| If you are an ordinary retail investor and you make hundreds of millions of dollars day-trading Tesla Inc. options, and you go to a financial adviser and are like "my entire account is hundreds of millions of dollars' worth of Tesla call options, any advice," what will the adviser say? I am not a financial adviser and this is not financial advice, but if I was a financial adviser and someone came to me and opened up a duffel bag full of Tesla call options and said "help me figure out what to do with these," I would yelp in panic, sell everything and put it in Treasury bills. And then when I calmed down a bit I'd figure out a diversified asset allocation plan for the money. And then later I'd work on optimizing taxes, and estate planning, and maybe charitable contributions. But first things first! Get the heck out of the Tesla options! The point of day-trading the Tesla options was to get you hundreds of millions of dollars, but now you have hundreds of millions of dollars, and you don't need to day-trade the Tesla options anymore! Oh, what, you want to? You love day-trading Tesla options? Fine fine fine, go ahead, take ten million dollars and use it to day-trade Tesla options, and if you parlay that into hundreds of millions more dollars then that's gravy. But you are too rich to have 100% of your net worth in Tesla options. The roulette wheel landed on your number 30 times in a row, you gotta stop! On Friday, Bloomberg's Zeke Faux and Christine Dobby reported on a lawsuit filed by a Canadian carpenter who allegedly made hundreds of millions of dollars day-trading Tesla options and went to Royal Bank of Canada to ask them what to do about it, and they were allegedly like "have you considered putting 200% of your net worth into Tesla options?" Christopher DeVocht, a carpenter from Vancouver Island, Canada, says he started out like a lot of day traders. After work, he'd read about trading on forums. His favorite things to trade were options on Tesla Inc. stock. Then he went on what has to be one of the hottest hot streaks in the history of financial markets, according to a legal filing. At the end of 2019, his account, with the brokerage division of Royal Bank of Canada, was worth C$88,000. Within two years, he'd turned that into C$415 million ($306 million), he says. Some people would have cashed out. DeVocht didn't. And when Tesla stock fell in 2022, he lost it all, according to a lawsuit he filed this week against RBC Dominion Securities, RBC Wealth Management and accounting firm Grant Thornton LLP. The filing, which is an initial notice of claim that doesn't require evidence to be provided at this stage, didn't include brokerage statements or other proof of his gains or losses. DeVocht now claims that the advice he received, geared mainly toward minimizing taxes, was negligent and failed to take into account his level of financial sophistication. His Tesla investment strategy involved loans from a Royal Bank margin account. ... The assembled team of professionals advised him to incorporate a company, roll all of his securities into it and conduct trades within the company "with a strategy of accumulating as many Tesla shares as possible and holding them for as long as possible," DeVocht claims in the lawsuit. The idea was to convince Canadian tax authorities to view it as an investment holding company, not an active trading business, because he'd pay lower taxes that way, according to the complaint.
Insane! One thing that has always puzzled me about retail financial advice is that people like to ask you about your risk tolerance, like that's a thing that you could know. But I suppose if you walk into a financial adviser's office and are like "I have $300 million and it's all in Tesla options," she will pull up her new client intake form, and there will be a field for "what is the client's risk tolerance on a scale of 1 to 10," and she will write "eight thousand," and the advice will proceed on that basis. Man if I made $300 million trading Tesla options my risk tolerance would then be zero forever. I would put everything in Treasury bills and gold bars and New Zealand bunkers and $100 bills sewn into my mattress. Nobody stays that lucky for long! One way to think about (some) exchange-traded funds is that they are direct-to-consumer structured notes. Like the way it works is: - If you are a hedge fund and you have an idea for a complicated trade — some weird combination of payouts on financial instruments, like "you give me 3x the payout of the worst performer of the S&P 500 index or oil futures, and I pay you 2x the total return on 2-year Treasuries, floored at 3% and capped at 20%, but if Bitcoin is up more than 10% at any point in the next month we do the opposite" — you can call up a bank and ask them to price it for you. And they will, because that's their business. Also if you do this more than once, or even if you don't, they will probably start calling you with ideas for trades like this, because they can charge a lot of money for this stuff and if you show a taste for it they will call you a lot.
- If you are a rich individual and you have an idea for a complicated trade, you can call up your bank's private wealth adviser and ask her to price it for you. Unless you're very rich indeed, you probably don't have an ISDA with your bank, so you can't do exactly the same trade that the hedge fund would do. But your private wealth adviser might be able to build a structured note for you, giving you roughly the same sets of payoffs. This too is pretty lucrative for the bank, and here again if you show a taste for this sort of thing they will be happy to call you up frequently with ideas of their own.
- If you are a regular retail investor with an online brokerage account, who can you call? Nobody. And yet the financial industry would love to sell you some complicated set of payoffs, because there's money in that. And modern financial and legal technology allows the financial industry to package complicated payoffs into exchange-traded funds, which trade like stocks and which you can buy in your online brokerage account without calling anyone.
Now, these are not as bespoke as hedge-fund trades or structured notes can be. If you have very exotic tastes, probably no one will sell you the product you want, because nobody knows what you want. You can't get your idea for a trade; you can only buy the trades that someone wants to sell you. But after years of experimentation it turns out that a lot of retail investors share a taste for a wide variety of moderately complicated payoffs. "Pay me three times the daily returns of MicroStrategy Inc. stock" is, almost inexplicably, a thing that a lot of people want. Or "buy Coinbase Inc. stock and sell slightly-out-of-the-money call options every month to generate income." Bloomberg's Denitsa Tsekova and Vildana Hajric report on "funds that sell options to generate cash, which is then sent back to shareholders as dividends": Even with those extravagant-sounding payouts, the ETFs frequently trail the market or stocks they're linked to. A product like the YieldMax Coin Option Income Strategy ETF, ticker CONY, for instance, has sent more than 100% of its current share value back to holders as cash in the past year. Yet thanks to a swoon in the ETF's price, it's actually down on a total-return basis so far in 2024, and trailing the company it tracks, Coinbase Global Inc.
This morning Coinbase's stock was trading at around $175, and November $185 call options were trading around $15. If you buy the stock for $175 and sell a $15 call option every month for a year, then at the end of the year you've made $180 selling options, so you've gotten more than a 100% yield on the $175 you invested in the stock, and you still have the stock. The problems with this math are left as an exercise for the reader. Here I will just point out: - If you are a hedge fund and you want some complicated trade and you call your bank and ask them for a price, or they call you to pitch you on a trade, you are a hedge fund. Your job is to be somewhat sophisticated about these things. If you blow yourself up on a thing that the bank pitched you, that's really your fault.
- If you are a private wealth customer and you call your bank for a structured note, or they call you to pitch you one, they have some obligation to you to recommend "suitable" trades, not insane ones, and to warn you about the risks. I know about these obligations mostly because banks sometimes get in trouble for doing shenanigans in their structured notes business, so don't rely on them too heavily, but at least they exist. (But see the previous section.)
- If you are an online brokerage customer looking to put all of your money into a Coinbase buy-write ETF, you can just click a button to do that! No one will stop you!
So Tsekova and Hajric write: Issuers say they're simply meeting incessant demand for smart investing styles that were once solely the province of the financial elite. But market professionals, along with regulators, are asking whether buyers truly know what they are getting, with YouTube tutorials typically shining little light on technical risks like the volatility drag and the erosion of net-asset value — risks that can prove make-or-break for day-trader portfolios.
And: Free-market proponents say the changes were a long overdue boost for democratizing access to finance, empowering everyday investors to ride a slew of hot strategies. The liberating spirit energizes firms like Tidal Financial Group, which supported a flurry of fund launches this year. "There is a breaking down of traditional barriers because ETFs are direct-to-consumer products," says Gavin Filmore, chief revenue officer at Tidal. "The minute I launch a product, every trader at home can buy it. It's like a sneaker, it's like a potato chip."
And in fact you can call someone up and ask him for the set of payoffs you want, and if enough people call him then he'll do it: At Roundhill, CEO Dave Mazza has noticed a flood of new inquiries for his firm's expanding suite of products, including questions about the Roundhill Innovation-100 0DTE Covered Call Strategy ETF (QDTE), which has taken in more than $450 million since its March launch. The involvement of DIY traders has impacted the company's strategy. Roundhill recently launched a small-caps covered-call fund, the idea for which was spurred by inquiries from retail investors. The firm has gotten requests for T-shirts, hats and water bottles bearing tickers of its most popular ETFs, and its website has seen a big boost in traffic over the past year. Mazza has done interviews with YouTubers, and Roundhill tends to see upticks in inflows once they're posted online.
I don't know what to make of this. It's easy to make fun of the ones that go down. It is entirely possible, though, that retail investors might get better advice from influencers on YouTube than they would be from financial advisers selling them structured notes. The YouTube influencers might have less of a conflict of interest? To me democratizing access to complicated derivatives strategies sounds obviously bad, but I am perhaps not representative, and a lot of people seem to want this sort of thing. And now they can get it. Elsewhere in ETFs. I feel like I read a dozen articles a week about Jane Street Group, and they all mention how secretive and press-shy it is. Here is a Financial Times profile of the "quirky and opaque New York firm," "a trading company that long cherished its obscurity" but "has now emerged as one of the industry's most followed players, an uncomfortable position for many Jane Streeters." Disclosure, I used to work at Goldman Sachs Group Inc., back when people were writing stuff like that about Goldman. Goldman, people were saying in like 2010, used to be secretive and press-shy, but recently it had exploded into the public consciousness. But in a bad way! Goldman was "a great vampire squid wrapped around the face of humanity," people learned, when they first heard about it. There are a lot of financial firms that go from "relatively obscure" to "very well-known," but usually for bad reasons. Jane Street, on the other hand, now gets constant press, but usually good press. Well, except for one trade-secrets dispute, but even its Sam Bankman-Fried-related press was pretty good. I feel like its popular depiction is something like "a bunch of nerdy friends who enjoy hanging out together and solving puzzles, and somehow every time they solve a puzzle they get a billion dollars." From the FT: "The amount of money they make is almost obscene. And that comes from handling instruments that many other people don't want to touch," said Larry Tabb, a longtime analyst of the industry who now works at Bloomberg Intelligence. "That's where the greatest profits are, but also the greatest risks."
But also: Jane Street has no CEO, and in loan documents shared with investors, the company calls itself "a functionally-organised structure consisting of various management and risk committees". Every trading desk and business unit is run by one of 40 equity holders, who together own $24bn worth of Jane Street's equity. Outsiders believe [co-founder Rob] Granieri — who resembles a softly-spoken, lanky-haired extra from Silicon Valley more than a billionaire trading magnate — is the biggest of these, but Jane Streeters say big decisions are taken by the broader collective leadership group, which it argues fosters collaboration and minimises hierarchy. … "Back in the early days when you got these guys in a room they wouldn't give you a card, they'd all be dressed in shorts and T-shirts and you'd have no idea who you were talking to," Bloomberg's Tabb recalls.
And: Former and current executives say the company's love of puzzles — an integral part of its convoluted interview process — reflects and feeds a willingness to tackle knottier trading challenges, such as how to handle ETFs in less liquid markets such as corporate bonds, Chinese equities or exotic derivatives.
I suppose one problem with this sort of press is that it is a potential negative for recruiting. I mean, in the sense that it is too good for recruiting. If Jane Street is an obscure haven for math nerds, it will mostly recruit math nerds and replicate its culture. If Jane Street is a famous financial services behemoth known for its minimal hierarchy and obscene profits, then it will attract a lot of resumes from people who love money more than they love math. And Jane Street's distinction, perhaps, comes from hiring people who love math more than money and turning the math into money. From that Jane Street profile: Jane Street's prowess is particularly noticeable in the bond market, where it has rapidly muscled its way into a world long-dominated by banks and considered impossible for standalone trading firms to crack. "You can think of the history of Jane Street as automating so that we can move on to the next task that's somewhat more complex, and then trying to automate that somewhat more complex task, and then moving on to the next one," Matt Berger, the head of fixed income at Jane Street, told the FT. "That's been the constant evolution throughout our business."
One model that you could have for why firms like Jane Street have been able to take market share from banks in a lot of trading businesses is that this mindset is not very natural for a bank. If you run a bond trading desk at a bank, your goal is not to get rid of all your bond traders. You're a bond trader! They're your buddies! They are doing the bond trading the way it has always been done, manually, with close personal relationships and gut instinct. Whereas if you started the bond trading desk at Jane Street, you had no personal relationships with customers, and you had no bond traders. You just had some nerds who liked solving puzzles, so they'd be quite happy to work on a puzzle like "how do we trade bonds without human involvement?" The bond traders at banks have mixed feelings about that puzzle. Here is an IFR story about portfolio trading: Electronic trading has revolutionised the way corporate bonds are traded and organised in recent years. The growing prevalence of algorithms to price bonds, along with the emergence of exchange-traded funds as an outlet for offloading risk, has helped trading volumes across US corporate bond markets increase by around 50% over the past five years, according to Coalition Greenwich. Portfolio trading has come to typify this shift towards a more equity-like trading paradigm by allowing investors to buy or sell hundreds of different securities worth as much as US$2bn in a short space of time – a feat that seemed impossible only a few years ago in these once human-dominated markets. "There has been a shift in the way people contextualise risk in credit; there are now more equity-like calculations of beta [ie, how bonds move relative to the wider market] and of factors [different buckets of risk such as industry, region, tenor, etc]," said [Bank of America's Sonali] Theisen. "It's now become something of an arms race on how to systematically recycle risk through the different strategies." Banks are devoting huge resources to keep pace with the fierce competition in this space, including from non-bank specialist trading firms like Jane Street. Technological prowess has fast become indispensable in a world where the speed at which trading desks respond to client enquiries could be the difference between winning a trade and being an also-ran. "The benchmark keeps changing," said a senior fixed-income banker. "If a client has a US$500m portfolio trade and everyone takes 30 minutes to quote, then that's fine. But as soon as one dealer does it quicker – in 10 seconds, for example – then the bar changes and you have to get better and more efficient to stay competitive."
Only a few years ago people loved to complain about bond market liquidity, and a standard complaint was that corporate bonds can never be all that liquid, because there are so many of them and they are all different. Each company has only one stock, but can have dozens of bonds, each with a different maturity and terms. If I want to buy Bond XYZ123, and you have some Bond XYZ125 to sell, there's no trade to be done, even though they're almost the same bond. The only way for us to each get what we want is for a dealer — a big bank — to take both sides of the trade on its balance sheet, finding some XYZ123 for me and buying your XYZ125 for itself. But banks' balance sheets and risk appetites had shrunk, making that trade hard to do. But it turns out you can relax that constraint: If two bonds are pretty similar, then there is a trade to be done. I can have, not a shopping list of particular bonds, but a matrix of factor exposures, and I can say "ehh XYZ125 is 99% as good as XYZ123 at getting me the exposure I want so I'll take it." Or Jane Street can do that calculation, and its balance sheet and risk appetite keep growing, so it can buy your bond and sell me the one I want. And once you start thinking like that, you might stop thinking in terms of individual bonds altogether: You will trade big piles of bonds without knowing which bonds they are, focusing not on the particular names and tenors of the bonds but rather on the overall factor exposures of the piles. Each bond is just a set of factor exposures, you manage your portfolio to some target set of exposures, and the actual bonds involved are interchangeable and unimportant. The bonds are inputs into an equation rather than unique snowflakes. And 10 years ago a bank's bond trader could do some form of that by intuition and feel: If you called her for a quote on some bond she didn't own, she'd think "well that's the same sector as this bond I do own, but the company is a bit more volatile, and it's shorter dated," and sort of triangulate to a price. But now a computer will do that for 100 bonds in 10 seconds, and the bond traders can move on to more complicated things. I guess the hedge-fund trade here is: - Sell spot gold.
- Have all your employees get Costco memberships and credit cards.
- Have them buy as much gold as possible at Costco at a 1.6% markup to spot prices.
- Collect the 4% cash-back rewards from Costco.
- Arbitrage profits!
Bloomberg's Yvonne Yue Li reports: Costco started selling bullion in June 2023 in US stores and on its website. … In its fiscal first quarter, the company said it sold more than $100 million in gold bars — equal to about 51,740 ounces, based on calculations using average gold prices during that period. There are benefits buying from Costco. The retailer offers 2% cash rewards for using an affiliated Citi credit card on purchases at Costco. Shoppers also get a 2% reward on purchases with an executive membership, which costs $130 a year. Costco was selling one ounce bullion bars on Sept. 28 for a 1.6% premium to spot gold's price — below what precious metals retailers charge. Add a potential 4% in rewards, and Costco members get an even bigger break.
I'm putting this here only because I fully expect someone to email me to either say "yes my fund does this" or else "we looked into this and we found the operational problem was ________." Do you, like, buy credit default swaps on Costco to hedge the cash-back counterparty risk? This guy! Still got it: The latest twist in the fight between former Greenlight analyst James Fishback and his old boss David Einhorn is an arbitration filing from the young provocateur stating he was paid less than he should have been because he was "a kid." Fishback's filing, submitted to the American Arbitration Association in late September, asks arbitrators to award him at least $5 million for alleged age discrimination, though the 24-page filing spends most of its time outlining the "defamation" Fishback believes he has faced because Greenlight has said he was never the head of macro at the firm. … "Mr. Einhorn dismissively told Mr. Fishback that his compensation was 'a lot of money for a kid,'" the filing states, and Fishback argues the comment "demonstrates that Defendants' decision about Mr. Fishback's compensation was driven largely by his age — a protected characteristic." ... Fishback also claims Einhorn discriminated against him because he's Catholic; Einhorn allegedly wrote in an email to Fishback that he was "beyond salvation" after Fishback had left Greenlight.
We have talked about Fishback before and honestly his talents were wasted in macro investing; now he has found his true calling, which is trolling. Activist Starboard Value Takes $1 Billion Stake in Pfizer. Key US Yields Hit 4% for First Time Since August on Fed Rethink. US Corporate Bond Spreads Rally to Three-Year Low, Bucking Risks. Banks Whip Out Checkbooks for Leveraged Buyouts as Rates Fall. Carrying a Credit-Card Balance Has Gotten Way More Expensive. Despite Geopolitical Tensions, China Is Big Business for Western Consulting Firms. Marc Rowan, the man with a plan to remake Wall Street. John Kerry Joins Billionaire Tom Steyer's Investment Firm. Shkreli Bid to Overturn $65 Million Daraprim Award Rejected by Supreme Court. EY to hold back some pay from US partners after tough year. Free Blockbuster. Lithium Elon. Lunch-meat Succession. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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