Thread by @gary_norden

Happy New Year, I hope 2022 is a great one for you

In the lead up to Dec31 there's always a lot of talk about traders trying to mark up markets for EoY P+L and bonuses.

Here's a thread about why this view can be off the mark

It assumes that Dec 31 is Financial EoY for bonus purposes. There are some banks/firms who don't use Dec 31

A significant amount of investment nowadays is in ETFs. These only receive a (low) management fee and no performance fees. So no incentive to move markets for EoY

Their 'success' is more likely to be defined as how closely they tracked their benchmark

Traditional mutual/pension fund managers also charge a management fee and no performance fee. However, if a particular manager does have a stand-out year he/she may be in-line for a larger bonus

Hedge fund managers tend to paid quarterly. There is not necessarily any reason why the Dec quarter is more important than any other quarter

There are far fewer traders who can move markets than you think. Large, liquid markets are hard to move anyway

There is no 'they' - no cabal that is working together to screw over retail traders. Retail traders do that on their own due to their use of t/a & other poor skills

There are fewer and fewer investment bank traders with risk on their books.

I think the idea of marking up trades for EoY is an old idea that was more typically applied to these traders

But in my experience, it was a misguided idea anyway

In the comments below I'll show some scenarios that explain why

Typically the senior traders took leave over Xmas and New Year, so desks were staffed by junior traders. They were less skilled to move markets (yes it is a skill that needs to be learned!)

If the bank & the desk/trader had had a great year & bonuses were expected to be good, there was little incentive to create more profit

In fact, traders were more likely to want to mark trades down. Why? To create profit for the start of the next year. This year was already good

But if the bank or the desk had had a bad year and bonus expectations were low, there was also no incentive to mark trades better.

In fact again, traders were more likely to want trades marked harshly to create P+L for the next year which would hopefully be better for all

Incidentally in a bad year you got a Bonfus not a Bonus.

Why?

There's no 'f'-in-bonus 😂

So, as I have said consistently, it is far harder to work out what the big traders are doing and why

It is unlikely that retail traders can get edge from trying to do this

Many of their gurus have never operated at that level and don't really know what happens

This leads me to the JPM options trade which I plan to do a thread about soon

Happy New Year!