"trader" is a uselessly broad term

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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.

🙈Shameless 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.

He’s 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 aren’t 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.

Get 20% off your moontower.ai sub

Anyway, back to Euan’s recent knowledge-drop.

🎙️Euan 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 there’s one in particular I want to zoom in on:

🔎Institutional vs. Retail Trading - Fundamentally Different Jobs

Euan on the track record misconception:

If you’re working at a trading firm you don’t get an account like that... you don’t know how much risk capital is being allocated to it. So when someone’s like what’s your track record the answer is really ah I see you don’t understand what professional institutional trading is.

Kris: I’ve written about this more extensively here from the perspective of an employee, running a market-making biz, and as a HF PM in When it’s normal to have no idea what your returns are (13 min read)

Euan on the value of a seat:

There’s a lot of money they get given because they’re 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 I’m making all this money because I’m making markets to customers and the markets are wider, that’s not you. That’s Goldman.

For a lot of them they wouldn’t have the first clue where to start because they’re 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 they’re 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 there’s a million bucks, sit in front of your IB screen, make some money. Most of them can’t do that either. It’s just it’s a very, very different job.

Kris: There are levels to this as well. I got my fund job after pitching Parallax on how I’d 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, here’s 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 wasn’t 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 (“measurement”) and combining those cards with the players’ 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. “You just sell vol when it’s higher than realized, right?”. Sir, we run vega-neutral books, shoot for absolute returns, and expect to do really well when this stupid bull market hits a hiccup…you’re gonna need to try harder than that.

But now as a retail trader, I don’t have the scaled cost-structure and I don’t see any voice flow so I’m missing the bet/call/fold actions that I was accustomed to. The retail trader’s advantages are liquidity is easier to get and they aren’t forced to trade anything they don’t want to. The first advantage is real but is the first victim of success and the second is a consolation prize for not mattering.

It’s 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. That’s a better comparison.

I say more on that in this thread.

☂️Other ways the term “trader” is asked to do too much

I’m not even addressing all the ways “trader” 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 “bettor” 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 don’t 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 “I won’t flip the desk over in my bonus meeting” with “this is probably more money than I’d get if looked elsewhere”. A true eat-what-you-kill deal fixes this but they likely have much tighter risk limits.]

Anyway, I’m 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. “What they say about me?”

“You’d be bored.”

Meanwhile I’m like, yea, so what? Being bored at a job paying a million bucks per year sounds like a Me problem, not your problem. I’ll take my chances.

Anyway, there’s 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 note…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 can’t 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, don’t pick up a phone call during an interview.]

More insights from the interview…

Hedging

If you go to a firm like a Jane Street or a SIG, their idea of hedging isn’t so they don’t lose money. Their idea of hedging is so they take away all the risks that they don’t 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, you’ve 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, it’s just act like a goddamn adult. Come to work, do your job, don’t 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] don’t think of losing a million dollars in a day as a risk. That’s just what happens if you’re tossing a coin.

The Sequence of Returns Problem

People will do a very careful analysis. They’ll go over five years of data, you know, thousands of data points, come up with a strategy, and then they’ll trade it for two weeks and go [expletive]. But if I told you, I’ve got a trading strategy and I’ve tested it on two weeks of data, you’ll be like, what the [expletive].

Position Sizing and the Yield Hunting Trap

People decide they want to make a certain amount. You can’t make a certain amount. You can only make what the market’s 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]... There’s always a price where you should buy stuff too.

Zero DTE Warning

Don’t 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 you’re 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 it’s 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 there’s an event and you don’t know what the outcome’s going to be, but you know when the event is, sell V.

Biotech Sizing - Accept Individual Losses

You have to accept you’re going to get a 10SD loss. You can’t 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, I’m not going to get a 10s.