The Derivative - We’re Back!! Talking Trend, Miami, and Volatility with Nasdaq’s Kevin Davitt

Episode Date: February 16, 2023

We're back with a new episode of The Derivative, and this time we're talking all things trend-following, Miami, and volatility with Kevin Davitt from Nasdaq. This episode starts by clarifying some questions about trend-following strategies and sharing some quick thoughts on volatility in 2022. It was a unique year for trend following, with different sectors showing up at different times and overlapping, making for a much smoother experience than we've seen in the past. We also discuss the importance of embracing uncertainty, being proactive, and investing in relationships, as well as the common misconceptions around trend following and managed futures. If you're interested in learning more about trend following, managing volatility, and building relationships in the industry, be sure to give this episode a listen! Chapters: 00:00-01:47 = Intro 01:48-13:32 = Clearing up questions about Trend Following strategies & Quick thoughts on Volatility in 2022 13:33-43:55 = Embrace Uncertainty, Be Proactive & Invest in Relationships with Kevin Davitt Stay tuned for the panel discussion in Part II of this episode next week! Follow along with Kevin on Twitter @kpdavitt13 and check out his recent articles writing for Nasdaq, and for more information on Nasdaq visit nasdaq.com Don't forget to subscribe to The Derivative, follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello, everybody. Welcome back to the show. I've missed you sort of sometimes, to paraphrase an old Steve Martin line from the movie Roxanne's, one of my favorite toasts. I'd rather be talking with you than with the finest people in the world. We're going to do a little something different to kick

off the new season here. First up today, you get me doing a solo, talking through the past year in trend, talking through the past year in vol, and sharing some of the vibe from hedge fund week down in miami uh then we recorded uh an excellent live lunch and learn session down there in miami at smith and walensky's right there on the canal overlooking the water uh and we're going to split that up into two parts the first part will be the second half of this pod with nasdaq's kevin david talking options and uncertainty and volatility and all that good stuff. And then for next week's pod, we'll have the full panel we did down there with myself, Jason Buck, Zed Francis, Luke Ribari, and Rodrigo Gardeo talking portfolio construction and volatility, why it was or wasn't a weird year and more. So welcome back and send it.

This episode is brought to you by RCM Alternatives. We got a lot of questions down in Miami. What are you guys doing in China? What are you doing in outsourced trading? What are you doing in cap intro, mutual funds, fund of funds, ETFs, the list goes on and on. So head over to rcmalts.com slash about to see just what RCM does for investors and managers alike. That's rcmalts.com slash about to see just what RCM does for investors and managers alike. That's rcmalts.com slash about. And now back to the show.

Okay. So just want to share a few thoughts at the top here. We'll start with trend following, which had its best year since 2008 and the financial crisis uh personally i hate that it's become known as the gfc i was there nobody was calling it the gfc as it was unfolding but anyway i digress back to trend it was a cool year to watch for us trend wonks because it wasn't just one big trade uh like short energies in 14. It wasn't just one big macro move like 08. 22 to me was a unique year in that different sectors within trend showed up at different times and at overlapping times, which made for a much smoother experience. Typically in a big up year, everything kicks in at once pretty much, and you get those outsized gains. Last year, we started with commodities and the

whole inflation narrative with trend riding those trends, pun intended. Then nearly seamlessly, which was the interesting part, moved on to the long dollar short bond trades as the commodity bull ran out of steam a little bit. Or perhaps it was snapped back into place by those rates, which was leading to those trends in bonds. So anyway, it was a rather unique setup from what I've seen over the years in that bonds and currency trades stepped up at exactly the same time as commodities reversed. So it was more of a passing the baton type of year instead of a huge, big outlier move followed by a big reversal. In the past, it's been hard for one such trend to keep trucking along while the others are

reversing and falling. But that's how it's supposed to work in theory, as you draw up the white papers on trend of all these different pieces working separately. You grab a trend in cotton, you grab a trend in euro currency, you grab a trend in rates, you grab a trend in oil, right? It's not just one big trade like we saw in the aforementioned GFC in the beginning half of this year. So maybe hopefully we're going back into some of that. A few more things on trend one. It was interesting to see that because of this commodities faltering, bonds picking up the slack dynamic, those programs most exposed to commodities did

less well in 22. You'd think with the huge commodity year in the first half, they would have done better, but the second half of the year and the big sell-off in bonds rates higher made it a good year for those who had less commodity exposure. It was surely a rising tide and nearly all the boats we know of were sailing along quite well though. Two, talking with some trend managers down in Miami, the phones haven't really been ringing off the hook, as you might expect with the trend indices and many individual programs up over 25% on the year. This is usually just paranoid managers being paranoid, but the more nuanced view is that trend started so well in 22 that once it got people's attention,

a lot of the people came in and said, oh, you're already up 20, 30%. Like, did I miss it? I'm too late. I better stay out, which leads into a recent blog post we did commenting on the comments of a tweet by our friend Meb Faber. Yes, we passed the singularity where I'm talking on a podcast about a blog post about a tweet, but so be it. That's the new year. So Meb's tweet was rhetorically asking why investors are so under allocated a trend. Then he fake answered on behalf of investors that because there's not long enough track records, they don't trust it.

And then sharing some really long track records, he dug up on the RCM database. Check it out at rcmults.com and pulled not one not two but four different managers with 30 plus year track records saying basically hey that this is a no no good excuse saying there's not long enough track records look at these guys um but that brought the comment crazies out saying things like i bet these don't include fees that's cheating without a chart. You can't get this in taxable accounts. The volatility seems high. Not all trend did well. Fort struggled and more and more and more. They were a great insight into maybe why trend followers phones aren't ringing off the hook. People still don't get this strategy for some reason, despite

it being around for 40 plus years. So what we did in the blog post I'll do here, let me clear a few things up for you. One, it's damn near impossible to find any track record of a registered manager that isn't net of fees. It's an NFA rule and a CFTC regulation, like the law, to show performance net of all fees. So most anytime you're looking at some trend follower managed futures program, that's going to be net of all fees. Two, saying not all trend did well because a manager like Fort didn't do well is confusing trend with managed futures, a very common mistake that a lot of people make. Here's how that all works.

And we'll throw in CTAs just to make it a little more confusing. Managed futures is the main allocation bucket used by institutional investors to classify and categorize investments which trade primarily in exchange traded futures. It's best thought of as an alternative asset class in that light. I like to think of it like I'm at whatever Duke's endowment. I'm putting 10% into venture capital, 10% in real estate, 10% in a long short equity, 10% into managed futures. That's how they think of that bucket as an asset class.

Now, it's just one of those buckets. Next. Now, the people who run these programs in the managed futures universe are registered as commodity trading advisors, CTAs, with the NFA, with the CFTC. And then inside of that bucket, Managed Futures umbrella, registered CTAs, the predominant strategy that has the most assets and has been around the longest inside of those buckets is trend following.

So a program like Fort that was mentioned in the comments does many things, but generally does not consider themselves to be a trend follower. They're a registered CTA, they're squarely in the managed futures bucket, but not trend, thus the confusion. But to be hesitant to allocate to trend because you see other managed futures managers doing poorly and because they're way off the trend index performance, maybe they were down last year. Just doesn't follow to me. They're not doing the same thing. They're not trying to do the same thing. So you got to be careful of what's on the label. Is it managed futures? Okay, yes. But then what is it doing? Is it trying to trend model? Is it trying to do spread trading? Is it doing

short-term trading? Is it doing absolute return? Is it doing option selling? There's tons of stuff under that managed futures umbrella. You got to make sure that you don't always equate managed futures with trend. Three, the typical fees for trend have come down with most other hedge fund strategies. There's trend programs available for as little as 50 bps per year. There's many still charging two and 20-ish fees, but typically you'll be around 75 and 17 and a half. That's 0.75, 75 bps for an annual management fee, which is usually paid monthly, and a 17 and a half percent incentive fee, which is the share of the net new profits that the manager gets. Now, note I said net and new profits. So, yes, that's after expenses and their management fee.

And yes, that's only when they get back to a new all-time high. So say you started with 100K and they make 23.5% gross, which would net to approximately 20% after the incentive fee, your high watermark would now be $120,000. Now, if you go down to $95,000 in the next quarter and then back up to $118,000, there's no fee on that move from $95,000 to $118,000 because you've already been to $120,000. The fee's only when they get back above the $120,000. That's what we refer to and what we call a high water mark. Last bit here, there were a few comments signed about the volatility seeming high.

Now, granted, Mab was showing Don and some others who had quite a bit of vol in their returns back in the early days, 40, 80% type years. But two things to remember here. One, because trend is a positive skew profile, most of its vol is to the upside and gets seen when and if they capture one of those outlier trends and those trends continue throughout the year and have a big outlier move. This is one of the reasons people hate the Sharpe ratio. It penalizes for this kind of upside ball. Many use the Sortino ratio when analyzing trend following programs because it's essentially a Sharpe return over volatility, but only considers downside volatility. Two, we ran the numbers in the blog post and since January of 2000, the Sock Gen Trend Index has actually had lower vol than the stock market. So this big, scary alternative investment using derivatives

theme has actually been less volatile than the thing held in little old lady pension accounts. Go figure. So anyway, it was a fun tweet thread. It was fun to read through all those comments and it was fun to set the record straight so go on over to rcm alts.com slash blog to read it all yourself on to vol some quick thoughts on volatility in 22 uh you'll hear on the pod next week a few of the panelists talking how vol wasn't that weird uh and you should could go back and listen to our pod with wayne himmelsen at the end of last year um the bottom line from both of those conversations in my experience as this wasn't so much of a weird vol year as highlighting that how we think about vol in the vix and its relationship to equity prices is the weird part ball as most of us know it

equals the vix we equate those two synonymously vol as most of us know, equals the VIX. We equate those two synonymously. VOL, as most of us have experienced it, is VIX spikes when the market goes down, Feb 18, March 2020, so forth. But we just haven't really had a grind down lower since the VIX has been so popular. The VIX isn't supposed to spike huge when the market grinds lower. That's just how it works. It can be a 20 and perfectly pricing in the daily moves of the next 30 days. In theory, you could have the market falling the exact same amount every day and the volatility is coming in because there's no new movement. There's no new volatility.

It's just the same price action every day. So those who relied solely on volatility, expanding dramatically via out of the money puts or the VIX or VIX calls last year didn't have a great year. Indeed, they mostly had a bad year and some lost as much or more than the S&P, the thing they're designed to protect against. The winners from our seat in 22 in the vol space were three types of managers. One, those long gamma and able to monetize on all the back and forth during that grind lower. Long gamma being as the market went down, they're getting shorter and shorter deltas. If they monetize that before the market comes back, those kind of guys did well.

Two, those doing complex options, which I like to think of as sports parlay betting, paying it out if stocks, if bonds, if the Euro all go down, pay out 10 to 1 versus paying out two to one on each of those happening individually. Those usually happen, OTC trades with banks and whatnot. And then also managers taking on basis risk versus S&P and involved in rates vol or currency vol, which the volatility there did spike and did have some outlier moves. And then three, those just outright short the market, either opportunistically via day trading or swing trading, or those structurally with some sort of option structure that short dealt us most of the time.

So anyway, you'll get way more on that next week from the pros, but just wanted to give my quick thoughts. And then lastly, some quick thoughts on Miami. That place was kicking. There's no recessionary fears to be seen down there. People seemingly spending money hand over fist. Every meal's hundreds of dollars. Every other car's hundreds of thousands of dollars. And a few boats and houses look like they're hundreds of millions of dollars.

The economy seems to be booming down there. The event we go down every year for is informally called Hedge Fund Week. And more formally, it's the MFA, Context, iConnections, and ETF Exchange conferences. So you have these back-to-back-to-back weeks of conferences where vendors and asset managers and hedge funders and institutional investors all show up, mingle and network. I personally had about 15 meetings with different hedge fund managers at iConnections, learned a lot of good stuff. In years past, there'd been a steady increase in all the crypto funds and crypto vendors at these conferences, sponsoring everything from boat parties to dinners to golf. That was noticeably absent this year. I think we can all know why.

And there was noticeably more private credit type groups. I met with a few of those. Most seem to just be doing bridge loans to commercial real estate without really thinking through, or I don't know enough to know about how they think about that commercial real estate having a big recessionary issue. Then there are a lot of great groups we met with doing interesting things in and around the managed future space in short-term trading, multi-model, multi-strat trading, trend, but with options, energy traders. Talking about dispersion, seemed like there was no dispersion there with every

energy trading. Having a pretty good year. And a lot of more interesting folks that we hope to get on the pod soon coming up. All in all, a great week down there and still one of the best places and round of events to get a firehose level intel and meetings over a few short days all right that's all i've got uh coming up next we'll hear the first part of our miami event two weeks ago with nasdaq's kevin david talking through embracing uncertainty which i sort of like the sound of thanks guys uh we're going to start with ke Davitt, head of options content at NASDAQ. He's going to give us a quick little talk. Then we'll finish with our panelists.

And in between, they'll be serving you guys lunch. We've been doing these virtually for the past couple years and encourage a lot of questions. This is our first one since COVID here live. So thanks for being here and ask as many questions as you can. It's meant to be intimate and this is an intimate room. So do what you do.

And with that, I'll let Kevin take it away. Awesome. Thank you. They got me mic'd up over here. Well, thank you, Jeff. Thank you to all today's sponsors and to RCM for putting on this event. Thank you all for making the time, for coming.

Full disclosure, I worked at RCM years ago, and I've stayed friends with a number of these guys. It's exciting to see how their group has grown over the past decade. As Jeff mentioned, I'm now part of NASDAQ's index options team. And my explicit goal is to help grow volume in the NASDAQ 100 index options. I'm a straightforward guy. That's what I want. We have three different NDX products that are all European-styled, cash-settled settled and should benefit from 1256 tax treatment The flagship product is the full-sized NDX options. It's like 1.2 million in notional exposure for each option There is a 1 5th offering and then XND which is a 1 1 hundredth of the size

So that that product we're talking about 12,000 in notional exposure. So from an advisor's standpoint, I would argue that XND could find a home in nearly any accounts, particularly if you are trading QQQ options and managing NASDAQ 100 exposure at the moment. I also work to help grow the recently launched VolQ futures and options which give end users the ability to position based on at the money NASDAQ 100 forward volatility estimates. The group that's going to talk later is really well versed on those type of products. Now that concludes my overt product promotion portion of the launch. All right. I told you I was straightforward.

So Jeff just came up to me a couple of minutes ago and he was like, let's keep this high level. And it happens that I took that opinion before I got started. So I'm of the opinion that a slideshow kind of never moved an individual or an institution to increase activity and derivative products. Maybe I'm wrong about that, but I believe that kind of overall utility and stories motivate action far more than numbers. And it's why the group that will be on a panel after this do the things they do, get in front of audiences, do podcasts. They tell stories and they speak about the utility of the products that they use. And so that's kind of what I've set out to do. I'm joined by my friend and my colleague, John Black, who heads NASDAQ's Index Options group. Prior to this work, I spent years at SIBO

and I was focused on index options. And before my time at RCM, I traded single name equity options, ETFs, commodity futures and options way back in the day when we were like filling out sheets on stone. So if you have any questions for me or John today, just ask. Like Jeff said, that's what this is about. Or grab a card. I rarely bring these things, so it'd be nice to have somebody take them away. Yeah, exactly. Open up. And that's how you can ask questions, too. Open out, cry. This is

required for legal purposes, but I'm going to make a reference to it very shortly. All right, so I have 15, 20 minutes or so. And philosophically speaking, I believe that time is our most precious commodity. Jeff, I told you I was going to keep it high level, right? So I spent a fair bit of time thinking about any time I'm going to make a presentation. And a couple weeks back, I'm walking around thinking about this event, and I try to put myself in the audience's shoes, so to speak. And I think about the fact that you took the time to be here today, which we certainly appreciate. And so why do I think that that's our most valuable asset? Well, basically, because you have no idea how much of it you have and when it's gone it's gone like time is highly uncertain and I

think that that reality could be unsettling or it could be empowering and beyond that I'm thinking about the audience and I'm thinking about your experience and I know that you're going to forget most of this. So for those of you that are attending Hedge Fund Week or the iConnections event, you're going to be inundated with forecasts, with ideas about what you or your clients need and business cards. And you're going to forget most of it because you're human and time creeps in and life creeps in and you're going to forget a lot of this. So in an effort to be a little bit less forgettable, I'm taking

a more philosophical approach. So my belief is that in life and in capital markets, you ought to embrace uncertainty because it's a constant. I believe that being proactive is almost always a better approach than being reactive. And I also believe that investing in relationships can produce the highest yield. So that disclaimer slide is kind of exhibit A for embracing uncertainty. There's risk in everything that we do precisely because the future is and always will be uncertain. Now, some Big Lebowski philosophy. Change, which is a synonym for uncertainty, is the constant. So from my perspective, there's no such thing as good volatility or bad volatility.

Volatility simply is, and volatility is why we or your clients invest. So visually here, the chart shows monthly returns for the NASDAQ 100 going back to 2015, right? Cool. Cliff notes. Change is good. Some change is higher. Some is lower. Overall, the NASDAQ 100 has gained 185% over this time frame. So you can compare that to the S&P 500 up 96%. The Dow, Luke, you were talking about back in the day, that Dow reference, Dow up 90% over that time frame. And small cap Russell 2000 up 58%. Sorry for those small cap advocates. Hasn't worked real well. But NASDAQ 100 performance speaks for itself. And to coin a phrase from the Big Lebowski, I suppose that's just my opinion, man. So I understand full well that your position, your client's position, is going to be influenced in a positive or a negative way by volatility.

I get that. But philosophically, we all know that change will continue to happen, and change or volatility is why we invested in the first place. So you all likely know that options can be used to gain exposure to offset a pre-existing price risk or potentially enhance yield. They are risk management tools. Options are rooted, like essentially everything else in the world around us, in physics. Sorry Jeff. I think about the Black-Scholes model that was pioneered in the 70s. It's rooted

in physics. There are assumptions about Brownian or random motion. Randomness is scary, but it's also reality. I don't have the background or the inclination to go into that today, but I'm going to speak briefly about Heisenberg's uncertainty principle, which dates to 1927. Jeff, I told you. I told you, man. All right. So in short, this theory argues that we cannot know both the position and speed of a particle with perfect accuracy. So this slide shows a more well-known Heisenberg, but the visual of the roller coaster is kind of apropos. So the takeaway from this, at least in my opinion, is that stocks or indexes behave like waves. Uncertainty is embedded in anything that exhibits wave-like behavior. So applying the theory, you can very accurately calculate a position or from my perspective, an index price, but then there's a trade off because your calculation of the speed or velocity will be uncertain.

And then if you shift your focus, which the guys in a couple minutes will talk about to the velocity or the volatility there's a trade-off with that position analysis and so I think that like going back to the 20s is an opportunity to manage risk with options so options and derivatives in general help us to embrace and typically reduce uncertainty and that's profoundly powerful. My work generally has really centered around advocating for the informed use of options and specifically index options. And so it's nice because I genuinely feel like I'm advocating for something I believe in and I'm not really selling anything. And like I said a couple of minutes ago, the performance of the NASDAQ 100 kind of makes that easier. They sell themselves as do options. But volatility

is endemic to the human condition. And I think that the earlier we understand that and the sooner that we come to terms with the fact that we can measure almost anything but we can control almost nothing the better off we are so that brings me to my second point about being proactive and when i think about this i think about when i was younger and my mom would say this all the time she'd be like kevin you can't should have and right maybe maybe your mom or dad said something similar damn it was she right right so if you start with the thought I should have it's a waste of time it's the past and it can't be changed it's very similar at least in my mind that draws analogies to historical volatility.

You can't do anything about that, but you can learn from volatility and you can allow that knowledge to inform your future behavior. I think from a portfolio standpoint, you're less likely to start sentences with, I should have, if you proactively utilize index options or volatility products. At a very, very basic level, using an index put option, super simple, is akin to saying I have risk in the market. I want to protect my capital. I don't know what's going to happen in the future, but this can protect me to a certain degree over a specific time frame. So then I think in a related vein. Again, we're talking about proactive versus reactive.

I think about the companies that, generally speaking, are proactive. I think back to Google buying YouTube in 2006. How did that work out? I think about Facebook buying Instagram in 2012 or WhatsApp in 2014, Amazon getting into the grocery business, maybe in a handful of years we'll look at Microsoft buying Activision if that clears FTC in a similar vein. But what we're talking about there from a company standpoint are the ones that make up and drive the NASDAQ 100. And generally speaking, you and your portfolios probably have

exposure to them. The companies that I'm referencing kind of lead the U.S. and the global economy, and they're proactive. And I believe that you and your clients should be too. And then I'm going to contrast that with a reactive example and one that you're all familiar with. So the Federal Reserve's decision in 2021 to keep short-term interest rates bound at roughly zero, despite a pickup in prices, and they're continuing to buy mortgage-backed securities until Q1 of 2022, despite a very significant pickup in the real estate market, where home prices down here, I don't know, you guys can let me know how much those have moved up, but a very, very big move in real estate markets. The Fed was anything but proactive.

And by maintaining that zero interest rate policy, the Federal Reserve essentially denied themselves optionality last year and this year. They did not have the flexibility to move rates at a measured pace, and they instead had to be reactive, and that played out by 75 basis point moves at four consecutive meetings, which historically speaking is kind of unprecedented. That played a significant role in the drawdown in U.S. equity markets, and it continues to reverberate to this day. We'll see tomorrow if they move down to 25 basis points or the future what that looks like, but they were forced to be reactive. I think about

my Stone Age days on the trading floor and situations where I was forced to be reactive and generally speaking they were not good situations. And then I think about ways that I can manage personal risks now. And when I'm proactive about a risk management plan, generally speaking, I'm using options. And things tend to work out better that way. So the cliff notes here, a proactive approach is superior, in my opinion, disclaimer, and optionality is valuable. As I mentioned at the outset, I would like you to consider the use of NASDAQ 100 index options. Maybe that takes the form of ETFs with embedded optionality. There are some I've spoken to that have utilized structured products for years.

That world is moving into the listed ETF world. It's being democratized. I think that's awesome. Maybe you'll use liquid alternatives and learn more about that this week. Maybe use volatility products. Whatever it is, I think being proactive about managing that risk and your wealth is a better approach. And if we can help explain any of that, great. I know the guys at RCM are very good about it. And the guys that will talk when I wrap this up are excellent too. So I got a couple minutes left

and you guys are trying to eat, like have at it. In the last couple of minutes, I wanna talk about investing in relationships. And this last point, just a second, is probably self-evident to any of the IRAs, I'm sorry, RIAs or wealth advisors in the audience. It's kind of a key driver for you growing your business, managing those relationships. But investing in relationships is more than just inviting somebody to lunch, right? This is an example today, or going out to golf or dinner. There are natural relationships that govern the

world around us. And there are relationships between implied volatility levels and underlying index prices and the panel that's going to talk in a couple of minutes are likely going to address that reality. Big picture, I would argue that nearly every investment that you have or your clients have is implicitly short volatility whether you realize that or not. I'm going to repeat that. Nearly every investment you have or your clients have is implicitly short volatility. So you don't have to take my word for it. You could read stuff that Chris Cole, who I admire, or Chris Sidial, who we had dinner with last night, or Jason and the Mutiny guys, stuff they put out, it will explain that clearly because volatility just is and positive systematic

exposure to volatility can be a really really powerful shield during times of duress and working with a group or groups that understand how to reduce the carry costs that are typically associated with uh with portfolio insurance in the form of volatility can make even more sense. And I'm not here, I'm genuinely not here trying to push volatility as an asset class. I know that market risk and economic risk mostly occur together. And I am here finishing up to say that volatility was, it is, and it always will be. Understanding and investing in that inverse relationship can provide value in many cases and I guess I said it would be my last overt product push but Nasdaq has created the

VolQ index and there are VolQ futures and options in partnership with the CME. VolQ is an alternative to VIX, which many of you are likely familiar with. It's unique in a couple of important ways. Talk to me after if you'd like to know that. Generally speaking, that reference asset is the NASDAQ 100, and the focus is at the money volatility as opposed to a variance replicating approach that VIX utilizes. Nobody's falling asleep. I'm not going to get into the weeds on variance replication. So wrapping it up, you have choice with respect to index options and volatility products. I think choice is a good thing. You have choice with respect to asset managers. That's a good thing. You have the choice to act or to wait. You have the choice to embrace uncertainty. You

have the choice to foster and maintain relationships because you have the choice with regard to how you spend your time, but not how much you have. Because you don't know what's going to happen, not today, not tomorrow with the Fed, not month to month or year to year. Uncertainty just is, and that is okay, particularly when you're proactive and you value relationships appropriately. Jeff, was I high level enough?

Very good. Thank you for listening. Anyone have any questions out there? I'll throw one at you. Retail option volume has increased dramatically. Do you think that's a good, bad, or indifferent thing? I mean, I work for an exchange where volume is good. What surprises me is when I think about how the landscape has changed over the past two years. So I think the uptick in 2020 made a lot of sense. There was an understandable narrative behind that. But you have a year like last year where broad-based indices suffer meaningfully and you

don't see average daily volume fall off. So industry-wide, we're talking about average daily volume running around 40 million options a day. When I started in this business, that number, which was not all that long ago, 20 years or so, average daily volume was around a million, million and a half. So there's tremendous growth and you didn't see a huge drop off. You didn't see any drop off from 2021 to 22,

despite the market moving from like a narrative single stock overarching one to a much more macro global one. And that surprises me. And also the fact that the industry has evolved and offered shorter dated options. I remember not that long ago when weekly options were introduced and the reaction was like, nobody needs these. Nobody's going to use them. Well, those people were wrong and those people continue to be wrong because optionality, people understand these tools better and they see that optionality is valuable and they continue to stick around and so I feel given the backdrop we've seen over the past three years that this is likely here to stay and it's a good thing so long as you understand the risk that you're assuming or the risk that you're

offsetting that's my take yeah here here is right hey we're headed in the right direction the gamma is positive minis were disaster but there's something maybe happen where that becomes a conversation maybe bring it back interesting question um I'm gonna answer that philosophically and it's okay yeah sorry so Eric said that overall and if I'm misconstruing this correct me that the new product rollout or new offering in terms of expiries have been embraced wholeheartedly, but offering smaller products has been,

what was your term, a disaster? Okay, I wouldn't share that characterization. I think some have been, and if you're in this business long enough you know that there are plenty of products that end up in in the graveyard and there are a number of examples particularly on the futures side where smaller products have really been embraced. It's been more difficult on the equity and index options side. I think because human behavior,

we stick with what we know, particularly if it's working. And you also have this issue with liquidity, right? Like how do you grow liquidity? Well, there needs to be some there in the first place and then interest and it's difficult. So it takes time. And I'm excited to work with somebody like john that in in in my experience takes a longer perspective on this and sees that kind of playing field with with a panoramic view and isn't likely

to put a product on hospice ahead of time sorry Sorry if that's a poor analogy. But this is hard. And you have to get out just like you have to with clients and give them a compelling narrative as to why this is the appropriate fit. And then we're kind of inundated by choice. And sometimes the reaction there is like, no, I don't want more, I need less, right? And there's all sorts of psychology behind that. So I don't think it's been a disaster. It's been on a case by case basis. And I think given enough leeway, I think about VIX products and the futures and the options were around years before they took off and then you have a macro event that changes the understanding and the utility and i think timing period plays a huge role in success

or failure and like sometimes you just need things to be timed well yeah good question because you're older like me and and you mentioned open outcry. Less hair, though. I think you're older than him. No, I am older. Because I used to have to call the Board of Trade and do futures against cash. Yep. Okay, in New York.

And this question has to deal with the fact that electronic versus the old day of an open outcry my personal belief is because i could call there and like no bill hold off you look we lose that today so that most probably having that human interaction that used to be there yeah did it yep has actually made volatility probably higher today by losing that internet. Do you think that or not? Because probably you can't handle

volumes today even if you wanted to on the pits because it's just too great. I agree with you there.

The volume would unequivocally suffer. I think that man that's an interesting I relate to that because I remember

when the stock market crashed. I'm sitting in Canterbury and at 10 o'clock, the market had moved 200 points. We lost 22% in one day. Right. And the 30-year bond moved 8.5 points.

Okay, so the... It's 85,000 per million. Yeah. And we're whipping and driving these things all day long. So the... I was in the tape room until 1 a.m. The industry has put in some bumpers to make that less likely yeah um i also would point out that there are exchanges one of which is nasdaq owned that maintain uh a floor and the

old approach a higher touch business for the reasons that you point out, they don't do it for old time's sake. They do it because there is demand for that and people that value... So there's still human interaction if you want to circumvent the market. Particularly on the index option side of the business, yes. And if you want to talk more about that...

I'll go away from that. I don't want to eat into the panel discussion. I want you guys to have a full lunch. So it still exists. And I think the evolution of the industry that there will continue to be value in that for years to come. Okay, cool. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe.

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