When looking through the top holdings of the Powershares DB double long crude ETC, the leveraged commodity ETF that is about to be liquidated, we were intrigued to discover that the largest owner of units was one EWT LLC, a company FT Alphaville had never heard of.
So, we decided to look into this firm . . .
Now, it has been the theory of FT Alphaville for a while that the large number of inexplicable inflows and outflows from commodity ETFs has been down not so much to retail appetite, but market arbitrage opportunities opened up by things like contango, which ETF-authorised participants have taken advantage of — authorised participants being the parties that ETFs depend upon to iron out deviations between their net asset values and unit prices.
In previous posts, we have also speculated about the influence of electronic trading on commodity prices in general as well as the opportunity electronic trading has presented for arbitrageurs trading both commodity ETFs and the underlying commodities.
We added that the likes of Jeff Sprecher, CEO of the Atlanta-based Intercontintental Exchange and owner of the ICE commodities platform, had dismissed the practice of flash trading on his exchanges but not the presence of high frequency traders, when testifying to the CFTC on position limits.
So who are EWT LLC?
As far as we can make out they sound exactly like a dedicated commodities HFT player, part of a wider group called Madison Tyler holdings, a cross-asset HFT player, which describes itself thus (our emphasis):
MTH is a leading electronic trading firm and market maker on numerous exchanges and electronic marketplaces in equities, fixed income, currencies and commodities. Our market making lowers costs for both retail and institutional investors who trade on public securities and commodities exchanges, and supplies the liquidity necessary for the public to trade and invest. Since 2002, MTH’s business has grown to comprise a significant market share in several asset classes, playing a vital role in contributing to the healthy and efficient functioning of global financial markets. Unlike a hedge fund, MTH has no customers or external investors, allowing it to focus exclusively on unconflicted and independent market participation.
MTH is as much a technology company as a trading company, and its success is based largely on its proprietary technology. MTH develops and employs proprietary software that automates liquidity provision and trade execution through a focused collaboration between traders and developers.
The Madison Tyler Holdings (MTH) family of companies is privately held and includes Madison Tyler, Madison Tyler Trading (MTT), Madison Tyler Energy and Commodities (MTEC), and EWT. MTH and its affiliates are members of the NYSE Euronext, NASDAQ, the Chicago Mercantile Exchange (CME) and more than 25 other exchanges and market centers around the world.
It might also be of interest that EWT, according to regulator filings for the period ended June 30, was a major holder of the USO ETF and a member of Nymex and Comex non-clearing member firms. Oh, and there’s the fact that one of the key figures behind the company is Vincent Viola, the former New York Mercantile Exchange chairman, now an active investor.
The team behind Madison Tyler, meanwhile, appeared also to be behind the following hedge fund:
Ex-Citi, Goldman, NYMEX Execs Prep Multi-Strategy Hedge Fund October 20, 2006 A new alternatives firm founded by a trio of Wall Street veterans is preparing to launch its first hedge fund, a multi-strategy offering, on Jan. 1.
New York-based Actium Capital Management was founded by Justin Brownhill, a former managing director in Citigroup’s equity department, David Solomon, formerly a Goldman Sachs executive, and ex-New York Mercantile Exchange Chairman Vincent Viola.
The latter two already work together as managing partners of Beverly Hills, Calif.-based proprietary trading firm Madison Tyler. According to Brownhill, the Actium Absolute Return Fund will invest in commodities, derivatives and equities, using quantitative and high-frequency strategies. The fund will invest with outside managers and use proprietary models, in addition to in-house managers, focusing on low risk, low volatility and beta-neutral returns.
“We are looking for the very best trading strategies, whether they are proprietary, in-house or external parties that fit our style and trading acumen,” Brownhill said. Brownhill said the fund will charge “standard fees,” though he added that “some of the management fees might be a touch higher,” as the fund will be using extensive proprietary trading technology and risk management systems.
Lastly, it might also be of interest that EWT is signing itself up to be an authorised participant in the upcoming ETFS Gold Trust ETF, the new fund being launched by UBS to compete with SPDR Gold fund in the US. The other signed-up authorised participants will be Credit Suisse, Goldman Sachs, HSBC, JP Morgan, Merrill Lynch and Newedge.
As to the other large holders of the Powershares fund, they also include other HFT and algorithmic specialist houses like Susquehanna International Group, Jane Street, and IMC-Chicago.
Still think all that interest in commodity ETFs came purely from retail investors?
Related links:
PR flashing at ICE – FT Alphaville
Statistical arbitrage and the big retail ETF con-fusion - FT Alphaville