to increase volumes (and so revenue), pushing the risk management on the clearing members. There is as a consequence little consideration to tail risk by the exchange Maxrobot: Don’t IM models have to get approval if you don’t want to use SIMM? Therefore there is a continual reg failure…

    Secretceller: The CME publish their SPAN models daily. If you play around with portfolios, you can become very cash efficient without breaking any rules. Maxrobot: isn’t this what openGamma help people do?

    Secretceller: Yup, and it has the potential to end in tears as leverage becomes unsustainable

    Cr1: Sorry, could you explain in a more easy way [why it’s easy to have an IM that is way less than the VaR]?

    Secretceller: So let’s say you have a position on…say Long 1000 lots of Brent spreads and the IM of that is $1m, VaR is $500k. If you then add a RV trade to the portfolio, ie long WTI vs Brent, your IM will go down faster than you VaR. It can get quite extreme where 50 lots of WTI/Brent can have a 70%+ reduction in IM with little movement in VaR

    Cr1: So basically, the added Rv trade allows to reduce the IM due to netting. I think I got the point. Many thanks!

    Secretceller: Correct. But the point is your VaR barely moves. And so you can end up with a $1m VaR position but an IM of $200k. And so long as you cover the daily margin calls, no regulatory rules have been broken. But I have spoken to the exchanges on the matter multiple times and they don’t care.

    Cr1: So in a way its a kind of bug in the system.

    Secretceller: Yes. But purposefully it seems. In order to encourages higher trading volumes.

    Cr1: As it provides incentives to trade more, hence more fees for the exchange? But how does the Rv trade work? Is it a kind of convergence trade whete I go long Brent and short WTI?

    Secretceller: If long brent spreads, long WTI/short Brent. It works for everything as well…corn, sugar, pork bellies…..FCOJ.

    Cr1: Ok. Many thanks!

    Izzy: This is really interesting. So basically even the main established exchanges – not just nutter crypto ones – have an incentive to turn a blind eye to risk for the fees.

    SecretCeller: Now here’s the funny thing. In a low-interest rate environment, the big boys would not care about optimising. You would have to get a Noble type of event for such optimising to occur…thus the optimising probably just occurs within the small-cap world and so not particularly worrisome. But in a higher-interest-rate environment, perhaps they become more sensitive? As why would you have cash sitting on the exchange account earning zero interest when it can be sitting in T-bills. Or more risky assets that can’t be used as margin collateral.

    Cr1: Is trade compression, where you hand back collateral based on statistical modelling based on past data, done by clearinghouses, not similar? As it reduces collateral needs while outstanding trades remain. Banyan: Pledge Tbills to the exchange you keep the interest, same as cash.

    SecretCeller: Yes but your clearer haircuts you anything from 50 per cent to 80 per cent depending on the security used as collateral.

    Maxrobot: Margin RTS also has definitions of concentration of collateral so you can’t just put what you want IIRC, obv clearing house can have diff rules.

From the “Fake News” Zone:

  • Did NATO switch its weather machine on?
  • Bellingcat takes a look at the revival of the great GESARA financial “reset” conspiracy.
  • How Jeffrey Sachs, Mark Episkopos and Dimitri Simes are contributing to the Russian propaganda effort.
  • New FOIA documents allegedly reveal that the Department of Defense was in control of America’s COVID-19 response programme.

    But this was sort of obvious from the moment we heard about the “red dawn” response emails, surely?

  • The American Conservative suggests Joseph Ratzinger – a.k.a the late Pope Benedict – knew he was living in an age of epochal change and was shocked by the chaos unleashed by the Second Vatican Council — all of which possibly helps to explain the mystery of his resignation.

House-Keeping Note:

  • Spot Markets Live will be back at 11am UK time on Monday with co-host Anjuli Davies.

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