Transcription
Hey, what's up, guys? I'm going to tell you a trading story from when I was a junior trader. I started trading options at one of the options market-making firms in Chicago. This is a brutal story; I still think about it sometimes and cringe.
The story is about how I had a chance to make like $2 million for myself within maybe 10 seconds. To start off, at this particular options market-making firm, the commission was like 20%. The agreement between the traders and the firm is that whatever you make for the firm, you get 20% as your bonus. It's a contractual obligation, so they have to pay you that. If they don't, you can sue them. There have been disputes, and people have sued them and gotten their full 20%.
I was the newest junior trader, so I had my product that I was options market-making, but they also put me on a new product that the CME was rolling out. For those who don't know, when you work for an options market-making firm, there's a contractual agreement with the exchange. When they list new products, they want to get liquidity in there, so they need someone to get the ball rolling. Options market makers come in, and they'll pay them rebates and give them other benefits if they leave their markets out there for others to trade with.
Without getting too into the technical details, it's not like you just leave resting orders out there. The options move with the underlying, so you're basically quoting around where the fair market price is. You get to scalp—buy here, sell there. But the thing is, with new products, there's no volume; it's a completely new product. With this particular product, I think it was like one lot trading a week. It was really dead, but they needed some market makers out there to show that there's liquidity to build confidence so that paper would come in and start trading this product.
So, anyway, I'm out there quoting and leaving my market out there. Every morning, you have to leave your market out there like 95% of the day to qualify for the rebates. You have to be at a certain size on the bid-ask, and there has to be some level of depth. There are all these rules you can learn about if you take the Series 56; they go into all the different variations of those rules.
The thing about this time during options trading is that my age is showing, I guess. This was when options market-making came from the pits to the screens, and the options trading software was relatively new, so it was kind of buggy. We had a license with a startup that was building a certain kind of software we were using. I won't say the name of it, but there was another options trading software firm in Chicago that made a mistake.
This is a side tangent story, but I think it's interesting. They made a mistake, and during our biggest options expiration, we completely lost connection to it. It infuriated all the partners. We lost all this opportunity; we couldn't see our positions, so we were flying blind during the highest risk time of the month when options expire. The partners were furious and were threatening to switch to a competitor. The founder of that software firm was begging, saying, "No, no, no! I'll take you out to a great dinner; we'll talk it over. We're so sorry."
So they were like, "Alright, fine." They told everyone, "Yo, anyone who wants to come, we're going to run the bill up on these guys." We all went because I was just a junior trader, so I was like, "Okay, sure, that sounds fun." We brought like 30 people, and we ordered so much food—lobster, steak, all this crap. We ordered these Henry the 13th shots, which were ridiculous. Each shot was like $200, and they brought it out in this red velvety tray. They lifted this red napkin to show you the bottle, and they poured you this shot. We were just throwing them back, like, "Alright, another one, another one."
I think the bill was like $16,000 or something. The founder of that trading software firm was on the other end of the table, just crying. I felt bad for him; he was this nerdy Indian guy. I think I looked him up on Crunchbase or something, and I think he's worth at least $10 million because a couple of other people besides us adopted his software, so he's doing fine.
But anyway, back to the story. With this new product, I was one of the only market makers, and there was this other market maker who was probably at another options market-making firm in Chicago. He was showing size on his markets; he was like 100 up. I would mostly just piggyback on his markets because I was like, "Whatever, this thing never trades. I don't care."
I would put on my quotes every morning, leave my market out there just to fulfill being in the market 95% of the day, and I would turn it off after the market closed. One morning, I come in, and the markets are reversed. The only other person in the market is that other guy at the competing trading firm. I'm confused because I was going to just piggyback on his market, and I'm like, "What the hell is this?"
It's the morning, and trading firms have to get in there like 6:30 a.m. or something, so I'm a little foggy in the head. I'm like, "What the hell? How's this possible?" But then I'm like, "Oh, there’s no one trading this product." I can see how he could possibly leave the market out there for that long without anyone actually trading with him.
I don't usually trade with this other market maker because we're doing the same thing. We're on the same side of the trade, just both trying to scalp. So it's just me and him out there. I immediately think, "Wait, is this a real trading opportunity?" I trade a one lot on the teeny part of the options chain. For anyone who doesn't know, options have all these strikes, and there's an options chain that lets you see the bid-ask spread for every single strike.
I trade some really far away teeny; I do a one lot. I buy here and sell there because his markets are reversed. I buy at this low price and sell at this high price, one lot. Then I see in my trading software that I just scalped $300, and I have no position because I bought and sold the same strike. I'm completely out of it, so I'm like, "Wait, this is real."
The fear running through my mind is that my software is malfunctioning. You don't know whether that guy made a mistake and put his quote backwards or whether it's my software that's backwards and just showing me the market backwards. I stand up and call the CTO over, like, "Yo, come here, come here, come here. This is really important."
The CTO jogs over, and I'm like, "Hey, is this real? You think this is real?" He checks and says, "Yeah, I think that's real, man." He reviews my one lot trade and says, "Yeah, trade those, man. Trade those. I think those are real."
So I start doing like 20 lots or 100 lots—buying and selling, buy here, sell there, broom broom broom. His market auto reloads, so he has tons of size and depth behind the amount he's showing. I take out 100, and the new 100 just auto-fills. I'm like, "Holy, this guy has depth too." I keep doing it—100, 100, 100, 100.
I'm up maybe like $50,000, and my bonus is 20% of that. For me, that's like I'm up 10 grand in my own net worth in like 30 seconds. Then suddenly, the markets disappear. They just go away, and I'm like, "What happened?"
The CTO is standing behind me, saying, "Oh man, I think he just took his markets down. You should have done more. You should have done them bigger." I'm like, "Oh man." You know, you're weighing the risk, right? Should you just YOLO this thing, or should you do it conservatively?
I was willing to trade up to like $50,000 or so because I reasoned that’s about the amount they wouldn't fire me for if I was wrong. I just gave away $50,000 because my software was just showing the market backwards. I figured they would yell at me, but they would be like, "Whatever, I could see why you would think that. You're a junior trader; just don't screw up like that again. That's coming out of your bonus."
But in hindsight, that was the wrong move because the expected value for me, the way these firms are structured, is that you share all the upside but don't share any of the downside. The EV is actually most positive if you just take the most risk possible. I'm not encouraging that; I'm just saying EV-wise, that is factually a true statement.
If I YOLO that and just trade everything, if I make the firm $10 million, I'd be a hero. I would be a legend they would talk about at holiday parties for the next 20 years. "Oh, this one dude made the firm $10 million in like a minute. He made himself a $2 million bonus. Unbelievable, man." I could have been a legend—legend of the firm, maybe even the industry because that's such an entertaining story.
Then the downside is that I just blow out $10 million, and the partners all scream at me. I just kind of tiptoe out of there like, "Alright, I'm fired." You know, have HR send me information through email. I just didn't have the balls to pull that trigger. I was a junior trader, and I wanted my career. I was new to the industry, and I wanted to start out my career and build up a track record. I didn't want to just blow out in like 10 seconds.
Here's a detail I'm not telling you: with the trading software, you can automate your trades. We have something called the "eye," which is just scanning the market. You can set conditions like, "If the amount of edge in the trade surpasses this amount, then automatically trade all of them up to this size." I had the eye set up for that product, but I didn't turn it on.
What would have happened if I turned the eye on that morning and all of his markets were backwards? It would have gone and hit every single strike—100, 100. It would have done all the bids, all the offers, and every month, not just the front month. It would have made thousands of trades at once.
If his stuff was auto-reloading, as I realized it was, I don't know how much depth he had behind that. For him to be trading that big, this might have been like Citadel or some big player with deep pockets. If I turned the eye on, I would have definitely made millions of dollars all at once. I'm estimating like $10 million for the firm and $2 million for myself in bonus in like 10 seconds, 20 seconds.
That guy who put his market up backwards that morning would have definitely gotten fired and screamed at for sure. But I only took $50,000 off of him, and he probably got reprimanded. If it's a place like Citadel, they don't care that much about $50,000, but he would have gotten reprimanded for being so careless to make such a stupid mistake. Who knows, he might have gotten fired for that, but that's the nature of the industry.
After that happened, I was kind of shaking in my seat a little bit as the information started to sink in. I made myself $10,000; I made the firm $50,000. But I was conservative about this opportunity. I could have just turned the eye on and made millions of dollars in like 20 seconds, maybe even less.
Thinking about it made me so miserable. I couldn't eat lunch that day. My food came out, and it just slowly got cold at my desk. I was traumatized, and I couldn't sleep that night. I was so shell-shocked and depressed. I was like, "Oh my God, dude, who knows how deep that guy's capital was? I probably could have made myself $2 million in 10 seconds, and I was a coward. I just didn't pull the trigger."
I just made $10,000 instead, and I was so angry. I might have started crying; I was so angry. I definitely punched the out of my pillow. I was so angry. I didn't get over it for like a week or two. I think it might have been more.
So yeah, that's the meat of that story. I try to tell myself that even though we took $50,000 off of that other market maker, maybe there are some safeties at the OC or exchange level. If you make a mistake like that and it's just one other person that makes the trade with you, they would just dispute it with some board at the OC or something, and then they'll bust the trade. You'd have to give them all the money back.
Maybe there's some judiciary board, and if I took a million off that guy and my bonus was like $200,000 on top of whatever my bonus would have been, I don't know where that limit is. Maybe $50,000 was just small fries for these guys. If it's Citadel, maybe they were just like, "Whatever, dude, that's like a swing we have in like 3 seconds," and that's why they didn't challenge it or something.
I try to tell myself that to cope, to make myself feel better. But I still wonder, man, if I just turned the eye on and it went and traded everything, I would have made $10 million for the firm and $2 million in bonus.
So yeah, it's one of my biggest regrets as an options quant trader in the industry, knowing that there was a chance I could have made that much. But you can't live in the past, you know? Everyone's got regrets, and you just have to learn from your mistakes and move forward.
That's what I did, and I just thought I'd share that story to give you a feel for how dynamic the industry is. You know, the kind of things that you can run into. I have so many trading stories of crazy stuff that's happened—people screaming, yelling, crying. It's a very wild industry, put it that way.
To put it into perspective, even that $10,000—I made $10,000 in like 10 seconds. There are people in India who pull their rickshaws every day in the hot sun for the whole year, and they probably don't make $10,000. In 10 seconds, I'm eating my breakfast, and I click a button, and I make that guy's whole salary pulling his rickshaw in the hot sun. It's just crazy to think about.
Anyways, yeah, that's the story. Check out the sunset, though. Oh my God, Lake Tahoe is beautiful. I'd love to come skiing here. It goes all the way around.
Alright, guys, hope you enjoyed that story. See you next time!