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Interactive Brokers Group, Inc. Message Board

  • edgar_reader edgar_reader Oct 24, 2009 1:32 PM Flag

    THE IBKR MARKET MAKING STRATEGY: BUY HIGH, SELL LOW!

    The ridiculous state of affairs at IBKR, wherein its senior management doesn't understand its business and continues to bungle, has reached new heights of hilarity. Folks, options implied volatilities are what an econometrician calls "mean reverting." Which is to say that they cycle, reflecting markets alternating between frenzied and more quiet periods. They have longer-term cycles (peaking in Nov-Dec 2009 and then quickly retreating back toward their mean, for example), and shorter-term cycles, intra-quarter, intra-month, etc. What that means for an options trader is that HALF THE TIME, VOL IS GOING UP, THE OTHER HALF IT IS GOING DOWN. Incredible insight there, I must say! WHAT GOES UP MUST COME DOWN!

    We contrast that scientific knowledge (Isaac Newton would be proud) of how volatility behaves with the words and business activity of Thomas "Wilhelm Klink" Peterffy, who typically presides over IBKR's Timberhill market making operation having a "customarily long volatility position." Take a look at these two URLs:

    http://www.bloomberg.com/apps/quote?ticker=VIX%3AIND

    http://wealth.bloomberg.com/apps/news?pid=20602085&sid=aXI5fcmfrOrc

    Also check out the quote below of Peterffy talking to a pack of clueless analysts in the IBKR Q3 2009 earnings call, which can also be seen here:

    http://seekingalpha.com/article/168399-interactive-brokers-group-inc-q3-2009-earnings-call-transcript

    You now know why 2009 options market making P & L at IBKR has been sharply below levels of a year ago. Vol peaked in Nov-Dec 2008, and has sold off all year. Anybody who was "customarily long" over that period got their clock cleaned. And I'm not speculating here folks. What Peterffy admits that IBKR did in volatility in Q3 2009 was that it BOUGHT HIGH AND SOLD LOW! Brilliant job guys, one worthy of an intellectually jealous disco dance from Tom Frank! If you have a "customarily long volatility position," then you are WRONG HALF OF THE TIME. Great job, brainiacs! How long until Thomas Peterffy admits that he and his senior staff do not understand the business they are in, and fires them and himself? His doing so is vastly overdue.

    Here's the quote...

    "Beginning with market making, I will review the various drivers that impact our trading gains and how they behaved this quarter. First, volatility; actual and implied volatility levels continued their retreat (inaudible) is now in the very low 20s.

    As the (inaudible) got below 40, we begun to reestablish our customarily long volatility position and the ratio of actual versus implied volatility has again become an important factor in our trading results.

    Just to refresh, the implied volatility derived from the prices of which options [trail] in the market. So that it determines the price we pay for the options we buy in order to be long volatility. The actual volatility is a measure of price movement of the underlying overtime and is a determinant of the trading profit that we derive from this long option position.

    As the ratio of actual to implied, volatility decreases, our trading result suffers, as it increases they improve. The ratio during the third quarter, decreased to 67% which is an unusually low number, the lowest I can remember."

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IBKR
22.90+0.11(+0.48%)Jul 29 4:00 PMEDT

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