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?
What if they approach differently and say "I want to buy the Sep22 25 put. What call can I sell to do the trade at 0 cost?"

Well now I'm reasonably certain the order is benign flow. It's a hedger doing a classic zero premium collar. Plus it's 1 year out. Jives with my prior.
Even more confident if they are willing to trade a flex (unlisted strike) to make it zero cost. This contra is willing to put a position on with me knowing that I will know their position. Def benign.
On the other hand if they wanna trade a near dated riskie where they buy call and sell put, I have to wonder. Hedgers buy puts. This client might know something, if they want to use a riskie to get long delta. How much competition am I in?
If I have to share the trade with another mm then there's a race to trade the stock once its announced. Is the pricing wide enough to allow for slippage.

Vs if I get to be heads up against the customer and work out of the delta on a twap for the next week.
If the customer is "wired" or delta smart that strategy won't work.

Anyway, between this kind of stuff and the dashboard that are customized for this workflow, there's a lot here.
The price a mm trades with you at is a price where they think you are beat based on the information at the time. The hedges they are leaning on, other flow, etc.

Your execution costs are real but often invisible bc tight bid/ask spreads can hide them.
The act of getting filled is the biggest clue that you paid them.
Notice, at no point do I care about what this company does. In reality, I care a little bit bc I will look at the names vol cheapness and skewness in its sector and I will care about the upcoming event calendar (conferences, earnings, retail sales releases etc).
But any big boy model of single stock vol will already be calendar aware, so I'm more concerned about events that are harder to know about without research or if the inputs have recently changed and I have stale data
Back when I traded single stock if you found out earnings were a month later or earlier than what quotes implied, then you'd have to come up with the sneakiest way to disguise your pickoff.

More often than not you were defending against that. So you put yourselves in the mind..
of a contra and think...if I knew earnings were in a different month what kind of time spread would I devise to make my opening trade look like a run of the mill roll?

What if the div was altered? Too obvious to quote a rev/con. Maybe a riskie would disguise it.
Maybe look at the open interest and pick a liquid line so my flow blends in with the marketplace.

Could go on and on.

Get a good broker. The best ones know all the tricks. Many of them were traders.

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More from @KrisAbdelmessih

30 Sep
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
Read 11 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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