April 15, 2015

Patterns

Happy Tax Day!  Don’t you wish you could be somewhere else?

Sit at Saba Rock looking north where beyond the earth’s curvature lies Anegada and you know why Richard Branson embraced the British Virgin Islands.

We did too, abandoning electronics including in my case a shaver. From the Soggy Dollar on Jost Van Dyke (named for a Dutch privateer) to Sandy Spit and Sandy Cay and into the azure chop around The Indians off Norman, we let time run a delightful course.

Norman Island is among the reputed inspirations for Robert Louis Stevenson’s “Treasure Island” (which gripped my young imagination), ostensibly eponymous for the pirate Captain Norman, a Briton caught and hung by Puerto Ricans.

Today Norman Island is owned by billionaire Henry Jarecki who in his youth fled anti-Semitic Nazi Germany and later pioneered commodity-futures investing in the USA. His son Andrew recently made film headlines with HBO’s The Jinx on accused killer Robert Durst, the black sheep of the New York real-estate family managing Freedom Tower.

Dr. Jarecki, for years a practicing psychiatrist (still a Yale medical school faculty member) before switching to quantitative futures-trading at his firm Gresham Investment Management LLC, told Wall Street Journal reporter Cynthia Cui in a 2010 interview that both trading and psychiatry are about recognizing patterns. So armed, Jarecki said, you can “transform a modest effort into a grand result.”

How you announce your earnings-date is a recognizable pattern for traders.  One of our clients wrote while I was out, “I know you’re still floating among the virgins but when you reconnect thought you might like to see this exchange I had recently with the quant shop (name removed for privacy but we know and track them)…”

Our client had gotten inquiry from these traders asking when the company would report results. Our client said you’re quants so why do you ask? An analyst there with a Ph.D. thoughtfully responded:

“We are indeed a quantitative firm, focusing in options market making…. Options are typically priced based on the current stock price, a volatility component which characterizes the typical stock price movements possible, and a time component which characterizes how much time the volatility component has to act on the stock. The wrinkle in the problem of option pricing is that volatility doesn’t act uniformly in time; after earnings the stock prices tends to move more than on a typical day. Therefore it is important that we have the correct earnings date in our trading system as soon as it’s publicly available…”

This trading group is profiting in options-volatility, which depends on eliminating price uncertainties including questions about the timing of your earnings. What your company does, your financial results, are irrelevant to the grand opportunity. What matters is the volatility pattern.

This is why we track patterns everywhere in your trading.  We know a great deal about the patterns and we’ve been telling you for ten years now that if you move differently from your peers it’s not about your results but standard deviation, arbitrage, spreads.

Public companies spend colossal sums on tools for tracking fundamental drivers.  You don’t need to do that.  You do need to provide accurate information to management about what prices your shares.  This is what’s now valuable in IR, because it’s a pattern. Henry Jarecki turned that notion into money for islands (two – he owns Guana Island there too).

Don’t be a pattern. You’re not helping your investors by doing the same thing all the time.  You’re helping quants turn you into a volatility trade.  Don’t report results during options expirations.  Don’t conclude that fundamentals are continually setting your price.

Do take steps to understand the patterns in your trading. We track patterns.  Patterns help us to know when activists think they’re invisible in your trading and when quant traders are pricing your shares.

Armed with that information, you’re more valuable to management. That way you can pay more taxes.

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