Anthony Saliba is the CEO of LiquidPoint, LLC and executive managing director of BNY ConvergEX Group, LLC, where he manages the options trading platforms for both the buy-side and sell-side investment communities. He is also the founder of Saliba Portfolio Management, L.L.C., founding member of Saliba Partners, L.L.C., an options trading firm on the floor of the CBOE, and founder of International Trading Institute, Ltd., an international derivatives training institution. He served on the CBOE’s board of directors from 1987-1989 and has participated on numerous industry committees. Saliba was the only options trader to be profiled in the best-selling book Market Wizards by Jack Schwager, a compilation of interviews with unusually profitable traders. He began his trading career in 1979 at the Chicago Board Options Exchange (CBOE) trading equity options as an independent market maker. He spoke with JLN Options editor Sarah Rudolph about options innovations, the changes to the industry brought about by new regulations, and his long and bumpy road to success.
Q: Options aren’t at the top of the regulatory changes in Dodd-Frank, but there are some ways in which options trading will be affected. How do you see the regulatory changes affecting your business?
A: We’re a shop of market practitioners who came together 15 years ago to deliver trading software solutions for ourselves and our friends, and then realized we had some pretty good stuff we could sell in the marketplace. In the past 10 years we’ve seen a lot of changes in the options industry. None of it has really surprised me except for the most recent changes, which are not all for the better.
When you look at the SEC, there is not one true options person involved. They have always looked at options as a “cousin to equities,” and they think if it works for equities, it will work for options. In the past few years, big equity trading shops have pushed the SEC to adopt rules that are more equity-like (going to penny quoting, ‘maker-taker’ fee structures, non-transparent order types). The fallout is that the quote-driven market of the past, which was very solid, has been denigrated and we’ve lost a lot of liquidity providers.
In December of ’08, there were over 260 registered liquidity providers on the American exchanges, from prop shops all the way up to the big guys. It was a rich tapestry of liquidity provision. Today there is less than half that number, because of the continuing push of the options industry – which is 180 degrees out of phase to the equity industry as far as how you make money – toward the rule set of the equities market.
As a basic example, when you buy a stock you make money by selling it higher or selling a derivative of it at a higher price, but with options you want to be taken on your offer or buy on your bid because of “fair value,” and all the newly minted rules promote others to step in front of you. For liquidity providers, the incentive to post their best prices has been destroyed. The maker-taker model works in the equity world, but in the options world the maker pays and the taker gets paid. It is predominantly entities participating in fee arbitrage.
The rule changes that have happened over the last few years have changed the way this is done in options, I think for the worse. We now have less transparency, more business being done with fewer liquidity providers. In the European markets, the screens are dark; it’s a call-around business and very much an “old boys’ network” style of trade. That’s not the recipe for growth… not as we have seen it here in The States. These markets were the envy of every exchange around the world. The exponential growth in the business that we had in the first part of this decade has slowed down considerably, and I think these last few rule changes will hurt the smaller retail user and the smaller trader. That is a characteristically American phenomenon in derivatives markets.
We at LiquidPoint have adapted. Most of our clients are institutions. It’s a pity, because the further growth potential is tremendous and it will be dampened by Washington and the forces that lobby Washington to come up with some of these new rules and order types. The QCC [Qualified Contingent Cross] and the directed order that was just approved for BATS [and just withdrawn yesterday], are setting up the market to be a relationship business done only by the big shops.
LiquidPoint provides tools for the market-makers whose business practices have fallen out of favor due to these market structure changes. They understand risk taking, have capital, and are smart and aggressive; but they need tools now to compete. We provide high-speed access, trading algorithms, and low-cost data center management. We try to preserve their desire to use their trading acumen to play in the market. They are no longer quoting and providing liquidity, but they’re participating in the market.
Q: Are market-makers now basically algorithmic traders?
A: I don’t know about mostly, but I think they are trending that way. I know a lot of shops and friends I grew up with who are leaving the business. It’s a shame, because at some point we will just end up with a few large firms and without that diverse mosaic of guys with varied trading interests: those who just want to trade in the money, guys who just want to trade LEAPS, guys who want to trade the health care sector vs. the communication sector, etcetera. There is less and less of that.
Competition on the screen continues to diminish and it’s expensive to go the route of being a market-maker as opposed to a price-taker, because exchanges charge you a lot (including the obligation) to make markets. It’s very expensive from a resource aspect, but also because of the risk.
We tried to educate the SEC a few years ago, but they were thinking in terms of equities, so they thought, ‘Why do posted spreads matter? They don’t have them in equities.’
Well, that’s one of the beauties of options. We’ve been writing about this in various forums, and I can’t say we’ve given up, but it does seem that nobody in Washington is listening.
Q: You mentioned education. You have written several books about options trading. What made you go from being a trader to educating others?
A: Initially, necessity was the mother of invention. I did it to train my own traders, because at one point we had a lot of clerks we elevated to trading our capital, and my brother and I were training them ourselves. It was repetitive and not efficient. In 1988, the use of personal computers was just scratching the surface . I sought to create a solution for myself; but it was so expensive to get it right that I figured others must have the same problem. We decided to start selling what we had built, mostly to firms and banks overseas that were getting ready to trade: banks at the Deutsche Terminbourse, the forerunner of Eurex.
We try to educate regulators and industry people, too, to help spread the word about listed options, because we think it’s the most fluid and malleable risk management tool ever invented. We felt everyone should have them in some form in their portfolio. Not everyone should use the same strategies, but you can find a place in your portfolio for some type of option component, whether it be to enhance income or reduce risk or bracket certain payouts. Educating people means more users in the marketplace and that’s good for everyone. We were just trying to make the pie bigger.
Q: It does seem that education has been the biggest factor in growing the pie.
A: Absolutely. I worked with the Options Institute at the CBOE in the mid ‘80s and then started The International Trading Institute in ‘89 on my own. We did most of our training overseas, focusing on trading from a market-making point of view. Now the classes are held quarterly, and I’m not involved in the management of the business – my brother manages all of that; but I would say we have probably trained more than 5,000 trading professionals. I bump into people all the time who say, ‘I took your class in 1995’ or whenever. It’s a great feeling.
Q: You have an anecdote in “Market Wizards” where you talk about caddying for traders in high school and wanting to emulate them. You started as a stockbroker at a desk, but then discovered that the floor was where the big money was being made; but what drew you to options in particular?
A: It was a bit of Kismet. When I interviewed for a position in Indianapolis in 1977, options were a “newfangled thing.” It was an old firm I interviewed with, and no one knew anything about options. They decided to start an options trading department and they said, ‘Kid, we’re going to need an assistant who knows what he’s doing, so in your last couple of months of school, we want you to learn a lot about options.’
I read a lot on options. I also read Joe Granville and Robert Prechter and the Dow Theory Letter and a lot of fundamental and technical analysis. I read everything I could get my hands on about options, although there wasn’t a lot at the time.
I began to work as an options assistant, but they wanted me to go out and sell economic development bonds to septuagenarian-farmer-husband-and-wife-teams, who would say, ‘We’re not gonna risk our money with some 21-year-old boy! Get outta here!’
So I did.
I would drive around for a while doing cold calls and answer the phones after hours. I was reading everything I could about options now that I was at the firm. One day I got a call after market close from a young man who was from Highland Park, Illinois, where I went to high school. He went to school with my younger brothers. His dad was a successful advertising maven and had some positions in a stock that had options traded on it. He was curious about doing a buy-write and I made some suggestions to him, and they worked. He called me back later and I made some more suggestions. After a while the dad opened up an account with me and I directed his trading based on what I knew about options. In a few months I had doubled his money. I spoke to the dad and he said, ‘You did a good job doubling my money in three months…but I see here that the firm has made almost as much in commissions. That’s really unacceptable! That’s called churning!’
I said, ‘No, it’s not churning! We’re trading options!’ But he wanted to know how we could do it without getting charged so much in commissions. II told him I had to be on the floor to do that.
I set out to become a CBOE member. We were going down the path to form a partnership when I met a guy trading on the floor who was friends with the person whose assistant I was going to be in Indianapolis. He said, “I could use a good clerk like you.” I had just turned 22. I told him the story about doubling the guy’s money. He said, “It sounds to me like he’s a poor winner. And if he’s a poor winner he’s going to be an even poorer loser! You’d better be careful.”
He talked me into breaking it off with the young man and his dad and coming to clerk for him. But my membership license at the CBOE only had six months to it. I was running out of time and it cost a lot of money to take that test and I wasn’t going to be able to take it again. I didn’t want to become an indentured clerk. When one of the guys I had caddied for saw that I knew a lot about options, he asked me to come trade for him. I told my employer, I’m still staying down here [on the floor], but I’m going to be doing it with a badge and trading for myself.
In the first six or eight weeks, I almost lost everything. That first summer was very depressing. In fact, there was a crash of a Delta airlines plane in May of ‘79 and about 300 people died. I was having such a bad time of it that I said to my colleague, I would trade places with one of those people. That’s how bad I felt. I was almost out of money, my strategies weren’t working, and my partner was very upset.
Q: How did you come back from that?
A: I sought out a couple of guys who were standing in the crowd in a less volatile stock. They were my dad’s age, just biding their time there and “flipping” options around. They didn’t know nearly as much about options strategy as I did, but something was working for them. I had lunch with them on occasion and I asked them what they did. They said they traded time spreads, calendar spreads… back and forth, in and out. I said that sounded pretty boring, but they said it works. We might only make a couple of hundred dollars a day, but if you make $200 a day every day you’ll make $4,000 a month’ — not a bad living for a 22-year old in 1979. And sometimes they’d make a lot more.
I adopted that philosophy of trading smaller and I went into their crowd. I still had a position on in my previous appointment, Teledyne, which was a very big, volatile crowd. I was trying to manage it out of the corner of my eye and get out of it. It had been a couple months when the stock went crazy one day and I had to run over and take care of my position. I started to adopt the more docile, meticulous spreading plan those guys used, but in the rock-and-roll Teledyne crowd. I did one contract at a time because it was so volatile and prices were 10 times as big. That’s how I got the initial nickname “One Lot.”
I was back in, and I was making $500 a day, and then $2,000 a day and then $5,000 a day. The gentleman I used to caddy for (who was also my trading partner) said, “You’re doing so well, but you’re only doing one-lots. Why don’t you increase your size and do two-lots or five-lots?”
That’s the only advice he ever gave me, but it was enough, and I took it.
I did that for about five years. I had made $1 million before I turned 25. I had been doing really well during the whole Ronald Reagan rally and the volatility in interest rates. When I turned 29, I said, ‘I’m going to retire on my 30th birthday. In 1985 I bid everyone adieu and left the floor.
I was having fun being 30 and retired. I went to Greece and Italy and Hong Kong (with The Options Institute), and then after a few months someone at the CBOE called to say they would be launching currency options on the floor. “They are really volatile, right up your alley, and we need someone like you to come and help build that crowd.”
I got lured into that. It was a big bank business, not an individual business. I went back on the floor and one day in September of ’85, hurricane Gloria hit the Eastern seaboard and the G5 had realigned the currencies the night before. They were up about 30 percent. It was tough – it was not anything close to trading equity options – and I gutted it out for a year and a half. That’s when I started getting involved in training the traders personally.
I still had the trading company, but my brother was running it. We had equity traders on the floor, a couple of guys in the OEX index. In 1986, no one was trading the SPX. It was American style options, a big contract compared to the OEX, and it wasn’t making it. The exchange said “we’re going to re-launch it as a European style contract” (as the contract is today). They said they needed some guys willing to risk capital and try to figure it out like I did in the currencies. Chicago Research and Trading, O’Connor, Hull Trading, a firm from Philadelphia – three or four other big firms, and two or three of us individuals and some brokers set out to ‘re-launch’ the product. We were doing maybe 20,000 contracts a day and the OEX was doing 150,000 a day or more. We vowed the S would do more than the O one day. The OEX traders laughed at us.
Then the market crashed in ‘87. A lot of focus came on the SPX crowd. We got a lot of business from the 100 (OEX). I stayed in there until ‘91 and helped build up that crowd. That was 20 years ago, but that’s how it began – with Terry Andrews, myself, guys who aren’t in the business any longer. Those floor trading days were mostly about doing whatever was needed to help the business. I made a lot of money and I had a strong feeling of wanting to give back. That’s when Jack Schwager came out to interview me for “Market Wizards.” I think that angered some of the administrators at the exchanges. They had it 180 degrees out of phase.
Q: What do you mean by that?
A: People are fans of sports celebrities, for example, because they relate to the people doing the struggle. The CBOE thought the exchange should be the popular institution. Nobody wants to care about the lowly little floor trader.
Q: The exchange should be the celebrity?
A: Yes, but having personalities young people can relate to by thinking, “There’s a guy who made it at that place…maybe I could, too,” rather than “Oh, there’s that cool place!’ is a better way of creating a buzz.
The notion of having a celebrity really stuck in their craw. Now, we have the Najarians and others who have taken their presence on the floor to a personal level where people recognize them and relate to them. And that only can help the business.
I didn’t set out to be above the exchange. I was just the subject of a couple of documentaries and news pieces about the exchange and the markets. And I became a persona non grata at the exchange. But it helped in my next business, selling the classes and my risk management software abroad, because people saw the book and articles about me.
I was not there, but two or three years ago at the OIC conference they had the heads of exchanges on a panel and the woman representing the Australian Stock Exchange (ASX) options division, was asked what was the single thing to which they attributed the success of their exchange. This woman, I was told, said “Tony Saliba! He came to Australia and helped us transition off the floor and get our market-makers to get on a system, transfer what they were doing on the floor to the screens and make deep and meaningful markets.”
I had spent two years doing that and it was a labor of love. So I kind of left my fingerprints on a number of things there. It was a great experience, a successful endeavor.
In Vienna during the first gulf war, with my staff training 130 bank employees to make markets in options using our software, that little community launched the OTOB options exchange with great success. We did the same thing in Milan, but Frankfurt is where it all started. It was because we believed in the product and in options being a necessary tool; although today, options as a risk-management vehicle does not get the respect it deserves.
Q: You see a lot of articles that say many people think options are risky instead of realizing they are a risk management tool. Obviously in the last few years people have become much more aware of what options are about, but do people still lump them in with the negative perception of the word “derivatives,” confusing them with OTC derivatives and some of those riskier instruments?
A: I think so. “Derivatives” is definitely a double edge sword. After what happened in ‘08…who would have thought that packaging mortgages from three different locations around the country, three different socioeconomic strata of housing ownership into one risk-averse package and calling it a derivative…! Then walking to work is a derivative, because you’re not doing it the same way every day, so it’s a derivative of the way you usually walk to work! Yes, technically they are derivatives, but they’re far from what we do [with exchange traded derivatives].
In the crash of ’87, the tar bucket dropped and we got splashed. After the crash there was a big war between the futures and options exchanges. The futures exchange pointed the finger at us and said it was those darn options! When really it was the equity specialists who stepped away from their obligations to make fair and orderly markets and let that market free fall for a while. They all ganged up on options and it was two to three years before the options market overcame it.
Q: You are obviously still involved in options in a number of different ways. What takes up the majority of your time, is it managing the trading platforms for LiquidPoint?
A: In ‘07 when I sold LiquidPoint to ConvergEx, I agreed not to spend more than five hours a month on anything other than LiquidPoint. I have been good about that. Two of my brothers, John and Bob, have been involved with my business, John since ‘84 and Bob in the past 10 years. Bob’s son Michael has worked for me for 11 years. He started as a clerk summers when he was 15. Then, during his college years, he managed our books and records. He has a great financial mind and knows the ins and outs of our business. He graduated less than a year before we sold the company, and as part of this agreement not to be involved in my other businesses, I set it up so that Mike and John run the hedge fund, and Bob oversees the training institute and classes. I’ve been involved in some other businesses that are doing really well, but I don’t need me to be there to succeed.
So I spend about 100 percent of my time on LiquidPoint and other ConvergEx opportunities. We bought a number of companies in the past few years: NorthPoint, RealTick and LDB Consulting, the largest purveyor of margining software for the industry. Seventy-five percent of the industry uses the software to calculate their options haircuts, their risk-based portolio margining, fixed income calculations, SMA, the whole thing. I’m on the executive committee and help the acquisition team find candidates and help with some of the due diligence for these companies.
We have about 1400 people worldwide. We are consistently in the top five providers of liquidity for equities. We are one of the largest international purveyors of electronic execution. The LiquidPoint division that I run does about 32 percent of the national volume every day, so 32 percent of the options order flow is touching our software every day. BBrokers on three of the four floors count on our software – participants on CBOE, Amex and Arca codify most all of their orders on our software every day. So as floor brokers get the orders, they punch it in once and they can direct it and execute it or reroute it or hold it or analyze it many times over. It helps them comply with access rules and reduces errors. Philly has a few brokers who use our software unofficially, too.
It’s an interesting business, but the regulatory issues we talked about are what gets me down. I’ve got some great guys who have been in the industry for as long as I have, and it hurts them that this industry – which people in Chicago built up to be a robust liquidity environment – is being torn down for the sake of larger institutions and lack of understanding by the SEC.