A little bit outside of the scope of this website, but Imtech has been the talk of the town lately. We’ve seen a fat finger trade, claim/stock arbitrage and rumors about firms making or losing millions in the meantime.
The 131:1 rights offering has been a text book example of a messy finance operation. Retail investors holding regular shares received a claim for 131 new shares at 1 cent each. That was a 20% discount of the regular stock price. In reality, these rights can be seen as in the money call options.
Stock price dropped a bit and all rights expired worthless. Think about it, a modest stock drop and investors losing 96% in a few weeks. Not many folks must have realized the tremendous risk of this rights offering.
There’s more some investors probably have missed. Monday the reverse stock split ratio will be announced. When the ratio is higher than 210 old shares for 1 new one, the contract size for each option will drop from 106 (current situation following the offering) to less than 0.5 share for each contract.
The rules from Euronext are very clear. Regular options have a contract size of 100 shares. They won’t allow options with an underlying of less than one share. If contract size drops below 0.5, all options will be delisted and settled in cash. Reference is the closing price. In Imtech this means calls will settle at 1 cent, all puts will settle 1 cent below parity.
Unsure how exchanges, clearing and brokers will handle such an operation in terms of transaction costs. Very well possible traders and investors will be confronted with unexpected transaction costs for worthless calls. Open interest is large. TOM will follow Euronext, but Eurex will accept options with a fraction of a share as underlying. Imtech, what a mess.
It has been little more than a year the discount broker DeGiro started operations. A sort of a sister operation of a small hedge fund, it was new in the business. They understood correctly investors won’t switch to another broker for marginal lower fees. Option fees are a fraction of those at formerly discount brokers Binck and Alex.
They’re currently rolling out their service to the rest of Europe. Apart from Scandinavia, Italy and the UK they are covering the entire continent, even banana republics like Greece and Spain.
All investors switched to DeGiro and lived happily ever after? Unfortunately, no. Everyone should switch at least a portion of their portfolio to DeGiro. But while I’m a fan of price competition, always support the underdog and believe they have a reliable and friendly CEO – there’s a lot to improve at DeGiro. Executing trades in the market is a commodity, once a fixed set of conditions are met. Here are the nine things I hate about trading with DeGiro.
Was flabbergasted to discover it’s impossible to change your password. You have to stick with your first password, well.. forever. Okay, there’s a work around (“Sorry, I forgot my password“). Don’t tell the hackers in Russia about it. Maybe the rest of DeGiro’s security technology is state of the art. Am afraid not.
You can’t bother them with new passwords, and they won’t bother you with trade confirmations. They don’t write, they don’t call. When orders are executed there is not such thing as trade confirmations in your mail or as a text message. The Russian hackers can safely destroy your account. You won’t notice until you login again.
Some stocks give the opportunity to select cash or stock dividend. Clients of DeGiro will have no possibility to make decision. They get the cash. It gets even worse when receiving US dividends. The dividend witholding tax for Dutch clients used to be 15% – but is raised to 30% as DeGiro switched from ABN AMRO to Morgan Stanley. They don’t know anything about taxes. Clients are on their own. Nothing is communicated about the matter.
The website interface is horrible and hard to navigate. Finding stocks quickly is difficult. Connected to a lot of exchanges, but finding a regular Dutch stock is giving a headache. When Cees Smit compared DeGiro with a Rumanian version of the Lidl – this was what he ment (also see this review – nl). Finding simple US stocks based on the ticker code isn’t possible. They assume you’ll be using ISIN codes. Sure. No option chain available. Help section is a joke.
In bowling, there are rules. At DeGiro you can’t rely on a set of rules. For example expiring in the money options can be exercised, according to a reaction from their director. Depending on “circumstances and market expectations”. And they take half of the profit (seriously!). Same story with rights offerings. Clients who forget to subscribe to a rights offering and don’t sell their claim can’t rely on DeGiro. Sometimes DeGiro takes action, subscribes to the claim, sells the shares and takes half of the profit. It depends. Case by case.
From several traders I’ve understood they felt the need to check closely all trades apart from the ordinary. Once they used the wrong prices when options were cash settled in a take over situation. Trader had cash settlement prices straight from the exchange, but DeGiro used other prices. Was hard to convince them to correct their mistake. However, some KBC clearing veterans joined ship so things will probably have been improved. Also see point 3 on taxes.
Straightforward trading possibilities are lacking. Most painful are the lack of combinations and spreads in the option market. Time spreads, straddles and strangles : all have to be executed in single legs. Less relevant, but still annoying are the weekly stock options which are missing out. The US stock market is served but prices are lagging 15 minutes. While the background of the delayed prices is understandable, the lack of communication about delayed prices is not. You will realize you’re looking at old prices as soon as you try to send an order.
DeGiro hasn’t got an app for your phone or tablet. You can do without, using the regular browser – but the website is hard to navigate on a regular computer let alone on a small screen. Don’t even try. It’s probably coming in the future.
It’s 2014 and there’s no active twitter account for DeGiro. There’s one, but it seems to be asleep. When website is down or clients seek help – nothing. Especially with all uncertainty about the brokerage and lack of communication about everything this is a missed opportunity. Response time from the helpdesk varies, but it’s weird the exchange Euronext is teaming up with DeGiro on a marketing deal. No trade confirmations, no twitter account and no fixed rules ; but DeGiro is taking over the “retail investor services” from Euronext (pdf - nl). Ironic.
Proud to publish a guest post by Alexandre Laumonier, which appeared earlier on his website sniperinmahwah.wordpress.com. As an anthropologist he is connecting all the dots in the microwaves networks – using public information on communication towers and dishes in Belgium. Reading official documents, visiting the towers and knowledge of microwaves networks for high frequency trading : a very uncommon combination.
This is insane: more than 28,000 visitors came to read Part I of “HFT in my backyard”. Some of them are inevitably bots, but my logs reveal the majority to be human readers from bank desks, technology providers and so forth. Who would have imagined a simple map would garner such interest? Microwaves have been used for HFT since 2010 after all. Since so many readers want to learn about these networks, allow me now to continue my story. In order to give you a clear picture of what to find on the map and how to locate all these towers, let’s return to Houtem.
In the US, the New York Stock Exchange (NYSE) is currently located in Mahwah, in New Jersey. For the Lenape people who originally lived there, the word mahwah meant “Place Where Paths Meet” – a perfect description of a present day exchange. At NYSE, co-located traders meet in a data center, and microwave paths converge on the roof. In Europe, there are two main data centers in England near London: one to the east in Basildon, the NYSE facility housing the Euronext/Liffe exchanges plus Goldman Sachs’s dark pool Sigma-X; and one to the west in Slough, the LD4 data center containing the BATS exchanges. Frankfurt, Germany is home to the Equinix FR2 data center which hosts Deutsche Börse and Eurex.
There are two types of competitors in the very small world of microwaves. First are HFT prop trading firms: Chicago-based Jump Trading (aka World Class Wireless), Dutch companies Optiver and Flow Traders (aka Global Connect) and DRW (aka Vigilant Global). Some of these firms sell part of their bandwidth to other customers. Second are actual providers: McKay Brothers, Custom Connect and, more recently in EU, NeXXCom or Latent Networks. Their customers are banks, hedge funds, even other HFT firms. Some like McKay are only interested in the Frankfurt-London path, while others such as Optiver, Flow Traders, Jump and Vigilant also join the Atlantic Crossing 1 cable landing station in Whitesand Band, Cornwall, England, to allow data to cross over the Atlantic and go straight to Chicago using US microwave networks. Let’s start with Jump Trading.
Contrary to the legend, the Houtem tower featured by Bloomberg was neither used nor owned by NATO; rather the tower was built by and for the US Army in the 1970s. The tower (and two others located in Belgium, one of which is also now used by Jump) was sold to Belgium in 2006. “Closure of these sites will result in an estimated annual savings of over $84,000 based on a comparison of the current annual operations and maintenance costs to an annual replacement commercial communications cost,” wrote the US Department of Defense. In 2012, the Belgium Ministry of Finance used the same money-saving rationale to auction the tower.
The sale took place in Veurne on December 18, 2012. While the auctioneer is now retired and my request for his phone number was refused by the Services Patrimoniaux office, I did speak with someone who attended the auction. Only eight people attended: the auctioneer, his assistant, a government official, and five potential buyers – two or three Americans including a Jump representative, one large Belgian law firm probably acting on behalf of a competitor and a single observer. Prior, the prospective buyers had all visited the Houtem tower in situ so they entered the auction knowing the tower was in poor shape and required renovations my informant estimated would cost the winner $1,000,000. The starting price was €255,000 and the Belgium government would have been very happy with €400,000. The first tick-size was a €5,000 increment, but after half an hour the price was at €700,000 and the tick-size was increased to €10,000 accordingly.
The auctioneer didn’t know who the buyers really were or why they’d have such interest in a lousy old tower; this unexpectedly high price left him perspiring nervously and calling for a break. Collecting himself in the bathroom, he exhaled quietly, bewildered, “What the hell…” The auction resumed, bids climbing to €1,000,000, €1,500,000, €2,000,000. At this point the auctioneer asked for another pause. Finally, after three and a half hours, the tower was sold for €5,000,000. One attendee quickly left, as his car was parked in front of a police station and the meter was long expired. Another losing bidder approached Jump to ask, “Can’t we arrange?” meaning their company would purchase bandwidth or rent some dish space on Houtem tower. I wish I had been a fly on the wall to confirm my suspicions about which competitor attempted to make arrangements with Jump at the auction deep in Flanders that day.
Since I missed the tower over my early July holiday, I decided to go back to Houtem with my family at the beginning of September. I spoke with different people from the microwaves industry ranging from Jump’s competitors to technology providers, and they explained how I might conduct my field work. I learned to be discreet, parking my car far from a tower, taking binoculars and a camera, checking the GPS of my mobile and then walking – one is obliged to walk far, as most of the towers are in potato fields. Several expeditions to different towers gave me the practice to perfect my technique before I was confident to approach the object of my visit. At Houtem, I parked near a farm and walked along the Chemin des Limites road near the Belgium-France border. Nearing the site, I noted a van and a workman in the tower’s basement. “Not good news,” I told myself, thinking an intelligence officer should always remain unseen. I began to surreptitiously photograph the Houtem tower:
When the worker came to burn things in the field, I moved closer:
There was none “No Trespassing” sign on the railing so of course I entered only to discover an unexpected windfall – the workman left all the doors open! My 63 year old mum stood guard, eyeing down the worker as I visited each room, taking pictures of the equipment until there, right in front of me, was a big red button functioning as the emergency stop. It was amazing to realize I could have cut the Jump microwaves network just by pushing it. But I didn’t want to bother Jump nor Perseus’s customers, and besides, microwave networks have fiber optics backup so any sabotage would have been useless. A message to the jump lawyers: don’t sue me. I know I was on “private property” so I won’t publish the photographs I took, save this one:
It’s fascinating to see the extremely small basement of a 243 meter tower. These kind of towers are engineering marvels. Here the diameter of the foundation is only 25 centimeters and the structure stands erect only thanks to 48 guy wires. Okay, I have to publish one more photo, as the viewpoint is amazing:
I was actually more interested in trying to jump and climb the tower than cutting the power, but the worker came back so I disappeared quietly.
The tower has been fully refurbished from top to bottom with all new guy wires, but my goal was to check the dishes. When the Bloomberg story came out, there were two dishes at the top of the tower:
My photograph shows three dishes, so Jump added one between early July and early September:
This brings me to the question that so flummoxed the auctioneer: why? Why would Jump pay so much for the Houtem tower? The first reason is height; HFT players need tall towers for speed, and the Houtem tower is the fourth tallest tower in Belgium. The list below expands Wikipedia‘s list of the highest structures in Belgium to include my HFT firm entries:
Since the Houtem tower was owned by the US army between 1974 and 2006, I dug up this document published by the US Department of Commerce in 1979 and titled “Signal Level Distributions and Fade Event Analyses for a 5 GHz Microwave Link Across the English Channel”. The article contains these two charts:
(Incidentally, Jump uses a frequency between 7.448400 and 7.48401 GHz for this 87.8 kilometer path..)
All the HFT competitors have to cross the English Channel from France or Belgium to England. They mainly go to Swingate in the north of Dover, where there are two old towers housing Optiver, McKay and Vigilant, or to Hougham in the south of Dover where Latent and Custom Connect have dishes:
The Swingate towers are located on the famed white cliffs of Dover, at about 141 meters above sea level. However, most HFT competitors link to Swingate from Dunkirk, a city which is at sea level elevation:
In Dunkirk, dishes have been installed on the Tour du Reuze:
For the logic, let’s go back to amend the US Department of Commerce chart:
Without getting too deep into the physics, microwaves don’t travel in straight lines. Depending on atmospheric conditions they bend more or less and mostly downward. This generally extends the reach of towers beyond the straightforward result that Euclidian geometry would yield. Jump’s tower provides only a very limited advantage because the extra distance is proportional to the square root of its height whereas it’s price is more than linear in height. I have not found anyone who has understood why Jump paid such a large price.
I don’t know if Jump was in Dunkirk before purchasing the tower, or if they used another tower in Calais (Mollien, 50°57’23.31″N | 1°52’19.86″E) to link to Swingate. I do know that their current microwave route in Belgium is divided in two parts from Houtem: the Houtem-Swingate path enabling a way to Slough west of London, and the Houtem-Ramsgate path allowing access to Basildon east of London.
Jump uses other towers in Belgium as well. There is a distinct lack of transparency in Belgium radio regulators, but I have found dossier after dossier after dossier after dossier allowing me to piece together some paths:
In Flobecq, another old US army tower, they co-locate with Flow Traders and Optiver:
In Hannut, they co-locate only with Optiver. Comparing this two documents reveals Jump added a third dish in Hannut between February 2012 and February 2013, perhaps after they bought the Houtem tower. In Liège, Jump is alone on a tower but Vigilant and McKay are within 1.07 kilometers:
I only visited one other tower housing Jump, in Wavre near Brussels. The Wavre tower is the third tallest structure in Belgium. Once again, I parked my car from the tower and walked through the fields. Some techs were working at the top of the 250 meter tower, but they looked tiny from my vantage point on the ground. Unlike the Houtem tower, which needs guy wires to remain erect, the Wavre tower is a beautiful “standing structure”:
Wavre is also used by practitioners of the extreme sport “base jumping”. Here you can see two crazy people jumping from the tower – hope they didn’t damage the Jump dishes during their fall:
My reason for trekking to the Wavre tower was that it made big news in Belgium when it was sabotaged last spring. On the early morning of May 24, 2014, a few people started a fire which caused severe damage to the tower – this video coverage in French actually shows Jump dishes in a shot. The tower is property of the Belgium national TV/radio operator RTBF but also supports many dishes used by mobile operators. The fire received such media attention because May 24 was an important election day in Belgium, and the police wondered whether the fire was related to the election. RTBF quickly erected a temporary tower to install mobile, TV and radio dishes, but the Jump dishes stayed on the tall tower because the 50 meter temporary one wasn’t high enough.
During my visit to the Wavre tower, there were still some burnt parts on the ground:
It is certain that all the cables burned, rendering the Jump network ineffective for some time. I wonder if police interrogated any of Jump’s competitors, or anyone who knew a trading firm was on the Wavre tower. As of early September all the cables were knew so the Jump network is likely in good shape. Following are the three big dishes owned by Jump, two pointing to Hannut and the other facing toward Flobecq or Oostvleteren:
I would love to know if Jump, Optiver and, above all, Vigilant really use these paths between Newhaven and the Isle of Wight:
The Jump competitor who asked, “Can we arrange?” at the auction for the Houtem tower may not have been asking to install dishes on the tower; rather his proposal might have been to share bandwidth. Despite the small world of financial microwave networks being as silent as the potato fields in which stand their towers, I have discovered that Jump is sharing its network with Perseus and another data provider I’m not at liberty to name. The facts are as follows:
Now, imagine every customer in a service sends data at about the same time, a somewhat likely scenario due to the likelihood of one customer sending data nano or microseconds before the next customer and so on. In this thought experiment, Customer 1 is first, taking 6 microseconds to serialize into the 100Mbps microwave link. Customer 2 sends their trade data 2 microseconds later, so they wait 4 microseconds to serialize and another 6 to actually serialize. Customer 3 sends trade data 1 microsecond after Customer 2, waiting 3 microseconds for Customer 1, then 6 microseconds for Customer 2, then 6 more microseconds to actually serialize. Customer 4 is quicker; they send their data 1 nanosecond after Customer 3. And wait 2.999 microseconds for Customer 1, then another 6 for Customer 2, then another for Customer 3, then another 6 microseconds to actually serialize.
This example illustrates the supremacy of the owner of network in terms of speed in a shared bandwidth agreement. Jump shares its bandwidth with Perseus. While Perseus has additional customers, none will be as fast as Jump. This doesn’t mean Jump is the fastest operator in the HFT world, however. Despite purchasing a tall tower in a strategic place, they still aren’t as quick as contenders like….well, I’ll detail the fastest of the HFT competitors in Part III.
A lot of discussion in the option market of Imtech. The troubled company with a billion debt will start a rights offering worth EUR 600 million. The offering if fully guaranteed by a consortium of banks. As the current market cap of the company is some modest EUR 200 million, the dilution will be heavy. New rights will be offered with a huge discount, as the banks want to avoid the risk as possible to be stuck with millions of Imtech shares nobody wants.
As usual, the rights will be trading at a discount and the arbitrage game is on. Sell the shares, buy the rights at a discount and lock in a profit. You won’t be able to borrow the shares as soon as the rights start trading. If you own the shares before the offering, you’ll be receiving rights. But everybody wants to own the shares, without the rights. In-the-money calls start trading at a premium. Be long the itm put and itm call – and exercise the call as soon as the rights start trading.
Another issue is the availability of the shares. The option contracts get a huge contract size, due the recalculation options get a contract size of 400 or even 1000 instead of just 100. When options get a contract size of a 1000, the availability of shares to cover the delta may run out of supply. A short squeeze in Imtech was widely anticipated. The new shares from the offering will take some weeks to arrive.
Euronext realized this, and decided to change the rules of the game. Instead of the fixed rulebook for right offerings – the rights will now be seen as a “spin off” company. Options will have a basket of claims and shares as underlying (package method). Investors unaware of the risks have been selling deep itm calls with a big premium, and can keep the profit after Euronext stepped in.
Then again, these new rules can be changed again and can only be seen as guidelines. Difficult to trade without a fixed set of rules.