If one rogue profit center loses $50 to $100 million and blows out the whole firm, no chance Ronin is honoring their 60/40 deal with you.
I have my personal doubts, but since I couldn’t say for certain I did not want to proffer an opinion couched as fact.
I was just curious if the auction wiped out all of the firm's equity or if they still continue to operate as a firm given the other Exchanges they trade on and their other venture investments. It was always kind of strange how the firm was set up between their various interests. Did the loss take their trading software firm Rival under as well? Given that most of their customers consisted of Ronin's traders it probably doesn't look promising.
Looks like Ronin's website no longer has any content or contact info. They had a really nice setup (70,000 square ft) with a full-time gourmet chef, gym and personal trainer for their traders. Heard they spent like $25MM building the space out back in 2010. Rival Systems spun off from Ronin in 2015. Although they just lost all their Ronin clients, they do have other customers outside of their core Ronin clients, who'll just simply relocate to other prop shops and start using Rival again. So Rival should survive the debacle.
"CNBC reported that Ronin’s difficulties were tied to losses on its VIX positions. VIX futures and options trade at Cboe, but Ronin’s losses on those contracts could conceivably have caused its capital to fall below the level it is required to maintain by CME Clearing. CNBC’s report was based on unnamed sources. A Cboe spokeswoman noted that Ronin is a customer of Cboe and that it trades a number of Cboe listed products." The only relevant paragraph of Lothian's diarrhea.
I had previously posted that I wondered if Ronin was still a going concern despite the loss. Lothian's article touched upon some of the questions I had raised. Does anyone know if Ronin's traders are still going into the office or have they gone to different firms? During the MF Global debacle it was Ronin who took on many of their prop traders who the CME couldn't find a home for due to size of their positions and the capital requirements caused by the way that the long/short options were being marked for liquidation purposes.
The CME doesn’t relocate prop firm traders. And the vast majority of proprietary trading firms are not Direct Clearing Members.
I meant to say that the traders had their own accounts at MF Global and would have been forced to liquidate positions with tolerable margins and under normal circumstances were well capitalized except for the way in which the Exchange was handling their options positions causing some of them to require large amounts of cash to continue to fund their positions. The Exchange stepped in and reached out to various firms who could potentially take on these accounts because it was a better solution than the disruption that would have occurred trying to liquidate the accounts in the open market. I think the Risk Manager for Ronin at the time who was responsible for handling the incoming MF traders is the same guy who was there through the recent blow up: https://www.linkedin.com/in/jonathan-galin-2035b7b6/. It would be interesting to get his take if he's been checking out this blog.
Poof! Legendary Ronin Capital Disappears View Larger Image “If it be now, tis not to come, if it be not to come, it will be now; if it be not now, yet it will come. The readiness is all.” – Shakespeare: Hamlet Act 5, Scene 2 Last Friday, March 20, CNBC was first to report that “one of the CME’s direct clearing firms was unable to meet its capital requirements. The move forced the exchange to step in and invoke its emergency protocols to auction off the portfolios. Ronin Capital, based in Chicago, was confirmed to be the firm in question, according to sources. Additional sources said Ronin’s problems stemmed from positions in futures tied to the CBOE Volatility Index (VIX).” In concert with Alphacution’s recent feed post, “Marketquake: The Volatility of Volatility,” on unprecedented volatility levels that surpass that of the 2008-2009 Global Financial Crisis (GFC) period, I wanted to assemble whatever we could on Ronin. A story not well known outside of Chicago prop trading circles, John S. Stafford, Jr. – the founder of what eventually became known as Ronin Capital in late 2001 – rose to prominence on the floor of the Chicago Board Options Exchange (CBOE) in the 80’s and early 90’s. Like those few of his vintage, Stafford eventually transitioned off the floor; becoming one of the foremost backers of upstart CBOE floor traders, much in the same vein as the likes of Lee Tenzer (LETCO; the first to hire future DRW founder, Don Wilson) and Steve Fossett (Marathon Securities / Lakota Trading; and the adventurer to complete the world’s first solo circumnavigation of the Earth in a hot air balloon). In those days, I might occasionally run into Mr. Stafford at a neighboring stair climbing machine at the old LaSalle Club… A maniacal sensitivity to risk management was the key to the success of guys like Stafford, particularly as they transitioned to managing multiple traders and multiple books. Furthermore, this factor never changed as the floor business gradually gave way to automated and high-turnover trading strategies spread across trading venues, regions and asset classes; and Stafford Trading eventually seeded Ronin Capital – to be operated by his son, John Stafford III – with its registrations, technical infrastructure, capital and deep institutional acumen. It is this culture of risk management upon which Ronin has thrived for so long that makes its sudden demise so strange and surprising… Now, by hedge fund standards, Ronin might have been considered among the largest in the world. The most recent regulatory data (from year-end 2018) showcased total assets of $21.2 billion, which was nearly 9x and over 40x that of the same reading for the core units of the more famous Chicago prop firms, DRW and Jump Trading, respectively, for the same period (see below). This base translated into market exposures ranging roughly between $10 and $20 billion since the GFC, as measured by gross securities fair values (or, long values plus short values across asset classes)… And, resulting in member’s equity – a measure of retained earnings – that grew over the 18-year period to $415.6 million, as of year-end 2018 (see below). When we look a little more closely at the portfolio composition, we see that it is mostly made up of US government securities, followed by cash equities, equity options, and options on futures (OOFs) – among a few other categories like corporate and municipal bonds (see below). And, when we further break the data down into net securities value by product class, we can see – generally speaking – that the equities books tended to be managed more tightly from a simple dollar neutrality perspective than the US government securities (i.e. – fixed income) book and the OOF books (at least a portion of which we are assuming are options on fixed income futures). Now, all of this setup may end up being little more than a novelty. Given how quiet prop firms tend to be, we may never hear anything more about what happened here. And, the explanation that Ronin was brought down by some VIX-related futures position gone haywire may stand as the only explanation ever semi-officially offered by “additional sources.” But, here’s another thought, just for grins and giggles: I’m wondering how a pedigreed firm with this kind of balance sheet – ostensibly full of “government securities” with an average net long value of $7.5 billion for the four years between 2015 and 2018 – gets taken down by positions in futures tied to the VIX. It doesn’t make much sense given the history, capabilities, and global reach of Ronin… Sure, the overall book and underlying strategies may have shifted since 2018. Lots of things could have changed since then. Ronin could have been in existential decline throughout 2019 and early 2020. (Certainly, the fact that expected regulatory filings for 2019 – typically made by March 1 of the subsequent year – had not been made, is a small potential clue of problems.) And, lots of “fat finger” type mistakes can still happen to trigger a blow up. We just don’t know (from the available data). But, with so many ways to hedge and trade out of stuck positions given access to liquidity all over the world, it would stand to reason that there’s more to this story… Chances are this is actually about a large negative gamma / positive theta position in options. Option market makers – and prop firms that traffic regularly in options – are often net short options. This is true because customer flow is typically looking to be long options and the professionals take the other side of that flow – and then manage the risk by trading in the underlyings and layering deltas as new flows occur. This is basically true across asset classes. Meaning: Ronin – and others – are, for example, regularly short VIX options at the CBOE against equity futures at the CME as well as being short Treasury OOFs against holdings in US bonds. With negative gamma positions – usually in the form of short out-of-the-money “wing” positions – large moves in any underlying security cause these options positions to balloon, sometimes in existentially uncomfortable ways. So, the question is: What is more likely? The legendary Stafford lineage of Ronin Capital blowing up over VIX options or possibly blowing up over fixed income OOFs? Curious about your thoughts (sent to feedback@alphacution.com) and happy to make amendments or correct any errors above. Until next time, stay safe out there…