The “flow desk” as it’s often called on the sell-side is about repeatability and scale in the service of institutional clients. It’s a competitive business with not a lot of margin for error, especially in a product like equity options where being on the wrong side of a misbehaving Greek could spell trouble. With this in mind, it was great to welcome Ali Samadi, Head of Flow Equity Derivative Sales at Nomura Securities International to the podcast.
Our conversation explores aspects of the salesperson / client interaction that make a relationship stick. Namely, Ali suggests that first and foremost, one must understand the client’s objective and tailor the coverage experience accordingly. As a derivatives expert, he sees opportunities to utilize the volatility surface not just in the construction of trades, but also as a source of information, as it may provide clues as to where investor interest is concentrated. We also talk about addressing the inherent negative selection risk for a sell-side desk. This includes the inevitable need to manage client expectations on what size can be transacted at a given price, especially when markets turn especially illiquid as they did on August 5th.
Lastly, we spend some time talking about training younger professionals, a pursuit Ali is passionate about. He believes the best way to help junior colleagues advance is to have them review trades in order to develop a sense as to what the right price is. Along with this, he encourages those in the early parts of their careers to diversify their skill sets, learning at least something about other products and assets classes. I hope you enjoy this episode of the Alpha Exchange, my conversation with Ali Samadi.
[00:00:00] My guest today on the Alpha Exchange is Ali Samadi, and he is the head of Float, and welcome to the Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry.
[00:00:15] I'm looking forward to it as well. Lots to talk about, and of course, MSI, Nomura Securities, is my own professional start in the industry.
[00:00:22] The Float Desk, as it's often called on the SOSI, is about repeatability and scale in the service of institutional clients.
[00:00:28] It's a competitive business with not a lot of margin for error, especially in a product like Equity Options.
[00:00:33] Why don't you first just kind of introduce your role in your desk. I think that'll provide a good background to dive into some of the topics we want to cover on the client business on how to make a mark in terms of covering clients.
[00:00:47] So just give us a little bit of an introduction to Nomura's Float Desk.
[00:00:51] Sure, on the desk we cover a lot of institutions primarily hedge funds when Nomura first bought the client's objective and tailor the financial crisis part of the U.S. operation.
[00:01:02] As a derivatives expert, he sees opportunities to utilize the volatility surface by hiring people from across the street to help build that out.
[00:01:10] I say that only to highlight that early on when we are a new business, a lot of it was almost primarily hedge funds with much less of the kind of larger asset managers that require you to have more of an institutional relationship that can be transacted at a given price.
[00:01:28] Especially when markets turn, obviously, as they did a wide range of clients.
[00:01:33] Lastly, we spend some time talking about training younger professionals who look for different sorts of ideas, different sorts of coverage, and we try to tailor it to whatever a client is looking for.
[00:01:44] It depends on the type of institution they are, the type of strategy that they employ, the type of trades that over time you learn, that they get involved in, and what they're supposed to tailor it to your skill sets.
[00:01:55] Yeah, you know, so many things I think in business today are about scale.
[00:01:58] I hope you enjoy this episode of the Alpha Exchange.
[00:02:00] Look at Amazon.
[00:02:00] And it's just such a behemoth realizing so many economies of scale.
[00:02:05] And that's definitely the case in the business of Pi Finance and specifically the flow business.
[00:02:11] You can't have too few customers.
[00:02:13] You can't have folks that just do the same thing all the time, or you'll wind up with a concentration of risks.
[00:02:19] And I'm curious, if you go back to 2009 when you got into the business, of course, there were a number of you with a lot of experience, but you were in some ways starting with a fresh book.
[00:02:30] There was one day when you did the first trade.
[00:02:32] And so take us back a little bit.
[00:02:34] It goes back 15 years ago, but that process of building up the book and trying to get to scale.
[00:02:41] I'd love to just hear a little bit more about those early days from your perspective.
[00:02:45] Yeah, like in any sort of business, especially in finance, it's good if you have two-way flow, especially on a flow desk.
[00:02:51] So having, in our world, buyers and sellers of volatility is helpful so that you don't have an outsized position one way or the other in general.
[00:02:58] When we first started, like I said, it was a lot of hedge funds, a lot of single manager hedge fund buyers of Gamma, often in very large size.
[00:03:07] That's obviously given away to a lot more vol sellers now.
[00:03:10] The single manager hedge fund buyer of Gamma, a lot of that has now morphed in just looking at how the hedge fund universe has changed into a lot more of the pod shops, centralized trading desk.
[00:03:23] So it kind of changes the relationship.
[00:03:24] It kind of changes the way you cover certain accounts over time.
[00:03:28] I'm going to date myself here because, of course, I'm not in the business of committing a firm's capital anymore.
[00:03:34] But just going back a lengthy period of time, the organizational structure, at least on the trading side, you had index and then you had these kind of sectorized books.
[00:03:43] And I just would love to get a better understanding of whether that's evolved and to what degree it's evolved.
[00:03:50] Take us through kind of the way in which a trading desk is organized now relative to back then.
[00:03:55] I don't think that much has changed, to be honest, in that regard.
[00:04:00] Still have an index team that's focused on index and ETFs.
[00:04:04] Again, I'm just speaking for Nomura, but I think it's pretty consistent streetwide.
[00:04:07] And the people running different sector trading books, I think that hasn't really changed.
[00:04:12] I have found, and maybe I just wasn't intimately involved in a lot of the conversations early on,
[00:04:16] but especially given the surge of so much overriding flow in the single stock space,
[00:04:20] I think a lot of desks now almost think of taking down some of that flow.
[00:04:24] And the layoff community thinks of it the same way as buying single stock vol and almost just running a bespoke dispersion strategy.
[00:04:30] So there's probably more connectivity between index and single stocks than maybe in years past,
[00:04:36] just because so much of the flow is one way in the single stock space.
[00:04:40] But 15 years ago, I'm not sure I was privy to those larger discussions that you might know better than me from our days at Bank of America.
[00:04:46] Well, I just finished this little four-part series, and you'll remember the document I created a long time ago,
[00:04:52] 20 things to do before you ask for a price.
[00:04:54] And it was my little Bible on how a salesperson could be impactful to the process of trying to get the trader and the client to,
[00:05:03] yes, never an easy task.
[00:05:05] And I think the kind of main idea was,
[00:05:07] how do you win on something other than just being the best price in an auction each time?
[00:05:11] That doesn't really make for a business model.
[00:05:13] And so just broadly, I'd love to just hear your thoughts on the value that the sales team,
[00:05:20] the coverage team needs to deliver to the client base.
[00:05:24] What do you think that looks like?
[00:05:25] How has that evolved over time?
[00:05:28] Is that a function of the economic and financial cycle?
[00:05:31] Take us through how you think about the value proposition.
[00:05:35] First of all, that 20 things a salesperson should think of for agreeing on a price is a must read.
[00:05:41] Obviously, you just had it in a four-part podcast, and now I must listen for everyone on my team.
[00:05:45] And I think it's pretty fantastic.
[00:05:46] Actually, one guy at my desk was like,
[00:05:48] this reminds me of something that you told us about four years ago when you had something similar.
[00:05:52] I'm like, no, it's the exact same thing.
[00:05:54] I stole it off to you.
[00:05:56] But just in terms of what value we try to deliver,
[00:05:59] I think in a broad sense, I think you just want to know your client.
[00:06:02] You want to know why they've chosen to do business with you.
[00:06:05] I'm not going to tell XYZ hedge fund that they should be bullish on the market or on a particular name.
[00:06:10] But if they are bullish on the market or on a particular name,
[00:06:12] then I could be scanning the ball surface or smart option structure to implement the macro or fundamental view.
[00:06:17] Or I could be dealing with accounts where they do care about your market call,
[00:06:21] and then you have to tailor your interaction accordingly.
[00:06:23] Our world is kind of figuring out what the ball surface should be priced
[00:06:26] and looking for ways where we could take advantage of it,
[00:06:30] either being able to source trades for our clients or just being prepared to facilitate these trades.
[00:06:34] But one thing that I think is somewhat underappreciated is the idea of the ball surface
[00:06:38] just as a source of information for clues of what other market participants think of potential future distributions.
[00:06:45] So if, say, there was like a big Feb put buyer and this resulted in downsized SKU going bid,
[00:06:52] if I know a customer is involved in a particular name,
[00:06:55] whether from the HDS screen or an interest list or they've traded the name with us
[00:06:58] or they've traded similar names or whatever,
[00:07:00] I now can be prepared to discuss the name.
[00:07:02] And if they're looking for downside protection but not a tail scenario,
[00:07:05] I'll be ready to discuss put threads because of the bid to SKU.
[00:07:08] If during the conversation I find out they're constructive on the name,
[00:07:10] I can suggest replacing stock into a bullish risk reversal
[00:07:13] because the ball surface could make for a more attractive way to play long delta.
[00:07:17] In both cases, the ball analysis is the same,
[00:07:20] but it's tailored to mesh with what the client wants to do.
[00:07:22] And sometimes the answer is to do nothing and option land
[00:07:24] and just remain in the underlying, and that's fine too.
[00:07:27] So give us a little bit more on that.
[00:07:29] So this idea of knowing the client probably applies to just about every industry.
[00:07:34] And in some ways, it just sounds like an easy thing to say, but it's not an easy thing to do.
[00:07:39] You meet a client initially on a specific day.
[00:07:42] You hadn't met them before.
[00:07:44] And then there's a process that comes about to, as you said,
[00:07:48] get to know that client and where your products and content can be valuable.
[00:07:52] I'd love to just learn a little bit more how you think about that seasoning process
[00:07:57] where the relationship is built.
[00:07:59] Yeah.
[00:07:59] I mean, it starts with an initial conversation where you just try to learn as much as you can
[00:08:03] from an initial phone call.
[00:08:04] Like a lot of times the questions are, do you want to see flow?
[00:08:07] Do you want to see ideas?
[00:08:08] Do you want to see single stock?
[00:08:09] Do you want to see macro?
[00:08:10] Is less is more?
[00:08:11] Is more is more?
[00:08:12] And just over time, you start to develop a bit of a rapport with the client
[00:08:16] and kind of know what they're looking for as they actually start trading you.
[00:08:19] Do you see the types of trades they're going to do?
[00:08:21] Maybe over time you figure out they're always buyers of all.
[00:08:23] They're always doing spreads.
[00:08:25] They're always overwriting, underwriting, whatever it is.
[00:08:28] And then for clients where it's not particularly clear off the bat what they want to do,
[00:08:33] sometimes you just need to be their eyes and ears for the stuff out there,
[00:08:35] like keeping track of all the options, selling strategies across structured notes,
[00:08:39] overwriters, underwriters, and ETFs with embedded option selling strategy
[00:08:42] and highlight when these products can have an outside effect on the market,
[00:08:46] often dampening potential moves where dealers just shuffle along gammer,
[00:08:49] or the lever ETFs, or the effects the opposite,
[00:08:51] or which you talked at length about recently.
[00:08:53] And over time, you'll get a sense if they find that information helpful,
[00:08:56] if they're looking to put on trades that take advantage of that sort of information,
[00:09:01] things like that.
[00:09:01] It's something that develops over many years or even decades.
[00:09:04] And I'm going back probably two decades, but I'll throw a compliment your way.
[00:09:08] We won't get too specific on the client,
[00:09:10] but I'm just recalling you effectively turned a couple of clients into layoff accounts
[00:09:16] just by really understanding how they thought about vol.
[00:09:20] And it's almost as if you understood how they thought about it more directly than they did.
[00:09:25] So it really does ring true, this idea of knowing the client.
[00:09:30] One of the things about our business, and again, I'm 15 years removed from the capital commitment side of things.
[00:09:37] And so, so many things have changed, right?
[00:09:41] I mean, back 20 years ago, you knew who did the trades.
[00:09:45] Now it's, you don't really know.
[00:09:47] There's a print that goes up and it's really hard to kind of know who took it down.
[00:09:50] Now there's so much electronic trading, some of which is one day trading,
[00:09:54] but there is still the proposition of loss, potentially large loss with regard to your client base.
[00:10:02] You know, if you're a grocery store selling bananas,
[00:10:04] if you don't sell enough of them, maybe that's a problem,
[00:10:06] but you can't really lose too much money selling bananas.
[00:10:09] In our business, you really could wind up on the wrong side of things.
[00:10:13] And so what I'd love to start the conversation on is this idea of negative selection.
[00:10:19] It's a competitive business.
[00:10:21] And sometimes you're going to be on the wrong side of a trade.
[00:10:23] How do you think about, well, first of all, when we use the term negative selection,
[00:10:28] I'd love to just hear how you describe it.
[00:10:31] And then I'd love to hear about how you think about mitigating it on behalf of the trading team.
[00:10:36] Yeah.
[00:10:37] I mean, you touched upon this when you were going through your 20 things to think about before getting
[00:10:40] to a price, this idea of a winner's curse sometimes, especially with when you're dealing
[00:10:45] with a client that might be checking eight different people on an index order.
[00:10:50] That's a pure auction format.
[00:10:51] Like we as a firm have decided we don't mind losing that.
[00:10:54] We do like to see it just in case we're at, but this type of flow tends to trade what
[00:10:58] historically would have said is the quote unquote wrong price or often on the other side of mid
[00:11:02] market or our value.
[00:11:03] And a lot of times if you win, you actually lose.
[00:11:05] I'll take you back to something.
[00:11:06] I know you remember back at our old shop when we had clients that would send us just spreadsheets
[00:11:11] of single stocks and wanted us to quote two way variants, swap markets and all these single
[00:11:16] names.
[00:11:17] And when we visited a client and actually asked about the pricing, they said they basically
[00:11:21] got cross markets on almost every name, meaning they got a bid from one shop that was above
[00:11:24] an offer in the other shop.
[00:11:25] And now I think was when this idea of negative selection was most crystallized in my head,
[00:11:30] because like if you won, you either really had an axe or you really screwed up the pricing.
[00:11:33] And then something that's a bit of a newer phenomenon, or I guess it's a phenomenon that's
[00:11:39] always been there, but because the event algos becoming so prevalent, it's gotten a lot
[00:11:44] worse from our side.
[00:11:45] When you're trading a high delta listed trade, where as soon as the trade is announced and
[00:11:50] you start sweeping the betters electronically, the algos know to front run the stock ahead
[00:11:54] of you.
[00:11:54] So one way we've tried to mitigate this is do more such trades OTC so that we can control
[00:11:59] the delta hedge and not fight the algos.
[00:12:00] But that's not always possible.
[00:12:02] Might not have an iso with us, for example.
[00:12:04] But it's definitely becoming more common to show an outright listed price and an outright
[00:12:07] OTC price.
[00:12:08] It's just a little better to account for our view that the latter could help mitigate
[00:12:11] this risk.
[00:12:12] And like I said, in terms of the different types of negative selection, this is one that
[00:12:15] has really become worse from the sell sides.
[00:12:19] Yeah, it seems like there's negative selection just in terms of the opening price.
[00:12:23] As you said, in some ways, the less transparent, more complicated the process, especially if it's
[00:12:29] an auction with a number of counterparties, you kind of lose by winning in some ways.
[00:12:35] There's other types of negative selection as well.
[00:12:38] You kind of talked about maybe getting front run on delta hedging.
[00:12:41] Another one, just as you talked about this overriding flow, which I'd love to hear more
[00:12:46] about.
[00:12:46] But in some ways, if you're taking down vol, you obviously want it to be the right price.
[00:12:52] But the idea of that right price might be some incorporation of, well, how much more might
[00:12:58] be to come?
[00:12:58] And I think that in maybe it's large corporate trades, trying to understand sort of the totality
[00:13:05] of what's for sale, I think, either at a given time or what's coming is an exercise as well.
[00:13:11] So I'd love to learn a little bit more as you think about the overriding business.
[00:13:15] It sounds like that's very one way.
[00:13:17] Share some thoughts on that for us.
[00:13:19] Yeah.
[00:13:19] I mean, I'll point out what we were talking about earlier in terms of the layoff community.
[00:13:23] I think since so much the single name option supply comes from overwriters and underwriters,
[00:13:27] a lot of the layoff counterparties and a lot of sell side desks buy the single stock options
[00:13:31] and sell index vol against it and effectively are just running largest version strategies.
[00:13:36] Now that will allow you to hedge your net vega.
[00:13:39] But depending on how liquid the option is, a constant reload, you're obviously, if you're
[00:13:43] not doing them all and averaging in, maybe you can't do them all and you can't average
[00:13:46] in because it just comes too big.
[00:13:47] You certainly don't want to be the first print and have it keep getting pushed against
[00:13:51] to you on subsequent prints.
[00:13:53] I think that comes back to developing a relationship with your client and knowing what they're doing,
[00:13:56] asking ahead of time, like what's your total potential size so we can have that information
[00:14:01] going in.
[00:14:02] And obviously, if the client doesn't adhere by what they say from the onset on several
[00:14:08] different occasions, then we have to factor that into pricing going forward.
[00:14:11] But hopefully you develop a good enough relationship with the client where they're upfront with you.
[00:14:16] They trust you with the information.
[00:14:17] They tell you what they're trying to do.
[00:14:19] And if the stock's going to sell off, maybe they're going to do more.
[00:14:21] If the stock goes up, maybe they're going to unwind, things of that nature.
[00:14:24] And over time, you figure out exactly what people are trying to do.
[00:14:27] How would you say clients' expectations have evolved over the years?
[00:14:32] In other words, for their top counterparties, what do you think clients are demanding and
[00:14:37] looking for specific to equity derivatives?
[00:14:40] So without repeating myself on the change in the type of trades, it used to be very large
[00:14:46] concentrated trades, especially like stock replaced with large foot buyers, large equity
[00:14:50] positions.
[00:14:51] You don't see that quite as much as you did.
[00:14:54] Or if that is happening, it's happening a lot more OTC than it once was.
[00:14:57] I think in terms of how tight the screens have gotten relative to like when we were working
[00:15:02] together at our old shop, a lot of times the expectations, you know, something used to be
[00:15:06] 20 cents wide, a couple thousand up, and now it's a nickel wide 50 options up.
[00:15:11] You have to kind of guide the client to understanding that that best offer might be a two, three cents
[00:15:17] above mid.
[00:15:17] But the next offer or where liquidity comes, especially after the algos move the stock is going to
[00:15:21] be a little bit higher.
[00:15:23] And hopefully they appreciate that and are willing to work with you in terms of price on
[00:15:27] much larger trades.
[00:15:29] And I think we touched on this a little bit, just the average duration of the flow.
[00:15:35] So zero DTE is a new thing.
[00:15:37] It doesn't seem to me, you tell me if this is correct or not, but it doesn't seem to me
[00:15:41] like a flow desk like Nomura is going to have a big presence in zero DTE.
[00:15:47] It seems to be totally computer to computer.
[00:15:50] I could be wrong, but they just seem to come and go very quickly, these trades.
[00:15:54] But it does also appear that the average time to expiration just has shortened over time.
[00:16:00] You just don't see a lot of six and nine month paper.
[00:16:03] You know, if someone trades a three month option, that almost seems rare these days.
[00:16:07] Yeah, I would agree with that a lot.
[00:16:09] With the one exception of being like, especially in some of the overriding programs, some of
[00:16:13] them are of a longer duration.
[00:16:15] And some institutions actually do these in the form of equity link nodes or functionally
[00:16:19] just synthetic call overriding programs.
[00:16:22] But some of those are actually kind of longer duration, 12 months and above.
[00:16:25] In terms of the zero DTE stuff, we do not have customers that come in that are trading
[00:16:30] that stuff.
[00:16:30] I think we actually now do have a QIS strategy that just sells like one or two day five Delta
[00:16:36] puts constantly, which I just found out about recently.
[00:16:38] So that's a relatively new development in our world.
[00:16:41] I do find it important to know about all this stuff because this affects how markets are
[00:16:47] going to react.
[00:16:48] And if you know that like the world is going to be stuffed with a lot of gamma and you see
[00:16:51] the market reacting a certain way at the end of the day, you want to be able to explain
[00:16:55] it to clients that aren't following a lot of the stuff.
[00:16:56] And as the strategies continue to explode in terms of total notional and total gamma and
[00:17:03] vega that are being sold in the street, you do want to understand the market structure
[00:17:07] and what's going on to be able to explain it to people who aren't trading it, which in
[00:17:11] our world, in terms of like the clients we talk to is basically everyone.
[00:17:14] And that market structure, as you say, there's these derivatives, ETFs that embed derivatives.
[00:17:20] There's the ultra short dated options, as you said.
[00:17:22] And then there just seems to be the ecosystem of dark strategies in QIS, most of which seem
[00:17:29] to be selling vol or at least generating risk premium.
[00:17:33] If you look at market structure and the way it kind of imposes itself.
[00:17:37] On market risk.
[00:17:39] Tell us what's on your mind there relative to 2009 or 2010.
[00:17:45] You have these gigantic stocks in the S&P.
[00:17:49] You have very low correlation, but it still has been profitable to sell dispersion.
[00:17:55] What would you say the sort of state of the state is in terms of the overlay of the products
[00:18:01] themselves into the market and how that might be impacting the vol characteristics of the
[00:18:07] market?
[00:18:08] Yeah.
[00:18:09] And just to put a number on it, we estimate it's about $260 billion notional in terms of
[00:18:13] these options selling strategies across structured notes, overwriters, underwriters, and ETFs
[00:18:16] with embedded options selling strategies.
[00:18:18] The number we estimate is $260 billion assets under management.
[00:18:21] And that number just continues to grow, especially in the ETF space that continues to grow.
[00:18:27] But we break it out in terms of ETFs, what we think are institutional overwriters and underwriters,
[00:18:32] and a lot more structured notes, including ELNs and things of that nature.
[00:18:36] One other thing before we even get into this is you really want to appreciate how your risk
[00:18:41] profile can change in periods of low volatility, especially where a move higher than implied
[00:18:45] volatility may not only result in negative mega market or negative P&L arising out of gamma
[00:18:50] hedging, but your Greek profile can change to where you're now short more vol than you
[00:18:54] were.
[00:18:54] And this phenomenon is most pronounced in lower vol regimes.
[00:18:57] Your vol exposure becomes like a coiled spring, which I think I'm stealing from one
[00:19:00] of your strategy notes as well in terms of that terminology.
[00:19:03] So just to really understand, which a lot of people, they just look at these strategies
[00:19:07] and how they've done over time, and more money keeps going into them, vol continues to go
[00:19:12] lower and lower.
[00:19:13] The strategy continues to well, more money goes into them, vol continues to go lower.
[00:19:17] At some point, if this ever turns, the fact that there's a path dependency to all this,
[00:19:21] the fact that we've had such a long period of low volatility, and the volatilities continue
[00:19:26] to get lower because more money is going into these strategies, the effect that if it were
[00:19:31] to ever reverse will actually be a lot worse now than it would have if something would have
[00:19:35] happened two years ago.
[00:19:36] In a way, it's much like what happened with Volnageddon a few years back.
[00:19:40] It is interesting, and I certainly wouldn't have expected it to grow so much.
[00:19:44] A lot of people were saying, well, these products got larger and larger during the very lean
[00:19:50] interest rate years, 2015, 16, 17.
[00:19:54] Your funds rate was down at zero.
[00:19:56] It got up to 1%, but nowhere near 5%.
[00:19:59] And it was argued, I thought it was a reasonable argument that, okay, you're selling vol even
[00:20:04] at low levels.
[00:20:05] VIX was pretty low in even 15 and 16, obviously, and 17 super low.
[00:20:10] But they were sort of replacing bond yields, right?
[00:20:14] They were creating income where income didn't exist in the world.
[00:20:17] Well, now income does exist in the world, and these products have gotten bigger and bigger.
[00:20:22] Why do you think that is?
[00:20:23] Is it just they've made things so accessible to the man on the street via the ETF?
[00:20:28] Yeah.
[00:20:29] I really do think it's this explosion of financial innovation, and they'll put quotes around
[00:20:34] financial innovation that have made it very accessible.
[00:20:36] And just this idea of all of these strategies that just backtest so well that you go on Yahoo
[00:20:42] Finance or a blog or look on Twitter, and how do you argue with the performance?
[00:20:46] More money goes into it, continues to drive down volatility, continues to backtest well.
[00:20:53] And just the feedback loop you've been talking about in different areas, I think definitely
[00:20:57] applies here as well.
[00:20:58] So Nomura is a very large firm.
[00:21:00] It's obviously a Japanese entity with a global footprint.
[00:21:05] I'd love to just get a better understanding of how the Equity Derives Flowdesk interacts with
[00:21:11] perhaps other desks, whether it's in other asset classes, in other regions.
[00:21:16] What can you share with us on that front?
[00:21:19] Yeah.
[00:21:19] I mean, we talk pretty regularly with our counterparts, especially in Asia.
[00:21:23] We work very hand-in-hand with our Delta One franchise because a lot of clients, especially
[00:21:29] if they're trading OTC, they kind of want as seamless an experience as possible.
[00:21:33] And if they have certain things that are on swaps that they need to trade options around,
[00:21:37] the more that we can work together with them.
[00:21:40] So the customer doesn't have to have two conversations and figure out things with two
[00:21:44] different teams of credit and things of that nature.
[00:21:46] We have a pretty large activist and corporate derivatives team that a lot of times, if someone
[00:21:53] comes in to do a trade, it's going to get us over certain threshold limits in terms of
[00:21:57] reporting.
[00:21:57] I'll just be like, let me stop the conversation right here.
[00:22:00] Let me introduce you to people upstairs that if they want to look at interesting ways to
[00:22:04] put on large positions, whether they're going to plan on going activist or not.
[00:22:08] Again, you kind of know when it's for you and when it's for someone else at the firm to
[00:22:13] do anything.
[00:22:14] And then, of course, every other asset class, if you can make an introduction to someone in
[00:22:17] FX, if you make an introduction to someone on our outstanding rates team, you do that and
[00:22:22] hope that that goes well for them as well.
[00:22:24] You and I have talked over the years on some of the, I just call them light exotic trades.
[00:22:30] Occasionally, it might fill a risk hole in someone's portfolio, assuming that the frictions
[00:22:34] that get introduced aren't too great.
[00:22:37] You and I have talked about rate contingent puts, worst of options.
[00:22:41] I know in Japan, you guys were active in things like Nikkei yen options.
[00:22:47] Anything you can share just in terms of how that stuff, the light exotic space, does that
[00:22:52] make its way into things you're looking at right now?
[00:22:55] So taking a step back, there are three components that kind of drive the price of the type of
[00:22:59] products that you're referring to.
[00:23:01] It's usually the vol of one asset, the vol of the other, and the correlation between
[00:23:04] the two.
[00:23:05] And depending on the product that we're talking about, positive correlation can make the
[00:23:09] structure cheaper or it can make it more expensive.
[00:23:11] It's this latter correlation component that's often being driven by the axes that come off
[00:23:16] structure product tests that you can take advantage of if you want to play the opposite
[00:23:19] correlation. Just look at how the correlation between TLT and spiders, meaning equities
[00:23:23] and rates, has changed over time.
[00:23:25] I remember a client many years ago came in and wanted to buy downside. Nikkei puts contingent
[00:23:30] on a very material sell-off in the yen.
[00:23:32] And his comment was, we don't think this is going to happen, but given where the correlation
[00:23:36] was priced, this is just too cheap and we'll buy it. We'll put it in the drawer and pull
[00:23:40] it out if we need to in two years.
[00:23:41] And they just tried to buy as many such contingent options that they could.
[00:23:45] And again, they were really just screening for where the correlations and the axes were
[00:23:50] so one way that the underlying products that they were buying just got cheap enough so you
[00:23:55] can have this kind of different range of scenarios that you could monetize if the world happened
[00:23:59] to turn out in a certain way.
[00:24:01] Look at a lot of the Asian customers, especially, I think it was about three or four years ago,
[00:24:04] there were a lot of structured products that were the worst of call options.
[00:24:07] And without getting too granular, you were effectively selling the volatility of high-vol
[00:24:12] names and thus these structured products, you got an enhanced coupon.
[00:24:16] Now, I wasn't out there pitching clients to do these trades.
[00:24:19] We had someone both in Asia, in our floor, in New York, that were very involved in these
[00:24:24] trades.
[00:24:24] But I do think it's important to know the dynamics involved, especially if these result
[00:24:29] in some outsized hedging in the U.S. listed market that you're tasked with explaining to
[00:24:34] a customer base that may not understand what's going on.
[00:24:37] These worst of call options that were pretty popular, again, I think it was about three or four
[00:24:40] years ago.
[00:24:40] They used names like Amazon and Facebook, which were popular names here.
[00:24:44] But the vol market could absorb the resultant hedging in the listed option market.
[00:24:48] But then there were names like Micron and AMD come to mind where the listed option markets
[00:24:52] went extremely bid.
[00:24:54] And if you didn't know it was because of the structured product hedging either on onset or
[00:24:59] during some of the unwinds, you'd be at a loss for what was going on in names you might
[00:25:03] care in.
[00:25:04] And also when you could expect the bid to vol to stop because smarter people than me on
[00:25:09] the floor could estimate exactly how much Vegas still need to be hedged because you can keep
[00:25:12] track a lot of stuff.
[00:25:13] So I think just the understanding of how this stuff works, understanding where correlation
[00:25:18] is being priced, but then also understanding if you needed to hedge it either on the way
[00:25:22] in or when these got knocked out, how that's going to affect stuff that you or your clients
[00:25:26] look at very regularly.
[00:25:28] I think it's important to follow this stuff.
[00:25:29] You made a really good point there as you were first describing this, which is this idea
[00:25:34] of inventory.
[00:25:35] You could have vol inventory.
[00:25:37] You could have dividend inventory that inspired a lot of the European dividend swap trades
[00:25:43] that were kind of structurally cheap.
[00:25:45] You could have correlation inventory.
[00:25:47] And so that's a really interesting concept, right?
[00:25:49] If you can get something, even if you don't think it's going to happen, if it's priced in
[00:25:53] a way that's kind of compelling, as you say, tuck it away in a drawer, it might be a
[00:25:58] couple of basis points well spent.
[00:26:00] Maybe just broaden that out a little bit with regard to how you think about the way in which
[00:26:07] the inventorying of complex Greeks, how does that come to be?
[00:26:12] Where do you see opportunities to offer that inventory as an advantage to clients?
[00:26:19] This actually makes me think that one of the first times that I really appreciated some
[00:26:22] of this was back in 04.
[00:26:23] I'm sure you'll remember it well.
[00:26:24] We were working together and we were looking at these graphs of implied correlation versus
[00:26:29] realized correlation.
[00:26:30] And I remember we were doing a lot of these in package variant swap form in the Dow against
[00:26:34] the 30 names.
[00:26:35] And when you're trying to explain it to people who maybe don't follow stuff like this, like
[00:26:39] why is it happening?
[00:26:40] And you could talk about the bid index ball that was around, I think at that time, it was
[00:26:42] the Republican National Convention was in New York and people were concerned about the
[00:26:46] Athens Olympics and terrorism.
[00:26:47] But you also wanted to explain that why would anyone want to buy this?
[00:26:50] And you'd explain that a lot of the products, especially the ones that were coming out of
[00:26:54] Europe at the time, left dealers with kind of a natural ax, both by index volatility,
[00:26:59] but also to buy correlation.
[00:27:00] To the extent that you can explain why a bank wants to do this, why this trade looks so good
[00:27:06] for me to do, like what am I missing?
[00:27:07] And then the second part is the correlation that they're pricing into the structure products
[00:27:11] that they're selling to retail.
[00:27:12] They need to buy that back and they're buying it at what's an attractive level to you.
[00:27:15] And I'm pretty sure that component into the retail structure products was at a favorable
[00:27:19] level to them in terms of the spread on the correlation.
[00:27:21] As you were talking about, you use the term buy it back.
[00:27:24] You get into a trade, you could get in at a favorable price.
[00:27:28] Again, the second we walk away from listed options, we're in OTC and the unwind liquidity
[00:27:35] just is less consistent.
[00:27:37] It might come and go.
[00:27:39] And I wanted to just use that as a starting point for exploring a couple of the risks that
[00:27:44] we've encountered this year.
[00:27:45] And maybe starting with August 5th, right?
[00:27:48] Which is this pretty unique and pretty interesting day where the VIX, I want to say, closed at
[00:27:53] 38.
[00:27:53] It looks almost like a flash crash sort of day.
[00:27:57] Came back down as soon as it went up.
[00:27:59] Intraday, I think we're in the 50s for the VIX.
[00:28:02] A lot of it is linked to a lot of volatility that materialized in the Japanese yen as well.
[00:28:08] And so I'd love to just get some perspective from you in terms of client dialogue at that
[00:28:13] time, trades that you and team were looking at.
[00:28:16] How do you think back on August 5th?
[00:28:18] So full disclosure, I was actually in Africa the two weeks before that.
[00:28:21] So that was my first day back.
[00:28:23] Welcome back.
[00:28:23] Yeah.
[00:28:24] What did I miss, guys?
[00:28:26] So afterwards, it seemed like a lot of commentators had a theory like kind of in search of no one
[00:28:31] really knew.
[00:28:32] So people that are staring at the yen will say that it was all yen carry unwind.
[00:28:37] I know one of your recent guests talked about how it was really more of an equity vol event
[00:28:43] or the dispersion unwind, I believe he was talking about.
[00:28:46] No matter what kind of triggered it, the moves in the equity vol market, I mean, that was the
[00:28:51] story.
[00:28:51] I don't think or maybe people don't realize that the outperformance of volatility during
[00:28:58] those days was a lot more material than even during COVID.
[00:29:02] And in terms of like the way we think about just in terms of the outperformance of all
[00:29:05] so that's the bid to vol relative to the decline in spot.
[00:29:08] If you look at like graphs on this stuff, the outliers, there's a little bit in the COVID
[00:29:12] thing, but then the dot plots show like the dots around August 5th are just way outside
[00:29:17] of everything else.
[00:29:17] So over time where you've kind of analyzed everything happened to skewed, everything
[00:29:21] happened to vol and correlation.
[00:29:24] I think a previous guest of yours talked about how it implied correlation actually traded up
[00:29:27] to 240.
[00:29:28] Again, I wasn't staring at it at the time, but we know that that really can't happen.
[00:29:31] So it does lend itself to the fact that this was mostly in terms of the ramifications of
[00:29:36] what happened, an equity vol event much more than kind of in other asset classes.
[00:29:40] Yeah, I think it's probably second to volmageddon itself in terms of a one day VIX beta.
[00:29:46] Yeah.
[00:29:47] And like February 5th of 2018, August 5th of 2024, just a real breakdown in liquidity.
[00:29:54] And the VIX went crazy because the S&P options market went crazy and really broke down.
[00:30:00] That's unsettling.
[00:30:02] So I'd love to understand a little bit more as you manage expectations in terms of leading a sales
[00:30:08] team where you have to be there for your clients, but you also have to be there for your traders
[00:30:12] and the liquidity dynamics in the market are pretty compromised.
[00:30:16] What's that balance look like?
[00:30:18] Yeah.
[00:30:19] So for the eight-way comp auction stuff on days like that, we just passed and really focused on
[00:30:25] clients that we consider partners.
[00:30:27] People understand that these SPX markets that were maybe a dollar wide in screens are now $12 wide.
[00:30:33] Maybe we can do a really wide stop or give us a level where you're comfortable.
[00:30:36] We'll just try to work better in the market.
[00:30:38] They're kind of all staring at the same things as their screens blow out, their risk metrics blow out.
[00:30:43] So I think clients that are true partners kind of understand what's going on and appreciate the pricing
[00:30:48] and us sticking our necks out with capital are just not going to be the same on a day like that
[00:30:52] as most other days and go from there.
[00:30:54] I mean, it's case by case.
[00:30:56] Everyone has to understand.
[00:30:57] I mean, the best salesperson thinks like a trader.
[00:30:58] And I think the best trader institutional flow derivatives does thinks like a salesperson.
[00:31:03] And it's really kind of treat each client as what's the history of the client.
[00:31:07] Have they always been partnered?
[00:31:08] If we're going to get hurt, will they work with us on the next one?
[00:31:11] Things of that nature.
[00:31:12] So this has got to be an all-time wide in terms of range of implied correlation in the S&P.
[00:31:18] So you mentioned 240.
[00:31:18] That does sound kind of high.
[00:31:20] And then as low as 10, right?
[00:31:23] What do you make of the dynamics that lead to a 10 one month?
[00:31:29] Maybe it's 13 or 14 for three months.
[00:31:31] And of course, the realized is 10 to 13 as well.
[00:31:35] How do you think through that?
[00:31:37] What do you think is happening?
[00:31:38] Well, like I said, with a lot of the overriding and underwriting flow,
[00:31:42] and the synthetic option selling strategies, that's just driving down single stock volatility.
[00:31:47] And the people that are buying it, I think, are selling index against it.
[00:31:50] Like I said, running effectively like a short dispersion strategy, short correlation strategy.
[00:31:55] So I think as that flow just continued to ramp up and ramp up and more assets under management
[00:31:59] of these strategies and more large institutions are selling puts,
[00:32:02] selling calls against their long and short positions,
[00:32:04] just driving it without really thinking about, hey, is this like an attractive vol sale?
[00:32:09] But this is their mandate.
[00:32:10] They just continue to do it, do it.
[00:32:11] And as people sold index against it, that just continued to drive down the implied correlation
[00:32:17] and also led to a lot of decline in realized correlation as well.
[00:32:21] Because as people were hedging, their kind of long single stock options tended to mute
[00:32:27] a lot of that volatility.
[00:32:28] And so when you calculate realized correlation, putting it all together,
[00:32:32] it's going to decrease realized correlation as well.
[00:32:34] So no one wants to spend money on insurance, even if it's cheap.
[00:32:39] You don't want to keep spending money on insurance if there's no payoff to it.
[00:32:43] And it feels to me like we're mired in one of those circumstances.
[00:32:46] So what's the dialogue like with clients that are confronting pretty incredible sharp ratios
[00:32:53] on a lot of equity type assets, very cheap hedging costs?
[00:32:58] What does that look like as we round out the year?
[00:33:00] How do those conversations sound?
[00:33:03] Yeah, I think people have stopped using words like it's almost too cheap.
[00:33:07] You kind of have to do it.
[00:33:08] This looks really attractive because you would probably said that when it was a vol higher,
[00:33:13] two vols higher, three vols higher.
[00:33:14] I think appreciate like here are the risks that you may or may not see in the market.
[00:33:18] Here are the risks you may or may not see in single names.
[00:33:20] Sometimes this looks very attractive from any sort of historical implied volatility.
[00:33:25] But then you couch it with, granted, it could obviously go lower.
[00:33:29] But in terms of you're going to spend X amount of basis points to not miss that upside rally.
[00:33:33] You're going to spend X amount of basis points to protect yourself into the new year as the
[00:33:37] new administration goes after a certain sector.
[00:33:39] I think those conversations just need to be couched with,
[00:33:41] I'm pitching you this because I think it looks cheap and it affords you good protection.
[00:33:45] But I understand that I would have probably said the same thing four months ago and you
[00:33:48] would have made no money.
[00:33:48] So I just think it's a change in the tone of the conversation and maybe the verbiage you'd
[00:33:52] use.
[00:33:53] And they would probably appreciate and understand they're looking at the same thing.
[00:33:56] Do you think that there's a certain degree of exhaustion from the client base where,
[00:34:01] in fact, I was just in Boston for some meetings yesterday.
[00:34:04] And as I walked out the door, the client made the point that they were effectively realizing
[00:34:08] alpha by not hedging, right?
[00:34:10] Every day you don't spend the money.
[00:34:12] You've pocketed the premium that you otherwise would have parted ways with.
[00:34:16] Is there a sense of exhaustion on kind of owning protection even at cheap levels?
[00:34:20] I think for people who use the option market to protect the downside, I think it's probably
[00:34:25] the case.
[00:34:25] Some of these upside trades have been just great in terms of like what the pitch is.
[00:34:30] Hey, you don't want to miss the end of year rally and be 10% behind your benchmark because
[00:34:35] you didn't have exposure to the upside.
[00:34:37] I think like buying cheap upside spider calls or IWM calls or Q calls or whatever it is,
[00:34:42] those have been somewhat easier pitches.
[00:34:44] But in terms of people that generally use the option market for downside protection, I would
[00:34:47] certainly say that's the case in terms of exhaustion.
[00:34:49] Two weeks left roughly till the end of the year.
[00:34:52] And we're sitting here staring right at the money at the big 40,000 lot sitting there in
[00:34:58] the, I think it's the 60-55 strike as part of the put spread collar.
[00:35:02] Seems like we wind up at this call strike regularly.
[00:35:05] Yeah.
[00:35:06] It's incredible.
[00:35:07] Every three months.
[00:35:09] But it becomes an intensifying gamma situation, at least that trade in isolation.
[00:35:13] Where do you come out on just the overlay of gamma into the market these days from a local
[00:35:21] standpoint?
[00:35:22] It matters because people believe it matters or is it truly the case that the dealers are
[00:35:28] going to be tripping over themselves to effectively hedge this gigantic call option and mute the
[00:35:34] vol in the process?
[00:35:36] Yeah.
[00:35:36] I mean, there's obviously that particular structure of that particular strategy, but I think it's
[00:35:39] just this idea of just knowing the overall market structure so you can, especially ahead
[00:35:45] of time, kind of understand what could be coming from all these rule-based products in the market.
[00:35:50] And it's not just something like that ETF and the listed hedging that happens, but CTAs,
[00:35:54] vol control, that can really add fuel to any sell-offs if we were to ever sell off materially.
[00:36:00] I mean, you always want to know like, hey, there's going to be a lot of large, long dealer
[00:36:05] gamma and here's how much we estimate in terms of the dollar notional that the dealer universes
[00:36:11] need to buy or sell.
[00:36:12] Now, it's really up to the client to determine whether that's a big number, that's a small
[00:36:15] number.
[00:36:16] I mean, when it gets to $12 billion per 1%, I tend to think that's a pretty important
[00:36:21] thing.
[00:36:21] You also don't want to oversell it.
[00:36:22] You want to make sure they understand that there are competing structures out there that
[00:36:26] could net out some of that gamma in terms of like some of the stuff that's going to lead
[00:36:30] dealers to be shorter gamma.
[00:36:31] So we try to follow all of them, we try to follow the effect of the overall market structure
[00:36:36] by translating them into gamma profiles and especially to people that aren't in tune with
[00:36:40] the Greeks as we are just the potential notional to buy or sell for different scenarios.
[00:36:44] And they can decide for themselves whether it's significant.
[00:36:47] We have a team at Nomura led by Charlie McElligot, so I think is as good as any on the street following
[00:36:51] these.
[00:36:51] So we try to put it all together.
[00:36:52] I actually remember, this is an aside, I remember doing a dinner with friends back in,
[00:36:56] this is right before COVID shut the world down, it was late February 2020.
[00:36:59] And the markets had really started to sell off on COVID worries, but before the world came
[00:37:03] to a halt, so you could still meet your friends at dinner.
[00:37:06] And a buddy who worked primarily in structured credit, major hedge fund, comes in and didn't
[00:37:10] even say hello.
[00:37:10] The first words out of his mouth were, quote, someone explain to me what synthetic short
[00:37:14] gamma is.
[00:37:16] And so it's up for a salesperson to really try to explain what's going on in the market.
[00:37:20] Maybe even if someone has no interest in trading equities or equity options with you,
[00:37:23] but the more you can provide the color of what's going on behind the scenes with a lot
[00:37:28] of these strategies that have no human making choices of what they're going to do, they're
[00:37:33] just rules-based mechanical trading.
[00:37:35] It paints a picture that I think can be helpful to clients.
[00:37:39] Yeah, I think the mechanistic trading and the way it overlays, whether it's an amplifier
[00:37:44] or a reducer of all, I think these are absolutely exercises really worth doing.
[00:37:50] It's vast.
[00:37:50] It's hard to truly get your arms around.
[00:37:53] I mean, a lot of the estimates I see maybe don't include VIX.
[00:37:57] I think you got to include VIX.
[00:37:58] Obviously, we have really no ledger on OTC exposures.
[00:38:02] And when I say OTC, I mean OTC institutional, the retail structure products got some funky
[00:38:08] Greeks in them, the leverage ETF complex, and then the way in which these trades are implemented.
[00:38:15] So short straddle is part of a dispersion trade where single stock fall is bought.
[00:38:19] That's very different than just the naked short straddle, the hedging.
[00:38:22] So yeah, it's super interesting.
[00:38:24] One of the things I think is, especially when you try to teach younger people on ZESC, is
[00:38:28] that the Greek profile is always changing.
[00:38:30] It's not this static, which I found is something that's hard for people to grasp, especially
[00:38:34] early on in your career.
[00:38:35] It's the latest idea that you have a certain risk now, but this risk can change materially,
[00:38:41] can flip.
[00:38:41] You just have to be aware and cognizant of all these different forces at play and how
[00:38:47] if X happens, Y can happen and be prepared for it.
[00:38:50] So I'd love to talk just about the election in terms of its impact on pricing.
[00:38:55] So we had, as expected, a pretty big vol risk premium going into the election.
[00:38:59] It came undone.
[00:39:00] VIX was at 20 right before, came back down to kind of 14.
[00:39:04] We're sitting there now in that 13, 14 handle range.
[00:39:08] A lot of other asset classes experienced the same thing.
[00:39:11] Rate vol, FX vol, same exact thing.
[00:39:13] Once the election came into the window of pricing, vol got bid.
[00:39:16] And then once the election came and went, vol came down a bit or came down a lot, I should
[00:39:21] say.
[00:39:22] So Trump is coming back into office.
[00:39:24] In 2016, when Trump won, everybody was expecting a very chaotic 2017.
[00:39:30] We all know that didn't happen.
[00:39:32] It was one of the lowest vol years in the last 50, I think, in the equity market.
[00:39:36] When you think about the risks, maybe say a little bit differently, the vol catalysts
[00:39:42] for 2025, I know you follow global affairs quite closely, US politics, geopolitics.
[00:39:50] We've talked a lot about the products themselves that exist within the market.
[00:39:54] What are some of the things both on your radar and then the things you pick up with regard
[00:39:59] to how clients prioritize risk?
[00:40:02] What are some of the things that are part of those conversations?
[00:40:05] Yeah.
[00:40:05] So I mean, I would break it up in a couple different buckets.
[00:40:07] I mean, you have in terms of global geopolitical, that type of risk that could cause like a
[00:40:11] systematic shock to markets.
[00:40:14] That's when you start thinking about index hedging.
[00:40:16] But I think a lot of times when you just start getting granular in terms of government
[00:40:20] policy, especially in the US, or maybe the tariff policy and how it relates to other
[00:40:23] countries, you start thinking of different sorts of risks.
[00:40:26] Because now you're talking about idiosyncratic names, there are going to be winners and losers,
[00:40:30] maybe certain sectors are going to go up, certain sectors are going to go down.
[00:40:32] And that could push your hedging towards more single names.
[00:40:36] Because again, if you have certain sectors going to go up, certain sectors going to, depending
[00:40:39] on their weightings, the S&P, that's going to mute realized correlation.
[00:40:42] So then index vol is not going to be a very good hedge.
[00:40:45] So you talk to client, try to get their view on what are they worried about?
[00:40:49] Are they worried about Russia really amping up the war with broader Europe?
[00:40:53] That's going to cause you to think of a certain type of hedge.
[00:40:56] But if they're worried about, well, I think tech is going to rally and I think energy is
[00:41:00] going to rally.
[00:41:00] But I think all these other sectors are going to sell off.
[00:41:03] Now you don't really want to pitch any sort of larger index trades.
[00:41:06] Now you're looking for more specific stuff within certain names and certain sectors.
[00:41:11] Well, let's finish this off, maybe take a little bit of a detour here away from markets,
[00:41:16] away from the business of running a flow desk and managing interaction between clients
[00:41:21] and traders and talk about kind of a favorite subject for me.
[00:41:24] And it sounds like for you as well, which is just training young folks.
[00:41:28] One of the things that you mentioned COVID, I mean, obviously just a tragic circumstance
[00:41:33] for the world, for families changed the way in which we interact professionally.
[00:41:38] It was especially difficult for, I think, the sell side because we thrive on client interaction.
[00:41:45] And then within the sell side, I think really, really challenging for young folks coming up
[00:41:50] on a desk and just not having the opportunity to learn by listening, just be kind of a fly
[00:41:56] on the wall in different situations or attending a dinner.
[00:41:59] And so I'd love to learn just how your team thinks about bringing in new folks into the business,
[00:42:05] the process of training them to make them ultimately effective people on the team.
[00:42:10] I cannot agree more in terms of COVID because the model of our business is that of an apprenticeship
[00:42:14] model.
[00:42:14] And if we, before COVID said, follow trades as they're going along over time, try to develop
[00:42:20] an idea of what you think the right price is.
[00:42:22] Just listen, don't ask right away.
[00:42:24] Maybe wait for a dull moment or wait for after 4 p.m.
[00:42:26] Pull up the trade, have a view of what you think the right price is and just be prepared
[00:42:29] for questions.
[00:42:29] And one of the tragedies of COVID is you really couldn't do that.
[00:42:32] You can just sit at work and observe and take in what's going on around you and ask
[00:42:34] questions later because now it could just be a senior salesperson, a senior trader, just
[00:42:38] talking from their respective homes.
[00:42:40] You know, obviously mentorship and training is something that I've really been involved
[00:42:44] with throughout a lot of my career.
[00:42:45] I tend to like to bring up trades from the past that even if it's slow, I'm like, hey,
[00:42:50] here's the trade, whether it's in the form of a little quiz or be like, hey, what are
[00:42:53] the things that we need to think about?
[00:42:55] Can you believe that this is what happens?
[00:42:57] Because 20 years of looking at different situations.
[00:42:59] And I think the really unique outsized trades that really make you consider different types
[00:43:04] of risks and ones that they hadn't thought of and would have never thought of, I think
[00:43:09] are really helpful in terms of training.
[00:43:11] We do a boot camp for all our juniors, not just on our floor, but I think it's open to
[00:43:15] people across different asset classes and different parts of equities and try to bring
[00:43:19] up as many of these that are both current and from our careers to think of.
[00:43:23] One that comes to mind several years back, we had a customer come in and wanted to buy,
[00:43:27] I think it was like a three-month 25 Delta call, not very illiquid name, OTC.
[00:43:32] And we were working stocks.
[00:43:33] There's no one Delta risk.
[00:43:34] It was a pretty outsized trade for the names.
[00:43:36] The trade cleared a couple of vols above screens.
[00:43:38] We decided to buy some at-the-money vol from the vol layup community and we'd be left with
[00:43:41] something effectively, like a one-by-two call spread.
[00:43:44] I was buying, I remember the numbers exactly, about 40,000 options and a name that traded like
[00:43:49] two to two and a half million shares a day.
[00:43:50] So while the Greek profile on day one was pretty benign, if we got to that short strike on
[00:43:54] X3, we could be dealing with a serious scam situation.
[00:43:57] Potentially one to two days of average yield volume that could, emphasis on could, not
[00:44:01] from day one, but at X3, be needed a hedge.
[00:44:04] But what even made this trade more interesting was the stock was drifting towards a strike.
[00:44:09] It was above it and was going lower.
[00:44:10] And a couple of days before X3, the client indicated they would probably be exercising
[00:44:14] even if it was two, three, 4% out of the money because they just wanted the exposure and
[00:44:18] thought it could take more room than that for them to buy back 4 million shares.
[00:44:20] Now it's a fun conversation with our risk managers because we're going into X3, long 4 million
[00:44:26] shares where Black Scholl says we should probably be long 100,000 shares or something thereabouts.
[00:44:30] And you have to really have developed trust between yourself and the client that they're
[00:44:33] going to do what they said they're going to do in contract exercise because otherwise you
[00:44:36] could come in on Monday with a $200 million delta position.
[00:44:39] And it's examples like that that I think really you see the day-to-day constant flow and you
[00:44:46] get a sense of liquidity, you get a sense of option liquidity, stock liquidity.
[00:44:49] It's these kind of unique esoteric trades that people, I think, kind of expand how they think
[00:44:55] about volatility and unique risks that you have to think about.
[00:44:58] And since they're not going to be involved in a lot of those trades, you want to bring them
[00:45:01] up as much as possible so that they do get an idea how to think about this.
[00:45:06] That's a great example.
[00:45:07] And I think it's in the realm of the holes in Black Scholls, right?
[00:45:10] Black Scholls, neat and tidy model, but it lives in a world of infinite liquidity.
[00:45:15] So the market's never a problem.
[00:45:17] Your size is the market size no matter what.
[00:45:19] And certainly that's not really the case.
[00:45:21] That's a great example.
[00:45:22] Another one was one of the first strategy pieces that I read of yours, I want to say,
[00:45:26] I think you were writing most of them back at our old shop, is that the Microsoft Employee
[00:45:30] Option Program, where I think it was JP Morgan was effectively bidding all Microsoft employees
[00:45:35] for their stock options.
[00:45:36] Now, even though this was Microsoft, the sheer amount of Vega involved here was just outside
[00:45:40] the vol market.
[00:45:41] And if memory serves me well, they were bidding something like low 30s blended vol.
[00:45:45] And at the very end, they were selling Microsoft variants around 15 when they were just on the
[00:45:49] exposure.
[00:45:50] And I remember reading this and I'm like, well, this doesn't sound like what I've learned
[00:45:54] so far, just kind of watching the desk.
[00:45:56] But it was an early lesson of outsized risk.
[00:45:58] And it illustrates something that I always try to stress that anytime there's a situation
[00:46:02] where there's a buyer of optionality that's hedging versus the seller that's not hedging,
[00:46:06] or that could be relevant.
[00:46:07] Or if there's a seller of optionality that's hedging, the buyer's not hedging, that could
[00:46:11] be relevant.
[00:46:11] And you try to put it all together in a way to try to explain things we see.
[00:46:14] And when the size gets big enough, we tell a story that may be relevant to a client's
[00:46:19] investment process.
[00:46:20] But it's also just helpful in terms of juniors learning things like this, because that's not
[00:46:24] something that you would have ever expected, especially in a name like Microsoft from that
[00:46:28] example.
[00:46:28] So we live in a world where an understanding of how to code stuff up is almost table stakes
[00:46:35] these days, Python and so forth.
[00:46:37] But a lot of the flow derivatives role is just having a keen understanding of the client base
[00:46:43] and how to intermediate between the trader and the client.
[00:46:47] But with regard to how you think about the skill set that's needed, what likely leads to
[00:46:53] success?
[00:46:53] How might that have changed over the past decade or so?
[00:46:57] I mean, I studied 4Shan when I was doing my biomedical engineering degree back at Duke.
[00:47:02] So that shows me how long ago it was.
[00:47:04] The tools that they have now are just so much better than when I was starting my career,
[00:47:08] back when I actually knew how to use Excel.
[00:47:10] Now we have, aside from the coding, we have these fancy scenario analysis tools.
[00:47:15] We have all data analytics.
[00:47:16] We even built a client diagnostic tool to help us analyze trades we've done with clients and
[00:47:20] also missed trades to help us determine how to hedge for different accounts.
[00:47:24] I think it's a bit of a double-edged sword as sometimes you become overly reliant on plugging
[00:47:28] in new numbers and not trying to visualize it yourself.
[00:47:31] You had a recent podcast with the gentleman from Suscon Parallax, who has the Moon Tower
[00:47:35] subsack, whose name escapes me right now, where he discussed the SUC training program and how
[00:47:40] they learned to have a very good sense of what options are worth and the rough delta by just
[00:47:45] conceptually thinking through the interplay between spot, time to explain implied volatility
[00:47:49] without using any tools, just figuring it out in their heads.
[00:47:52] Now, I'm not saying that junior members of the team should be stupid and not use the tools
[00:47:55] available to us now, but you also don't want to be too reliant that you miss out on developing
[00:48:00] some of these skills that maybe us old-timers developed along the way.
[00:48:03] But really, the biggest thing I tell them is your career is on you.
[00:48:07] We're here to help.
[00:48:08] But it's really up to you to develop as many tools in your toolkit as possible because you
[00:48:12] don't know whether you're going to be an institutional flow derivative sales trader for your whole
[00:48:16] career, whether you're going to work in other asset classes, you're following macro, maybe
[00:48:21] owning one sector, maybe you'll go to the buy side, maybe you do some work in a cross asset
[00:48:24] capacity, maybe you just sit on the beach and trade your PA.
[00:48:27] So the more reps, the more ideas, the more questions.
[00:48:32] I think that just like in any apprenticeship model, I think that's the best way to help your
[00:48:36] career.
[00:48:37] Well, Ali, it's been a pleasure.
[00:48:38] I'm glad you took me up on the ask to be a guest on the Alpha Exchange.
[00:48:42] It was great to catch up, and I'm sure our listeners will enjoy the insights.
[00:48:46] I just want to thank you for everything you've done for me and my career.
[00:48:49] You took a shot on someone on paper, probably that makes any sense to do so.
[00:48:53] And if my dad could have talked to you 20 years ago, he probably would have punched you in the face
[00:48:57] because he didn't understand why his son was deciding to walk away from a seemingly successful,
[00:49:02] albeit new law career.
[00:49:04] And I'm sure back then how the career change objectively made sense.
[00:49:07] But when you forget your pitch, even if I told you I didn't even know what the ticker to
[00:49:11] Microsoft was, you just said, you'll know the math better than most and I can teach you the rest.
[00:49:15] And hopefully that's worked out.
[00:49:17] I'm mostly surprised.
[00:49:19] You've been listening to the Alpha Exchange.
[00:49:21] If you've enjoyed the show, please do tell a friend.
[00:49:24] And before we leave, I wanted to invite you to drop us some feedback.
[00:49:28] As we aim to utilize these conversations to contribute to the investment community's
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[00:49:38] Please email us at feedback at alphaexchangepodcast.com.
[00:49:42] Thanks again and catch you next time.