Floor trading and fintwit share an overlapping dynamic

"cooperative competition"

It'll be fun to lay out some basics of the floor trading ecosystem and you will spot analogies.

First an fyi.

The floor gave traders what was known as "time/place advantage". It was the first place an order became public if it was not an electronic order.

Let's classify the traders on the floor:

"Locals" and prop firms

"Locals" are independent traders.

They trade their own money and secure the right to trade on the floor by owning or leasing one of the limited seats which represented an ownership stake by the exchange's "members" (this was before demutualization)

You know prop shops.

Names like Group One, Timber Hill (IBKR), Jane Street, CTC, DRW, Cooper Neff, O'Connor, Cutler, Wolverine, and my alma mater SIG.

Traders representing these firms usually have a salary and bonus (discretionary, formulaic, or hybrid)

A little digression. There's a 3rd class of trader which is a "backed" trader which blurs local and firm.

These firms were usually tied to clearing firms and offered economies of scale in risk management, software, data, clearing rates.

I left SIG in 2008 to get backed...

A former CIA math genius built a quantitative trading fund that earned more than $100 BILLION for investors.

At 66% return/yr, his track record destroys that of Warren Buffet, George Soros, Carl Icahn, and every investor who ever lived.

The Smartest Billionaire in Finance:

1/28
If you'd have put $100 into Jim Simons' Medallion Fund in 1988, it would be $400M+ today.

By contrast,

$100 in the S&P 500 in 1988, would be $2,000 in 2022. (roughly)

Let that sink in.

2/28
Jim Simons's Medallion fund has had unreasonably high annual returns of 66% across 30 years.

For comparison, Buffet clocked in at about 20%/yr.

Many funds don't make that in a lifetime.

3/28
Even during the financial crisis of 2008, it made a net return of 82.38%.

They make so much money for their investors that they charge 44% in management fees.

The industry standard is 20%.

4/28
It uses math calculations to decide the bulk of its trades, & none of the market trends apply to how it performs.

It wins by finding order in chaos.

The fund is managed by Renaissance Technologies, the parent company founded by the mathematical genius Jim Simons.

As I completed 23 years on this lively planet and 5 years in this stock market, I want to share my 23 mistakes of my Investing journey.

A thread🧵

1. Quick Money
I begin with the stock market in a thought that it is an easy and fastest way to make money. Initially, I begin with buy and hold strategy but I felt, that is not what I came for and so I initiated with trading and in few months, (1/n)

I made some good returns, in the next succeeding month I lost my profit and my initial capital. (due to demonetization).

One quote revamp my mind “Rome was not built in a day and Hiroshima and Nagasaki were destroyed in a day” (2/n)

2. Taking tips from News Channels
I lost my faith in 2016 due to such a heavy loss and embark to take tips from TV channels and follow them on daily basis. I don’t know about others but this step failed me miserably. (3/n)

TV channels are just for TRPs, if they don’t provide tips, viewers shift to another channel, while you know the rest.(4/n)

Things I've learned trading for the past 4 years in no particular order while reflecting this Sunday on it all:

* It always goes higher than you expect it will.

* It always comes back down.

* It is very easy to make money in these markets. It is much harder to keep it.

* You will FOMO no matter how much you say you won't. Make sure you don't FOMO with everything and blow your account.

* You don't need some fancy indicator to be profitable. Get solid with a few (personally for me, Ichimoku and OBV are my favorites)

* Horizontal levels are more reliable than diagonal.

* Trade with friends. They'll tell you when you've fucked up and shame you for it.

* You can follow someone else's TA, but you better be able to tell if they're full of shit or not.

* Risk Management will ultimately lead to your success over time. Luck runs out.

* "As soon as you stop trying to get rich quick, you'll get rich quick."

* Beware of getting sucked into coin communities. They're full of hopium, bag hodlers, and outrageous price predictions. Echo chambers are dangerous.

* Always leave behind a small moon bag. Makes you feel better when it does another 10x.

I'll just put this out there:

1. This is classic liquidity crunch and has happened many times.

2. RH/etc. will turn out to have made mistakes, didn't plan for any of this, ultimately lose big.

3. Reform will center on how services are offered/advertised to retail investors.

4. Lots of coverage will center on class warfare narrative and the 'game being rigged'.

5. That same coverage will make 3 seem like the answer and a fair resolution to the problem.

6. The real culprit, as always, was leverage and incentives.

7. In the US financial institutions that accept deposits insured by the federal government (FDIC etc) are allowed to hold positions in risky assets, though this is regulated.

8. Other even less regulated institutions (funds etc) hold shares in the guys referred to in 7.

9. The REAL problem is those institutions are allowed to make leveraged bets that, if they go badly enough, could affect the value of 'safe' assets like savings accounts and pension funds.

10. Thus the ultimate incentive problem: Big funds ultimately insured by taxpayer dollars

11. Ultimately the ONLY real reforms that matter are:

i) Reserve requirements, i.e. how much banks/funds/etc are allowed to borrow to invest in risky assets

ii) Trade restrictions, i.e. some institutions (commercial banks) not allowed to hold some assets/positions (short)

My 2021 DeFi Predictions:

1\ the rise of Decentralized Derivatives
In 2020, the embryo of the DeFi derivative market started to take shape. A dozen DeFi derivative platforms were established and began to launch mainnets. I expect this market will explode in 2021.

2\ Central bank currencies
The COVID-19 pandemic will continue to haunt the world's economy for some time. The economic uncertainty will last.
China will launch its Central Bank Digital Currency in 2021, and many will follow.

3\ Cross Chain BTC will continue to grow.
BTC will take a more important role in DeFi and Derivatives.

4\ Regulations intensify
There will be an increase in official and legislative scrutiny from regulatory agencies concerning the overall cryptocurrency industry internationally.

5\ More traditional money into Crypto and DeFi
Regulations are not bad things. More traditional money will find legitimate paths to crypto investment and in DeFi applications. This may become the drive to another great bubble.

After trading profitably for a living every year since 2000, in late Jan of 2018 I lost 500k in an hour in the XIV blowup. It destroyed me mentally. I Couldn’t think clearly for 18 months. Couldn’t stop “trying to get my money back” which just made it worse.

Finally, I shut it all down scared shitless that I couldn’t trade any more. I had to protect what was left of what I had built over the previous years. The village of idiots in my head had somehow taken over the castle.

I had to dive deep and fully accept the financial loss and so many other life losses that I was carrying with bitterness and anger to find neutral again. My career had become my compulsion to fix the wrongs of the past, my opiate that had huge hangovers.

Thru the painful process of true awareness of what I was doing, I started day trading 100 shares of AAPL just to keep connected to my roots. Not thinking, not caring just trading my feel of the day from all that I had seen over the years.

Not caring was liberating. It felt so good to trade and simply not give a shit if I made money or not. I just flipped 100 shares around based on my feel of the tape and I did this for 3 months while I licked all my wounds trying to figure out how to let it all go. Summer 2019.

Support MSME

The Australia China trade war has resulted in China seeking support for import of of iron ore from Africa. Africa is building its iron or system which will take nearly the next five years to develop completely till then China is looking at India for its import.

This is a very crucial time for the Indian market to understand its own local and domestic needs and fulfill it before exporting the much-needed iron and steel raw materials to China.

This will in turn result in increasing prices of iron and iron materials in China and therefore India can capitalise this opportunity to export and products made of these important commodities at much higher prices.

The Indian Steel market has been under great pressure due to skyrocketing prices as the after effects of the covid-19 lockdown still persist increasing the ever growing gap between the huge demand and the shortening supply.

The manufacturers have not been receiving their pending payments due to which they are not able to procure enough raw material to make the products.

Solid session on 🇮🇳 by @balajis and @naval via @joinClubhouse

Key takeaways... 👇

1/ India will be the biggest beneficiary of the move to #remotework. Three factors driving this: the English-savvy population, willingness for companies out West to hire from a global talent pool, and the large STEM-educated workforce.

2/ India has the potential to become a media superpower. We have Bollywood, the massive audience, the content creators. They foresee India churning out media that isn't uniquely Indian, but one that resonates with global audiences.

3/ The government isn't doing foreign investors any favors with the stringent capital controls they've put in place. Additional capital gain taxes, overbearing KYC controls, and cumbersome paperwork are a few factors dissuading foreign capital from entering Indian markets.

4/ Where you choose to live, incorporate your company, and target your audience could be thought out and optimized for. They don't need to all be in the same region anymore. The world is flatter than ever before.

Are stocks overpriced? How much growth is required to justify a P/E of 100?

In this article, we shall explore how the one- and two-stage Gordon Growth Models, and Dividend Discount Model, relate growth rates, valuations, earnings, dividends, inflation, and return on investment.

Let
E = earnings
d = dividend
P = price
r = discount rate
g = (terminal) dividend growth rate

Then
y = d/P is dividend yield
Y = E/P is earnings yield
P/E = 1/Y
p = d/E is dividend payout ratio

According to the Gordon Growth Model (GGM),

y = d/P = r - g.

Hence,

Y = y/p.

So, for example, if r = 10% is the required return, and growth rate is g = 3%, then dividend yield should be y = 7%.

If also the payout ratio is 70%, then the P/E must be 10.
If the payout ratio is p = 100%, then the P/E can be ~14.

It may appear counter-intuitive that higher retention requires a lower P/E. But remember that we are talking about dividend growth rates, g, not earnings growth rates.

So if a firm is able to grow dividends without retaining earnings, this likely means that it benefits from pricing power, protecting from inflation, or that it has conservative accounting.

However, when the dividend is zero, g cannot be measured, and the model breaks down.

here’s a slightly wonky thread that people who use post-nominal letters will not like: let’s talk about real-time learning in quant-driven strategies and how to do it in practice, because a lot us do this as a result of real-world constraints. its basically TA with a dress-code.

so lets say you found a nee factor, but data is limited becuse it is new-ish? how the hell do you implement it without waiting eons in market-time? first: in small size because distributions are unknown. second: you update the calibration parameters dynamically as you go.

sometimes i am asked why i favor matching assets with volatility estimators instead of betas:
1) volatilities are not stationary but they undergo relatively synchronized regime changes
2) exponentially weighted vols are more responsive to changes in current conditions

3) betas are not stable in shorter terms and identifying changes takes longer and in the short term you get measurement errors if your sample is driving your benchmark
4) honestly the numerical methods are just simpler and i’m a dumdum so it makes it easier for me

5) for long-only baskets of different assets it avoids painful assumptions which may be wrong about correlation, which is good when you know your sample is low quality
6) for long-short baskets of like assets it avoids painful assumptions about intercepts (and therefore betas)

I've been trying to understand for some time the impact of $GBTC (Grayscale Bitcoin Trust) on the price of $BTC. Here's a good article to start, and here's a thread on my current thoughts...

There's no doubt that $GBTC has been a driving force in allowing investors to gain exposure to $BTC. For many investors, it provides the easiest way to get crypto exposure. As a result, $GBTC often trades at a large premium (20%-30%) over spot $BTC 2/9

Recently in January, $BTC prices have declined from a high of >$40k to <$30k (now back near $35k). $GBTC's premium to NAV has also dropped to <5% 3/9

It's worth understanding the mechanics of $GBTC. $GBTC allows accredited investors to buy private shares for 0% premium to NAV, and in return the accredited investors are locked up for 6 months. If you are a non-accredited investor, i.e. retail, you don't have this option 4/9

Many sophisticated investors have taken advantage of this arbitrage opportunity. One way an accredited investor can buy private shares of $GBTC is by depositing BTC (often times with leverage). In doing so, they can collect the $GBTC premium 5/9

A lot has been written today about the $GME pump on /r/WallStreetBets from a financial angle.

But I think there's another angle - this it also works as a *multiplayer game* and one with an interesting design.

Don't believe me? Let's look at it structurally!

1/

WSB pump of $GME exhibits a number of gamelike elements:
1. resource mechanics
2. multiplayer social mechanics
3. progression mechanics
4. multi-system interactions
5. prediction complexity, and
6. a powerful player fantasy to tie them together

2/

1. Just by itself, the stock market is an engrossing game (for those who can afford the time and money). It's got a variety of simple resource mechanics (buy / sell stocks), more complex mechanics (buy / sell options), super complex mechanics (would you like some futures?) ... 3/

... and a very high analytic complexity (which mechanic should I apply to maximize return, short term or long term?).

Like in chess, this analysis is very hard but therefore interesting.

And the system gives somewhat clear feedback about how well you're playing ($$$). 4/

2. Now WSB specifically adds social mechanics. Being a lone wolf timing the market is one thing - but banding together to see what you can do together, now that's something else!

Specifically WSB allows not just socializing/meta, but also for coordination. 5/

It's Sunday morning and I'm grumpy 😑😑 and bored 🥱🥱

Why you ask? It's the weekend, everybody loves the weekend. Time to chill and relax and unwind!!

Yeah talk to a Trader!! We hate weekends and Love Mondays 😂🤣😋

So anyway, my threads on real life practical trading seem to be helping you guys and getting lots of good questions

One which I'm getting asked a lot and a traders biggest dilemma is "WHEN TO SELL"!!

I mean we first look thru a 1000 charts, then we select one to enter, get the entry correct nd wowza it's moving in th right direction nd we're in some profits

Shud be super happy rite?

Unfortunately that's a traders worst nightmare!! Why you ask? Cos goddamit when do we sell?

If we sell too early we risk losing big profits

If we wait too long it might just reverse and we lose most of our profits and most likely even end up in a loss

If we do nothing then our blood pressure goes up cos hey we're traders and that's how we are 😋😋

So here's a "DEEP DIVE WITH DEEPS" on "When To Sell"

** Took me several days to come up with this catch phrase for my learning threads. I hope you guys like it

1/7: I understand that #Ripple's selling concerns many people. But the question is... how do you responsibly distribute Ripple's 50B $XRP? Ripple holding so much #XRP is one of the biggest complaints about XRP and why so many people don't like it and may also prevent ODL adoption

2/7: Escrow was introduced to help this, but that $XRP is still in Ripple's custody. They really need to distribute it. But how? Ideally, it should already have already been done years ago, but you can't go back in time to do it. @JoelKatz has talked about this challenge before.

3/7: So we're against them holding it and we're also against them selling it. So how do they distribute it? They can't give it away, who gets it, how do they choose? Giveaways this late in the game also negatively affect prices. Higher supply = lower demand = lower prices.

4/7: Ideally, they would only distribute this to Financial Institutions for use in #ODL, but unfortunately, there's not enough demand for the utility of XRP through ODL. Perhaps because Finacial Institutions don't want to hold it/use it due to regulatory uncertainty.

5/7: As I see it, there are a few options for distribution:
a) Incentivize the use of ODL despite regulatory clarity - such as giving incentives to #Moneygram,
b) Lock it back up in escrow, effectively reducing supply, but giving #Ripple custody.

🚨Weekly Market Update #1🚨

I go through a daily and weekly process that helps me maintain a higher level perspective on markets and not lose the forest for the trees.

I use @KoyfinCharts for essentially this entire process - thank you @koyfman!

Time for a thread 👇

1/ Domestic Markets

Note: I look at many time periods for everything presented here. For convenience I show trailing 3 months in this thread.

Nasdaq outperformance vs. the S&P and Dow is narrower when compared to T6M. Over the T12 period, the Nasdaq has outperformed by 26%.

2/ European (+Brazil) Markets

Germany (DAX) has lagged both the French (CAC) and UK (FTSE) markets. Including Brazil (Ibovespa) here - it has been outperforming Europe.

The DAX and IBOV have fully recovered from the March 2020 drawdown while the CAC and FTSE continue to recover

3/ Asian Markets

The KOSPI (Korea) has been on absolute fire, with the NKY close behind. The SHCOMP has lagged of late.

The KOSPI has also outperformed since the pandemic, with the NKY and SHCOMP lagging by 17% and 21%, respectively, over the T12 period (HSI is breakeven).

4/ US Sectors

Energy and Financials have been on a tear lately (economic recovery). Materials have also performed well, playing the recovery.

Technology and Consumer Discretionary have led over the T12 period, but are in the bottom half T3M.

Healthcare has held up strong.

This FT piece on deb #cancellation is interesting and poses a few interesting questions.

Let me begin with what I do not like.

The case against cancelling debt at the #ECB https://t.co/o0Vvvf6leU

#monetization 1/

The excessive focus on Italy is off the mark. Any serious discussion on sterilizing this exceptional debt linked to the pandemics should concern all EMU countries. All have had a spike in deficit

2/

Nor I like the argument that debt sterilization would not bring fresh cash. It would not, and of course it would not be needed. EMU public debt is today (and for a long period to come) in excess demand. On top of that the ECB will keep the PEPP umbrella open for a while

3/

Sterilizing the EMU pandemics-related public debt is a medium term issue, related to future fiscal space. Will this exceptional stock of debt that built in 2020 constrain EMU countries in their ordinary fiscal policies in the future? This is the question to ask
4/

If the answer is yes (I believe it is), then sterilizing that debt is eventually going to be an issue to be dealt with. And the ECB will have to be part of the solution
This is what the FT seems to suggest too (this is why the piece is more complex than it seems)
5/

A dumb thing I did in 2020:
Saw something that wasn't there on a maiden RE trade and bot late. Should have known bulk tonnage MRE/PEA etc almost all sold news in 2020 but was busy and rushed. Need to be early to best win those types of deposits. -25%ish for my trouble. 1/11

It was small money fortunately. <---GT Gold. Embarrassing thinking back on it. Industry guy told me it was kinda dumb after.😀I would say the lesson is to never rush into things but that's not true. There's times you can rush into things but it depends on the circumstances. 2/11

Example: I just happened to be watching the trading on Kodiak Copper as I thought it was through an interesting spot then all of a sudden the stock just started getting walked up. Grabbed some. It halts a minute later and releases proof of concept assays the next day. 3/11

Context is everything. Don't be afraid to try some things but keep it small when trying. You can learn really important lessons. Save piling in on concepts for when you've been doing this for years (10+?). You might win big early and think you're smart. Most of us are not. 4/11

No substitution for the grindstone. I won on a couple positions early. Tough to lose on Claude Resources buyout & finding Nexgen. Was saying to a few of the guys last night that I am surprised I did not go -50% on portfolio next. My strength was knowing I still knew little. 5/11