THE WALL STREET JOURNAL. **** Saturday/Sunday, March 28 - 29, 2020 |B11
MARKETS
looking for stocks that get
pushed too low or too high
during big market swings that
drag the entire market up or
down. Right now, he said,
many are buying stocks that
are low in debt and selling
stocks with lots of debt that
will likely suffer as the econ-
omy deteriorates. If a low-debt
stock gets pummeled during a
big selloff, traders will swoop
in and buy, expecting it to re-
bound.
Thomas Peterffy, chairman
of Interactive Brokers Group,
an electronic brokerage popu-
lar among day traders, said
daily volume handled by his
firm has more than doubled to
more than two million trades
a day in the past three weeks.
New accounts are also surging,
he said, a sign that people
confined to their homes might
be turning to trading.
The losers among the com-
puterized trading strategies,
at least so far, are those that
bet on longstanding correla-
tions between different finan-
cial instruments. Such disloca-
tions can cause losses in
statistical arbitrage, or stat
arb, strategies.
Among the correlations
that broke down during the
worst of the selloff last week
were between stocks and
Treasury bond prices, which
usually move in opposite di-
rections. But during the recent
selloff, investors fled both.
“Treasury selloffs on big down
equity days mean that correla-
tion is finally getting chal-
lenged,” said Pav Sethi, chief
investment officer at Gladius
Capital Management, a Chi-
cago trading firm.
Mr. Sethi said another
breakdown in correlations has
been between stocks and a
broad measure of market vola-
tility, the Cboe Volatility In-
dex, or VIX, known as the fear
index. Typically the VIX rises
when stocks fall as fear
spreads through Wall Street,
and vice versa. While the VIX
soared to record levels as the
market plunged in recent
weeks, the link hasn’t always
worked as expected.
Although volatility has
mostly benefited electronic
trading firms, “you can still be
caught by surprise,” said Rob
Creamer, CEO of Chicago-
based firm Geneva Trading.
One victim of the extreme
moves wasRonin CapitalLLC,
a Chicago-based trading firm
that incurred hundreds of mil-
lions of dollars in losses on
strategies tied to the VIX, peo-
ple familiar with the matter
said. Futures-exchange opera-
tor CME Group Inc. said
March 20 that it auctioned off
some of Ronin’s portfolios af-
ter it failed to meet capital re-
quirements.
A person reached at Ronin’s
office didn’t respond to re-
quests to comment.Fast-trading investors have
made big profits during the
market’s volatility, with strate-
gies ranging from sophisti-
cated computer algorithms to
ones as simple as “selling the
rips and buying the dips.”
High-frequency traders,
which typically deploy sophis-
ticated algorithms and power-
ful computers to move in and
out of markets at lightning
speeds, tend to do well when
markets are volatile.
Virtu FinancialInc., one of
the largest high-speed traders,
last week said it expects to
post trading income of be-
tween $509 million and $519
million in the first quarter,
more than double the amount
from the year-earlier period
and its highest quarterly trad-
ing income since the company
went public in 2015.
Virtu’s results are “a quarter
for the record books,” Piper
Sandler analyst Richard
Repetto wrote in a note. Virtu’s
stock is up 41% this year while
the S&P 500 is down 21%. The
only other publicly traded
high-speed trading firm, Am-
sterdam-basedFlow Traders
NV, is up 28% year to date.
High-frequency firms have
struggled in recent years amid
a period of low volatility and
steadily rising markets. Still,
they are estimated to account
for around half of the trading
volume of the U.S. stock mar-
ket, having largely replaced
the floor traders who once
controlled exchanges’ ebb and
flow. Virtu is a designated
market maker for the New
York Stock Exchange.
Like market makers, high-
speed traders often make
money on the difference be-
tween buy and sell orders,
known as the spread, by sell-
ing high and buying low as
stocks tick up and down.
Spreads in heavily traded
stocks, such as Apple Inc.,
which are typically 1 or 2
cents, have ballooned to 30
cents or more in recent weeks
because of the highly volatile,
fast-moving markets. While
wide spreads indicate riskier
market conditions, firms that
can exploit the difference can
earn sizable profits.
Some plain-vanilla rapid-
trading strategies are also far-
ing well, traders said.
“Our traders are having
some of their best months in
years,” said Dennis Dick, a
trader at Bright Trading, a Las
Vegas broker dealer that pro-
vides computer-driven trading
platforms for day traders. He
said one of the strategies that
has worked best is “selling the
rips and buying the dips”—
selling stocks after big moves
higher and buying after sharp
downturns.
Mr. Dick said traders are
BYSCOTTPATTERSON
ANDALEXANDEROSIPOVICH
High-Frequency
Traders Have a Feast
In Volatile Market
Dan McNamara and Managing
Director Catie McKee started
analyzing whether to bet
against the CMBX 6. It was an
idea being circulated among
hedge funds by Eric Yip, an in-
vestor who had once worked
as an analyst for Mr. Icahn be-
fore starting his own fund, Al-
der Hill Management, princi-
pally to short the index.
The premise was that online
shopping and a glut of malls in
the U.S. would push many sec-
ond- and third-tier shopping
centers into default on their
mortgages. Mr. McNamara and
Ms. McKee began visiting malls
around the country that are in-
cluded in the index, paying
close attention to vulnerable lo-
cations like the Fashion Outlets
of Las Vegas in Primm, Nev.,
and the Crystal Mall in Water-
ford, Conn.drove the index higher. Mr.
Rosenthal’s fund lost about
30% in 2019. Many other
hedge funds with similar
“short” trades tapped out.
AllianceBernstein and Put-
nam said they remain confi-
dent of their holdings, point-
ing out that debt losses could
still be contained even if there
is greater economic distress.
One of the riskiest slices of
the index fell to about 46 this
week from around 84 at the
start of the month, according to
data from IHS Markit. MP’s
main fund, which includes
other investments, has gained
about 75% this year while a
smaller fund launched last
month solely to bet against the
index has returned more than
100%. Those gains will remain
unrealized until the index con-
tracts fully pay out or are sold.
“You could make a clear
case for either side of the
trade,” said Manus Clancy, se-
nior managing director at real-
estate data provider Trepp
LLC. While the headwinds fac-
ing retailers are undeniable,
many troubled malls can nego-
tiate with lenders to avoid de-
fault for years, propping up
the index. The trade attracted
the attention of billionaire in-
vestor Carl Icahn late last year
when he began betting against
the index.
Formerly a subprime mort-
gage investor at Credit-Based
Asset Servicing & Securitiza-
tion LLC, or C-BASS, Mr. Rosen-
thal co-founded his fund with
Noelle Savarese in 2008 to buy
mortgage debt on the cheap.
The bet against malls traces
back to 2018, when PrincipalMP started buying swap
contracts on a slice of the index
in the summer of 2018, when it
traded around 80, agreeing to
pay annual premiums for de-
fault insurance from Alliance-
Bernstein and others who were
bullish on the index. If the in-
dex rose, MP would owe more
money to its contract counter-
party, but if it fell, MP would be
owed the price difference. The
firm eventually bought con-
tracts worth more than $500
million, a person familiar with
the matter said.
The screws tightened on
MP, Alder Hill and other funds
betting against CMBX 6 start-
ing in January 2019. Counter-
parties such as AllianceBern-
stein and Putnam kept selling
more insurance, driving the
price of the index up.
Exhausted by years of wait-
ing for CMBX 6 to crack and
mounting paper losses, Mr.
Yip closed Alder Hill in Sep-
tember, a person close to the
fund said.
Mr. Rosenthal hung on but
the index kept rising, peaking
around 89, and some clients
said they wanted out of the
trade, forcing him to restruc-
ture his fund late last year. A
group of MP’s clients moved
into investment vehicles with
no exposure to the CMBX
short.
Those who stuck with the
strategy began to see daylight
in January, when the index
started to fall because of ris-
ing worry about the economic
impact of the coronavirus. “It
is the recession component
that really drove this down,”
Mr. Rosenthal said.Hedge-fund manager Marc
Rosenthal’s wager on the de-
mise of U.S. shopping malls
nearly crippled his business
last year. Now the trade is de-
livering paper gains exceeding
100%, a rare win amid the
market carnage caused by the
coronavirus.
Mr. Rosenthal’s investment
firm, MP Securitized Credit
Partners, has been betting for
almost two years that an index
tracking debt from malls
across the country would de-
cline in value as in-store shop-
ping declined. It is a strategy
that fueled big losses in 2019,
before fallout from the corona-
virus halted traffic at malls,
hotels, movie theaters and
other properties in the index.
“We always knew in our
heart of hearts the trade was
right,” Mr. Rosenthal said, after
the index lost half its value in a
matter of days. “I just can’t be-
lieve it happened so fast.”
The index, known as CMBX
6, tracks the performance of 25
mortgage-backed bonds that
bundle debt from commercial
properties, including around 40
malls, many that are in small or
struggling markets. Investors
betting those malls can pay
their debts make out when the
index rises, and doubters when
it falls.
For much of past year, the
trade looked bleak. It pitted
Mr. Rosenthal’s roughly $250
million firm against mutual-
fund giants AllianceBernstein
Holding LP and Putnam In-
vestments, whose bullish betsBYMATTWIRZ
ANDESTHERFUNGMall Bears Count Up Gains
As Shopping Centers Close
The parking lot at Fashion Outlets of Las Vegas in Primm, Nev., earlier this month, after the mall closed because of the coronavirus.GENE BLEVINS/ZUMA PRESSAheavilytradedderivatives
indexlinkedtocommercial
mortgageslosthalfitsvalue
thismonth.
BB tranche of CMBX 6 indexSource: IHS Markit1000204060802017 ’18 ’19 ’20quarter at a 57% loss. WTI fu-
tures were flat at $22.60 a
barrel, after shedding 63% of
their value since Jan. 1.
Those historic declines have
followed the imposition of cit-
izen lockdowns by govern-
ments around the globe in re-
sponse to the pandemic.
Meanwhile, an impasse in
production cut talks between
Saudi Arabia and Russia—two
of the world’s largest produc-
ers—has sparked an oil-price
war, with both sides and other
oil exporters vowing to slash
selling prices and ramp up
production in an attempt to
capture greater market share.
Investors had hoped that an
extraordinary meeting Thurs-
day of the leaders of the
Group of 20—an alliance of
the world’s largest econo-
mies—would offer an opportu-
nity for Saudi Arabia and Rus-
sia to ratchet down tensions.
While the meeting produced
no statement that related tooil, the coronavirus and its im-
pact far outweighs any action
oil producers might take, ana-
lysts say.
“Any producer action is
rendered mute as long as de-
mand estimates keep getting
revised lower,” said Harry
Tchilinguirian, global head of
commodity markets strategy
at BNP Paribas.
This week saw several or-
ganizations slash demand
forecasts, with the heads of
both the International Energy
Agency and Vitol Group—one
of the world’s largest indepen-
dent oil traders—saying global
oil demand may drop by 20
million barrels a day, or 20%,
in the coming weeks.
Goldman Sachs Group Inc.
said this week demand will fall
18.7 million barrels a day in
April.
After the Organization of
the Petroleum Exporting
Countries and its allies failed
to agree to additional cutsearlier this month, the fore-
cast plunge in demand means
“supply will have to adjust and
we’re looking at the fact that
prices will have to go lower
and force shut-ins in U.S. shale
supply and likely elsewhere,”
Mr. Tchilinguirian said.
If the banks are correct in
their forecasts, U.S. oil compa-
nies will be selling oil either at
or below the cost of produc-
tion during the course of the
year.Onaverage,itcostU.S.
producers $35.90 to produce a
barrel of oil, according to Rys-
tad Energy.
In the past, the impact of
low prices on the U.S. shale in-
dustry has taken a while to fil-
ter through, according to Ja-
mie Webster, senior director
at the Boston Consulting
Group Center for Energy Im-
pact. “This time will be differ-
ent and there’s potential for
there to be shut-ins as you’re
well below operating expendi-
ture prices,” he said.U.S. crude is set for its
worst year since 2003, as the
coronavirus pandemic drags oil
demand
lower in
the sec-
ond quarter, investment banks
predict.
Futures for West Texas In-
termediate, the main U.S.
benchmark, are expected to
trade at an average of $34.95
a barrel in 2020, according to
a poll of 11 major banks con-
ducted by The Wall Street
Journal.
The banks also forecast that
Brent crude, the global bench-
mark, will average $38.12 this
year, its lowest since 2004.
Brent is expected to stay be-
low $28 a barrel in the second
quarter, and WTI below $25,
the poll showed.
Brent crude slipped 0.7% to
$28.44 a barrel Friday, on
course to close out the firstBYDAVIDHODARIU.S. Crude Set for Worst Year Since ’03
posted its largest one-week
percentage gain since Septem-
ber 2008.
The yield on the benchmark
10-year U.S. Treasury fell for a
second consecutive week,
dropping 0.188 percentage
points to 0.744%.
The Cboe Volatility Index, a
closely watched measure of
turbulence in U.S. stocks, fin-
ished the week lower after ris-
ing for five consecutive weeks,
its longest such streak since
December 2012. Many inves-
tors expect the recent market
volatility to persist.
The U.S. overtook China
this week as the country with
the most coronavirus cases. As
of Friday, the U.S. had more
than 100,000 confirmed cases,
accordingtodatafromJohnsHopkins University. Hospitals
in the New York metro area
and Seattle have been over-
whelmed despite stringent
measures to curtail the conta-
gion.
Adding to concerns about
how long the pandemic may
damp economic activity, China
said Thursday it would close
its borders to nearly all for-
eigners and drastically slash
international flights in a bid to
curb the reintroduction of the
virus from abroad.
“Underlying all this is how
do we get this virus under
control,” said Neil Hennessy,
chief investment officer of
Hennessy Funds. “Once we
have it under control or it
peaks, subsides, whatever,
then the market will be backon its legs.”
Oil prices declined after the
U.S. Department of Energy
suspended the purchase of 30
million barrels of crude oil it
was going to add to its Strate-
gic Petroleum Reserve.
The meeting of G-20 lead-
ers also disappointed some
traders after it failed to pro-
duce any statement that re-
lated to oil or the price war
raging between Saudi Arabia
and Russia. U.S. crude de-
clined for a fifth consecutive
week, losing 4.9% for the week
to $21.51 a barrel.
Overseas, the Stoxx Europe
600 index rose 6.1% for the
week, snapping a five-week
losing streak.
Japan’s Nikkei 225 climbed
17% for the week.to be really bad in the near
term, but with this kind of a
stimulus I can
see that a re-
covery will
happen at
some point later this year po-
tentially.”
Despite the week’s gains for
stocks, there were signs that
investors remain cautious.
Gold, a traditional haven,
Continued from page B1
Dow Ends
Week Up
Sharply
March 11
EntersbearmarketFeb. 12
HitsrecordpeakMarch 16
Second-worstone-day
performanceonrecord
JanuaryDow Jones Industrial Average, daily changeSource: FactSet15–15–10–50510%February MarchMarch 26
Startofnew
bullmarket
March 24
Bestone-day
performance
onrecordSources: Virtu Financial Analytics (bid-ask); FactSet (VIX)January
*Figures as of March 26
Average bid-ask spread
in S&P 500 stocks, in
basis points*20010February MarchMarch 16
24.2Cboe Volatility Index
80040February MarchRecordhigh
March 16
82.7JanuaryCOMMODITIES
FRIDAY’S
MARKETS