Give the People What They Want

Feb 11, 2014

By Henry Schwartz – President, Trade Alert

When people ask what sparked the idea for our real-time option flow monitor, I have a simple answer- Ian.   Ian was the top producing derivative salesperson on Wall Street when I was a trader, and his clients were primarily ‘fast money’ hedge funds who demanded size markets and top notch service in exchange for their commission dollars.  In those days an upstairs trading floor could be as loud as an exchange floor at times- with salespeople yelling across the aisle at traders who were usually on two phones at the same time.  Ian used to scream for ‘market color’ to pass on to his clients, and every time he picked a stock in my book I’d cringe– partly because of his whiny voice, but mostly because I was a very neutral trader who didn’t put much thought into the story surrounding any given stock. I quickly realized this was going to be a problem.

My ‘basic training’ in options took place in the classrooms of Hull Trading Company in Chicago.  Like most true market-making firms at the time, Hull’s profit model was simple: capture bid-ask spread with minimal risk. Taking a directional view in a stock was absolutely off-limits and could get you fired, so we stuck with Black-Scholes, hedged every trade, and made a lot of money in the process.  The downside was that I never got very good at forming a view on a stock- and most of the time I simply didn’t care what was happening in terms of options flow because it did not impact my ability to lock in ‘edge.’

It didn’t take me long to realize that keeping customers happy is rule #1 on Wall Street.  While some traders whispered ‘just make something up,’ I was uncomfortable with that approach and scrambled to ask every floor broker I could find what might be going on in a name.  In the 90s this worked because even with multi-listing, most of the flow in a stock gravitated to one exchange.  A good floor broker could tell you who bought what when, and often what they were looking for in the position- this is what the customer wanted to hear, and payback was in the form of orders.

The launch of the ISE in 2000 marked a major turning point for the US options markets- as electronic, anonymous execution became the modus operandi for a large part of the volume.  But customers still needed market color – which became more difficult to collect, and the trend toward further fragmentation was already underway.

This problem for the derivatives community became our opportunity, and we have put a great deal of work into helping people see and interpret activity of interest in real time regardless of where or how things are trading.  While it’s easy to get lost in the immensity of the option markets (30 billion messages per day, 15 million messages per second, 1.1 million trades, 636,000 options, 4130 underlying securities…) it’s important to remember that most of the flow originates with people who do their homework and ‘pull the trigger’ on trades, and we believe this human part of the equation is even more important than that which won the Nobel Prize back in 1997.

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