"trader" is a uselessly broad term
Moontower Munchies #133
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Friends,
Erik had Euan Sinclair on the podcast last week. Euan is a straight shooter, so his interviews are not just info-dense but fun to listen to.
šShameless testimonial
Back on April 10th, during the Liberation Day market chaos, Euan texted me:
The [moontower.ai] app has been super helpful. when this sort of thing happens, having a top down tool is the only way to keep up.
Heās since told his own community (emphasis mine):
Kris A looks at vol markets very much in the way a professional vol trader does. You really need to be comfortable thinking in IV terms rather than price terms, but once you get there, this stuff is gold. I really think you could use only this site and trade successfully as a professional. Kris is a good guy, very helpful and again, totally legit. As you know, there arenāt many resources like that.
Just saying bruh. The only sale of the year is going on now (20% off) and applies to Starter, Pro, and Enterprise plans.
Anyway, back to Euanās recent knowledge-drop.
šļøEuan Sinclair on Retail vs Institutional Trading | The Outlier Podcast (YouTube)
I list many of the key moments from the interview later in this email but thereās one in particular I want to zoom in on:
šInstitutional vs. Retail Trading - Fundamentally Different Jobs
Euan on the track record misconception:
If youāre working at a trading firm you donāt get an account like that... you donāt know how much risk capital is being allocated to it. So when someoneās like whatās your track record the answer is really ah I see you donāt understand what professional institutional trading is.
Kris: Iāve written about this more extensively here from the perspective of an employee, running a market-making biz, and as a HF PM in When itās normal to have no idea what your returns are (13 min read)
Euan on the value of a seat:
Thereās a lot of money they get given because theyāre at the institution, not because of anything they do. The seat and the franchise has a lot of value. Whereas a retail guy has none of that.
Even if he acknowledges Iām making all this money because Iām making markets to customers and the markets are wider, thatās not you. Thatās Goldman.
For a lot of them they wouldnāt have the first clue where to start because theyāre a piece of a team, right? They might be at the end of a chain of sales groups where they have to make a market, but theyāre making a market to a structured desk, which is then decomposing it, talking to a sales guy, pitching it to the customer, and then it comes back to him.
You take a professional out of his seat, say thereās a million bucks, sit in front of your IB screen, make some money. Most of them canāt do that either. Itās just itās a very, very different job.
Kris: There are levels to this as well. I got my fund job after pitching Parallax on how Iād build out a cross-asset commodity options trading business (you can see the seeds of moontower.ai in the inspiration for what that plan encompassed). At the fund, we had no sales desk. It was basically, hereās a phone, a computer, access to capital, now run along and make more capital.
I had to give brokers a reason to call me even though I wasnāt going to be in the habit of crossing bid-ask spreads. I had no insight into physical markets or fundamentals that could make crossing the spread consistently worthwhile. It was just a matter of composing the data the way I wanted to see it (āmeasurementā) and combining those cards with the playersā actions (the orders in the broker and electronic markets) to construct option portfolios that had value.
When it came time to hiring, this concept was clearly foreign to some candidates (usually coming from banks with sales desk and captive flow) OR the candidates understood this would be the nature of a buy-side options job but since they were never actually forced to turn water into wine had only naive conceptions of how you do this. āYou just sell vol when itās higher than realized, right?ā. Sir, we run vega-neutral books, shoot for absolute returns, and expect to do really well when this stupid bull market hits a hiccupā¦youāre gonna need to try harder than that.
But now as a retail trader, I donāt have the scaled cost-structure and I donāt see any voice flow so Iām missing the bet/call/fold actions that I was accustomed to. The retail traderās advantages are liquidity is easier to get and they arenāt forced to trade anything they donāt want to. The first advantage is real but is the first victim of success and the second is a consolation prize for not mattering.
Itās harder to be a retail trader. But that juxtaposition is not quite right. The retail vs institutional trader distinction is apples and oranges. Retail trading is more like being an entrepreneur. Thatās a better comparison.
I say more on that in this thread.
āļøOther ways the term ātraderā is asked to do too much
Iām not even addressing all the ways ātraderā is used. Some brokers call themselves traders. Execution traders take orders from PMs but are still called traders. These roles all certainly overlap with the job descriptions of traders who act on their own ideas but the broad connotation of trader is closer to ābettorā and in that sense the customer of the broker and the source of the thesis.
About 20 years ago, after my 3-year non-compete expired, I interviewed with a large multi-strat to be an excecution trader. The job paid 2x what I was making.
[It was the heydey of HFs getting way overpaid for beta-like risk/reward. Lot of fat on the bone as they were not moneyballing their talent the same way prop shops were accustomed to where regardless of your 1-year performance you are only worth some spread to replacement level trader. You donāt have an unbounded call option on a great year because they will tell you your seat was worth more. The goalposts move in a way that keeps your comp at a level which balances āI wonāt flip the desk over in my bonus meetingā with āthis is probably more money than Iād get if looked elsewhereā. A true eat-what-you-kill deal fixes this but they likely have much tighter risk limits.]
Anyway, Iām interwiewing for this execution trader job on a small team. I think it goes great. I feel like I show well.
Nada.
I backchannel with a friend who worked there. āWhat they say about me?ā
āYouād be bored.ā
Meanwhile Iām like, yea, so what? Being bored at a job paying a million bucks per year sounds like a Me problem, not your problem. Iāll take my chances.
Anyway, thereās lots of different kinds of traders.
Fwiw, I think the types of traders best embodied by the word trader are the sociopaths featured in World For Sale.
[Random personal noteā¦during that job interview, I was left alone in the conference room for a bit. My dad called. This was either Star-tac flip or Nokia phone days, I canāt quite remember. I picked up to discover my grandmother had just passed out of the blue. I had to do my own sociopath act to get back to the interview without letting on. Note to self, donāt pick up a phone call during an interview.]
More insights from the interviewā¦
Hedging
If you go to a firm like a Jane Street or a SIG, their idea of hedging isnāt so they donāt lose money. Their idea of hedging is so they take away all the risks that they donāt want so they can isolate the exposure to the one thing they do want.
Transaction Costs
With trading, you become a better trader by taking your hands off the keyboard and letting things play out because every time you touch the keyboard, it costs you money... You might make 5,000, but whether you make 5,000 or lose 5,000, youāve got that 50 bucks always. And it adds up.
Trading Psychology - Act Like a Professional
If you pull that shit as a professional trader, you lose your job... Instead of reading all this nonsense about trading psychology, itās just act like a goddamn adult. Come to work, do your job, donāt be a [expletive] and then go home.
Risk Management - Small Losses vs. Catastrophic Risk
Retail is too averse to small risks and leave themselves open to catastrophic risks... [Professionals] donāt think of losing a million dollars in a day as a risk. Thatās just what happens if youāre tossing a coin.
The Sequence of Returns Problem
People will do a very careful analysis. Theyāll go over five years of data, you know, thousands of data points, come up with a strategy, and then theyāll trade it for two weeks and go [expletive]. But if I told you, Iāve got a trading strategy and Iāve tested it on two weeks of data, youāll be like, what the [expletive].
Position Sizing and the Yield Hunting Trap
People decide they want to make a certain amount. You canāt make a certain amount. You can only make what the marketās giving you... If you go basically yield hunting and try to make the same amount of money each time, you are going to blow up. I guarantee it.
Price Matters More Than Structure
Everyone thinks their edge is in the structure. So they become price-insensitive around that structure [he picks on iron-condors]... Thereās always a price where you should buy stuff too.
Zero DTE Warning
Donāt trade zero DTE... The amount of money you can make is pretty small because the premiums are pretty low and the costs relative to the amount of money you can make are huge.
Volatility Rank vs. Variance Premium
If youāre just looking at the vol of a single stock through time, selling it when its vol gets high is usually the wrong way round... Usually implied vol is understating, you know, implied vol might do this when the realized V is doing that.
[moontower.ai users understand this in their bones because itās embedded in the calibration of fair value]
Event Premium - Earnings and Announcements
Selling options right before earnings is a good trade. Selling biotech options right before FDA announcements is the same thing... Whenever thereās an event and you donāt know what the outcomeās going to be, but you know when the event is, sell V.
Biotech Sizing - Accept Individual Losses
You have to accept youāre going to get a 10SD loss. You canāt expect to do that risk-reward thing on one stock... You have to do that over a whole bunch of stocks and say on average, if I do this on a 100 stocks, Iām not going to get a 10s.
Stay groovy
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