Philip Gocke is managing director of institutional education for the Options Industry Council. In that role, he develops and implements research and education for institutional investors to help them understand how they might best use options. He is also president of Brite Sky LLC, the personal options trading firm he founded and runs from Philadelphia. He spoke with JLN Options editor Sarah Rudolph about his start in the business, high frequency trading and good books.
Q: How did you begin your career in options?
A: I was at the Federal Reserve and when left I joined Bank of America and ran their advisory service for corporations that traded foreign currencies. I was transferred to their world headquarters in San Francisco to work on product development. The new product in the early 1980s was currency options. I knew about trading currencies but had no clue about options. I met Barry Tague [of Tague Securities] when he was looking for a bank to help him provide currency hedges for his role as specialist in Japanese yen options at the Philadelphia Stock Exchange. I asked him what experience he had to develop currency options. He said, “I traded a little gold etc, but the truth is I’m really an options guy.”
I was incensed. I said, “What do you know about trading currencies?” He told me that, to trade options on currencies, knowing currencies was less important than knowing options theory. So Tague Securities started a joint operation with BofA to trade currency options, and I found out he was right; it was more import to know options theory than to know the underlying. Those currency options became the most widely traded product in the world. The largest transaction in the early 1990s was in the French Franc options.
Q: Was it easy for you to learn about options coming from a background in currency trading?
A: I was so inept it was incredible. I said, if I have to do this [trade options on the floor] we’ll lose every dime. I ended up going upstairs and managing risk. At that time, currency options had many of the issues that plagued the equity options world later — strike price proliferation, for example. Currency options had so many strike prices that they used to wrap around. That problem is being addressed now in equity options with the options symbology initiative.
So coming to options through the currency door helped me gain perspective on risk and operational issues that I wouldn’t have gotten if I had come in through the equity world like most people do today.
Q: How did you end up at OIC?
A: Barry Tague was on the OCC board and I traveled all over world giving speeches and workshops to clients on how to use currency options on behalf of Tague Securities and Phlx. Much of that travel was with exchange officials. At that time I formed my own options trading firm, Brite Sky. I ended up talking to George Hender, my former partner at Tague, who had joined the OIC. They wanted to develop institutional education. I put together a business plan and they liked it. And I found it more interesting than trading my own account at Tague. I spend most of my time now generating research and education. It’s the world’s greatest job.
Q: Have you learned things from your personal trading with Brite Sky that you bring to your options workshops? And vice versa?
A: Yes. It’s one of the things that distinguishes me [as an educator]. I can speak not just from a theoretical but from a practical background – I can say, “This is a strategy I have employed and I know what the failures are.” I want to advocate not just the use of options but the proper use of options. “Such-and-such a strategy won’t work under certain circumstances,” for example.
As far as vice versa, the workshop for institutional traders requires me to constantly monitor market movements. You need to be cognizant of today’s market risk. Being prepared to talk about a collar or buy write strategy helps me integrate that into the context of a market dynamic. So I spend more time looking at the markets’ economic and financial developments than if I were just trading on my own.
Q: What is the biggest or most exciting change you’ve observed in the options industry since you began?
A: There is no doubt — The SEC mandate that all options be traded at all the exchanges. That occurred right at the time the International Securities Exchange was being formed and led to a significant narrowing of bid/offer spreads, a lowering of fees, electronic execution, and a huge influx of retail orders. As you know, the industry was 60 percent retail trading at that time. The influx of retail traders provided the critical mass to facilitate institutional trading, so now the industry is 60 percent institutional and 40 percent retail.
Q: Who are your heroes in the industry?
A: Three of the Sullivan Award [The Joseph W. Sullivan Options Industry Achievement Award] winners are giants: Sullivan himself, Dave Krell and Bill Brodsky. They’ve been incredible in the development of this business.
Q: What do you do for fun?
A: I ride my bicycle from my office in Philadelphia to my home in the suburbs and listen to books on tape and music.
Q: Any interesting reading lately?
A: I read The Kite Runner by Khaled Hosseini, and his second book, A Thousand Splendid Suns. Those are maybe the two most moving books I’ve ever read. Here we are fighting a war in Afghanistan and virtually no one here in the U.S. has any knowledge of that country’s history. Hosseini has incredible insight into sociological issues, women, poverty, and the war mentality.
Oh, I also think Avatar the movie is one of the top ten movies ever made.
Q: What’s the most exciting thing happening in the options industry now?
A: That options are being discovered for their risk management characteristics — which unfortunately only came into people’s consciousness as a result of the massive credit crisis. One wishes you didn’t have to have that much pain for that discovery.
Q: How has that happened?
A: The end users — pension plans, endowments, retail traders — are asking, How could this have happened and how can I prevent it from happening in the future? They are asking that question of their financial advisors and they want to know, why didn’t you tell me this two years ago? It’s really a groundswell from end users, not think tanks.
The crisis was a global mis-pricing of risk anyhow. But options education could have helped people have a more stable outcome. They can’t be blamed, because they were told all you have to do is have a fully diversified portfolio and everything will be fine. That philosophy is what’s being questioned. A buy and hold philosophy is insufficient.
The collar study is one of my premiere teaching mechanisms to show institutions how they could protect themselves from the tech bubble in 2000 and the credit crisis.
Q: What do you think will happen if the proposals to ban or more strictly regulate high frequency trading and sponsored access come to fruition?
A: Well, I think it’s really locking the barn door after the horses have gone. This is now a global industry. You can execute trades from anywhere in the world, 24 hours a day. Firms tie you into products that allow you to hedge risk. The question is, how does that impact global risk reduction? We ended up having a global decline with the credit crisis. How does a regulator who is nationally organized, for example is a U.S. entity, ever keep up with that?
Some of the issues that relate to finding liquidity in the institutional side, for example dark pools and algorithmic trading, are simply a reflection of the tension between retail traders, who want the narrowest bid/offer spreads and low fees, and institutions whose real concern is not the five lot or the ten lot but the thousand lot trade. We spend time arguing about whether these things are bad or not, but really, institutions will always figure out how to execute large blocks. You just have to manage the tension between retail needs and institutional needs for large block orders so that it doesn’t damage the retail traders.
Q: You said you have the world’s greatest job. What’s so great about it?
A: I’m a geek. I love this. I get to wake up in the morning and look in the mirror and say, “I don’t have to sell anything. I have to do what’s right.” After the crash in 1987, we recognized that people had no idea what their risk was, including their options risk. We realized if we didn’t educate people about the proper use of options, we would lose them again like in ‘87. So our mission [at the OIC] is not to say, “You’ll make more money with options, everything is fine.” We tell them how to manage risk. So I can wake up in the morning and say I get to do what’s right.