WEBVTT - The $300 Billion Structured Notes Market Is Booming 0:00:02.730 --> 0:00:04.430 Bloomberg Audio Studios. 0:00:04.890 --> 0:00:06.430 Podcasts. Radio. 0:00:06.850 --> 0:00:07.270 News. 0:00:18.060 --> 0:00:20.900 Hello and welcome to another episode of the All Thoughts Podcast. 0:00:21.020 --> 0:00:21.880 I'm Tracy Allaway. 0:00:22.040 --> 0:00:23.319 And I'm Joe Weisenthal. 0:00:23.730 --> 0:00:25.390 Joe, I'm going to warn you in advance. 0:00:25.489 --> 0:00:27.290 This is one of those episodes that's going to come 0:00:27.330 --> 0:00:29.030 with a lot of Greek letters, I think. 0:00:30.530 --> 0:00:33.950 I like these episodes. You know, it's funny. Some people, listeners, 0:00:34.430 --> 0:00:37.010 they'll tell us, they're like, you know, I love listening 0:00:37.050 --> 0:00:38.550 to Odd Lots. I have to admit, there are a 0:00:38.550 --> 0:00:41.090 few episodes I don't totally get what you're talking about. 0:00:41.120 --> 0:00:42.979 And I'll be like, I don't really get what we're 0:00:43.000 --> 0:00:43.840 talking about either. 0:00:44.260 --> 0:00:46.479 But I, you know, I aspire. 0:00:46.500 --> 0:00:47.779 But we like to aim high. 0:00:47.800 --> 0:00:50.580 Yeah, we like to aim high on this podcast. That's right. 0:00:50.680 --> 0:00:50.900 All right. 0:00:50.920 --> 0:00:53.260 Well, I think this is actually an important episode. We're 0:00:53.280 --> 0:00:55.220 going to be, I don't think we've ever devoted an 0:00:55.260 --> 0:00:58.930 entire episode just to this topic. We probably touched on 0:00:58.990 --> 0:01:00.850 it at various points in time. But today we're going 0:01:00.870 --> 0:01:04.480 to be talking. about structured notes. And I think this 0:01:04.550 --> 0:01:07.030 is important because we're used to talking about markets as 0:01:07.110 --> 0:01:10.990 these sort of fundamentally driven things. Like what's the bull 0:01:11.030 --> 0:01:13.530 case for AI? What's the bear case for AI? 0:01:13.930 --> 0:01:14.789 But there are all. 0:01:14.670 --> 0:01:18.949 These technical flows that also have an impact on markets. 0:01:19.010 --> 0:01:21.130 And I think we're in one of those moments right now. 0:01:21.709 --> 0:01:24.289 No, totally. So I think a couple of things. First 0:01:24.330 --> 0:01:26.789 of all, you know, we are in this moment where like, look, 0:01:27.470 --> 0:01:31.930 anything AI related has been up an extraordinary amount. over 0:01:31.970 --> 0:01:36.010 the last few years. That's undisputable. And in fact, if 0:01:36.030 --> 0:01:38.730 you look at like expectations going over the next couple 0:01:38.750 --> 0:01:41.640 of years, all you see are various straight lines into 0:01:41.680 --> 0:01:45.539 the right. So revenues, capital expenditure, all of it, it 0:01:45.600 --> 0:01:48.140 all looks pretty good. But we are clearly in this 0:01:48.200 --> 0:01:51.000 moment of turbulence. If you just look at, say, certain 0:01:51.220 --> 0:01:53.420 aspects of the market, whether we're talking about some of 0:01:53.480 --> 0:01:57.480 the neoclouds, whether we're looking at credit default swaps, even 0:01:57.600 --> 0:02:00.480 credit default swaps on some of the really big companies 0:02:00.830 --> 0:02:02.550 are starting to inch out. I mean, I hadn't seen 0:02:02.610 --> 0:02:04.990 anyone post a chart of NVIDIA credit default swaps up 0:02:05.030 --> 0:02:07.610 until recently, but they're inching up just a little bit. 0:02:07.850 --> 0:02:10.630 There is clearly like, it's like the planes like rattling 0:02:10.690 --> 0:02:13.679 at high speeds here. And one of the ways that 0:02:13.740 --> 0:02:17.799 people have expressed bets on the AI trade is through 0:02:17.900 --> 0:02:21.200 structured notes, which, as you've mentioned, we've mentioned in various episodes, 0:02:21.220 --> 0:02:23.480 but I don't think we've really devoted an episode to them. 0:02:23.660 --> 0:02:25.590 Yeah, so this is one of the things when markets 0:02:25.690 --> 0:02:28.470 start to get kind of crazy, we tend to see 0:02:28.530 --> 0:02:31.590 more of these structured products sold. So, you know, people 0:02:31.850 --> 0:02:34.630 aren't satisfied with a 20% return in. 0:02:34.590 --> 0:02:36.650 An AI name. They want to get 40% yields. 0:02:36.690 --> 0:02:39.980 Yeah. through a structured note on, I don't know, a 0:02:40.030 --> 0:02:42.109 core weave or something like that. And at the same time, 0:02:42.150 --> 0:02:44.989 there are also investors out there who start to get 0:02:45.030 --> 0:02:47.950 nervous at these valuations and they want to buy downside. 0:02:48.070 --> 0:02:51.130 And that's what some of these structured notes are doing. 0:02:51.190 --> 0:02:53.940 So today we do in fact have the perfect guest 0:02:54.320 --> 0:02:55.020 for all of this. 0:02:55.160 --> 0:02:55.940 We're going to be speaking. 0:02:56.300 --> 0:03:00.299 With Alex Michelizzi, he is a managing director and international 0:03:00.340 --> 0:03:03.980 head of equity structured notes over at Nomura. So Alex, 0:03:04.020 --> 0:03:05.540 thank you so much for coming on All Thoughts. 0:03:05.639 --> 0:03:06.740 And thank you so much for having me. 0:03:07.280 --> 0:03:08.840 Why don't we go ahead and start with a super 0:03:08.900 --> 0:03:13.540 basic question. How do we define a structured note or 0:03:13.560 --> 0:03:16.160 a structured product? My personal preference is I like to 0:03:16.200 --> 0:03:18.960 describe it as like a bank deposit or a bank IOU. 0:03:18.980 --> 0:03:21.800 I don't know if they like met a derivative and 0:03:21.820 --> 0:03:24.019 had a baby. This is what it would be. But 0:03:24.100 --> 0:03:25.560 I'm sure you have a different definition. 0:03:25.580 --> 0:03:28.139 I was thinking the same thing, actually. So yeah, you 0:03:28.160 --> 0:03:30.839 give me $ 100 or you give the issuer $ 100 and 0:03:30.900 --> 0:03:34.430 you're foregoing an interest rate. And in return, you take 0:03:34.490 --> 0:03:38.110 the issuer's credit risk. and they customize something related to 0:03:38.330 --> 0:03:43.070 the equity component. So there's two things there. Either we 0:03:43.110 --> 0:03:46.730 customize participation, the interest that you missed, we'll give you 0:03:46.750 --> 0:03:49.210 a call option, or we'll give you a call spread 0:03:49.390 --> 0:03:51.810 or a fancy name for a call spread is a digital, 0:03:52.410 --> 0:03:55.100 or we give you a bearish structure. You buy a 0:03:55.160 --> 0:03:58.140 put or a put spread or a put digital, something 0:03:58.160 --> 0:04:02.120 like that. Or the more common thing is yield. So 0:04:02.200 --> 0:04:06.390 you've got this forgone interest rate, this, and this extra credit, 0:04:07.050 --> 0:04:10.270 you can sell a put that premium. We then get 0:04:10.310 --> 0:04:13.890 that premium and give you a coupon. And that coupon, 0:04:14.070 --> 0:04:16.609 if it's really depends on how much you want to 0:04:16.750 --> 0:04:19.970 amp up that yield. And so we can do things 0:04:20.010 --> 0:04:22.870 with that, that make it take it away from, Hey, 0:04:22.970 --> 0:04:25.070 I could do this on the listed market by buying 0:04:25.110 --> 0:04:27.470 a put spread myself, and I could have the rest 0:04:27.510 --> 0:04:30.089 of the money in a bank account. We do stuff 0:04:30.230 --> 0:04:33.630 that enhances that yield. And generally that's in the, in 0:04:33.650 --> 0:04:36.470 the form of an auto callable. You can also mix 0:04:36.529 --> 0:04:38.370 and match. So there's a lot of bells and whistles here. 0:04:38.790 --> 0:04:42.470 You can combine yield with participation and all these things, 0:04:42.570 --> 0:04:45.390 depending on who's selling it, have different types of names, 0:04:45.770 --> 0:04:49.390 but in effect, those are the three components. We take 0:04:49.410 --> 0:04:53.670 your money. We either give you a participation, we give 0:04:53.710 --> 0:04:56.880 you a yield and it's through a combination of options. 0:04:57.390 --> 0:05:00.859 And an extra layer of that is we add certain 0:05:00.900 --> 0:05:05.000 things to make the put that you're selling more desirable 0:05:05.200 --> 0:05:07.739 to us. So you get a higher type of coupon. 0:05:08.740 --> 0:05:12.140 Fantastic. I always think, and I've mentioned a couple of 0:05:12.200 --> 0:05:15.960 times on the show that I love Manuel Derman. We've 0:05:15.980 --> 0:05:20.400 had uses this analogy of the wall street bank as 0:05:20.620 --> 0:05:23.460 a kitchen and they give, they sell fruit salad. They 0:05:23.500 --> 0:05:27.490 buy a bunch of fruit in wholesale. apple. They buy 0:05:27.500 --> 0:05:29.670 a bunch of fruit in wholesale, but then they can 0:05:29.710 --> 0:05:32.489 chop it up in any different way possible to create 0:05:32.730 --> 0:05:36.470 any instrument that me, the customer wants. And then they 0:05:36.510 --> 0:05:38.570 sell it to me and then they charge a little margin. 0:05:38.950 --> 0:05:41.750 And because they're capable of chopping up the fruit in 0:05:41.800 --> 0:05:45.540 some way, any view that I want to express or 0:05:45.600 --> 0:05:47.620 any concern or any risk that I want to hedge 0:05:48.020 --> 0:05:50.479 with those raw ingredients, you can give me anything. Now, 0:05:50.960 --> 0:05:54.970 who is the natural buyer? Because if I'm interested in AI, 0:05:54.990 --> 0:05:58.659 I could buy SPY, I could buy QQQ, I could 0:05:58.680 --> 0:06:02.960 buy a memory ETF. If I'm nervous, I could sell whatever. 0:06:03.320 --> 0:06:06.739 Who are some of the natural buyers of structured products 0:06:06.800 --> 0:06:07.260 from the bank? 0:06:07.540 --> 0:06:11.530 Predominantly high net worth individuals through the private bank channels. 0:06:11.990 --> 0:06:16.570 I would say that why they want this is people 0:06:16.810 --> 0:06:21.170 understand a yield, right? And people understand what that means 0:06:21.230 --> 0:06:24.770 relative to owning a linear stock and the type of 0:06:24.810 --> 0:06:27.890 protection I can get. And so they can't, in a 0:06:27.930 --> 0:06:31.930 lot of ways, they can't structure this themselves. They can't 0:06:31.970 --> 0:06:33.950 go into the market. And we'll get into some of 0:06:34.029 --> 0:06:36.970 the more popular types of trades, which involve worst ofs 0:06:37.010 --> 0:06:39.590 and correlations and things like that and order callables. You 0:06:39.630 --> 0:06:42.750 can't physically do that in a listed market space. And 0:06:42.790 --> 0:06:47.300 so this product offers that ability to enhance yield that 0:06:47.380 --> 0:06:51.029 you just can't. get by selling, say, a particular stock downside. 0:06:51.650 --> 0:06:54.810 And with that comes, I think, what you initially said, 0:06:54.870 --> 0:06:57.330 some of the complications and some of the things that 0:06:57.450 --> 0:06:59.750 end up driving some of these market factors as well, 0:06:59.790 --> 0:07:04.540 because how we end up hedging this and the residual 0:07:04.570 --> 0:07:07.540 of what's left creates a very interesting dynamic that we're 0:07:07.560 --> 0:07:08.340 starting to see in the market. 0:07:08.920 --> 0:07:12.180 So you mentioned this particular moment in markets. Talk to 0:07:12.240 --> 0:07:14.280 us about what we're seeing in terms of issuance or 0:07:14.300 --> 0:07:16.460 what we have been seeing in terms of issuance. 0:07:16.640 --> 0:07:17.420 I'm used to thinking. 0:07:17.950 --> 0:07:21.330 about a lot of these things as single stock calls, right? 0:07:21.430 --> 0:07:24.850 So again, something that's tied to a core weave, and 0:07:24.970 --> 0:07:28.150 if the stock collapses by a certain amount before the 0:07:28.190 --> 0:07:31.150 note actually matures, then you either get all your money 0:07:31.190 --> 0:07:34.340 back with the interest or you lose out completely. But 0:07:34.380 --> 0:07:37.300 I know that we've seen a lot more index products 0:07:37.640 --> 0:07:38.060 as well. 0:07:38.800 --> 0:07:42.080 Yeah. So there's a multitude of things going on. We 0:07:42.100 --> 0:07:45.950 can start with index. So The stuff you're predominantly seeing 0:07:46.110 --> 0:07:50.870 on the index, which is creating interesting market dynamics in 0:07:50.910 --> 0:07:55.190 the longer dated option market is related to a US 0:07:55.350 --> 0:07:59.970 issued type product. So if we look at the structured 0:08:00.030 --> 0:08:03.429 product business in the US, it's got larger and larger. 0:08:03.470 --> 0:08:06.830 I think SEC registered notes this year are on track 0:08:06.870 --> 0:08:10.970 to hit about 300 billion versus approximately 200 billion last year. 0:08:11.810 --> 0:08:15.610 And a large change has been, the biggest contributor is 0:08:15.750 --> 0:08:19.810 S & P, but the greatest growth has been worst 0:08:19.970 --> 0:08:23.390 of order callables, which generally have S & P, NASDAQ, 0:08:23.970 --> 0:08:27.950 and Russell. And why that's the case is you look 0:08:28.030 --> 0:08:31.410 at something like the Russell Index, and for many years 0:08:31.470 --> 0:08:35.969 it was basically sideways. And from Liberation Day last year, 0:08:35.990 --> 0:08:38.970 it's effectively been in a straight line. So it's meant 0:08:39.050 --> 0:08:42.850 that these auto-callables that have been issued on this have 0:08:42.929 --> 0:08:44.630 knocked out, which is a whole topic we should talk 0:08:44.690 --> 0:08:48.559 about in and of itself. So let's just step back 0:08:48.620 --> 0:08:52.000 a second. An auto-callable, why is it different? Why is 0:08:52.040 --> 0:08:55.819 it giving you a larger yield than just a plain 0:08:55.900 --> 0:09:01.830 structured product? So- An auto callable is a product that 0:09:02.429 --> 0:09:07.210 can knock out earlier than its effective maturity date. Generally, 0:09:07.630 --> 0:09:10.710 if the stock is above its initial performance and it's 0:09:10.770 --> 0:09:13.929 periodically looked at. So we generally will put on a 0:09:13.980 --> 0:09:15.920 trade and let's start with a simple S & P. Yeah. 0:09:16.100 --> 0:09:18.360 Three year trade or five year trade that we observe 0:09:18.820 --> 0:09:22.640 every three or six months. If after six months, this 0:09:22.660 --> 0:09:25.260 S & P is higher than when you initially put 0:09:25.300 --> 0:09:28.949 it on, the product disappears and knocks out. And so 0:09:29.809 --> 0:09:31.569 that yield is the last time you're going to get 0:09:31.590 --> 0:09:33.630 the yield on this product. Then you have to reset. 0:09:34.610 --> 0:09:37.089 Why does that give you a higher yield than just 0:09:37.130 --> 0:09:40.630 selling a three-year put on S & P? Well, a 0:09:40.710 --> 0:09:44.790 put is worth more as an index or stock goes down. 0:09:45.440 --> 0:09:47.760 So from my point of view, if S & P 0:09:47.800 --> 0:09:51.400 has rallied, this put in and of itself is worth less. 0:09:51.460 --> 0:09:53.280 So I don't have to worry about it anymore and 0:09:53.300 --> 0:09:56.760 it's got less value. So you're taking a contingent bet now. 0:09:57.160 --> 0:10:00.500 And that increases the yield of the product. I don't 0:10:00.520 --> 0:10:02.700 need to put S & Ps up 30% if its 0:10:02.740 --> 0:10:05.199 value is a lot less than where it was beforehand. 0:10:05.679 --> 0:10:09.100 But it also creates a risk for an investor. If 0:10:09.179 --> 0:10:13.460 markets are volatile and you enter this product, it means 0:10:14.160 --> 0:10:17.420 implied volatility is higher. The premium that I get to 0:10:17.960 --> 0:10:20.120 be able to invest in a coupon is higher. But 0:10:20.179 --> 0:10:24.400 if we rally and volatility falls, my reinvestment risk now 0:10:24.640 --> 0:10:26.390 is that the coupon yield I get the next time 0:10:26.410 --> 0:10:27.550 around is lower. 0:10:28.090 --> 0:10:30.130 It's like convexity in mortgages, I guess. 0:10:30.570 --> 0:10:34.580 Yeah, it's a relationship between the direction of the market 0:10:34.820 --> 0:10:38.100 and volatility. We generally think that as markets go up, 0:10:39.040 --> 0:10:42.020 volatility goes down. To some extent, as markets go down, 0:10:42.380 --> 0:10:46.219 volatility goes up. And so that dynamic is important in 0:10:46.260 --> 0:10:49.020 this product. So an auto callable gives you a higher 0:10:49.080 --> 0:10:50.800 yield because of that feature. 0:10:50.820 --> 0:10:52.240 Why is it called an auto callable? 0:10:52.620 --> 0:10:52.980 Because. 0:10:53.000 --> 0:10:54.100 Let's talk about this word. 0:10:54.500 --> 0:10:58.540 Yeah. Auto on day one, once we put the initial, 0:10:58.820 --> 0:11:00.710 once we know where the initial spot price is. 0:11:00.830 --> 0:11:01.070 Yeah. 0:11:02.190 --> 0:11:05.030 We will periodically look at its value. 0:11:05.110 --> 0:11:05.410 Yeah. 0:11:05.590 --> 0:11:08.130 And it will auto knockout if the value. 0:11:08.210 --> 0:11:09.150 What does knockout mean? 0:11:09.429 --> 0:11:12.130 Knockout means the product. I'll give you a hundred dollars back. 0:11:12.290 --> 0:11:12.469 Yeah. 0:11:12.510 --> 0:11:13.290 I'll give you a coupon. 0:11:13.309 --> 0:11:13.390 Yeah. 0:11:14.050 --> 0:11:16.059 We're out. So we started with a three-year product. We 0:11:16.080 --> 0:11:18.900 have sold it every three months. Stock has gone up 0:11:18.980 --> 0:11:22.700 or the index has gone up. It's knocked out. Basically, 0:11:23.120 --> 0:11:24.040 the trade terminates. 0:11:24.220 --> 0:11:24.530 Oh, I see. 0:11:24.559 --> 0:11:26.620 As opposed to having a three-year termination, it's now a 0:11:26.840 --> 0:11:27.840 three-month termination. 0:11:28.300 --> 0:11:31.590 Actually, let's stick with this because we really need to 0:11:31.970 --> 0:11:35.309 understand this in detail. I entered this trade. Let's just say, 0:11:35.490 --> 0:11:38.450 let's keep it super vanilla. Let's just say it was 0:11:38.610 --> 0:11:40.050 one index. S & P 500 or NASDAQ or something 0:11:40.090 --> 0:11:44.980 like that. I entered it a year ago. I gave 0:11:45.000 --> 0:11:48.079 you $ 100. What are you telling me I get back 0:11:49.380 --> 0:11:50.960 for that? For $ 100, what am I getting? 0:11:51.260 --> 0:11:55.480 You're going to get a coupon when it will pay 0:11:55.980 --> 0:11:58.800 whatever periodically, and you will get down. 0:11:58.900 --> 0:12:01.170 Presumably higher than what I would get on the treasury? 0:12:01.730 --> 0:12:04.890 Yes. Okay. Well, it depends on other factors as well, 0:12:04.910 --> 0:12:09.010 because you may want to have some participation. Some equity exposure. Yeah, exactly. Participation. 0:12:09.050 --> 0:12:12.179 Got it. But generally, that's the sort of benchmark where 0:12:12.420 --> 0:12:14.400 people are not very interested if they're getting less than 0:12:14.420 --> 0:12:17.000 the risk-free rate. But in order to give you a 0:12:17.100 --> 0:12:21.140 higher level than the risk-free rate, you're also selling some 0:12:21.179 --> 0:12:22.980 sort of put option to me. 0:12:23.240 --> 0:12:23.540 I see. 0:12:23.900 --> 0:12:27.110 And there's variations on that put option. We've been in 0:12:27.150 --> 0:12:30.150 an upward market for a long time, so we haven't... Sorry. 0:12:30.809 --> 0:12:35.140 No, no. So this is great. So I give you $ 100. 0:12:34.500 --> 0:12:36.540 You are going to give me some coupon that is 0:12:36.600 --> 0:12:40.280 presumably higher than I could get just by paying a treasury. 0:12:40.300 --> 0:12:44.350 And in return, essentially what I am giving up is 0:12:44.429 --> 0:12:47.710 some participation in this upward move of the stock market. 0:12:47.770 --> 0:12:50.730 Some participation. And in a lot of cases, you are 0:12:50.770 --> 0:12:55.730 taking a downside risk, which isn't linear to the S & 0:12:55.410 --> 0:13:00.010 P performance. There's generally a buffer, some protection. And there's 0:13:00.330 --> 0:13:03.170 variations of what that protection is. So if we say, 0:13:03.190 --> 0:13:06.430 we'll take a typical example of a knock input and 0:13:06.450 --> 0:13:07.830 we'll put a 60% strike. All right. 0:13:08.210 --> 0:13:09.110 Let's talk about what that means. 0:13:09.370 --> 0:13:12.709 So that means that if S & P, you start 0:13:12.929 --> 0:13:15.250 day one at a hundred dollars and it's a one year, 0:13:15.270 --> 0:13:16.969 say it's a one year trade and we observe it 0:13:17.030 --> 0:13:20.390 every three months on the auto call ability. If S & 0:13:19.890 --> 0:13:25.500 P is down 20%, you still have protection until you 0:13:25.580 --> 0:13:27.080 hit down 40%. 0:13:27.080 --> 0:13:27.260 Okay. 0:13:28.380 --> 0:13:31.699 At which this will treat, in this example of a 0:13:31.720 --> 0:13:35.520 knock input, you will get the same equity participation as 0:13:35.580 --> 0:13:38.140 of earning S & P. So you get all the 0:13:38.179 --> 0:13:41.350 downside as if from $ 100, but it has to be 0:13:41.370 --> 0:13:44.530 below 60. That's a general structure. Other structures are you 0:13:44.550 --> 0:13:47.650 just sell a vanilla put there. So your put payoff 0:13:47.730 --> 0:13:51.010 comes in at that 60% point. But there's a lot 0:13:51.030 --> 0:13:53.980 of variations, bells and whistles on that. And that creates 0:13:54.030 --> 0:13:58.000 a digital exposure, which we'll talk about because that drives 0:13:58.040 --> 0:14:00.380 a lot of what we're seeing in the market. And 0:14:01.120 --> 0:14:04.390 the more... risk you take, for example, take the example 0:14:04.730 --> 0:14:09.050 of the 60% knock-in at a hundred from 60% down 0:14:09.090 --> 0:14:11.929 to zero, I basically have a hundred percent risk. So 0:14:11.970 --> 0:14:13.489 basically if I go down to zero, I've lost a 0:14:13.510 --> 0:14:18.130 hundred dollars. And so I can expect to get more 0:14:18.490 --> 0:14:21.410 premium for that as opposed to just selling a vanilla 0:14:21.450 --> 0:14:24.010 put where the most I can lose is 40%. And 0:14:24.050 --> 0:14:25.500 that changes the coupon as well. 0:14:41.620 --> 0:14:44.800 You mentioned worst of auto callables before. When did those 0:14:44.860 --> 0:14:48.060 become a thing? Because the idea of like tying a 0:14:48.280 --> 0:14:52.640 product to the single worst performing stock seems kind of 0:14:52.740 --> 0:14:53.480 risky to me. 0:14:53.700 --> 0:14:55.380 And yet they seem to have become more popular. 0:14:55.900 --> 0:15:00.100 Yeah, I'd say they've, so historically they've always been there. 0:15:00.180 --> 0:15:03.180 Like I can't remember a time not having a worst of. 0:15:03.800 --> 0:15:08.340 It comes down to the yield factor. So what is 0:15:08.400 --> 0:15:10.990 a worst of? Instead, in the example we just had now, 0:15:11.540 --> 0:15:14.540 We had S & P and it's down 40%. We 0:15:14.560 --> 0:15:16.900 take a typical structure in the market that has S & P, 0:15:16.940 --> 0:15:20.200 NASDAQ and Russell and the worst of, we now observe 0:15:20.260 --> 0:15:23.580 the worst performer. So you could have two of these 0:15:23.640 --> 0:15:27.300 indices up 20% and you could have, you know, the 0:15:27.760 --> 0:15:29.680 main street, wall street sort of trade. And one of 0:15:29.710 --> 0:15:34.590 these indices really underperform, you could end up with that put. 0:15:35.210 --> 0:15:40.200 And so it's, going to derive more premium, more premium 0:15:40.280 --> 0:15:43.870 from just selling a one index, which gives you a 0:15:44.310 --> 0:15:49.050 high yield. And it's also going to create additional risk 0:15:49.090 --> 0:15:51.970 factors for us because we have to model how these 0:15:52.070 --> 0:15:56.750 three things are moving together. And also it means that 0:15:56.830 --> 0:16:00.290 there are cases where what's the best, what's a great 0:16:00.350 --> 0:16:02.890 outcome for someone who has this yield and say it 0:16:02.930 --> 0:16:05.200 was done during a time of turbulence and the yield 0:16:05.220 --> 0:16:08.790 is very high. The best sort of outcome is two 0:16:08.820 --> 0:16:10.740 of these stocks rally and one of the stocks is 0:16:10.800 --> 0:16:13.340 marginally down and just stays there and the volatility on 0:16:13.360 --> 0:16:17.280 this thing does nothing and it goes sideways. You have now, 0:16:17.580 --> 0:16:19.800 I wouldn't say locked in, but you now have a 0:16:19.840 --> 0:16:23.200 relatively higher yield than just doing S & P that's 0:16:23.240 --> 0:16:27.660 gone up, right? That complexity of trying to monitor the 0:16:27.740 --> 0:16:31.830 worst one and being able to hedge it, is, I think, 0:16:31.870 --> 0:16:34.800 a segue to what's trading in the market and why 0:16:34.820 --> 0:16:37.400 it's creating this market dynamic, or why it's grown, sorry. 0:16:37.860 --> 0:16:41.340 And so you look at the three assets, the Russell, 0:16:41.680 --> 0:16:44.940 S & P, and NASDAQ trade, you basically have had 0:16:45.950 --> 0:16:49.150 all three of these indices and Russell over the last year. 0:16:49.190 --> 0:16:53.330 Russell was effectively sideways for many years. It's now performed 0:16:53.390 --> 0:16:57.450 a lot better. And so think about this. What drives 0:16:57.510 --> 0:17:00.550 volumes in an order call is a knockout. I can 0:17:00.590 --> 0:17:04.439 have a five-year trade, but if these three indices or 0:17:04.480 --> 0:17:09.580 three stocks or whatever go up every three months, I 0:17:09.619 --> 0:17:13.250 can do a five-year trade now has the same notion 0:17:13.290 --> 0:17:16.450 of every three months. So that volume goes up considerably. 0:17:17.340 --> 0:17:20.480 Just before we get more into the market impact of 0:17:20.560 --> 0:17:22.820 all of these, talk to us about what's happening, I guess, 0:17:22.920 --> 0:17:25.780 on your side of the desk when you actually issue 0:17:25.920 --> 0:17:28.899 one of these products. So you mentioned having to model 0:17:28.940 --> 0:17:32.150 the correlation between three indices just then. What's the first 0:17:32.190 --> 0:17:33.750 thing you do when you sell one of these? 0:17:33.770 --> 0:17:36.450 Okay. So the first thing we do is we eliminate 0:17:36.570 --> 0:17:39.330 the delta. So we hedge the delta. That's the simplest thing. 0:17:39.369 --> 0:17:41.430 We're not taking a directional view. 0:17:41.450 --> 0:17:42.350 Is that some Greek letter? 0:17:43.410 --> 0:17:44.390 Yes, it is a Greek letter. 0:17:44.410 --> 0:17:45.250 What does it mean again? 0:17:45.410 --> 0:17:46.570 I said there'd be Greek letters. 0:17:46.590 --> 0:17:47.090 I don't know. 0:17:47.230 --> 0:17:48.210 What's the delta again? 0:17:48.690 --> 0:17:51.910 The delta is the relationship between the price of this 0:17:51.990 --> 0:17:56.000 product and the spot price of a stock. 0:17:56.200 --> 0:17:56.400 Okay. 0:17:57.260 --> 0:17:57.420 Right. 0:17:57.960 --> 0:17:58.240 Excellent. 0:17:58.280 --> 0:17:59.460 Keep going. Right. 0:17:59.500 --> 0:18:04.440 So this product is bullish in nature. So as the 0:18:04.460 --> 0:18:06.780 market goes down, we went through that 6,100 thing. 0:18:06.859 --> 0:18:07.090 Yeah. 0:18:07.330 --> 0:18:09.530 I'm on the other side of it. So I have 0:18:09.570 --> 0:18:13.380 a short delta position. I'm short the market. The first 0:18:13.390 --> 0:18:15.540 thing we do is we hedge that out. Now we're 0:18:15.580 --> 0:18:19.899 left with more interesting Greeks. And so at a headline level, 0:18:20.520 --> 0:18:23.379 what have we got? And let's take the example of 0:18:23.460 --> 0:18:27.560 the one year single S & P example, and let's 0:18:27.600 --> 0:18:31.140 take the auto call. The maximum maturity of this thing 0:18:31.400 --> 0:18:34.020 is one year. And I own some sort of put 0:18:34.260 --> 0:18:39.100 on that one year trade with the risk of this 0:18:39.160 --> 0:18:43.070 thing not existing every three, six, nine, 12 months. So 0:18:43.119 --> 0:18:46.250 I've got Vega on this put, and what's Vega? 0:18:46.270 --> 0:18:47.790 Thank you. 0:18:48.910 --> 0:18:54.210 Vega is the put sensitivity to the implied volatility. I've 0:18:54.230 --> 0:18:59.610 got Vega there, and I've got these quarterly knockout features. 0:19:00.510 --> 0:19:03.330 So what are they? What is a knockout? A knockout 0:19:03.510 --> 0:19:07.420 is a fancy way of saying a digital and a 0:19:08.119 --> 0:19:11.060 less fancy way of saying it's a call spread. I've 0:19:11.100 --> 0:19:14.240 got three call spreads there. that I look at. And 0:19:14.280 --> 0:19:17.820 so that, that is a lot of options in that phase. 0:19:17.859 --> 0:19:21.179 And so what do we do? What, what do we 0:19:21.220 --> 0:19:23.960 have headline Greeks? So we look at our Vega and 0:19:24.700 --> 0:19:27.510 a lot of my exotic brethren will probably go, well, 0:19:27.730 --> 0:19:30.270 that's not technically correct, but the way we generally look 0:19:30.290 --> 0:19:33.770 at it is when do we expect, how long do 0:19:33.790 --> 0:19:38.290 we expect this thing to last? And it's probably gonna, 0:19:38.650 --> 0:19:42.050 we can model that sort of, and just say in 0:19:42.090 --> 0:19:45.620 this example, we say it's going to last six months. 0:19:47.140 --> 0:19:51.540 We will assign the vega of this put at the 0:19:51.580 --> 0:19:53.820 six month level, and we'll go to the listed market 0:19:54.180 --> 0:19:58.330 and we'll sell some sort of downside because it's related 0:19:58.350 --> 0:20:01.890 to that 60% strike and sell that out there. That's 0:20:01.950 --> 0:20:03.430 not really what's in this product. 0:20:03.830 --> 0:20:06.110 Can I ask really quickly, who do you actually sell 0:20:06.350 --> 0:20:07.150 that vega to? 0:20:07.730 --> 0:20:12.840 Yeah. We generally use the broker or listed market. So 0:20:12.880 --> 0:20:15.770 we will go to the S & P market makers 0:20:15.810 --> 0:20:18.590 in this case, and we will go there. We'll either 0:20:18.630 --> 0:20:23.990 do it on screens or via the broker market. It's 0:20:24.030 --> 0:20:26.590 generally what we do in this case. With the trend, 0:20:28.810 --> 0:20:30.379 we'll go to the trend a little bit later because 0:20:30.390 --> 0:20:33.260 I think it's important to understand why it's an imperfect 0:20:33.480 --> 0:20:39.560 hedge and what disruption that causes and how dealers, my 0:20:39.800 --> 0:20:44.520 colleagues have changed some of the trading methodologies as well. 0:20:44.920 --> 0:20:48.350 Let's talk a little bit about the action that we're 0:20:48.410 --> 0:20:51.369 seeing these days. And I guess to understand maybe the action, 0:20:51.430 --> 0:20:53.850 these days markets have gotten a little bit, like I said, 0:20:53.869 --> 0:20:56.530 it feels like the plane is like rumbling a little 0:20:56.550 --> 0:20:59.760 bit or something at high speeds. But before maybe we 0:20:59.800 --> 0:21:03.139 understand right now, let's maybe start and go back to 0:21:03.180 --> 0:21:05.899 the start of the year. Let's start, okay, we're talking 0:21:05.940 --> 0:21:08.550 about We're talking to you at the beginning of 2026, 0:21:08.550 --> 0:21:12.520 or maybe March 2026, three months ago or whatever. What 0:21:12.540 --> 0:21:15.379 are popular things that you're selling and what are the 0:21:15.440 --> 0:21:18.560 popular thing to clients? And then what are the popular 0:21:18.600 --> 0:21:20.580 trades you're putting on to hedge those trades? 0:21:20.780 --> 0:21:23.840 Yeah. So I would say it's bifurcated. There's an index side. 0:21:24.180 --> 0:21:26.179 So US registered stuff, we talked about the 300 billion 0:21:26.680 --> 0:21:29.940 run rate. And then there's the single stocks stuff, which 0:21:30.020 --> 0:21:34.679 is a very similar concept, but It's the, when we 0:21:34.720 --> 0:21:37.869 talk about maturities and we talk about these knockout dates, 0:21:38.350 --> 0:21:42.310 it's basically shrunk to a level that's creating a different dynamic. 0:21:42.830 --> 0:21:45.449 Let's start at the beginning of the year. So markets 0:21:45.710 --> 0:21:50.030 are going up. This product is effectively on the single 0:21:50.050 --> 0:21:52.649 stock side, on the index side is knocking out the 0:21:52.730 --> 0:21:55.110 single stock side is a lot faster because we observe 0:21:55.170 --> 0:21:57.170 it instead of every three months. Some of this stuff 0:21:57.210 --> 0:22:00.870 we observe every day. And so this stuff is churning 0:22:01.210 --> 0:22:05.409 a lot and In terms of hedges, there's less hedges 0:22:05.490 --> 0:22:11.389 because there's less vega because the product isn't extending because 0:22:11.450 --> 0:22:14.910 markets are going up. So this is a pretty virtuous 0:22:15.190 --> 0:22:19.190 cycle because it trades out, one comes in, and your 0:22:19.230 --> 0:22:21.369 day one hedges are working and you don't have to 0:22:21.390 --> 0:22:25.210 think too much about it. And then it's all hunky dory, 0:22:25.609 --> 0:22:29.379 as we say, until we hit some turbulence and certain 0:22:29.390 --> 0:22:35.869 stocks go down. And indices go down and that hedge, 0:22:36.010 --> 0:22:40.160 which isn't static and needs to be dynamic, changes. And 0:22:40.180 --> 0:22:44.300 the participant, the value of where I can hedge in 0:22:44.340 --> 0:22:47.940 terms of that implied volatility has also changed because a 0:22:48.940 --> 0:22:51.280 lot of people need to hedge at the same time. 0:22:51.960 --> 0:22:55.250 And some of the counterparties that were used outside of 0:22:55.290 --> 0:22:59.320 the listed market and IDB are pulling back because of turbulence. 0:22:59.400 --> 0:23:02.520 And so you have this concurrent effect of a lot 0:23:02.540 --> 0:23:06.840 of dealers have to now sell more optionality as markets 0:23:06.960 --> 0:23:11.080 are coming off. And a lot of the, I guess 0:23:11.359 --> 0:23:14.470 the demand for it is also fading come August. 0:23:14.790 --> 0:23:17.629 So just to be clear, you're left in a situation 0:23:17.670 --> 0:23:19.930 where the dealers or the issuers have a lot more 0:23:19.990 --> 0:23:23.210 Vega that they need to offload at the same time 0:23:23.310 --> 0:23:26.760 that I guess primarily the market makers are a lot 0:23:26.800 --> 0:23:29.260 more reluctant to take on that Vega. 0:23:29.560 --> 0:23:34.760 That is very well described. Yes. And again, that's because 0:23:35.980 --> 0:23:39.810 what was disappearing or knocking out every three months now 0:23:40.730 --> 0:23:44.619 seems to be having an extended maturity. because the spot 0:23:44.630 --> 0:23:48.480 prices come down. And I think the market makers are 0:23:49.000 --> 0:23:52.960 seeing all the supply come as these indices and stocks 0:23:53.060 --> 0:23:56.220 are coming off and going, well, what's happened? Like the 0:23:56.260 --> 0:23:59.199 last nine or the last seven to eight months, we 0:23:59.240 --> 0:24:01.960 didn't see this. Now we're seeing it. There's a yin 0:24:02.000 --> 0:24:05.189 and yang to this though. And we've seen it on 0:24:05.369 --> 0:24:08.550 a lot of V-shaped recoveries. It's, hey, I've got this 0:24:08.630 --> 0:24:11.030 product and I think in all fairness, if we look 0:24:11.070 --> 0:24:14.030 at the worst of three, it's generally three to five years. 0:24:14.470 --> 0:24:17.430 So that's where the, that's where, and with say an 0:24:17.490 --> 0:24:20.260 expected life, we call it when we expect that maturity 0:24:20.300 --> 0:24:23.240 to knock out of about two years, we see dealers 0:24:23.780 --> 0:24:26.020 hedging more and more of that as the markets come off. 0:24:27.040 --> 0:24:31.340 But all of a sudden, if these indices start to 0:24:31.440 --> 0:24:36.160 rally again, we could have a situation where this product 0:24:36.200 --> 0:24:41.030 knocks out in three months. And I am left just 0:24:41.090 --> 0:24:47.359 with my short hedges in the market and the supply 0:24:47.540 --> 0:24:51.040 is not yet there from my auto callable. So there's 0:24:51.080 --> 0:24:54.960 a situation where dealers can be left short, a lot 0:24:54.980 --> 0:24:57.820 of vaguer on the street. just on a small rally. 0:24:57.840 --> 0:25:00.189 And in all fairness, we're not too far from all-time 0:25:00.230 --> 0:25:00.970 highs as it is. 0:25:01.270 --> 0:25:04.710 It's the funny thing. It's just the funny thing. We 0:25:04.730 --> 0:25:08.310 do these things like, oh my God, the volatility, et cetera. 0:25:08.330 --> 0:25:10.429 And we're like, we're like one and a half percent, 0:25:10.540 --> 0:25:12.439 I don't know, from an all-time high. It's kind of, 0:25:13.960 --> 0:25:15.439 the stock market's doing fine. 0:25:15.660 --> 0:25:18.600 Well, is this part of the, your colleague at Nomura, 0:25:18.640 --> 0:25:20.720 who's been on the show a number of times, Charlie McElligot, 0:25:20.780 --> 0:25:21.360 he calls. 0:25:21.160 --> 0:25:24.129 This the spot up, vol up. regime, right? 0:25:24.210 --> 0:25:26.930 Is this like part of why we're getting that situation? 0:25:27.270 --> 0:25:30.470 Yes. I would say it's even more prevalent on the 0:25:30.530 --> 0:25:33.770 single stock side, but on the index side, we are 0:25:33.810 --> 0:25:37.320 definitely seeing that just because of the growth of the 0:25:37.359 --> 0:25:40.500 worst of and the growth of the US SEC registered notes. 0:25:40.880 --> 0:25:44.400 We're seeing that dynamic in the longer dated and there's 0:25:44.420 --> 0:25:49.080 just been, I guess, less capital committed to that vaguer 0:25:49.160 --> 0:25:52.340 or Less understanding of what's driving it. And it's basically 0:25:52.440 --> 0:25:55.359 this that's driving it. This factor that we just have 0:25:55.480 --> 0:25:59.419 more of this stuff in this bucket. On the shorter 0:25:59.460 --> 0:26:03.100 dated stuff, when we look at single stock, it's been 0:26:03.119 --> 0:26:08.690 driven by the same product, but the product complexity, it 0:26:08.770 --> 0:26:13.030 goes to another level. So when we talked about how 0:26:13.070 --> 0:26:15.530 do we get a higher yield and we said, hey, 0:26:15.830 --> 0:26:19.170 let's put these auto calls in there. There are other 0:26:19.210 --> 0:26:21.480 things we can do to get a higher yield as well. 0:26:21.580 --> 0:26:28.200 So we can put contingent coupons. So that basically means 0:26:28.560 --> 0:26:31.900 that I won't pay you this coupon if the stock 0:26:31.940 --> 0:26:34.270 or the worst of has fallen too much. So that's 0:26:34.310 --> 0:26:37.070 another thing we can do. We can also, instead of 0:26:37.130 --> 0:26:41.830 having the observation every three months, we can have it daily. 0:26:42.430 --> 0:26:46.119 And so that means any rally, this thing's gone. And 0:26:46.619 --> 0:26:51.040 if you look at something like that, It becomes very, 0:26:51.119 --> 0:26:55.100 very binary. Generally in this type of structure, it's on 0:26:55.200 --> 0:26:58.939 single stock name, worst of three. We let the stocks breathe, 0:26:58.960 --> 0:27:01.460 for want of a better term, for a month. And 0:27:01.480 --> 0:27:04.200 then we start observations on a daily basis. And these 0:27:04.240 --> 0:27:06.800 things typically go from six months to 18 months, maybe 0:27:06.880 --> 0:27:10.420 two years. So on every day, I might be left 0:27:10.460 --> 0:27:14.949 with no option, no vega, no put. Or if one 0:27:14.970 --> 0:27:18.070 of these stocks goes down, I'm left with a lot 0:27:18.470 --> 0:27:23.320 of put value in that one year timeframe. So either 0:27:23.480 --> 0:27:26.370 I have vol here or I don't, and I'm now 0:27:26.420 --> 0:27:29.710 observing it every single day. So it's creating this on 0:27:29.830 --> 0:27:33.470 off type of market in, in the single stock names. 0:27:33.850 --> 0:27:35.950 Just to be clear, if I'm one of these high 0:27:35.970 --> 0:27:40.350 net worth investors and I buy one of these nodes, 0:27:40.910 --> 0:27:43.790 what do I typically want to happen? I want it 0:27:43.830 --> 0:27:46.750 to last the entire lifetime and just keep clipping the 0:27:46.790 --> 0:27:50.590 max coupon possible. Like what is the sort of ideal 0:27:50.710 --> 0:27:52.410 market regime for me as the buyer? 0:27:52.900 --> 0:27:55.679 As the buyer, the market regime, things are very volatile. 0:27:56.820 --> 0:27:59.359 So my yield from this put selling is very high 0:28:00.020 --> 0:28:05.479 and things quieten down and markets have drifted lower. Not 0:28:05.520 --> 0:28:08.270 in a volatile way, but they've just drifted lower and 0:28:08.330 --> 0:28:11.109 the world has become nice again and I'm left with 0:28:11.130 --> 0:28:15.470 this really high coupon for as long as possible. That 0:28:15.510 --> 0:28:16.470 is the outcome. 0:28:16.730 --> 0:28:18.870 So if it goes up too fast, Then the note 0:28:18.930 --> 0:28:21.230 is over and I don't get all my coupons. If 0:28:21.270 --> 0:28:24.730 the market plunges, then I'm actually potentially in the red 0:28:24.810 --> 0:28:27.380 because I'm outside of this buffer zone and I'm actually exposed. 0:28:27.700 --> 0:28:29.720 But we get this nice little quiet thing, maybe a 0:28:29.740 --> 0:28:32.900 little bit lower, et cetera. Then I get that coupon. 0:28:33.080 --> 0:28:35.140 It lasts for a very long time and I'm not 0:28:35.160 --> 0:28:36.100 picking up any downside. 0:28:36.359 --> 0:28:38.780 Exactly. That's what you want. And so when we get 0:28:38.820 --> 0:28:43.410 those drift downs, it's when we generally get this fold dynamic. 0:28:43.450 --> 0:28:45.610 And it's happening in the skew. So when I said 0:28:45.810 --> 0:28:50.650 knockouts and coupon contingent, Again, digitals, fancy words for put 0:28:50.670 --> 0:28:51.870 spreads and call spreads. 0:28:51.890 --> 0:28:52.890 Why is it called digitals? 0:28:53.330 --> 0:28:56.490 Because it's binary. It's binary, right. And so it's either 0:28:56.650 --> 0:28:59.110 zero or one. And so if we think of these 0:28:59.150 --> 0:29:02.270 things as put spreads and call spreads, we're now going 0:29:02.310 --> 0:29:06.270 into another dynamic, which is skew. So we can look 0:29:06.350 --> 0:29:10.390 at volatility and say, hey, at the money volatility is 30. 0:29:10.390 --> 0:29:13.610 But what really matters in these type of products is 0:29:13.710 --> 0:29:16.550 how steep or not steep the skew is because we 0:29:16.630 --> 0:29:20.280 really have this clump of put spreads and call spreads 0:29:20.420 --> 0:29:23.640 on rather than just this outright Vega. And I guess 0:29:23.660 --> 0:29:26.900 the question you would ask, I think is, Hey, you 0:29:26.920 --> 0:29:29.290 told me you just sell one put. 0:29:29.370 --> 0:29:29.660 Yeah. 0:29:30.010 --> 0:29:32.050 Why are you doing that when you've got like these? 0:29:32.230 --> 0:29:35.470 I was just about to say exactly that, exactly that question. 0:29:35.730 --> 0:29:36.150 Keep going. 0:29:36.410 --> 0:29:41.130 Because to replicate those put spreads in the notion or 0:29:41.150 --> 0:29:46.560 the dollar somewhere trading, it's just not conceivable. There's too 0:29:46.640 --> 0:29:48.820 many of these things we have to do. There's, in 0:29:48.840 --> 0:29:51.100 a lot of cases, especially single stock, which is changing, 0:29:51.380 --> 0:29:55.930 there's not daily option markets. The bid-offer spread would just 0:29:55.970 --> 0:29:58.960 be too high to try to even contemplate doing this. 0:29:59.440 --> 0:30:01.479 Actually, this reminds me of something I wanted to ask you, 0:30:01.520 --> 0:30:05.260 which is correlation is one of the trickiest things in 0:30:05.380 --> 0:30:07.980 all of finance to model. And I'm very curious how 0:30:08.180 --> 0:30:14.110 often the models disagree, I guess, internally on a potential outcome. 0:30:14.290 --> 0:30:17.950 And if there is disagreement or if there is uncertainty... 0:30:18.390 --> 0:30:20.710 Where does that actually get priced? Does it get priced 0:30:20.830 --> 0:30:24.070 in the coupon that you're paying out to the investor? 0:30:24.290 --> 0:30:27.290 Or do you, I don't know, add an additional reserve 0:30:27.490 --> 0:30:28.410 or something like that? 0:30:28.710 --> 0:30:33.130 Combination of all those things. So I guess the modeling component, 0:30:34.580 --> 0:30:40.360 we think of finance as this risk-neutral world. And so 0:30:40.640 --> 0:30:43.580 if you look at that empirically and the returns on equities, 0:30:43.840 --> 0:30:48.020 it's not risk-neutral to start with. We also have liked 0:30:48.040 --> 0:30:51.540 to look at markets in terms of, so basically markets 0:30:51.580 --> 0:30:55.220 have gone higher than what a risk neutral rate would suggest. Right. 0:30:55.540 --> 0:30:58.680 And so a lot of these products they're based on 0:30:59.020 --> 0:31:03.070 the expected knockout date, because a big component of this 0:31:03.160 --> 0:31:05.470 is the funding. You gave me, you gave the issuer 0:31:05.910 --> 0:31:09.530 a hundred dollars. How long is that going to invest for? Right. 0:31:09.570 --> 0:31:12.150 And so we base it on risk neutral. So that 0:31:12.210 --> 0:31:15.719 in and of itself is a constraint, but also. what 0:31:15.760 --> 0:31:18.920 can we observe? The selling the put, we can observe 0:31:19.300 --> 0:31:22.780 implied volatility in the listed market. And so we can 0:31:22.800 --> 0:31:25.520 build a volatility surface on that, a local vol surface. 0:31:26.520 --> 0:31:29.280 But if you look at this actual trade and we 0:31:29.320 --> 0:31:32.230 look at the, let's go back to that simple three 0:31:32.290 --> 0:31:37.010 month quarterly knockout and the knockout again, is that put spread? 0:31:37.450 --> 0:31:40.130 I've got a series of these put spreads that are 0:31:40.250 --> 0:31:43.550 forward starting. All right. So I've got a, you know, 0:31:43.650 --> 0:31:45.990 in three months time, Am I going to have to 0:31:46.030 --> 0:31:48.890 do something in that next three month bucket? So you've 0:31:48.910 --> 0:31:51.670 got forward starting risk. And when we look at local 0:31:51.710 --> 0:31:55.140 vol and the construction of local vol, it really, really 0:31:55.260 --> 0:32:00.760 underestimates the relationship between these dates going forward. So to 0:32:00.800 --> 0:32:04.979 cut a long story short, there's modeling assumptions that we 0:32:05.080 --> 0:32:08.960 use and we look at stochastic volatility to try to 0:32:09.060 --> 0:32:12.570 take that into account. And that's just, again, some of 0:32:12.610 --> 0:32:15.110 this stuff is opaque. because one of the components of 0:32:15.130 --> 0:32:18.370 stochastic volatility is vol of vol, and you can't really 0:32:18.470 --> 0:32:22.370 observe vol of vol outside of maybe VIX options. And 0:32:22.390 --> 0:32:23.930 so on a single stock name, you can't do that, 0:32:24.210 --> 0:32:26.730 especially when you get to these daily nuggets. 0:32:42.970 --> 0:32:47.650 With the single stock structured notes, what are the popular 0:32:47.830 --> 0:32:50.010 ones that we're talking about here? 0:32:50.030 --> 0:32:51.290 NVIDIA? 0:32:51.550 --> 0:32:54.490 Apple? Meta? What are people buying? 0:32:54.770 --> 0:32:58.370 Semis. Okay. You've got the hyperscalers. 0:32:58.390 --> 0:33:01.810 Are there ones for the neoclouds? Are there people buying? 0:33:01.850 --> 0:33:04.550 There's a CoreWeave one in Asia. 0:33:04.610 --> 0:33:05.730 There's probably some in the U.S. 0:33:05.750 --> 0:33:06.010 Too. 0:33:06.130 --> 0:33:08.570 But our colleague at Bloomberg, Shuli Ren, wrote a really 0:33:08.590 --> 0:33:11.070 good column about it. 40% annualized yield. 0:33:11.590 --> 0:33:13.970 That's pretty sick. So actually, I was going to thank 0:33:13.990 --> 0:33:16.630 you for bringing that up. Just to be clear, when 0:33:16.670 --> 0:33:19.840 you're talking about, you said $ 300 billion market this year? 0:33:20.120 --> 0:33:23.540 And that's predominantly on, that's just U.S. registered. 0:33:25.140 --> 0:33:26.120 So this is U.S. money? 0:33:26.740 --> 0:33:28.380 Yes, this is U.S. registered money. 0:33:28.720 --> 0:33:31.950 Okay. Because my understanding is for as much as like 0:33:32.890 --> 0:33:35.350 people talk about it here, this is like really big in. 0:33:35.310 --> 0:33:35.990 Asia, right? 0:33:36.190 --> 0:33:36.370 Yeah. 0:33:37.420 --> 0:33:40.810 One of my favorite headlines that I ever wrote was, 0:33:40.980 --> 0:33:43.050 I think it was when there was drama in the 0:33:43.090 --> 0:33:45.650 Chinese UN and a bunch of structured products in Asia 0:33:45.690 --> 0:33:46.390 got knocked out. 0:33:46.530 --> 0:33:47.970 And I called it the tarf barf. 0:33:48.330 --> 0:33:48.890 Oh, that's good. 0:33:48.950 --> 0:33:50.290 Thank you. Thank you. 0:33:50.470 --> 0:33:53.990 But can you explain what it is about high net 0:33:54.030 --> 0:33:57.440 worth in the US versus high net worth in Asia 0:33:57.520 --> 0:34:01.860 such that there is a maybe more naturally economic reason 0:34:01.940 --> 0:34:03.980 why these products are so popular in Asia? 0:34:04.000 --> 0:34:04.080 Yeah. 0:34:04.730 --> 0:34:08.910 I would say just because it's been around longer in Asia. 0:34:09.770 --> 0:34:10.950 Is there a reason for that? 0:34:11.590 --> 0:34:15.650 I would say it probably started with Japan when interest 0:34:15.670 --> 0:34:23.060 rates went to zero. And the concept of Uridashi started where, hey, 0:34:23.460 --> 0:34:27.339 how can I enhance this? And then you get a coupon. Hey, 0:34:27.380 --> 0:34:29.960 how can I make that coupon higher? And you add 0:34:30.100 --> 0:34:35.060 certain factors to it. And in markets, I guess... This market, 0:34:35.080 --> 0:34:38.640 the US market is more used to participation because just. 0:34:38.520 --> 0:34:39.950 Of how it's done. Yeah, I get it. 0:34:39.980 --> 0:34:44.330 I get it. And other markets have had different sideways down, whatever. 0:34:44.830 --> 0:34:46.830 And so having something that protects you a little bit 0:34:46.989 --> 0:34:50.870 on the downside and gives you a yield when maybe 0:34:50.910 --> 0:34:54.510 the equity performance hasn't been there starts to look more attractive. 0:34:55.650 --> 0:34:57.650 Now, these days we're talking about, you're going to get 0:34:57.670 --> 0:35:00.400 some pretty fat, pretty juicy yields in the United States 0:35:00.719 --> 0:35:04.680 these days. We're in this sort of weird situation. In which, 0:35:05.160 --> 0:35:07.510 and it's kind of a rare situation historically in which 0:35:07.530 --> 0:35:11.450 stocks have done quite, quite well. And also rates have 0:35:11.469 --> 0:35:14.310 been going up and also spreads have been going up, 0:35:14.370 --> 0:35:17.350 particularly on many of the stocks that have been going well. 0:35:17.370 --> 0:35:22.620 It's a very strange environment. Does that lessen at all 0:35:22.660 --> 0:35:25.339 some of the appetite for structured notes when I don't 0:35:25.360 --> 0:35:28.520 have to get particularly exotic if I just want a coupon? Yeah. 0:35:28.600 --> 0:35:31.219 So in the U S if we actually look at 0:35:31.380 --> 0:35:35.330 the size of the market historically, versus what the coupon 0:35:35.489 --> 0:35:39.370 or that yield has been, it's not as big as 0:35:39.910 --> 0:35:45.530 the total return. So what that's telling me is that people, 0:35:45.550 --> 0:35:48.729 the US, in the register space at least, are taking 0:35:48.770 --> 0:35:52.790 some of that return and using it as investment income, 0:35:53.350 --> 0:35:56.890 as a dividend per se. And so the market structure 0:35:57.130 --> 0:36:00.910 in the US is different because this is a participation 0:36:00.989 --> 0:36:05.280 trade and this is something that diversifies and gives some 0:36:05.480 --> 0:36:06.900 protection to the downside. 0:36:06.920 --> 0:36:07.319 All right. 0:36:07.660 --> 0:36:10.130 And I think it's being used like that in, in 0:36:10.170 --> 0:36:13.330 the U S whereas in other markets, it's more about 0:36:13.810 --> 0:36:16.710 how can I get the highest return and the duration, 0:36:16.770 --> 0:36:20.910 like the maturities are less. And also the, the idea 0:36:20.969 --> 0:36:24.390 of reinvestment is higher as well in terms of taking 0:36:24.450 --> 0:36:26.050 this and doing it again. Hmm. 0:36:26.580 --> 0:36:30.140 You know, you mentioned less capital available in the, I guess, 0:36:30.180 --> 0:36:34.739 financial ecosystem for absorbing some of this flow. I don't 0:36:34.760 --> 0:36:37.569 want you to name specific counterparties or anything like that, 0:36:37.610 --> 0:36:39.870 but what is going on here exactly? Is this like 0:36:39.890 --> 0:36:44.530 a restrictive balance sheet thing or are people nervous about 0:36:44.650 --> 0:36:47.350 actually like expressing particular views? 0:36:47.430 --> 0:36:48.040 What's going on? 0:36:48.280 --> 0:36:50.799 I don't think it was views. I suspect that to 0:36:50.840 --> 0:36:54.310 protect portfolios, call options were being bought in the market. 0:36:54.910 --> 0:36:58.750 And as those portfolios changed and maybe shrank, the need 0:36:58.870 --> 0:37:06.319 for that went away. And so a large buyer that 0:37:06.360 --> 0:37:10.000 elevated option premium disappeared at the same time. Well, I 0:37:10.219 --> 0:37:12.839 guess it's all related as markets were coming off as well. 0:37:13.180 --> 0:37:16.359 And that definitely changed some of the dynamics in the market. 0:37:16.650 --> 0:37:19.630 So what does that actually mean for issuance of structured products? 0:37:19.670 --> 0:37:22.560 If you can't offload the vega to someone else, if 0:37:22.600 --> 0:37:25.640 you can't properly hedge, are you naturally limited in what 0:37:25.660 --> 0:37:26.100 you can do? 0:37:27.239 --> 0:37:29.180 Yes and no. I think there is still a market. 0:37:29.300 --> 0:37:33.860 There is way more liquidity in the US capital markets 0:37:33.910 --> 0:37:37.330 than anywhere else. And looking at this from the lens 0:37:37.370 --> 0:37:40.890 of trading in Hong Kong and Australia, there are real two, three, 0:37:41.210 --> 0:37:45.450 five year equity markets that are hedgeable. I would say 0:37:45.770 --> 0:37:51.260 ultimately what drives issuance is the direction of the market. 0:37:52.050 --> 0:37:54.089 I would say if we do go sideways and there's 0:37:54.140 --> 0:37:58.219 less order callables or we go down, you're just not 0:37:58.280 --> 0:38:02.060 going to get the demand for more or historically demand 0:38:02.280 --> 0:38:06.100 tails off. And that does also create a very interesting 0:38:06.180 --> 0:38:11.560 dynamic in the market. So the example of, I think 0:38:11.580 --> 0:38:12.980 we moved it from a one year trade to a 0:38:12.980 --> 0:38:15.989 five year trade. So the dynamic that we're seeing in 0:38:16.030 --> 0:38:19.750 the market is we've got typically with the US registered, 0:38:19.930 --> 0:38:23.219 we've got three to five year maturities with expected life 0:38:23.260 --> 0:38:26.060 of two years, you're selling two years. If the market 0:38:27.020 --> 0:38:30.779 goes down or the worst of goes down, the chance 0:38:30.800 --> 0:38:34.319 that this goes to five years becomes a real thing, right? 0:38:34.460 --> 0:38:37.680 And so all the vegas there. So that dynamic will 0:38:37.719 --> 0:38:41.020 mean there's no new issuance, but I'm now short this 0:38:41.100 --> 0:38:46.150 two year trade and I never had Vega there. I 0:38:46.290 --> 0:38:49.230 used that position as a proxy for the 5U. And 0:38:49.270 --> 0:38:53.089 so that term structure also changes where you can get 0:38:53.469 --> 0:38:56.470 the stuff that's depressed in the market having a higher 0:38:56.550 --> 0:39:00.700 value because you've just got your short hedge on and 0:39:00.739 --> 0:39:04.500 now you've got exposure to the 5U. And again, conversely, 0:39:04.540 --> 0:39:07.379 we get markets go back to all-time highs. I'm just 0:39:07.440 --> 0:39:09.920 left short the 2U and that's another reason it can 0:39:09.960 --> 0:39:12.469 go up. And when we look at this stuff and 0:39:12.510 --> 0:39:15.460 we model it, we call it, you know, peak Vega. 0:39:15.860 --> 0:39:18.839 So what happens if like, all right, people, you know, again, 0:39:18.880 --> 0:39:21.400 we're in this bow of like, oh, it's the AI, boom, 0:39:21.460 --> 0:39:23.890 is it coming to an end or something like that? 0:39:24.650 --> 0:39:27.850 What happens if we really get some real, I mean, 0:39:28.290 --> 0:39:32.569 these moves aren't that big yet. Semiconductor ETF, I guess 0:39:32.650 --> 0:39:34.810 it's down, I don't know, maybe 10% from its peak 0:39:34.870 --> 0:39:37.680 or something like that. It's not that big. What happens 0:39:37.800 --> 0:39:39.859 if we're like, wow, you know what? We're really going 0:39:39.880 --> 0:39:43.900 to reprice the AI trade in a meaningful way for 0:39:43.980 --> 0:39:47.830 some theory, the ROI is up there, whatever. What happens 0:39:47.870 --> 0:39:49.610 to these products if we're like, all right, we got 0:39:49.650 --> 0:39:50.210 some moves here? 0:39:50.590 --> 0:39:53.570 So if we get really large moves in terms of, again, 0:39:54.110 --> 0:39:57.410 the client has, in effect, there is a directional component 0:39:57.469 --> 0:40:00.200 to this trade, right? They are short of put. So 0:40:00.340 --> 0:40:05.480 in extreme situations, in these cases, there's $ 100 potentially at risk. 0:40:06.120 --> 0:40:09.700 And there's a point where, depending on the type of 0:40:09.860 --> 0:40:13.940 put or how it was structured, that the dealer can 0:40:13.980 --> 0:40:18.080 be on Instead of being long gamma because of this put, 0:40:18.120 --> 0:40:20.600 it's really a put spread. I'm on the other side 0:40:20.980 --> 0:40:23.430 of the spread because it's gone too far. Now that's 0:40:23.469 --> 0:40:27.049 another Greek word just introduced. I'm now short gamma, which 0:40:27.130 --> 0:40:30.690 means that I'm more susceptible to market moves and I 0:40:30.830 --> 0:40:34.200 exacerbate the market moves. I have to buy when market 0:40:34.219 --> 0:40:36.720 goes up and sell when market goes down. That's gamma. 0:40:37.000 --> 0:40:37.439 Big short. 0:40:37.680 --> 0:40:39.879 Do you see like, all right, let's say a bunch 0:40:39.920 --> 0:40:43.540 of people bought these notes that don't take any hit 0:40:43.640 --> 0:40:47.319 until they're 40% down or something like that. Are there 0:40:47.420 --> 0:40:50.630 things that you see in the market when like a 0:40:50.660 --> 0:40:54.330 bunch of these things are 38% down and they're getting 0:40:54.410 --> 0:40:58.069 close to that barrier or whatever? Are there fingerprints on 0:40:58.090 --> 0:40:59.870 the market? It's like, wow, it looks like a bunch 0:40:59.910 --> 0:41:03.010 of structured notes. We're getting close to some of these levels. 0:41:03.270 --> 0:41:05.510 What would I expect to start to see happening? 0:41:06.150 --> 0:41:08.530 In all fairness, we haven't really seen a down market 0:41:08.550 --> 0:41:10.960 where those books have been there. We see it on 0:41:10.980 --> 0:41:15.420 the knockouts more. Because that's probably, it happens once every 0:41:15.460 --> 0:41:18.060 three months rather than once every five years. But the 0:41:18.100 --> 0:41:21.440 concept is the same. So it's a digital, it's a 0:41:21.480 --> 0:41:22.049 call spread. 0:41:22.180 --> 0:41:22.319 Yeah. 0:41:22.650 --> 0:41:25.810 And either this product is going to survive and go 0:41:25.950 --> 0:41:28.489 on for at least another three months or it's not. 0:41:28.870 --> 0:41:31.830 So the fact that it's a put spread or a 0:41:31.870 --> 0:41:35.299 call spread, it depends what side I'm on, whether or 0:41:35.340 --> 0:41:37.980 not I'm long or short gamma. So the same thing 0:41:38.239 --> 0:41:41.260 on the put, if it's a knock-in put especially. Depending 0:41:41.320 --> 0:41:43.980 on which side I'm on or approaching it, you get 0:41:44.380 --> 0:41:48.439 a gamma profile that can be short. That you being 0:41:48.500 --> 0:41:51.980 the dealer. Yeah. And so- What that means is you 0:41:52.000 --> 0:41:57.000 can get exacerbated moves around those levels as a result 0:41:57.380 --> 0:42:00.120 of being close to those levels and having this binary 0:42:00.200 --> 0:42:03.219 outcome near those levels. So we see it often on 0:42:03.239 --> 0:42:05.819 the knockouts just because there's more of them and we 0:42:05.860 --> 0:42:09.020 face them more. But yes, in a period of these 0:42:09.060 --> 0:42:11.279 things are down wherever the strike is, I think we 0:42:11.300 --> 0:42:15.009 said 40%. As we approach it, you'll start to deal 0:42:15.050 --> 0:42:16.489 a short gamma. And then when we're on the other 0:42:16.530 --> 0:42:19.150 side of it, you'll get the same sort of aspect. 0:42:20.160 --> 0:42:24.859 Which is more painful, the slow decline or the big 0:42:24.960 --> 0:42:25.620 overnight fall? 0:42:26.380 --> 0:42:31.220 That depends. I would say the virtuous cycle is that 0:42:31.780 --> 0:42:35.470 the product markets go up and we get new trades 0:42:35.750 --> 0:42:40.189 and everybody's happy because there's a coupon. Both of your scenarios, 0:42:41.310 --> 0:42:45.890 there's many ways to die and that slow grind down. 0:42:46.370 --> 0:42:48.250 And again, it depends on your hedging and what you've done. 0:42:48.630 --> 0:42:53.510 can be painful because we've got this dynamic of hedging 0:42:53.550 --> 0:42:58.590 with two, left with five, wrong hedge, volatility is going lower, 0:42:59.010 --> 0:43:03.299 the skew is flattening. That can be painful. And what 0:43:03.320 --> 0:43:06.160 can also be painful is, hey, I've hedged and I 0:43:06.200 --> 0:43:08.080 described a put spread or call spread and I've just 0:43:08.100 --> 0:43:13.480 done an outright position. So locally I'm hedged, but on 0:43:13.520 --> 0:43:17.870 a large move, I'm not because my call spread or 0:43:17.890 --> 0:43:20.430 put spread only gives me X amount of value, whereas 0:43:20.469 --> 0:43:24.680 the thing I've sold has value beyond that. So there's 0:43:24.719 --> 0:43:29.300 a scenario where that's horrible too. And it really depends on, again, 0:43:29.820 --> 0:43:31.620 how these things have been hedged. 0:43:32.590 --> 0:43:33.650 I have one more question. 0:43:33.810 --> 0:43:36.969 Some of these products are very creative in both their 0:43:37.010 --> 0:43:40.930 design and their hedging. Do you have a favorite that 0:43:40.950 --> 0:43:42.870 you like to point to and go, hey, this was 0:43:43.010 --> 0:43:43.759 extra creative? 0:43:44.180 --> 0:43:47.379 Yeah, I'd say a popular product now, so we talked 0:43:47.420 --> 0:43:51.259 about the worst of, we talked about daily observations, and 0:43:51.320 --> 0:43:53.790 we talked about what an auto callable is that we 0:43:53.870 --> 0:43:57.130 observe it, and the worst performer has to be above 0:43:57.170 --> 0:44:00.190 that level to knock out. So one of the more 0:44:00.250 --> 0:44:03.770 creative auto calls we've seen is one with a knockout 0:44:04.170 --> 0:44:08.160 auto call feature. So say you've got three stocks, and 0:44:09.540 --> 0:44:12.620 you've got observation dates that are daily. You can have 0:44:12.700 --> 0:44:16.719 one of these stocks... that rallies 20% on day one, 0:44:17.260 --> 0:44:20.420 say the other two are down 10%, it's now considered 0:44:20.500 --> 0:44:23.710 knocked out regardless of what happens next. So then you've 0:44:23.750 --> 0:44:28.450 got two names left and the first stock is down 30%, 0:44:28.450 --> 0:44:32.170 kind of irrelevant, but the other two, or just let's 0:44:32.210 --> 0:44:35.719 say another one goes up, it's gone. You're now got 0:44:35.739 --> 0:44:38.080 a position where the original stock, which was up 20%, 0:44:38.080 --> 0:44:44.060 is now down 40% and the stock A, If it 0:44:44.100 --> 0:44:47.440 just rallies a little bit, the whole product disappears. And 0:44:47.840 --> 0:44:50.460 this thing is way down, like the stock that was 0:44:50.500 --> 0:44:52.950 up 20 is now down, you know, 50%. It's going 0:44:53.450 --> 0:44:55.550 to be like, it's going to have real put value, 0:44:56.190 --> 0:44:59.750 but that put value is all destroyed if this last 0:44:59.790 --> 0:45:04.270 guy gets knocked out. So I now have this, this 0:45:04.450 --> 0:45:08.240 way in the money put, which can disappear very, very quickly. 0:45:08.700 --> 0:45:12.780 And so I've got this massive vol of vol position 0:45:12.840 --> 0:45:16.390 where If everything just rallies now, it's done. I need 0:45:16.410 --> 0:45:20.260 everything to fall. And it creates a really interesting dynamic. 0:45:20.300 --> 0:45:22.520 And I think it's what we're seeing in the very 0:45:22.620 --> 0:45:23.540 front in single stockings. 0:45:24.060 --> 0:45:28.060 As the clients get richer and richer, the last question 0:45:28.080 --> 0:45:30.880 for me, as clients get richer and richer, does the 0:45:30.940 --> 0:45:36.160 creativity with which they can purchase an instrument multiply as in, 0:45:36.500 --> 0:45:39.340 all right, you know what? Here's this guy's worth $ 100 million. 0:45:39.820 --> 0:45:41.899 Here's a few items you can pick from the shelf. 0:45:42.690 --> 0:45:44.930 Here's a billion dollars. You know what? We're going to 0:45:44.969 --> 0:45:47.049 bring out the best chef for him. And we're going 0:45:47.070 --> 0:45:49.460 to chop the mushrooms and everything. And we're going to 0:45:49.480 --> 0:45:52.719 come up with something really creative for him. Just in 0:45:52.760 --> 0:45:57.400 the nature of the business, there's other sort of more 0:45:57.460 --> 0:46:00.100 and more exotic versions that you can get depending on 0:46:00.140 --> 0:46:01.299 how much money you bring to the table. 0:46:01.660 --> 0:46:03.500 You can get more and more exotic. I would say 0:46:03.580 --> 0:46:07.660 that liquidity is a factor. And generally, what provokes or 0:46:07.780 --> 0:46:10.790 what creates these sort of structures is what created pain. 0:46:11.219 --> 0:46:15.040 So we had examples in 2018 of dealers getting into 0:46:15.200 --> 0:46:18.190 trouble and what created pain was that drift down. So 0:46:18.210 --> 0:46:21.910 a whole new product was created, not knock in, knock out, 0:46:21.950 --> 0:46:24.410 where if we drift down, but we haven't drifted too 0:46:24.430 --> 0:46:26.790 far and we stay in a certain area, we knock 0:46:26.830 --> 0:46:30.000 out as well. So I would say it's, and that 0:46:30.620 --> 0:46:32.640 the level of all of all that creates and, oh, 0:46:32.680 --> 0:46:35.919 this is a simple way to solve it. creates secondary issues. 0:46:36.120 --> 0:46:39.620 But to your point, I would say as it gets 0:46:39.660 --> 0:46:43.240 more sophisticated or you get large institutional clients, the amount 0:46:43.260 --> 0:46:46.190 of structuring that can happen, it's possible, but it's more 0:46:46.230 --> 0:46:47.989 about size and handling liquidity. Got it. 0:46:49.150 --> 0:46:49.390 All right. 0:46:49.930 --> 0:46:52.450 Alex, truly the perfect guest to talk about structured products. 0:46:52.489 --> 0:46:54.090 Really appreciate you coming on OnLogs. 0:46:54.270 --> 0:46:55.049 Thank you for having me, guys. 0:47:02.760 --> 0:47:10.450 Thank you. Joe, I thought that was fascinating. There are 0:47:10.510 --> 0:47:13.190 indeed a lot of Greek letters involved, but I got 0:47:13.210 --> 0:47:15.589 to say, I feel kind of bad for, for the 0:47:15.630 --> 0:47:18.509 market makers who are basically like the buyers of last 0:47:18.570 --> 0:47:21.819 resort or a lot of that Vega. And like, as 0:47:21.940 --> 0:47:24.940 the market does what it's been doing recently, they basically 0:47:24.980 --> 0:47:26.620 just have more and more that they have to absorb 0:47:26.640 --> 0:47:28.419 and then they have to hedge more and more and more. 0:47:28.440 --> 0:47:29.480 It seems hard. 0:47:30.620 --> 0:47:32.010 I guess I don't feel sorry for them. 0:47:32.070 --> 0:47:33.609 I mean, I guess they're paid to do it, but 0:47:33.790 --> 0:47:34.870 still it's hard. 0:47:35.350 --> 0:47:37.650 But that's what the money is for. You know, it's like, 0:47:37.670 --> 0:47:39.950 that's why they get paid well, because it's actually, it's 0:47:40.010 --> 0:47:42.980 very complicated to figure out where all these different like 0:47:43.040 --> 0:47:47.160 balancing prices are and how exactly, what exactly is the 0:47:47.200 --> 0:47:49.180 value of some of these things. But I don't feel 0:47:49.219 --> 0:47:51.660 bad for them at all because it seems like a 0:47:51.880 --> 0:47:54.299 job where not many people would have that skill. And 0:47:54.340 --> 0:47:55.980 if you do have that skill, you're probably getting paid 0:47:56.020 --> 0:47:59.799 very well. I really enjoyed that conversation overall. Helped me 0:47:59.840 --> 0:48:02.910 sort of understand what these products are there, what problems 0:48:02.950 --> 0:48:05.680 they solve for the clients. why the client is getting 0:48:05.840 --> 0:48:08.910 compensated for them, why the banks like to sell them. 0:48:09.610 --> 0:48:11.029 It clarified a number of things. 0:48:11.190 --> 0:48:13.990 Yeah, and I do also think it definitely underscored that 0:48:14.030 --> 0:48:17.230 sometimes the most painful environment isn't the big sharp move 0:48:17.270 --> 0:48:18.810 down or the sharp move up. 0:48:19.050 --> 0:48:21.290 It's that slow grind. 0:48:21.410 --> 0:48:24.569 Which kind of is what we've been seeing recently. 0:48:25.090 --> 0:48:28.759 It's interesting. U.S. stocks have just done so well for 0:48:28.820 --> 0:48:31.160 so long. I mean, that is the big story. And 0:48:31.180 --> 0:48:33.440 I think about this all the time in many cases. 0:48:33.930 --> 0:48:37.100 flavors of this conversation where we talk about hedge funds 0:48:37.180 --> 0:48:39.500 and options and trading and stuff like that. It's like, man, 0:48:40.000 --> 0:48:44.000 you got paid in retrospect, sitting here in 2026 for 0:48:44.020 --> 0:48:47.160 basically the last 45 years, you got paid a lot 0:48:47.219 --> 0:48:50.080 of money to just invest in the market and do nothing, right? 0:48:50.320 --> 0:48:53.840 To buy the index or whatever. And with very rare exceptions, 0:48:54.180 --> 0:48:55.580 that's all you had to do to make a ton 0:48:55.620 --> 0:48:57.779 of money is buy the index and go swimming. But 0:48:57.820 --> 0:49:01.420 it's interesting to think about how, for example, in other countries, 0:49:02.100 --> 0:49:04.219 Problems are a little trickier. It's like, how does someone 0:49:04.239 --> 0:49:06.719 in Japan get yield during all those Zerp years and stuff? 0:49:06.739 --> 0:49:08.680 So you have to get a little bit exotic and 0:49:08.719 --> 0:49:12.020 stuff like that. Now I can understand why, you know, 0:49:12.080 --> 0:49:14.590 people sitting on some huge gains, they don't want to 0:49:14.610 --> 0:49:16.610 miss out on future gains, but maybe they want to 0:49:16.630 --> 0:49:19.290 like take off some risk. Now there's yield again in 0:49:19.310 --> 0:49:22.060 the United States. over the last few years. That could 0:49:22.100 --> 0:49:25.290 be interesting and stuff like that. So I understand a 0:49:25.330 --> 0:49:28.529 little bit more about like inherently why these products have 0:49:28.550 --> 0:49:32.410 gotten more lucrative or Desirable for high net worth American 0:49:32.450 --> 0:49:33.890 investors in recent years. Sure. 0:49:33.969 --> 0:49:36.120 But I guess the issue is when the market becomes 0:49:36.160 --> 0:49:39.120 so big that it actually ends up impacting everything and 0:49:39.140 --> 0:49:42.160 you get these sort of weird like negative gamma instances 0:49:42.239 --> 0:49:45.500 where people have to sell into a down market and 0:49:45.540 --> 0:49:46.200 things like that. 0:49:46.260 --> 0:49:48.760 And it just sort of. starts wagging the tail. 0:49:49.100 --> 0:49:52.480 Totally. And look, the market has gotten a little more turbulent. Like, again, 0:49:52.800 --> 0:49:54.620 I'd like to point out that it's not like we've 0:49:54.640 --> 0:49:56.029 had some huge crash or something. 0:49:56.070 --> 0:49:56.590 No, we haven't. 0:49:56.770 --> 0:49:59.450 But it is, it has not been straight up. People 0:49:59.469 --> 0:50:01.690 are starting to look for the weak players and the 0:50:01.730 --> 0:50:04.910 links and so forth. People getting a little bit of anxious. 0:50:04.989 --> 0:50:07.279 And so it's sort of important to get a better 0:50:07.450 --> 0:50:11.580 grasp on like, what are some of the ramifications if 0:50:11.600 --> 0:50:15.200 we were to see longer sideways market or God forbid, 0:50:15.520 --> 0:50:16.799 something resembling a bear market. 0:50:17.070 --> 0:50:18.110 Learn your Greeks. 0:50:18.260 --> 0:50:18.840 Learn your Greeks. 0:50:18.880 --> 0:50:19.589 Shall we leave it there? 0:50:19.660 --> 0:50:20.200 Let's leave it there. 0:50:20.320 --> 0:50:20.540 All right. 0:50:20.600 --> 0:50:23.120 This has been another episode of the All Thoughts Podcast. 0:50:23.200 --> 0:50:25.780 I'm Tracy Allaway. You can follow me at Tracy Allaway. 0:50:25.980 --> 0:50:28.980 And I'm Joe Weisenthal. 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