WEBVTT - Vaneer Bhansali on Losing Fed Independence as the Biggest Tail Risk Right Now 0:00:02.720 --> 0:00:16.400 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.560 --> 0:00:21.480 Hello and welcome to another episode of The Odd Lots Podcast. 0:00:21.560 --> 0:00:22.880 I'm Tracy Alloway. 0:00:22.720 --> 0:00:23.920 And I'm Joe Wisenthal. 0:00:24.200 --> 0:00:27.720 Joe, I've been reflecting on this year. It's been a 0:00:27.760 --> 0:00:28.280 busy year. 0:00:28.440 --> 0:00:29.320 Yeah, go on. 0:00:29.520 --> 0:00:32.080 In fact, we're recording this. We're on yet another trip. 0:00:32.720 --> 0:00:35.760 We're in Huntington Beach for this year's future Proof conference, 0:00:35.800 --> 0:00:38.200 which is always a fun time an event I always enjoy, 0:00:38.320 --> 0:00:40.559 but we happen on the road a lot. Yeah, and 0:00:40.840 --> 0:00:43.480 I feel like the entire year is starting to feel 0:00:43.560 --> 0:00:47.120 very surreal for me. It feels just very different to 0:00:47.320 --> 0:00:50.240 prior years for many different reasons. But I was also 0:00:50.280 --> 0:00:53.760 thinking one of those reasons is because it seems harder 0:00:53.800 --> 0:00:57.560 and harder to do portfolio construction nowadays. And I know 0:00:57.600 --> 0:01:01.240 that sounds really weird, given that markets are still at 0:01:01.280 --> 0:01:04.920 record highs and everything seems to be going reasonably well, 0:01:04.959 --> 0:01:07.360 even though we had that terrible jobs number. But if 0:01:07.360 --> 0:01:10.360 I think back to the big leg down that we 0:01:10.440 --> 0:01:14.680 saw this year, it seemed really scary because basically everything 0:01:14.840 --> 0:01:16.000 sold off at once. 0:01:16.160 --> 0:01:16.360 Right. 0:01:16.800 --> 0:01:18.240 You know what I really like. I like how you 0:01:18.280 --> 0:01:20.480 started this with this philosophical thing like we're out on 0:01:20.520 --> 0:01:21.120 the road and. 0:01:21.160 --> 0:01:22.800 All this, and then I was like, how do I 0:01:22.880 --> 0:01:23.440 protect my. 0:01:23.480 --> 0:01:26.960 Portfolio and reflecting and then the surreality of the times 0:01:27.480 --> 0:01:30.000 and now we bring it around to portfolio construction. But no, 0:01:30.080 --> 0:01:32.040 that's true, and there's two a couple of things going on. 0:01:32.120 --> 0:01:34.840 So one is the sort of like cross asset class moves. 0:01:34.959 --> 0:01:37.240 The other thing is and is very related to that. 0:01:37.360 --> 0:01:39.319 I mean it's the flip side of this, which is 0:01:39.360 --> 0:01:42.760 correlation breakdown. And then there was still this other element 0:01:42.800 --> 0:01:45.039 that I think there is a play where at least, 0:01:45.160 --> 0:01:47.400 like I would say, there's two more things, which is 0:01:47.400 --> 0:01:50.440 that one within us assets, the winners are still the winners, right, 0:01:50.520 --> 0:01:52.600 especially a lot of these big tech names, so you 0:01:52.680 --> 0:01:54.760 haven't gotten the sort of secular and people. 0:01:54.640 --> 0:01:57.520 Have been talking about overvaluations for forever. 0:01:58.480 --> 0:02:01.080 And then the fact that you know you're not getting 0:02:01.120 --> 0:02:04.760 paid much to take on volatility risk or volatility measures 0:02:04.760 --> 0:02:07.360 are still very low. So there's a lot of difficult, 0:02:07.400 --> 0:02:08.519 unintuitive things going on. 0:02:08.720 --> 0:02:10.400 And I don't even know what a tail risk hedge 0:02:10.440 --> 0:02:12.560 actually looks like at this point, because I would have 0:02:12.560 --> 0:02:16.079 thought like, well, obviously maybe you diversify into long duration 0:02:16.200 --> 0:02:18.960 bonds or something like that. But then in April when 0:02:18.960 --> 0:02:21.320 we had the big sell off long duration and not 0:02:21.400 --> 0:02:23.880 do that well either. So it kind of has me 0:02:23.919 --> 0:02:27.000 scratching my head about if you were worried about stuff 0:02:27.280 --> 0:02:30.440 both literally and figuratively perhaps blowing up at this point 0:02:30.480 --> 0:02:33.280 in time, what would you be doing, Like, what does 0:02:33.320 --> 0:02:35.000 a tail risk hedge actually look like? Now? 0:02:35.320 --> 0:02:37.840 You like buke gold that's already at record high. Yeah, yeah, 0:02:37.880 --> 0:02:39.080 it's confusing. 0:02:38.840 --> 0:02:41.480 Yes, Okay. So on that note, I'm very happy to 0:02:41.520 --> 0:02:43.959 say we actually have the perfect guest to talk about 0:02:44.040 --> 0:02:47.880 tail risk insurance and just tail risks in general, someone 0:02:47.919 --> 0:02:50.399 who's been working on Wall Street for a really really 0:02:50.440 --> 0:02:53.680 long time and has a very storied career, lots of 0:02:53.720 --> 0:02:57.720 stories involving big names that you and I would definitely recognize. 0:02:57.760 --> 0:03:00.240 We're going to be speaking with. Veneer Bensali is, of 0:03:00.240 --> 0:03:03.239 course the founder of a long tail Alpha and again 0:03:03.520 --> 0:03:06.120 has worked at many many firms previously. We'll get into 0:03:06.120 --> 0:03:08.200 all of that. Veneer, thank you so much for coming on. 0:03:08.160 --> 0:03:09.480 All thoughts, thank you for having me. 0:03:09.840 --> 0:03:11.920 So I should just go ahead and ask you to 0:03:11.919 --> 0:03:15.040 give a sort of five minutes summary of your career 0:03:15.080 --> 0:03:18.000 because it is kind of amazing. But the important thing 0:03:18.160 --> 0:03:20.280 is you didn't start out as a trader, You started 0:03:20.320 --> 0:03:21.360 out as a mathematician. 0:03:22.040 --> 0:03:25.239 Yep. I started out as a theoretical physicist. I was 0:03:25.280 --> 0:03:28.799 finishing my PhD at Harvard, and this is nineteen ninety one. 0:03:28.880 --> 0:03:30.880 The recession had just hit. I didn't know what a 0:03:30.919 --> 0:03:33.360 recession was. I wanted to be a professor, but my 0:03:33.480 --> 0:03:35.520 job evaporated because I was going to go work at 0:03:35.560 --> 0:03:39.160 the super colliders. The Superconducting SuperCollider got canceled by Congress. 0:03:39.600 --> 0:03:42.600 Nineteen nineties. I had a post dot lineup in France 0:03:42.680 --> 0:03:45.160 and one I think it was in Texas and Austin, 0:03:46.000 --> 0:03:48.640 and I got a call out of Wall Street, out 0:03:48.640 --> 0:03:51.280 of Goldman. They were looking for quants like me to 0:03:51.560 --> 0:03:54.880 work on options trading or options model building rather, I 0:03:54.920 --> 0:03:57.960 should say. So I went and interviewed, mostly because of 0:03:57.960 --> 0:04:00.600 the free trip in New York. I went there, got 0:04:00.600 --> 0:04:03.280 interviewed by an elderly gentleman who was taking notes saying, 0:04:03.360 --> 0:04:06.200 doesn't know any finance. For disclosure, I knew no finance. 0:04:06.240 --> 0:04:09.119 I had no interest in it. It was Fisher Black 0:04:09.120 --> 0:04:13.640 who was in Really Oh wow, I decided Black Scholes fame. 0:04:13.760 --> 0:04:16.680 Little did I know when I turned that job down 0:04:16.720 --> 0:04:20.080 from Goldman. I took another job at City Bank, trading derivatives, 0:04:20.080 --> 0:04:23.080 because in my mind was a sabbatical. I was going 0:04:23.120 --> 0:04:24.599 to do this for about six months to a year 0:04:24.640 --> 0:04:27.359 and then go back to physics. Well, little did I 0:04:27.360 --> 0:04:30.280 know that my whole life would become basically, very deeply 0:04:30.279 --> 0:04:32.520 connected with ation trading. So that's what I've been doing. 0:04:32.640 --> 0:04:34.360 And we'll talk a lot more about dail risk getting 0:04:34.400 --> 0:04:34.839 in a second. 0:04:34.960 --> 0:04:37.320 Wait, I got to ask why did you decide to 0:04:37.360 --> 0:04:40.800 turn down Goldman? And given the Fisher Black himself was 0:04:40.839 --> 0:04:42.800 doing the interview, and you chose to go to City 0:04:42.839 --> 0:04:43.120 at that. 0:04:43.080 --> 0:04:45.719 Time, Well, one was a research job at Goldman, and 0:04:45.960 --> 0:04:49.640 the job at City was actually trading drivens. And since 0:04:49.720 --> 0:04:51.760 trading was so far away from what I knew, and 0:04:51.800 --> 0:04:54.120 this was really supposed to be a vacation for me 0:04:54.160 --> 0:04:56.480 for about a year, like found like a good thing 0:04:56.520 --> 0:04:57.520 to do, for a fun thing to do. 0:04:57.680 --> 0:05:00.960 Rather, did you ever feel like always so curious about 0:05:01.000 --> 0:05:03.680 stories from the early days of physicists going to Wall Street. 0:05:04.040 --> 0:05:06.440 Was there a period where you felt like it was 0:05:06.480 --> 0:05:07.960 a bit beneath I mean, you call it kind of 0:05:07.960 --> 0:05:10.720 a vacation job. Did it feel intellectually beneath you for 0:05:10.760 --> 0:05:13.160 a while, and then did it eventually become sort of 0:05:13.600 --> 0:05:16.800 genuinely intellectually satisfying in the way that maybe you had 0:05:16.839 --> 0:05:19.919 anticipated an academic career to become so interesting. 0:05:19.960 --> 0:05:23.279 Though the modeling certainly at those days seemed a little 0:05:23.440 --> 0:05:25.359 too naive. So for instance, I'll give you an example 0:05:25.960 --> 0:05:28.840 very first trade that we did, large trade. I was 0:05:28.839 --> 0:05:30.720 a city bank at the time, and it was an 0:05:30.720 --> 0:05:33.719 interest rate gap on yen. Interest rates linked to the 0:05:33.800 --> 0:05:36.719 dollar yen, so it was basically a two factor option 0:05:36.839 --> 0:05:40.240 called hybrid option. And it turned out that at a physicist, 0:05:40.240 --> 0:05:43.240 I was very easy. It was very easy for me, 0:05:43.279 --> 0:05:45.320 and I was very able to write a Monte Carlo 0:05:45.760 --> 0:05:48.920 to write this knockout gap, but for the finance people 0:05:49.040 --> 0:05:51.280 it was kind of tough. So the math was very easy. 0:05:51.880 --> 0:05:54.400 But I also learned that trading is not just math. 0:05:54.480 --> 0:05:56.920 Trading is a lot of behavioral stuff and so on, 0:05:56.960 --> 0:05:59.560 and that I just obviously had to learn. And I 0:05:59.560 --> 0:06:01.960 have some great stories of stuff that I did really 0:06:02.000 --> 0:06:04.120 badly back in nineteen ninety ninety four. 0:06:04.240 --> 0:06:07.200 Tell us the story I did badly well, So nineteen ninety. 0:06:07.040 --> 0:06:09.400 Four, if you remember, in a nineteen ninety three the 0:06:09.440 --> 0:06:12.480 fed ad eased and rates were quite low, and everybody 0:06:12.640 --> 0:06:14.680 was long the front end of the yeld curve and 0:06:14.920 --> 0:06:16.719 buying year dollar features contracts. 0:06:16.760 --> 0:06:18.600 Wait, didn't it talent around here go bankrupt? 0:06:18.760 --> 0:06:21.799 Yes, yes, yes, we'll get to that exactly. So February 0:06:21.800 --> 0:06:24.200 of nineteen ninety four, the Fed raised race by twenty 0:06:24.200 --> 0:06:28.000 five and then very surprisingly April eighteenth of that year, 0:06:28.040 --> 0:06:31.200 they did an inter meeting increase. And at that time 0:06:31.800 --> 0:06:33.800 bond market has always sold off quite a bit, and 0:06:34.480 --> 0:06:37.040 I just did what human beings you do, which is 0:06:37.560 --> 0:06:39.120 that on mean reversion. So I tried to buy the 0:06:39.120 --> 0:06:41.760 bond market, and tried to buy the bond market again 0:06:41.800 --> 0:06:44.799 and again and again until I realized that there's something 0:06:44.880 --> 0:06:48.360 called trend following and exit. And I think the bond 0:06:48.360 --> 0:06:51.840 market sold off a good fifteen twenty points and finally 0:06:51.839 --> 0:06:55.520 I recouped all that. It was a brutal few months 0:06:55.520 --> 0:06:57.800 of literally getting my face ripped off. 0:06:58.200 --> 0:07:00.880 So one other thing, I'm curious the sort of early 0:07:00.960 --> 0:07:04.680 days of quants, But what exactly was the pitch to scientists, 0:07:04.720 --> 0:07:07.920 whether they're you know, mathematicians or physics guys. When these 0:07:07.960 --> 0:07:10.400 big banks or big trading firms are trying to recruit 0:07:10.440 --> 0:07:12.840 back then, because you know, like quant was in the 0:07:13.240 --> 0:07:15.120 I know we had nineteen eighty seven by them, but 0:07:15.200 --> 0:07:18.200 it was still relatively in the early days. So I'm 0:07:18.240 --> 0:07:20.800 really curious, like what they told you about what you 0:07:20.840 --> 0:07:21.560 would be doing. 0:07:21.960 --> 0:07:25.440 So from the modeling side is pretty straightforward, right, the 0:07:25.440 --> 0:07:29.960 blactual equation and stochastic calculus. Stochastic finance is basically what's 0:07:29.960 --> 0:07:33.320 called the eight equation or the diffusion equation in physics, 0:07:33.320 --> 0:07:37.840 and that's something that every physicist learns when they're in 0:07:37.880 --> 0:07:40.640 early graduate school. It's like solving a partial differential equation. 0:07:40.720 --> 0:07:43.360 So the math is exactly identical the math of finance. 0:07:43.400 --> 0:07:46.800 And maybe that's the problem actually in retrospect now that 0:07:46.880 --> 0:07:49.480 having done this for thirty years and thirty plus years 0:07:49.480 --> 0:07:52.520 and survived, maybe that's the problem because the beauty can 0:07:52.560 --> 0:07:57.600 somehow hide the frictions underneath it. From the trading side, 0:07:57.640 --> 0:07:59.440 when I first started crating, I think it was very 0:07:59.440 --> 0:08:04.040 simply being mathematically sharp and quick and being able to 0:08:04.080 --> 0:08:08.679 answer quizzes just made interviewers feel like they were getting 0:08:08.800 --> 0:08:11.120 smart people on the desk that they could train right 0:08:11.160 --> 0:08:12.600 the blank canvas, so speak. 0:08:12.920 --> 0:08:17.280 So once people on these desks got armed with PhD 0:08:17.560 --> 0:08:21.400 physicists and understanding of like Brownian motion and stuff like that. 0:08:21.920 --> 0:08:26.080 Did that change how the actual markets traded from your perspective, 0:08:26.360 --> 0:08:30.000 like sort of pre and posts that, did assets conform 0:08:30.320 --> 0:08:34.480 more to as models anticipated because of the model effect 0:08:34.559 --> 0:08:38.120 on them? Like what was your observation of actual existing 0:08:38.160 --> 0:08:40.800 market behavior pre and post the physics revolution? 0:08:41.000 --> 0:08:43.320 Oh? Absolutely, And this is a very important question because 0:08:43.320 --> 0:08:45.839 if you fast forward to twenty eighteen, the Big XIV 0:08:45.960 --> 0:08:48.800 debacle and the bottomagedin and a lot of things that 0:08:48.880 --> 0:08:51.760 happen now and actually fundamentally, what we do now, what 0:08:51.840 --> 0:08:54.520 I do now is related to this fact that there's 0:08:54.559 --> 0:08:58.400 a very night feedback loop between models and markets and models. 0:08:58.400 --> 0:09:00.280 So give you a very simple example, Right, you have 0:09:00.960 --> 0:09:03.920 an option that you've sold to somebody, and you have 0:09:03.960 --> 0:09:06.000 to manage the risk. Of course, when you sell the option, 0:09:06.679 --> 0:09:09.240 you're getting a multimary premium. That's why you sell it. 0:09:09.240 --> 0:09:11.480 You're getting an insurance premium, so to speak. But then 0:09:11.520 --> 0:09:13.520 to manage the position, you have to delta hedge. But 0:09:13.600 --> 0:09:15.640 delta hedging means that you have to buy and sell 0:09:15.679 --> 0:09:18.760 the underlying asset and some higher order greeks as well, 0:09:18.760 --> 0:09:21.680 Gamma vega data that you've all read about. But delta 0:09:21.679 --> 0:09:25.520 hedging requires people to be able to buy and sell 0:09:25.559 --> 0:09:28.040 so that they are the seller. The market maker is 0:09:28.080 --> 0:09:30.679 locally flat of course, so the market maker, that's what 0:09:30.720 --> 0:09:33.520 you do, and that's how you earn your keep, earn 0:09:33.600 --> 0:09:36.680 your visa, so to speak. The problem is that there's 0:09:36.720 --> 0:09:39.880 an idealization in mathematics or mathematical finance that you can 0:09:39.920 --> 0:09:44.079 do this at an unlimited size, and size doesn't matter, 0:09:44.120 --> 0:09:48.360 but it matters. Liquidity is actually not there. The basic 0:09:48.400 --> 0:09:52.199 assumption of black shoals is that you can continuously trade 0:09:52.280 --> 0:09:55.520 with almost zero transactions costs. Well, that's just not true 0:09:55.520 --> 0:09:57.839 in real markets. As a matter of fact, in the 0:09:57.920 --> 0:10:00.840 last maybe two years even you've seen liquidity in the 0:10:00.880 --> 0:10:04.760 EMNI futures contracts, which are possibly the I would take 0:10:04.920 --> 0:10:07.600 the zero to order hedging instrument for the equity markets 0:10:08.160 --> 0:10:11.160 go down relative to the high levels, frequently go down 0:10:11.240 --> 0:10:13.640 to maybe one twentieth or one fiftieth office level. So 0:10:13.679 --> 0:10:16.360 people just can't get out. So what happens is that 0:10:16.840 --> 0:10:19.640 people sell options, then they start delta hedging. Delta hatging 0:10:19.760 --> 0:10:23.880 results in the options market reacting to the delta, then 0:10:24.040 --> 0:10:26.720 results in new hedges coming in. So this feedback loop 0:10:27.040 --> 0:10:30.280 gets tighter and tighter and tighter until something breaks. And 0:10:30.320 --> 0:10:33.280 when something breaks and the box shut down, which is 0:10:33.280 --> 0:10:36.319 today's environment, you actually have no liquidity and that's when 0:10:36.360 --> 0:10:39.200 you get these crashes like Liberation Day on April second. 0:10:39.520 --> 0:10:42.240 Vall Mageddon was definitely one of the more weirder events 0:10:42.320 --> 0:10:45.520 in markets because everyone could see what was going to 0:10:45.600 --> 0:10:48.640 happen when the VIX curve actually inverted, Like you could 0:10:48.640 --> 0:10:51.280 see that all these products were going to go absolutely 0:10:51.320 --> 0:10:54.480 belly up and no one, no one seemed to react 0:10:54.520 --> 0:10:56.800 to it until it was like much, much too late. 0:10:57.320 --> 0:10:59.320 That reminds me so one of the reasons that we 0:10:59.360 --> 0:11:02.320 are interviewing you here in Huntington Beach is because you 0:11:02.640 --> 0:11:05.120 used to work at Pimco with Bill Gross. In the 0:11:05.160 --> 0:11:07.840 last time we spoke to Bill Gross, I think was 0:11:07.880 --> 0:11:10.800 actually at Huntington Beach two years ago, and one of 0:11:10.840 --> 0:11:13.440 the things we spoke to him about was volatility selling, 0:11:14.040 --> 0:11:16.560 and Bill kind of became the poster child for a 0:11:16.559 --> 0:11:19.520 little bit of volatility selling, at least in the bond 0:11:19.559 --> 0:11:21.839 market in the sort of like Guesse. It would have 0:11:21.840 --> 0:11:25.520 been twenty fifteen around then, mid sort of twenty tens area. 0:11:26.080 --> 0:11:29.480 I'm really curious who's selling fall now and how has 0:11:29.520 --> 0:11:31.360 it changed over the course of your career. 0:11:31.679 --> 0:11:34.240 Yeah, so a great little site point there. So Bill 0:11:34.280 --> 0:11:35.800 and I've been great friends. As a matter of fact, 0:11:35.800 --> 0:11:38.720 I went to pimcoll because I heard Bill speak at 0:11:38.760 --> 0:11:40.800 a talk when he was advertising in book back in 0:11:40.880 --> 0:11:44.800 two thousand and Bill's an amazing genius, great investor, and 0:11:44.960 --> 0:11:47.480 one of the best compliments I got. Recently, I was 0:11:47.520 --> 0:11:49.760 communicating with him and he said, I have your paper 0:11:49.800 --> 0:11:51.319 at the top of my reading list and I said, 0:11:51.360 --> 0:11:53.800 wish paper, Bill, And he said, this paper that I 0:11:53.800 --> 0:11:58.319 wrote with Larry Harris on the volatility selling ecosystem that 0:11:58.600 --> 0:12:01.800 basically you grew up before twenty eighteen. So yes, So 0:12:01.960 --> 0:12:05.640 Bill actually in a sense invented the sole idea of 0:12:05.760 --> 0:12:10.600 selling volatility in fixed income, especially through buying mortgages or 0:12:10.679 --> 0:12:14.719 explicit selling of straddles and strangles and what we realized. 0:12:14.840 --> 0:12:16.840 And again I was head of analytics at pimcos, so 0:12:16.960 --> 0:12:19.440 over the last or over fifteen years or so I 0:12:19.480 --> 0:12:22.720 was there, I got to see and help him manage 0:12:22.720 --> 0:12:26.040 the quantitative risks of those portfolios. We ended up educating 0:12:26.080 --> 0:12:29.880 a lot of our clients at that time about volatility selling, harvesting, 0:12:29.960 --> 0:12:33.120 wall premiums and so on, which did end up adding 0:12:33.200 --> 0:12:35.679 quite a bit of as Bill calls its structural alpha 0:12:36.080 --> 0:12:40.079 to the Pimco portfolios and twenty thirty forty basis points 0:12:40.080 --> 0:12:43.120 every year. What happened is that everybody got educated and 0:12:43.160 --> 0:12:46.120 it became part of the academic lore and everybody realized it. 0:12:46.679 --> 0:12:48.280 There was a lot of crowding, and it's a little 0:12:48.280 --> 0:12:50.560 bit like selling insurance, right, so when you find that 0:12:50.600 --> 0:12:53.440 one insurance policy selling works, then you say, why don't 0:12:53.480 --> 0:12:57.120 become multi line insurance provider, so you start telling insurance 0:12:57.160 --> 0:13:00.280 policy and everything. And so what has happened now over 0:13:00.360 --> 0:13:04.520 my career it have gone from institutional selling, where first 0:13:04.559 --> 0:13:07.320 of it was hedge funds, then it was large sophisticated 0:13:07.360 --> 0:13:11.000 mutual funds like Pinco, who could actually still fit it 0:13:11.160 --> 0:13:14.559 inside of the mutual fund complex because selling naked options 0:13:14.640 --> 0:13:18.320 is not really allowed unless you cash back it. And 0:13:18.400 --> 0:13:21.200 then over time it has now gone to all the 0:13:21.320 --> 0:13:26.000 do it yourselfers, so all the wealth offices and family 0:13:26.040 --> 0:13:31.080 offices and large endowments, and this whole area which is 0:13:31.120 --> 0:13:35.640 now called alternative risk premiums, is based on this idea 0:13:36.160 --> 0:13:39.440 that you can go and sell volatility in various forums 0:13:39.480 --> 0:13:43.720 explicit forms or implicit forms to generate income. So everybody's 0:13:43.760 --> 0:13:44.080 doing it. 0:13:44.160 --> 0:13:47.000 Yeah, that's the answer. Everyone. Even more people are doing it. 0:13:47.040 --> 0:13:50.000 So when we see alternative risk premia, it's basically a 0:13:50.080 --> 0:13:51.640 vall selling overlay. Is that it? 0:13:51.960 --> 0:13:54.320 Yeah, I mean you can make it more or less sophisticated. 0:13:54.360 --> 0:13:55.880 I mean it's a little bit naive to say it's 0:13:55.920 --> 0:13:58.880 only wall selling, but wall selling is a very important 0:13:59.480 --> 0:14:01.440 component of it. And there were some great papers by 0:14:01.440 --> 0:14:06.240 people from AKR who took every asset class, so equities, bonds, credit, 0:14:06.520 --> 0:14:10.120 foreign exchange, and then also sliced stray down in various 0:14:10.120 --> 0:14:12.800 types of strategy, style and quality and momentum and so on. 0:14:13.160 --> 0:14:15.720 They made like a sixteen by sixteen matrix, and then 0:14:15.760 --> 0:14:19.760 they recreated this what I'd consider to be more sophisticated 0:14:19.880 --> 0:14:23.480 sounding ball selling, But it really is ball selling. And 0:14:23.560 --> 0:14:26.120 what people do, just to be very clear, is it's 0:14:26.160 --> 0:14:29.600 not just ball selling. They also layer on other things 0:14:29.640 --> 0:14:32.000 like trend following on top of it to create a 0:14:32.040 --> 0:14:35.320 counterbalance to the ball selling, because trend following is naturally 0:14:36.200 --> 0:14:54.120 a ball liking or ball long ball type of strategy. 0:14:55.080 --> 0:14:58.440 Going back to I hadn't realized that about the declining 0:14:58.520 --> 0:15:02.520 or the collapsing liquid within the many futures. But is 0:15:02.560 --> 0:15:06.320 there some sort of I don't know, law of thermodynamics 0:15:06.440 --> 0:15:08.800 or something. I don't know if that's the term or 0:15:08.800 --> 0:15:12.160 that's the analogy in market where such that when some 0:15:12.360 --> 0:15:17.160 instrument becomes the hedging instrument of choice, the more popular 0:15:17.200 --> 0:15:20.560 that gets, the less capacity there is for liquidity in 0:15:20.600 --> 0:15:22.200 that instrument. Is that sort of what's going on? 0:15:22.320 --> 0:15:24.760 Yeah, So in this case, the even futures contract are 0:15:24.760 --> 0:15:28.720 basically a speculation vehicle. They're a cash equitization vehicle, so 0:15:28.760 --> 0:15:30.640 they serve a lot of different purposes. But I think 0:15:30.640 --> 0:15:33.600 the biggest thing that's going on here is that, starting 0:15:33.600 --> 0:15:36.560 maybe about ten years ago and somewhat surreptitiously, the market 0:15:36.720 --> 0:15:39.520 morphed from human market makers. So when I started trading, 0:15:40.200 --> 0:15:42.960 it was human market makers. I still remember when I was, 0:15:43.040 --> 0:15:45.920 you know, in the nineteen nineties, Tommy Baldwin on the 0:15:45.960 --> 0:15:48.960 pit of the CBOT floor chicagoboard to trade floor. You know, 0:15:49.000 --> 0:15:51.920 you would do a trade and Tommy Baldwin, and he 0:15:52.080 --> 0:15:54.320 was legendary obviously, he would lift his hand up and 0:15:54.360 --> 0:15:56.200 the market would stop and turn and go the other 0:15:56.240 --> 0:15:58.120 way humans could do that. 0:15:58.240 --> 0:15:58.680 Yeah, but what. 0:15:58.840 --> 0:16:02.200 Happened surrepticiously or very strangely over the last fifteen or 0:16:02.240 --> 0:16:05.640 ten years maybe, is that the human beings have sort 0:16:05.640 --> 0:16:09.840 of left this market making area and ninety plus percent 0:16:10.040 --> 0:16:12.640 is being made by bots. And what bots know very 0:16:12.640 --> 0:16:15.520 well self survival is extremely important to them is as 0:16:15.560 --> 0:16:19.280 soon as they see a liquidity tidal wave coming so 0:16:19.400 --> 0:16:21.600 nami coming at them, they just get out of the way. 0:16:21.840 --> 0:16:25.960 Liquidity just becomes very episodic and muhammadalarians to call it 0:16:26.560 --> 0:16:29.360 latent ill liquidity, which is just the fixture of the 0:16:29.360 --> 0:16:32.720 markets today. It looks liquid and when you don't need it, 0:16:32.720 --> 0:16:34.560 it's there, but if you need it, it's not there. 0:16:35.080 --> 0:16:37.120 So how do you actually deal with that as a trader? 0:16:37.560 --> 0:16:39.560 Yeah, so as a trainer. So this comes back to 0:16:39.880 --> 0:16:44.080 the role of options fundamentally, right, So what do options 0:16:44.680 --> 0:16:47.200 in the world of quantitative finance. You can take an option, 0:16:47.240 --> 0:16:49.320 you can replicate it by doing delta hedging and so on, 0:16:49.360 --> 0:16:52.840 basically looking at the partial derivatives of an option pricing equation, 0:16:53.160 --> 0:16:55.400 or you can say I'll just buy the option. An 0:16:55.400 --> 0:16:59.240 option is a contractual agreement between you and the option provider. 0:17:00.080 --> 0:17:01.960 So if there's ill liquidity, and if you believe this 0:17:02.000 --> 0:17:04.080 is a fixture of the environment that we're going to 0:17:04.160 --> 0:17:07.080 live in, then there is no other way than to 0:17:07.160 --> 0:17:11.760 actually have a contractual agreement with somebody where you're delegating 0:17:11.840 --> 0:17:16.240 the illiquidity is to them, so you are buying it 0:17:16.440 --> 0:17:20.280 when the premium is cheaper. But trying to delta heget 0:17:20.359 --> 0:17:23.720 yourself is like literally trying to put an elephant to 0:17:23.760 --> 0:17:25.959 the eye of a needle. It's just people just cannot 0:17:25.960 --> 0:17:28.280 work out. I mean, I just can't. I just can't 0:17:28.320 --> 0:17:32.280 imagine the market collectively trying to get to that needle. 0:17:32.560 --> 0:17:34.760 These days, there is just nothing there. 0:17:35.160 --> 0:17:37.840 Let's talk about April for a second, and maybe that 0:17:37.880 --> 0:17:40.600 period like between April second and April ninth, because there 0:17:40.640 --> 0:17:42.720 was a market event, for sure, and it was also 0:17:42.840 --> 0:17:45.840 a real economic event with many things going on that 0:17:45.920 --> 0:17:48.800 weren't just lines on a chart, et cetera. And we 0:17:48.880 --> 0:17:51.080 know it sort of happened there with the tariffs and 0:17:51.119 --> 0:17:53.240 then the reversal of some of the tariffs and what 0:17:53.359 --> 0:17:55.920 so forth. Since then, we've seen some of these correlation 0:17:56.000 --> 0:17:58.880 breakdowns that some of our previous guests have talked about. 0:17:59.040 --> 0:18:02.399 From your perspect active, you know, whether it's April second 0:18:02.359 --> 0:18:04.840 and three, April ninth, or April second through Now, what 0:18:05.040 --> 0:18:08.760 happened then such that maybe some maybe is it a 0:18:08.760 --> 0:18:10.680 new regime? What changed in that month? 0:18:10.840 --> 0:18:12.479 Yeah, So I think one of the thing that is 0:18:12.520 --> 0:18:16.080 going on is we are slowly undergoing a regime shift. 0:18:16.080 --> 0:18:17.840 And I'd like to always paint this picture, and I'll 0:18:17.840 --> 0:18:19.679 come to your question right after I give you this 0:18:19.720 --> 0:18:22.600 big macro picture. From the sixties to the eighties. Sixties 0:18:22.640 --> 0:18:25.200 to the mid eighties, you had this period of rising inflation, 0:18:26.119 --> 0:18:29.560 rising volatility, non credible central banks, and stuff was kind 0:18:29.600 --> 0:18:32.000 of breaking and people were behind the curve. Then you 0:18:32.040 --> 0:18:34.399 had the vulker increase of interest rates starting in the 0:18:34.480 --> 0:18:39.440 nineteen eighties and until the maybe late twenties twenty twenty 0:18:39.480 --> 0:18:42.119 call it twenty twenty one, COVID was an accelerant. You 0:18:42.200 --> 0:18:46.760 got negative yels and falling volatility, credible central banks and 0:18:46.800 --> 0:18:49.640 so on. And I think we've actually turned the corner again. 0:18:49.680 --> 0:18:52.080 So starting in twenty twenty twenty one, I think we 0:18:52.119 --> 0:18:54.840 are probably going to look more like the sixties to 0:18:54.920 --> 0:18:59.119 eighty than nineteen eighty seven to twenty twenty. Now, having 0:18:59.119 --> 0:19:01.399 put that backdrop, you know, in front of US. I 0:19:01.440 --> 0:19:04.879 think the issue really comes back to, yes, there is 0:19:04.920 --> 0:19:07.879 a regime shift, both in terms of people's response function 0:19:08.200 --> 0:19:11.639 and how quickly things happen. So one data point that 0:19:11.680 --> 0:19:14.040 I can realize since I started trading is in the past, 0:19:14.080 --> 0:19:17.199 when crises would happen, even including the GFC, which I 0:19:17.200 --> 0:19:20.560 lived through and did fairly well, it used to take months, 0:19:20.600 --> 0:19:23.320 maybe weeks for things to correct, and you had time 0:19:23.359 --> 0:19:26.920 to plan and time to execute. Then Vollmageddon maybe took 0:19:27.320 --> 0:19:31.560 a few days twenty twenty COVID it maybe happened in 0:19:31.600 --> 0:19:35.320 a few days to few hours, and then starting this year, 0:19:35.359 --> 0:19:38.440 it feels like things are actually happening on an hourly 0:19:38.600 --> 0:19:42.080 to maybe minute basis. For instance, in April, when the 0:19:42.440 --> 0:19:45.280 big crash happened and the correction happened, all the action, 0:19:45.400 --> 0:19:48.479 including some of our trading, happened in the pre pre market, 0:19:48.680 --> 0:19:51.000 so the markets had not even opened up, and if 0:19:51.000 --> 0:19:53.119 you needed to do something, you had to do it 0:19:53.200 --> 0:19:56.040 during the night session because that's where all the action was. 0:19:56.280 --> 0:19:58.320 So I think that's one fixture of what's going on 0:19:58.440 --> 0:20:01.440 right now, is that stuff is happening much faster, and 0:20:01.480 --> 0:20:05.000