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:
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:
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."
Look folks, I have this thing so pegged that you can trade it purely off of my wisdom. These clownheads overpay for "volatility," get their butts kicked, and then try to call it "hedging."
Actual volatility as of this past week has skyrocketed, while implied vol. was at a low point. This means that they will make a fortune this quarter just like they did in the 2nd Half of 2008.
The actual/implied ratio was the lowest it has been in decades as of last quarter, hence the ugly results last quarter (though they still earned a profit). This quarter is shaping up like 2008 where actual/implied ratio is moving off the charts again.
We are going to have one heck of a nice quarter if this keeps up!
without traders and hedge funds trading wash trades, volume is zero.
there are few investors all speculators to make those revenue and profits that this company stole in the hey days prior to the crash of 2008
50% less traders trading options and futures. hedge funds and traders shut down their operations. market makers and brokers make money on volume and trading against clients. 50% of the cliets are gone.
Vol could go up or lower. If vol goes down and they are still making money, what will happen if vol goes up?
Also the equity/bookvalue increase is more than the reported earning, so things are not as bad as it appears .....
This is not a good quarter, but in the long run a company that has the lowest cost of providing a good service always do well.
there are at least 50% less traders and hedge funds in the market prior to the crash of 2008 meltdown.
This company makes most of it's profit in market making,,,as for customers retail they make money on frontrunning and trading against their clients. that how this company makes it profit for Peter.