ICE Volatility Is What Big Money Lives For

NEW YORK (TheStreet) -- What big money likes most is predictable volatility.

Traders with capital can get in front of predictable market swings, take their profits, and get out fast.

That's what high-frequency trading was about. I first wrote about it in a 1999 profile of daytraders for Salon

You see a stock moving and you get in, you get out before the move reverses. There may be just pennies of profit per share, but if you're disciplined, the thinking went, you could make some money.

HFT simply automated this process. The "scandal" unveiled by Michael Lewis in his book Flash Boys was that BATS Trading found a way to beat the other markets doing this by microseconds, by locating their computers near the Holland Tunnel.

The BATS move was the climax of the HFT game. They were dealing in advantages measured by the speed of light, and 186,000 miles per second isn't just a good idea -- it's a physical law.

So the game has moved, and as is so often the case, Goldman Sachs (GS) is out ahead of the move.

The bank is closing its "dark money pool" called Sigma X, which was dedicated to HFT. It's even selling its New York Stock Exchange market-making unit

And here's the key to that story. The seat on the floor was acquired in 2000, through the acquisition of Spears, Leeds & Kellogg, for $6.5 billion, and the sale price in 2014 is a reported $30 million.

Over at Zero Hedge, Tyler Durden sees this as evidence Goldman Sachs is expecting a market crash.

That may be true. But there is also something else going on. The big boys' pool table has moved. It's no longer on Wall Street. It's no longer about stocks at all.

It's about ICE (ICE). The IntercontinentalExchange, which runs futures markets and bought the NYSE last year for its Liffe derivatives exchange, is where the action is.

Just as you can predict where the ultrawealthy will be with the seasons -- Cannes in the spring and Davos in the winter -- there are also fairly predictable moves in global commodities markets. Leverage, through derivatives, lets big players capture these swings.

For instance, we know that natural gas prices spike as the winter goes on. The harder the winter, the sharper the spike. So you read the weather report, then go to ICE's natural gas markets, bet on a rising price, and you win every year.

The same sort of thing is happening right now in oil. The "summer driving season" causes demand for oil and gasoline to surge in a predictable pattern. Traders can leverage their participation in that move and make a killing, through ICE. 

Profits are not about volatility. They are about predictable volatility. It's the same game that was played with HFT, getting in ahead of the move, but the weapon of choice now is no longer a fast computer, but a big bank balance tied to a fast computer.

This also explains one of the craziest moves of the last few weeks, the move in 10-year Treasury bonds. Rates in this market have moved just 10% this year, from 3% to 2.7%, as the growing Ukranian crisis caused the usual flight to quality.

The answer to the mystery is Liffe.

With enough leverage, the relatively small moves in the bond market can yield huge profits. Buy when they panic, sell when they relax, and profit on each side of the trade.

Big capital piles are supposed to provide liquidity to markets, and they do. But it's assumed that these piles of capital will be betting both ways, that they will balance each other out. They don't. They make money whenever and wherever there's volatility, wherever there is action.

And the action these days is far from the corner of Wall and Broad Streets. It's in commodities, in futures, in derivatives, in leverage. ICE ICE baby.

At the time of publication the author owned no shares in companies mentioned in this article.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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