Market Structure As A Weapon Of War
Plus: Ken Griffin the gamer, S&P Global, CBOE Europe, and more
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News
The West’s Sanctions Barrage Severs Russia’s Economy From Much of the World: We’ve heard it before. We’re all tired of hearing it. We’ve become numb to the phrase. And yet the world keeps throwing one historic event after another to make it all the more worth saying: we live in unprecedented times.
In response to Russia’s brutal attack on the Ukrainian people, much of the Western economy has banded together to enact some of the most devastating sanctions in modern history. Russian banks have seen their SWIFT access revoked & much of their overseas assets frozen. Airspace in the US and much of Europe has been closed to Russian flights. Companies of all shapes and sizes, from Boeing & Ford to Google & Oracle, have announced what seem like permanent exits from their Russian operations. The results have been crippling to Russia’s economy & financial markets - charts of the ruble & Russian equities look comical in their violently negative response:
Remember, Russia is home to nearly 150 million people & a $2 trillion economy - the speed & magnitude with which a nation of this size is being brought to its knees boggles the mind. And, as of this writing, we’re unfortunately nowhere near the end of the crisis.
Russian sanctions allow us to observe how a relatively new weapon is being used by the West to exert power - market structure. The NYSE & Nasdaq halted trading in Russian ADRs amid sanctions on their underlying shares - full delistings may follow. FTSE & MSCI have booted Russian stocks from their Emerging Market indices. Crypto exchanges including Coinbase & Binance committed to blocking accounts & transactions from Russian clients targeted by sanctions. ETF providers underpinning top Russian products like $RSX & $ERUS have halted new creations of ETF shares, meaning market makers can’t effectively arbitrage between the ETF and its underlying stocks.
The combined impact of these market plumbing decisions almost completely cuts off Russian assets & investors from global liquidity. If Russian oligarchs & other ruling elites feel serious financial pain & can’t access their money, they may begin to back away from Putin & put pressure on the Kremlin to end the war. With a coordinated global boycott of Russian assets & businesses like the one we’re seeing, I’m hopeful violence in Ukraine can end quickly & decisively.
Ken Griffin Talks Russia, Market Chaos and a Move to Go Public: Now for a bit of levity - Ken Griffin plays Call of Duty! On the elliptical! If any of you have children who stay glued to their Xbox on nights & weekends, or if you play video games to relax, pat yourself on the back - you & your children may have at one point triumphed over the founder of Citadel in Team Deathmatch.
In a recent interview with Bloomberg’s David Rubenstein, Ken Griffin opined on a number of important market topics including his evolving view of crypto, plans to go public, and Gary Gensler’s SEC.
Here are my main takeaways from the talk:
A Citadel Securities IPO will almost certainly happen: When asked whether Citadel Securities will pursue an IPO at some point down the road, Griffin didn’t announce official plans then and there, but he might as well have. “That’s a reasonable assumption” were the first words he used to answer, followed by explaining Sequoia’s investment in the firm as help to give Griffin’s management team valuable information on the benefits & challenges of being a public company. We still don’t know for sure when or how Citadel Securities will pursue an IPO, but I’m now willing to bet one happens sooner rather than later.
Griffin has completed his crypto 180: Just five months ago - five months! - Ken Griffin called crypto a “jihadist call” against the US Dollar. His skepticism towards the evolving crypto industry was clear & absolute. Now, Griffin says his firm is preparing to make markets in cryptocurrencies beginning “over the months to come” as the space continued to grow & mature. I respect the ability to know when you’re wrong & change opinions in the wake of new information, but I’m also unsure how successful Griffin will be in the crypto market-making business given the late start. Plenty of competitors including Jump, DRW & Virtu now have multi-year head starts in navigating the crypto space & have likely built up significant network effects in their respective fields. Will Citadel’s sheer size compensate for the lag?
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Other Stories I’m Reading
CME Group to Launch Micro-Sized Bitcoin and Ether Options
Investor Presentation - Completion of S&P Global & IHS Markit Merger
BlackRock Halts Purchases of Russian Securities Across Funds
Proof Engineering: Security Master
Chart of the Week
Remember CBOE’s new European derivatives exchange? The company launched CEDX in September 2021 with the goal of untangling the complex web of trading & clearing venues in Europe to take market share & increase overall volumes. The task before CBOE a tall one - it’s difficult for any exchange to enter any new market and build momentum, let alone the mature, fragmented & political world of European market structure. When the exchange launched late last year I expressed my skepticism that the venture would pay off considering the hefty up-front costs it would take to stand up. Five months have now passed & CEDX is still here - how are volumes doing?
The chart below plots monthly volumes & open interest for CEDX from launch to February 2022. A slow start in Q1 2021 has improved so far this year as OI reached nearly 700 lots in January, with volume still on an upward trajectory if down from record highs.
Obviously, trading ~1,500 lots per month does not a successful exchange make - CEDX still has a long way to go if investors wish to see returns from the venture.
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Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, SPGI, NDAQ and VIRT. I am also long Solana.