Nassim Taleb's Fund Made $1 Billion On Monday; This Is How The Other "Hedge" Funds Did

You can't say Nassim Taleb didn't warn you: the outspoken academic-philosopher, best known for his prediction that six sigma "fat tail", or black swan, events happen much more frequently than they should statistically (perhaps a main reason why there is no longer a market but a centrally-planned cesspool of academic intervention) just had a black swan land smack in the middle of the Universa hedge fund founded by ardent Ron Paul supporter Mark Spitznagel, and affiliated with Nassim Taleb.

The result: a $1 billion payday, translating into a 20% YTD return, in a week when the VIX exploded from the teens to over 50, and which most other hedge funds would love to forget.

The WSJ reports:

Universa Investments LP gained roughly 20% on Monday, according to a person familiar with the matter, a day when the market collapsed more than 1,000 points in its largest ever intraday point decline. Universa’s profits—some realized and some on paper—amounted to more than $1 billion in the past week, largely on Monday, as its returns for the year climbed to roughly 20% through earlier this week.

“This is just the beginning,” said Universa founder Mark Spitznagel, a longtime collaborator with Mr. Taleb, who advises Universa, lectures at New York University and is known for his pessimistic forecasts about the global economy. Mr. Spitznagel himself has spent the last several years warning of a coming correction, one he viewed as inevitable given accommodative policies by central banks around the world.

“The markets are overvalued to the tune of 50% and I’ve been saying that for some time,” said Mr. Spitznagel.

Universa gained renown for its outsize gains in 2008, racking up more than 100% profits for many of its clients. In 2011, it notched around 10% to 30% gains for clients. During the years in between it posted steady, small losses.

The firm focuses on finding cheap, shorter-dated options on the S&P 500 and other instruments it expects to rise in value amid a notable downturn.

During the past week, the value of such options that Universa bought over the past one to two months jumped, said people familiar with the matter.

The Miami-based Universa and some other “black swan” hedge funds that seek to reap big rewards from sharp market downturns have emerged as winners amid the world-wide volatility of the past week, say their investors, racking up double digit gains in roughly the past week.

Incidentally, this is precisely what a "hedge" fund should do: protect against massive, "fat tail" days like this Monday; instead they merely ride the beta train with the most leverage possible, hoping that the Fed will prevent any events that actually need hedging, and blow up in a fiery crash any time the market tumbles. Needless to say this makes most of them utterly useless, especially since one can just buy the SPY for almost nothing, and avoid paying the hefty 2 and 20 (or 3 and 45) fee, which until recently was merely there to fund trading based on inside information aka "expert networks" and "idea dinner" thesis clustering.

And speaking of non-hedging "hedge" funds, the table below lays out the performance of some of the most prominent names through either Friday of last week, or as of mid-week. You will notice three things: i) a lot of minus signs for entities that supposedly "hedge" market drops, ii) Bill Ackman's Pershing Square, which until last month was among the best performers, was - as of Wednesday - down for the year, and iii) Ray Dalio's "risk parity" quickly has become "risk impairty" in an environment where both stocks were sold by the boatload, at the same time that China was dumping US treasurys - a scenario no "risk parity" fund is prepared for.

http://www.zerohedge.com/news/2015-08-28/nassim-talebs-fund-made-1-billion-monday-how-other-hedge-funds-did

HFTs Are Overheating: CenturyLink Reports "Catastrophic" HVAC Failure At NJ2 Data Center, Starting "Safe Shut Down"

If today's ridiculous move is the kind that no retail investors would chase, it is precisely what HFTs around the globe love: nothing but momentum, momentum, momentum. In fact, HFTs are trading so much, they are literally overheating!

According to a notice mailed out moments ago by CenturyLink, its NJ2 data center has just experienced a "critical" HVAC data failure.

Incident Notification
All times listed are in Central time zone.

Time and Date of Event: 10:08, 08/27/2015
Location: ZZNJ2

Event Description: The south side of the NJ2 data center is having a critical HVAC event. Clients are being requested to begin a safe shut down of devices immediately.

Current Status: Steps are being taken by the data center to safely shut down client devices by request due to temperature concerns on the South side of the building.

Next Status Update: 30 mins

* * *

Here are some specifics on the NJ2 data center:

Real Estate Summary

    Located near Newark International Airport; 15 minutes from Manhattan, NY
    Four story building
    Total building interior (sf) = 223,022
    Raised floor (inches) = 12

Electrical Summary

    PSE&G provides power feeds
    Power density minimum (W/sf) = 150
    Generator configuration = N + 1
    Total Power Capacity = 16 MW
    Minimum two fuel replenishing companies

Mechanical Summary

    Cooling system configuration = N + 1
    CenturyLink manages temperature and humidity to strict ASHRAE standard

Fire Detection and Suppression Summary

    VESDA provides early warning detection
    FM200

How do we know HFTs are involved? Moments ago, BATS issued an advisory:

BATS Weehawken Network Point-of-Presence (NJ2 PoP) Advisory

August 27, 2015 12:26:21

Please be advised that the CenturyLink Weehawken, NJ data center (NJ2) maintaining a BATS PoP has reported a critical HVAC issue. Per CenturyLink, the cage will not have cooling over the next couple of hours at a minimum, so BATS would like to advise Members utilizing the BATS NJ2 PoP of potential impact that could result from overheating of equipment. BATS has shutdown all non-critical infrastructure at the NJ2 PoP at this time and will continue to monitor the situation. There is currently no customer impact but BATS will advise with material updates to this situation in NJ2 and if customer impact is expected.

IMPORTANT: There is no customer impact at this time in NY5 or NY4 (Secaucus) and all BATS exchange platforms are operating normally.

And while BATS may be safely offline and trading out of a redundant location, one wonders just how many other "wealth effect" mission critical HFTs clients of CenturyLink are about to go offline, and whether the entire market is about to go down with them?

This is a developing story: more as we see it.

http://www.zerohedge.com/news/2015-08-27/hfts-just-overheated-centurylink-reports-catastrophic-hvac-failure-nj2-data-center-s

1000s Of Political Figures Are Stashing Cash In Swiss Accounts, Foreign Ministry Admits

In spite of all the attention the nation has received in recent years, SCMP reports that thousands of so-called "politically exposed persons”, or PEPs - a category that includes heads of state and other top officials - hold Swiss bank accounts, a Swiss foreign ministry official said. But, perhaps not for much longer as Bern aims to finalize a law aimed at simplifying the process of freezing and unblocking such funds.

As The South China Morning Post reports,

Swiss authorities estimate that “there are thousands of PEPs [with accounts] in Switzerland, not hundreds,” Valentin Zellweger, who heads the ministry’s Directorate of International Law, told reporters on Monday.

Switzerland has repeatedly been embarrassed by revelations, splashed across front pages worldwide, of global political heavyweights hiding funds - sometimes embezzled from public coffers - in the Alpine nation’s famous banks.

But the country has not taken such scandals sitting down: it has been freezing suspicious assets for a quarter century.

By the end of this year, Bern aims to finalise a law aimed at simplifying the process of freezing and unblocking such funds.

In total, Switzerland has since 2003 returned a total of around US$1.8 billion embezzled by Ferdinand Marcos of the Philippines, the late Nigerian military dictator Sani Abacha, former Peruvian spy chief Vladimir Montesinos, Jean-Claude Duvalier of Haiti and others.

That is more than any other country has returned and represents a quarter of the US$4billion to US$5 billion in assets restituted globally, Swiss authorities said last year.

Swiss authorities are currently co-operating with a number of countries, among them Haiti, Egypt, Tunisia and Ukraine, to return stolen assets that have been frozen following changes in power, said Zellweger.

Specifically, they are working to return US$40 million to Tunisia, a “big slice” of the US$60 million stashed during the era of former leader Zine al-Abidine Ben Ali, he said.

But the killing of Egypt’s general prosecutor has slowed co-operation with Cairo on returning funds linked to former President Hosni Mubarak, he said.

The Swiss Office of the Attorney General has meanwhile opened a criminal proceeding against two executives and unknown persons from Malaysia’s troubled state investment fund for suspected corruption and money laundering.

Switzerland also recently seized around US$400 million in connection with a massive corruption probe targeting Brazil’s state oil company Petrobras.

Zellweger insisted Switzerland is trying to be “transparent” in its handling of the Petrobas scandal, which involves top executives accused of colluding with construction companies to inflate contracts and bribe politicians.

The Swiss opened their own inquiry into Petrobras in April last year, with authorities vowing to crack down on the large number of suspicious transactions believed to be linked to the case that had moved through the country’s banks.

Switzerland’s attorney general has said the suspected corrupt payments had passed through more than 30 Swiss banks.

This marks a hard blow to the Swiss banking sector, which for years has been striving to clean up its image and crack down hard on money laundering.

“We have to do better,” Zellweger acknowledged, stressing though that Switzerland was the only international banking hub that had provided information about Petrobas-linked transactions.

He said banks in other countries had handled much bigger sums linked to the corruption case, but that those countries were keeping mum.

http://www.zerohedge.com/news/2015-08-26/1000s-political-figures-are-stashing-cash-swiss-accounts-foreign-ministry-admits 

Why Everyone Is So Nervous About What China Does Next, In One Chart

Whether the motive behind China's stunning August 11 devaluation announcement was to get one step closer to the SDR basket by promoting a market-based FX regime demanded by the IMF, to further ease financial conditions in China, to boost exports, or merely to telegraph to the Fed that with the US preparing to hike rates China will no longer be pegged to the USD, is unclear, but one thing that is certain is just how much everyone (ifnot this website) was shocked by the PBOC announcement. Goldman summarizes it best: "The sharp 3% devaluation in the CNY fix last week was a surprise to us."

What happens next? Clearly more devaluation, or else China would not have pursued this step, especially since the paltry 4% deval in one week will hardly move the needle on Chinese exports, which is the real reason why China did this move (weeks after it boosted its official gold holdings by 57%). Goldman also admits as much: "It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policymakers, and by extension the near-term direction of the CNY. But on a longer horizon, the risks are tilted towards further CNY weakness."

The weakness is further guaranteed when one considers that China has all but tapped out its credit capacity (where even the IMF admits China's debt/GDP is headed to 250%), forcing the country to seek growth not from within (via credit creation), but without, in the form of beggaring its neighbors and promoting its competitiveness using external devaluation (a similar internal devaluation to what Greece has undergone in the past 5 years would result in a very violent civil war), i.e. currency war, as much as the serious people want to avoid calling it for fear headlines such as these (from overnight) will become a daily event...

• TAIWAN DOLLAR FALLS TO WEAKEST SINCE NOV. 2009
• INDIA'S RUPEE DROPS TO LOWEST LEVEL SINCE SEPT. 6, 2013.
• TURKISH LIRA DROPS TO RECORD 2.85 PER DOLLAR, DOWN 0.6% TODAY

... and the FX war will spiral out of  control.And yet that is precisely what will happen.

This is how Goldman pivots to the unpleasant reality of not only China now aggressively engaging fellow exporters, but those same fellow expoerters devaluing preemptively before China gets them:

It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policymakers, and by extension the near-term direction of the CNY. But on a longer horizon, the risks are tilted towards further CNY weakness. The core of this argument rests on our view that China’s bumpy downshift in growth is likely to extend, making for greater macro and market volatility along the way. China has experienced a substantial credit build-up, which will need to be unwound in coming years. As Andrew Tilton and team have discussed, unwinding such a large credit imbalance is typically associated with a period of below-trend domestic demand growth, and this is coinciding with slowing potential growth as the impulses from labour and capital deepening slow. China’s current account surplus is also not what it used to be, with a growing services deficit offsetting a still large trade surplus. Given this macro backdrop, where a greater contribution to growth from net exports would be very welcome, a 25% appreciation in trade-weighted terms – as the CNY has experienced over the past three years on account of its tight link to the USD – looks increasingly untenable.

And while nobody wants to admit it, the writing on the wall is clear: the age of all out FX warfare is upon us, and only the Fed believes it is immune... if only for the time being.

The clearest implication of China joining the currency depreciation train is that it further increases depreciation pressures on the rest of the EM FX complex. There are two important channels of transmission here: First, because China as a producer competes with several EMs in global markets, those EM exporters just became a touch less competitive relative to Chinese exporters; and second because China as a consumer is also a large destination for exports from the rest of EM, although in this case there is at least the possibility of a partial offset from any improvement in demand if an easing in financial conditions is delivered. So for EMs that have been trying to address their external balance, and have seen depreciating currencies since 2013, some of that relative price shift has just been undone. And if the recent CNY moves are the start of a journey, even undoing half of the accumulated trade-weighted appreciation of the last three years, this may provoke a meaningful additional bout of currency depreciation across the EM complex.

Translation: once begun, the currency war, which for the time being is being fought with conventional means, has no choice but to become nuclear.

Here, in one chart, is the reason why anyone following China's devaluation is very nervous. And if they aren't yet, they should be. Because if China is indeed intent on catching up with the rest of the EM complex - whose FX is trading about 30% lower - then the resulting devaluation will lead to nothing short of a global FX neutron bomb.

http://www.zerohedge.com/news/2015-08-17/why-everyone-so-nervous-about-what-china-does-next-one-chart

The Biggest Surprise About Claren Road's Upcoming Liquidation

That one (and pretty much all) of Carlyle's hedge funds, namely the commodity-focused Vermillion Asset Management, did not have a good 2015 was well-known after as Bloomberg reported, its founders - Chris Nygaard and Drew Gilbert - left after losses. Actually, losses is putting it mildly: AUM imploded to a paltry $50 million from $2 billion following horrible bets on the path of commodity prices.

As Bloomberg further noted, "losses in Vermillion’s Viridian commodity fund, which invested in oil, metals and agriculture assets, have led to investor redemptions that shrank its size. The vehicle had $1.7 billion when Washington-based Carlyle bought a 55 percent stake in Vermillion in 2012, before starting its decline."

The collapse driven by a record commodity crash, while unpleasant for all the millionaires and billionaires involved, was explainable: the hedge fund which was just a glorified and levered beta chaser, was simply betting everything - and then added some leverage for good measure - that the BTFD "investment strategy" would work and commodities would rebound.

They did not, and Vermillion is now shutting its doors, and leaving Carlyle with another hedge fund implosion on its hands.

But, as noted above, there was nothing particularly surprising about that: invest badly for long enough, and you get wiped out.

What, however, is far more surprising was the fate of that other, far bigger Carlyle hedge funds, Claren Road, which as we learned moments ago from Bloomberg is also on death's door following a whopping $2 billion in redemption requests, representing about half of the firm's total $4.1 billion in AUM.

By way of background, Claren Road was founded in 2005 by former Citigroup Inc. credit traders Brian Riano, John Eckerson, Sean Fahey and Marino. Carlyle bought a 55 percent stake in Claren Road five years ago as part of a push into hedge funds.

At its peak less than a year ago, in September of 2014, Claren Road managed $8.5 billion. Now, in one month, Claren Road is facing redemptions that will pull 48% of the funds investments, forcing across the board liquidations, mass layoffs, and what will ultimately almost certainly be the fund's liquidation. Incidentally, the pain for Claren Road started at the end of 2014:

Claren Road investors had asked to redeem $374 million last quarter, a person with knowledge of the matter said earlier this month. The firm had faced redemptions of $1.9 billion at the end of last year.

Which means that bleeding billions is not exactly a new thing for Claren Road (or Carlyle). And, it goes without saying, a few "expert networks" left in operation would have surely prevented the fund's demise.

But, as in the case of Vermillion, liquidations are perfectly normal, and happen every time there is a major market meltdown, such as what commodities experienced, if not the centrally-planned and central bank-micromanaged US equities, which are the last recourse policy tool for the legacy status quo to preserve confidence in a crumbling global economy.

No, what is most surprising, is that Claren Road actually did not perform that badly: "Claren Road’s main fund gained 1.7 percent in the first two weeks of August, according to the person. It had declined 7.2 percent this year through July. Its smaller credit opportunities fund has lost 6.2 percent this year through mid-month after rising 1.9 percent in the first two weeks of August."

In other words, Claren Road was down a palrty 5.6% through mid-August, or underperforming the broader market by just 5.6% and was likely performing in line or even better than its benchmark, and yet its skittish investors saw that return as sufficient to require a liquidation.

One then wonders: if a single-digit underperformance was enough to lead to the wipe out of one of the formerly biggest hedge funds, just how big, literally and metaphorically, will the hedge fund gates have to be when the central banks finally lose control, and hedge funds experience double digit losses (or get Madoffed).

Because if truly investors are so jittery that one bad quarter is enough to force the 50% of one's cash, then what happens during the market downturn is now very clear, and is precisely what we warned in "How The Market Is Like CYNK", and how investors in China's epic fraud Hanergy learned the hard way: you can make paper profits in a rigged market on the way up all you want, but once the time to cash out comes, you can never leave.

http://www.zerohedge.com/news/2015-08-17/biggest-surprise-about-claren-roads-upcoming-liquidation

US Military Uses IMF & World Bank To Launder 85% Of Its Black Budget

Submitted by Jake Anderson via TheAntiMedia.org,

Though transparency was a cause he championed when campaigning for the presidency, President Obama has largely avoided making certain defense costs known to the public. However, when it comes to military appropriations for government spy agencies, we know from Freedom of Information Act requests that the so-called “black budget” is an increasingly massive expenditure subsidized by American taxpayers. The CIA and and NSA alone garnered $52.6 billion in funding in 2013 while the Department of Defense black ops budget for secret military projects exceeds this number. It is estimated to be $58.7 billion for the fiscal year 2015.

What is the black budget? Officially, it is the military’s appropriations for “spy satellites, stealth bombers, next-missile-spotting radars, next-gen drones, and ultra-powerful eavesdropping gear.”

However, of greater interest to some may be the clandestine nature and full scope of the black budget, which, according to analyst Catherine Austin Fitts, goes far beyond classified appropriations. Based on her research, some of which can be found in her piece “What’s Up With the Black Budget?,” Fitts concludes that the during the last decade, global financial elites have configured an elaborate system that makes most of the military budget unauditable. This is because the real black budget includes money acquired by intelligence groups via narcotics trafficking, predatory lending, and various kinds of other financial fraud.

The result of this vast, geopolitically-sanctioned money laundering scheme is that Housing and Urban Devopment and other agencies are used for drug trafficking and securities fraud. According to Fitts, the scheme allows for at least 85 percent of the U.S. federal budget to remain unaudited.

Fitts has been researching this issue since 2001, when she began to believe that a financial coup d’etat was underway. Specifically, she suspected that the banks, corporations, and investors acting in each global region were part of a “global heist,” whereby capital was being sucked out of each country. She was right.

As Fitts asserts,

“[She] served as Assistant Secretary of Housing at the US Department of Housing and Urban Development (HUD) in the United States where I oversaw billions of government investment in US communities…..I later found out that the government contractor leading the War on Drugs strategy for U.S. aid to Peru, Colombia and Bolivia was the same contractor in charge of knowledge management for HUD enforcement. This Washington-Wall Street game was a global game. The peasant women of Latin America were up against the same financial pirates and business model as the people in South Central Los Angeles, West Philadelphia, Baltimore and the South Bronx.”

This is part of an even larger financial scheme. It is fairly well-established by now that international financial institutions like the World Trade Organization, the World Bank, and the International Monetary Fund operate primarily as instruments of corporate power and nation-controlling infrastructure investment mechanisms. For example, the primary purpose of the World Bank is to bully developing countries into borrowing money for infrastructure investments that will fleece trillions of dollars while permanently indebting these “debtor” nations to West. But how exactly does the World Bank go about doing this?

John Perkins wrote about this paradigm in his book, Confessions of an Economic Hitman. During the 1970s, Perkins worked for the international engineering consulting firm, Chas T. Main, as an “economic hitman.” He says the operations of the World Bank are nothing less than “pure economic colonization on behalf of powerful corporations and banks that use the United States government as their tool.”

In his book, Perkins discusses Joseph Stiglitz, the Chief Economist for the World Bank from 1997-2000, at length. Stiglitz described the four-step plan for bamboozling developing countries into becoming debtor nations:

Step One, according to Stiglitz, is to convince a nation to privatize its state industries.

Step Two utilizes “capital market liberalization,” which refers to the sudden influx of speculative investment money that depletes national reserves and property values while triggering a large interest bump by the IMF.

Step Three, Stiglitz says, is “Market-Based Pricing,” which means raising the prices on food, water and cooking gas. This leads to “Step Three and a Half: The IMF Riot.” Examples of this can be seen in Indonesia, Bolivia, Ecuador and many other countries where the IMF’s actions have caused financial turmoil and social strife.

Step Four, of course, is “free trade,” where all barriers to the exploitation of local produce are eliminated.

There is a connection between the U.S. black budget and the trillion dollar international investment fraud scheme. Our government and the banking cartels and corporatocracy running it have configured a complex screen to block our ability to audit their budget and the funds they use for various black op projects. However, they can not block our ability to uncover their actions and raise awareness.

http://www.zerohedge.com/news/2015-08-14/us-military-uses-imf-world-bank-launder-85-its-black-budget

Malaysia Meltdown: Asian Currency Crisis 2.0 Sends Ringgit, Stocks, Bonds Crashing

When China went the “nuclear” (to quote SocGen) devaluation route earlier this week in a last ditch effort to rescue its export-driven economy from the perils of an increasingly painful dollar peg, everyone knew things were about to get a whole lot worse for an EM currency basket that was already reeling from plunging commodity prices, slumping Chinese demand, and the threat of an imminent Fed hike.

Sure enough, EM currencies from Brazil to South Korea plunged, and monetary authorities - unsure whether to play down the move or cry foul - scrambled to respond.

With some Asian currencies already falling to levels last seen 17 years ago, some analysts fear that an Asian Currency Crisis 2.0 may be just around the corner. 

That rather dire prediction may have been validated on Friday when Malaysia’s ringgit registered its largest one-day loss in almost two decades.

As FT notes, “sentiment towards Malaysia has been damped by a range of factors including sharp falls in global energy prices since the end of June. Malaysia is a major exporter of both oil and natural gas, with crude accounting for almost a third of government revenue.” The central bank meanwhile, "has opted to step back from intervening in the market in response to the falling renminbi, unleashing pent-up downward pressure on the ringgit.” That, apparently, marks a notable change in policy. “The most immediate challenge is the limited scope of Malaysia’s central bank to step in,”WSJ says, adding that “for weeks, it tried to stem the currency’s slide, digging into its foreign-exchange reserves to prop up the ringgit and warning banks from aggressively trading against its currency."

Surveying the damage, here's the one-day:

And the one week:

And the one month:

To be sure, capital has been flowing the wrong way in Malaysia for quite some time. As Bloomberg reminds us, "foreign funds have dumped about $3 billion of the nation’s shares this year as Prime Minister Najib Razak grapples with allegations of financial irregularities at a state investment company."

Indeed, concerns around capital outflows may have come to a head in today's move. Here's a look at where things stood in July (it's gotten worse since, as FX reserves fell below $100 billion by the end of last month):

And among Asian currencies, the ringgit is especially sensitive changes in "sentiment":

 

Clearly, falling FX reserves limit the BNM's ability (not to mention willingness) to arrest the slide.

As for specific catalysts for Friday's move, it looks like a $10 billion bond maturity may have contributed - i.e. investors converted the proceeds from ringgit back into dollars.

"It’s a bit of vicious cycle", Saktiandi Supaat, Singapore-based head of FX research at Maybank, told Bloomberg over the phone. He also remarked that it doesn’t seem fundamentally driven but rather sentiment-based or even a speculative move.

And it wasn't just the ringgit, Malaysian equities and bonds plunged as well, with stocks turning in their worst two week performance since Lehman.

So while China may have succeeded in jawboning/intervening the yuan back to some semblance of (temporary) stability, the global reverberations look to have just begun. 

http://www.zerohedge.com/news/2015-08-14/malaysia-meltdown-asian-currency-crisis-20-sends-ringgit-stocks-crashing

"Project Omega" - Why HFTs Never Lose Money: The Criminal Fraud Explained

Two weeks ago, without knowing the details of the most recent market-rigging and frontrunning scandal involving "alternative" market veteran ITG's dark pool POSIT, which issued a vague 8-K it would settle with the SEC for "irregularities", we explained what we thought had happened:

ITG had an in house prop trading group, or "pilot", which operated for nearly two years, whose only signal was client order flow, which it would frontrun, and make millions in profits. In other words, once again precisely what we have claimed since 2009. But oh yes, not everyone is guilty of such manipulation. Only Liquidnet... and Pipeline... and ITG... and countless other ATS and HFT firms for whom clients are better known as either "easy money" or muppets.

And yes, we get the "trading experiment" narrative: calling it "criminal market manipulation and order frontrunning scheme" just does not sound like something the Modern Markets Initiative would spend millions of dollars to get Congressmen to agree on.

It turns out we were spot on, the only thing we missed was the name of this market manipulation exercise. Now, thanks to the SEC, we know: "Project Omega" (or as it was also correctly dubbed here the "criminal frontrunning scheme") is how ITG dubbed its secretive prop-trading desk whose only purpose was to frontrun clients.

Here are the details for all you suckers who still read the HFT apologists and believe the bullshit that all these algos do is provide liquidity, when in reality all the really do is frontrun your orders, assuring them of 6 years of trading without a single day's loss (or in the case of Virtu, one trading day loss). From the SEC:

Between approximately April 2010 and July 2011, ITG violated the federal securities laws and regulations in multiple ways as a result of its operation of an undisclosed proprietary trading desk known within ITG as “Project Omega” (“Project Omega” or “Omega”). During the period of April to December 2010, Project Omega accessed live feeds of ITG customer and POSIT subscriber order and execution information and traded algorithmically based on that information in POSIT and in other market centers. In connection with one of its trading strategies, Project Omega identified and traded with sell-side subscribers in POSIT and ensured that those subscribers’ orders were configured in POSIT to trade  “aggressively,” or in a manner that benefitted Omega by enabling it to earn the full “bid-ask spread” when taking the other side of their orders.

Project Omega, which operated as part of AlterNet, traded a total of approximately 1.3 billion shares, including approximately 262 million shares with subscribers in POSIT. ITG’s proprietary trading gross revenues resulting from Project Omega totaled approximately $2,081,304.

A quick point here: since ITG was quick to settle at a cost of $20 million, one can be absolutely certain that the true damages to clients, aka Project Omega revenues, were orders of magnitude higher, however since it wasn't the SEC's intention to disclose just how criminal HFTs are in general but just to put a black eye on ITG's dark pool (as Goldman flexes its muscles and prepares for world algo domination by taking down its competition one by one), and since it is difficult to capture all the "externalities" and dollar benefit from rigging, the SEC was happy to only point out the absolutely bare minimum of damages which were probably the explicit documented loss by those traders who brough this case to the SEC's attention in the first place. Everyone else will have to wait in line for the class action lawsuits to begin when laying out their damages.

But back to the SEC's big picture "explanation" of what we have said for years:

While Project Omega was engaging in proprietary trading, including with ITG’s own customers, ITG was simultaneously promoting itself, and POSIT, as an independent “agency only” broker that did not have conflicts of interest with its customers and that protected the confidentiality of its customers’ trade information.

Project Omega was managed and overseen by an ITG senior executive who at the time served as the firm’s Head of Liquidity Management (the “Liquidity Executive”). The Liquidity Executive designed and directed Omega’s trading strategies even though they violated written policies set by ITG’s compliance department restricting Omega’s access to customer information.

ITG Inc. and AlterNet violated Sections 17(a)(2) and 17(a)(3) of the Securities Act by engaging in a course of business that operated as a fraud and by failing to disclose to ITG customers and POSIT subscribers, among other things, that: (i) ITG was operating a proprietary trading desk while at the same time promoting its brokerage services and POSIT by describing ITG as an independent “agency-only” broker; (ii) the proprietary trading desk, until December 2010, accessed live feeds of highly confidential order and execution information and used this information to inform its own trading decisions; and (iii) one of the proprietary trading desk’s strategies involved identifying sell-side subscribers with which the desk wanted to trade in POSIT, and ensuring that those subscribers’ orders were configured to trade “aggressively” in POSIT.

ITG Inc. violated Rule 301(b)(2) of Regulation ATS by failing to file an amendment on Form ATS at least 20 days before it launched Project Omega disclosing the commencement of its proprietary trading activities and that one of its primary trading strategies would involve accessing confidential information regarding subscribers’ identities and orders and trading algorithmically based on a live feed of highly confidential information regarding open orders bound for the POSIT dark pool.

And here are the details of Project Omega, ör as we called it in July for what it really was "the criminal market manipulation and order frontrunning scheme":

During the period of late 2009 to early 2010, ITG explored initiatives to increase diversification and revenues for the firm, including launching a proprietary trading operation that would engage in algorithmic high frequency trading. Thereafter, on the recommendation of senior management, Group’s Board of Directors approved a proprietary trading desk that was limited in scope to inform whether ITG should launch a fully-scaled and disclosed proprietary trading operation. This initiative at ITG, which was managed by the Liquidity Executive, became known as Project Omega.

When he began managing Project Omega, the Liquidity Executive had overall product management responsibility for all of ITG’s electronic brokerage products, including its entire suite of trading algorithms, its smart order routers, and for the POSIT dark pool.  Prior to becoming Head of Liquidity Management in 2009, for several years the Liquidity Executive had been the Head of Product Management for ITG’s algorithmic trading group. In that role, he was responsible for designing and building ITG’s entire suite of trading algorithms and managing a team of software developers who wrote the computer code for the algorithms.

As a reminder, it was Zero Hedge who broke, and subsequently BBG and WSJ confirmed, that the "Liquidity Executive", aka criminal frontrunning mastermind, was none other than Hitesh Mittal, the same person who left ITG in 2011 and went on to become the head trader of the world's 4th largest hedge fund, Cliff Asness' (formerly of Goldman Sachs) mega quant fund, AQR Capital. It was this same "liquidity executive" who, after making hundreds of millions in HFT profits for AQR, was unceremoniously fired early this month. Per the WSJ:

Hitesh Mittal was terminated from his position as head of trading at AQR Capital Management LLC in a move related to an enforcement action the Securities and Exchange Commission brought against a former employer.

Mr. Mittal was head of trading at the $136 billion hedge fund since 2012. Brian Hurst, AQR’s former head of trading, resumed his role on July 31, AQR said in a statement. Mr. Mittal wasn’t formally named in the action, but his role in the project was reported by The Wall Street Journal and Bloomberg News in recent weeks.

“AQR has ended its employment relationship with Hitesh Mittal,” the company said in a statement. “Mr. Mittal has been referenced in reports about an SEC investigation of ITG. This investigation reportedly relates to misconduct that occurred in 2010 and 2011 while he was employed at ITG.”

Mr. Mittal didn't respond to attempts to reach him Wednesday.

His boss, Mr. Asness, did not respond to twitter inquiries if the reason he "loves High-Speed Trading", as he admitted in a 2014 Bloomberg Op-Ed, is because of the criminal frontrunning profit it may have afforded him courtesy of the hiring of the "liquidity executive."

And just so there is no confusion, ITG's "prop trading" group was all HFT and algo-based.

None of the Omega team members had experience with proprietary trading. Instead, the Omega team consisted almost entirely of ITG employees with significant experience in ITG’s algorithmic trading group designing, building and/or writing computer code for ITG’s trading algorithms. Based on that experience, the Omega team had detailed knowledge regarding how ITG’s algorithms operated.

Not surprisingly, the whole criminal scheme was shrouded in secrecy:

From the start, and during the entire time it was in operation, Project Omega’s existence and trading activities were kept confidential and were not disclosed to ITG customers or POSIT subscribers or to the Commission.

Proprietary trading represented a significant departure from ITG’s core “agency-only” business model and public profile, and ITG had concerns that Project Omega or proprietary trading at ITG could result in reputational risk for the firm. If ITG decided to increase the scale of Omega’s proprietary trading activities, ITG planned to disclose its existence publicly and to customers at that time. However, before reaching that point, ITG decided that Project Omega and its proprietary trading activities were to be kept confidential.

Even within ITG, Project Omega was only to be discussed on a “need-to-know” basis, and even the customer-facing side of ITG was not informed of Omega’s existence.

The company was smart: it would only rip off sell siders, not the buyside, because as everyone knows the biggest idiots on Wall Street are on the sellside; buysiders tend to be at least modestly smarter on average.

Project Omega was subject to the limitation that its total open positions could not exceed $500,000 at any time. In addition, it was designed to trade only against the orders of sellside subscribers in POSIT, and not against buy-side subscribers. Based on these limitations, and that ITG initiated Project Omega to determine whether it could profitably engage in proprietary trading and/or market making on a larger scale, ITG considered Project Omega to be an “experiment.”

In short, Project Omega was this:

That's right: dark pools, HFTs, and so on, are nothing more than the Office Space scam: steal a little, millions of times, just don't get caught.

However, just like in Office Space, they eventually got caught.

And here's why:

For the period of approximately April to December 2010, Omega’s Facilitation Strategy, which was designed by the Liquidity Executive, involved trading based on a live feed of information (the “Aleri Feed”) relating to open orders routed by sell-side subscribers to ITG’s trading algorithms for handling. 8 The Omega team accessed the feed by connecting to a software utility called “Aleri” that was used by ITG’s sales and support teams. The feed contained various categories of real-time information regarding “parent” orders routed through virtually all of ITG’s algorithms, including: (a) client identifier, (b) symbol, (c) side, (d) quantity of shares, (e) filled shares, (d) target price, (e) the ITG algorithm in which the order was located, and (f) time parameters.

The Facilitation Strategy was designed to detect open orders of sell-side subscribers being handled by ITG via the Aleri Feed and, based on that information, open positions in displayed markets on the same side as the detected orders, and close its positions in POSIT by taking the other side of the detected orders. The Facilitation Strategy was designed to earn the full “bid-ask spread” by opening and then closing positions.

* * *

For the entire time that ITG’s proprietary trading desk was in operation, the Omega team had access to the identities of POSIT subscribers and used this information to identify the full range of potential sell-side subscribers for Omega to trade with in POSIT. In addition, the Omega team used the information to which it had access to analyze the Facilitation Strategy’s profits and losses by contra party. Based on these ongoing profit and loss analyses, and without POSIT subscribers’ knowledge or consent, the Omega team made decisions about whether to stop trading with a small number of subscribers and to continue trading with others.

The Facilitation Strategy was designed to trade only with the sell-side subscribers identified by Omega. In order to effectuate this aspect of the strategy, the Omega team needed assistance from the POSIT development team – a group that also reported up to the Liquidity Executive. At the direction of the Omega team, ITG’s POSIT team implemented the required configurations in the dark pool to “enable” sell-side subscribers to trade, or interact, with Omega in POSIT.

* * *

Despite the strategy’s goal of earning the full “bid-ask spread,” there were times when Omega executed trades in POSIT at “midpoint” and did not obtain the “full spread.” In certain instances when this happened, the Liquidity Executive directed his team to investigate by coordinating with the POSIT development team to determine why the trades executed at midpoint, instead of at the bid or the offer, as the Liquidity Executive thought they should have.

No market participant other than Project Omega had access to the information provided in the Heatmap Feed.

From approximately April to December 2010, Omega’s Heatmap Feed included live trade execution information for all of ITG’s customers, including both sell-side and buy-side customers.

In December 2010, ITG’s Senior Management and Compliance Department Learned that Project Omega was Improperly Accessing Subscriber Order Information.

In the late fall of 2010, ITG’s CEO directed two other ITG executives to speak with the Liquidity Executive to gather information concerning the operation of Project Omega for the CEO’s information and to assist the CEO in making a presentation to Group’s Board of Directors in February 2011.

In early to mid-December 2010, ITG’s compliance department and senior management learned – based on the Liquidity Executive’s admissions – that Project Omega was trading based on a live feed of information regarding sell-side customers’ orders that had been sent to ITG’s algorithms. As a result, ITG immediately suspended Project Omega’s trading. Shortly thereafter, the compliance department and ITG’s senior management learned additional detail regarding the Facilitation Strategy and Omega’s use of the Aleri Feed, as well as certain information about Project Omega’s use of the customer execution feed in connection with its Heatmap Strategy.

The Liquidity Executive had not previously disclosed to ITG’s compliance department or senior management that Project Omega’s strategies involved accessing and trading based on the Aleri Feed and the Heatmap Feed. Instead, prior to December 2010, the Liquidity Executive had misrepresented to ITG’s compliance department the manner in which Project Omega’s trading strategies were operating.

On approximately December 20, 2010, a meeting among ITG’s senior management and compliance department was held to address Project Omega. During this meeting, the CEO reprimanded the Liquidity Executive for violating ITG policy and placing the firm at risk. Thereafter, Project Omega made certain changes to its trading strategies and was permitted to restart live trading.

As a reminder, this same liquidity executive went on shortly thereafter to become head of trading at Cliff Asness' AQR hedge fund.

But wait, despite being "reprimanded" Hitseh Mittal continued to defraud clients:

On or around December 21, 2010, Project Omega restarted a modified Facilitation Strategy that did not involve access to the Aleri Feed. In addition, Project Omega restarted a modified Heatmap Strategy on or around January 24, 2011, without direct access to the Heatmap Feed.

When Project Omega resumed trading, no changes were made to its organizational structure. As before the temporary suspension, the Liquidity Executive continued to manage Project Omega and direct its trading strategies while also continuing his overall product management responsibilities for ITG’s trading algorithms, smart order routers and POSIT, which included access to confidential customer order and trade information. The other members of the team also continued in the same roles they had before the temporary suspension.

Despite the removal of the improper direct feeds, in connection with the Facilitation Strategy, Project Omega continued to have improper access to information identifying POSIT subscribers. In addition, the Omega team continued to coordinate with ITG’s POSIT development team to identify the sell-side subscribers for Omega to trade with in POSIT and to ensure that such subscribers were configured to trade “aggressively” in POSIT.

After resuming trading in late 2010, Project Omega continued to engage in live trading until on or around July 11, 2011, when ITG terminated the Liquidity Executive as an employee and discontinued Project Omega’s operations.

During and after the temporary suspension of Project Omega’s trading activities in December 2010, ITG continued to keep Project Omega and its trading activities confidential and made no disclosure of it publicly, to subscribers, or to the Commission via an amendment to the POSIT Form ATS.

That's ironic: at the time Traders Magazine reported that Mittal had been fired in what was a "cost-cutting measure." That was incorrect. He was caught rigging markets. At this point he wasted no time to move to AQR where he was welcomed with open arms, and make his boss Cliff Asness millions in profits which in turn gave Cliff the green light to write pandering op-eds about why he loves HFT.

* * *

The fraud was so blatant not even the staunchest supporters of the HFT lobby could come up with anything even remotely relevant to justify this fraud:

... one thing to say about this is: Hahahaha, that's really bad! Like, paranoid-fantasy bad. The deep worry of modern equity market structure is that high-frequency traders, brokers, exchanges and dark pools are conspiring in some combination to front-run unsuspecting customers: The bad guys know, somehow, that the customers are trying to buy a particular stock, and can, somehow, race ahead of those customers to buy the stock and re-sell it to them at a higher price. And that's exactly what happened here! So, terrible. ITG will pay the SEC $20.3 million, a record dark-pool fine. "'The conduct here was egregious,' Andrew Ceresney, director of the SEC’s enforcement division, said during a conference call Wednesday," and it is hard to argue with that.

The "analysis" could have just ended there, and spared itself the footnoted embarrassment.

* * *

But none of the above is really shocking: after all the only business model of HFT is criminal order frontrunning, pure and simple, which is why it allows multi-millionaires to become billionaires even as they profess their love of said crime, under the guise of "high-speed trading."

What is shocking is the following, from the filing:

... on the recommendation of senior management, Group’s Board of Directors approved a proprietary trading desk that was limited in scope to inform whether ITG should launch a fully-scaled and disclosed proprietary trading operation. This initiative at ITG, which was managed by the Liquidity Executive, became known as Project Omega.

So the company's board was ultimately responsible for Project Omega, a board among whose members was the following :

Mr. O’Hara worked in the Division of Enforcement of the U.S. Securities and Exchange Commission and as Special Assistant United States Attorney at the U.S. Department of Justice
 

As we reported before, O'Hara promptly quit the day ITG announced the SEC settlement - after all it wouldn't look very good  to have a former SEC enforcer oversee a market rigginal, and criminal client defrauding prop trading group which was busted by, well, the SEC... but by then it was too little, too late.

And there you have it: open, outright, market rigging and criminal fraud, and best of all, with the explicit blessing of former SEC enforcers. As in, the fox is not only not guarding the hen house, but telling the hens to come right in: the water is warm.

And that's why the US equity market is a farce, broken beyond repair and will never be fixed until everything comes crashing down to be rebult from scratch.

Source: SEC Charges ITG With Operating Secret Trading Desk and Misusing Dark Pool Subscriber Trading Information

http://www.zerohedge.com/news/2015-08-13/project-omega-why-hfts-never-lose-money-criminal-fraud-explained