I feel like I should make a video describing exactly what happens when a broker calls a desk with an option show.

Might be NSFW.

Seriously the signal chain from phone call, to the print on an exchange floor is not widely understood.

Announcement, crossing and blocking etc
The adverse selection of your order not being blocked. How the floor traders free roll off that moment. Why prop shops have people on various floors so they can block orders from crossing without getting their tribute.
Something important to realize is that anything represented by a broker on the floor of an exchange is considered "public" info since anyone can access that info by hiring a broker

Phone negotiations that result in an order/ trade are private until they are "announced" on floor
Since the broker is representing the client in those private convos, the information that is presented in that domain cannot be acted upon by the negotiating market maker. No pre-hedging. No touching of the options on the same name.
But you can start to think of how any peice of info radiates. For example, if a mm knew there was a size buyer of IWM vol that can influence quotes in correlated names.

And also, there's a speed game that occurs after an order is announced. That can take many forms.
A race to hedge. A race to buy the same vol the customer might have just bought from stale quotes that haven't moved as far as the slippage model might predict.
This is why mm's usually feel "beat" when their quotes get hit or lifted.

Oh crap, I just got lifted on [range of strikes]. You just got picked off by a mm who saw something else trade.
A naive market participant (who will learn quickly) thinks "oh yea I got to sell all these options on my offer"

Sorry. You got picked off and what you thought was a good price to sell is now the bid.
The lesson here is way beyond market making but investing period. When you get to trade something at a stupid price you need to wonder "what am I missing?"
That is the real lesson behind this post which seems like its about correlation but it's really much more meta

moontowermeta.com/you-dont-see-t…
And that concludes my slow-moving grift to use twitter topics of the day to promote my posts which will build an audience that serve my next life.

Don't ever complain I wasn't transparent. You are all options.

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More from @KrisAbdelmessih

1 Oct
There's so much that can be explained about what a mm thinks about and what tools they use when they handle a show. After so many reps the mental checklist and "feel" of the call is automatic but dissected it's prolly interesting to the corners of fintwit.
A really simple example would be someone soliciting a quote for a risk reversal. Take a symbol like URBN.

You are thinking about the class of customer the broker represents, where you are in the brokers pecking order.

Then you think about the stock itself.
What's the liquidity in the shares? What term do they want to trade? Are they looking to collar stock or disguising a skew trade? Well is it delta neutral or live?

How's the borrow? Confident in div dates? Are the screens stale or a good indicator of the fair vols for the name?
Read 15 tweets
30 Sep
Anyway, if you'd you'd like to check it out, here's what it covers:

1. Why I found Jensen's Inequality to be interesting in the first place (hint: it's a tool that helps you make better off the cuff predictions without crunching numbers)
2. Jensen's Inequality ELI5

This part includes a discussion of convexity/concavity and how this flips the direction of your predictions
3. I made up an example of trying to predict how long it would take to get somewhere in traffic.

I think everyone will have actually shared the same thought, but Jensen's formalizes the intuition
Read 5 tweets
27 Sep
A reminder that evaluating any performance requires comparing to a relevant control investment. That control should incorporate rebalancing and have the right vol scaling.

Some things you should wonder...
Does the manager have security selection edge, sizing edge, timing edge?

How do you test for these 3 edges...you need a sensible dummy benchmark.

Lots of room for details but you can listen to this pod to get your bearings

moontowermeta.com/notes-from-cap…
Scalability

Do money vs time-weighted returns tell us anything about the scalability of the strategy?

blogs.cfainstitute.org/investor/2016/…

(h/t @EconomPic)
Read 4 tweets
24 Sep
Friday musing before I hop off this app...

Is it inconsistent to be more compassionate to "horrible" people than to animals?

Animals that suffer seem to be a big monkey wrench in trying to hold together some worldviews.

A winding observation in the past week got me there...
I was at an exhibit in a museum in Danville that dealt with the opening of the US western frontier including the fate of native Americans.

It gets you thinking of course about how human cultures could evolve so differently.

But one of the ideas that I fixated on was...
The view to some tribes that owning land made no more sense than owning the air or water.

And the only thought that occurred (actually recurred, because I have it a lot) is how made up everything is. I mean rules and laws (not say physics...I mean we can build bridges and cars)
Read 9 tweets
24 Sep
2 games.

In one of them you roll a die and get paid whatever comes up. So if it comes up 4 you get $4.

What's that game worth to play?

Now consider a second game, where you ONLY get paid on a 6, but you get paid 21-1

What's that game worth?

News flash: VCs play game #2
Suppose there was a $10 strike call on both of these investments. What's it worth?

Ok I'll take 150 retweets, and a million likes now.
If someone managing money finds any of this "eye-opening" they are committing malpractice. This is what's known as a first round interview question for a 21 year old analyst role. There are no dumb questions, but if you have a seat and any of this is interesting I'm 🤯
Read 4 tweets
23 Sep
If your work makes you study companies and business models you build a deep pattern library to cross-reference a new idea against, adjusting for differences.

I totally lack this and it's a cool thing to have. Next best thing would be to lean on your friends who have it I guess
You can read and listen to pods to learn it maybe. You can even pick up some jargon that compresses some of the patterns (ie "melting ice cube"). But I wonder how far you can get without immersion of investing in companies.
When I hang out with friends (local dads) and shop talk comes up I'm always the one slowing it down "hold on what does that mean". A lot of it very credit/PE-sounding stuff, with more references to legal sounding stuff than I'm used to.
Read 7 tweets

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