I have a theory that WSB are so bad at trading that they actually do manipulate stocks due to messing up every automated trading platform that assumes there'd be some logic to the trades being made.
Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen.
This appeared to happen when WSB were meme-ing on TSLA and a whole bunch of them bought $1000 call options when it was $400. Shortly afterwards TSLA skyrocketed in value.
> Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen.
People buy far out-of-the-money calls all the time, they're actually overvalued compared to fair returns. Setting the strike price that high just makes the option more and more of a lotto ticket: the vast majority of the time it's just going to expire worthless, but that small chance of being "in the money" when the option expires is your jackpot. A fitting choice for that whole WSB attitude.
Some of this can also be a totally legitimate result of putting dealers short gamma. When options dealers are short contracts, their delta hedging activity (ie, their effort to reduce first-order risk to the share price by buying or selling a commensurate amount of stock) contributes to the momentum of a large move, because dealers' hedges chase the stock. If this explanation is unsatisfactory, look up "short gamma" on google.
In other words, demand for volatility via buying options can actually beget volatility in the movement of the stock price.
Yeah but I mean if you need to hedge fucking 5 delta deeeeep otm options, you don't need that much stock buying to get your book theoretically delta neutral. I know short gamma markets are a real occurrence on the dealer end, but that happens from institutional money. No one retail is going to be able to move this stuff (unless it's Warren buffett going in big on derivatives for some funny reason).
It's a bunch of mumbo jumbo from someone that takes the academic side of finance too seriously (LTCM anyone?).
In plain English: Options are basically a contract, with a time limit, that states the holder can buy a certain amount of stock at a certain price. "Options dealers" are the people who wrote the contract and sold it to another party. They are on the "hook" for fulfilling the terms, if the buying party wishes to "exercise" an option and buy their promised stock at the promised price.
Options dealers are automatically "short" all of the contracts they sell, because that's literally the definition of "shorting" -- selling something you don't own. Options dealers technically do not own the stock they're promising to sell to the buyer, but will have to once the buyer "exercises" the options contract.
Delta is basically the difference in velocity of the price of the options contract vs. the price of the stock it's representing. So, if the option is selling for $10, and has a delta of 1 (100%), then a $5 increase in the stock price will increase the option contracts price by $5 to $15. If the delta is 0 (0%), the price of the contract will not change.
Actually, I was wrong. The GP was correct to use the vocabulary he did -- because what I wrote isn't even the full explanation I was planning. However, three paragraphs in, I realized it would take much more to completely explain it.
Basically, options dealers hedge by buying the stock they issue options contracts for, and this can cause the price to move up.
> It's a bunch of mumbo jumbo from someone that takes the academic side of finance too seriously (LTCM anyone?).
Because they used standard, well-defined terms from that particular field? "Gamma" is further from mumbo-jumbo than 90% of computer programming vocabulary - it has a clear definition and everyone in the field understands exactly the same thing by it.
I am one of the best options traders in the world.
Options dealers don't necessarily sell options. They can also buy them. And "writing" an option means to sell it, so "wrote the contract and sold it" is redundant.
Options dealers are not automatically short all of the contracts that they sell. They may already have a long position in that option contract, in which case their sale is a closing sale. Also, I think you may be a bit confused...a short sale of options is not determined based on one's position in the underlying; you can be short an option and long the stock at the same time (for example, an overwrite is a sale of upside calls by someone who is already long the stock).
Delta is the first-order change of the option contract value, with respect to a unit change in the underlying price. I wouldn't refer to it at "velocity" because while I understand what you are intending to communicate (it is a rate), there is another options Greek called "speed," which is the change in gamma with respect to the underlying price. Wikipedia has a really nice description of the various options Greeks. For the truly curious, Sheldon Natenberg wrote a nice book called "Options Volatility and Pricing" that explains the Greeks better than I or Wikipedia can.
Options dealers who are short gamma will hedge by buying stock as it goes up, and selling stock as it goes down. Their demand for (or supply of) the underlying stock will impact the underlying price in a way that pushes the price in whatever direction it has already started to move.
In defense of my word choice: theory and practice are not mutually exclusive. If you want to be excellent at something, you should aim to learn both. BTW I have never taken an academic course on options or finance.
A comment I'm sure you expected you'd get on this forum: you're gonna have to elaborate a bit on/defend a bit that opening line there about being one of the best options traders in the world.
Oh yeah the explanation was much better, but this is one of those cases where the claim of being the best options trader makes the explanation less credible than if they hadn't opened with that and ended with "i've never taken a course" etc. Without it, they're citing the book and wikipedia, but with those statements, they're citing their own expertise and raising questions over their judgement on what sources they are drawing from.
I don't think that would merit the title - when you're talking about small niche situations it's harder to make the case that fantastic results are a result of skill versus luck + selection bias, and even if it's skill then you're not one of the best options traders, you are one of the best traders in that niche.
> someone that takes the academic side of finance too seriously
You know, that's totally fine with me. It's good to have those people around. As I learn more I'll be able to decide for myself what I think of that perspective. Your side is great too.
If you’re interested in learning more about finance, I recommend subscribing to Money Stuff (free daily finance newsletter). Matt Levine does a great job of explaining concepts like these to a layperson and I love his sense of humor.
Thank you for the recommendation. I'm already pretty deep in to a lot of economics and finance newsletters and podcasts. I am also familiar with Matt's work, though not a direct follower. I hear great things though!
> Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen.
The trading system and its operators deserve whatever fate results from such a decision.
In Sweden someone was convicted for triggering such bots to do stupid things. Morale: if you are big player, you file a lawsuit. If you are a small player, you get convicted.
There is no way Wall Street is using trades by retail traders as a signal (except maybe to counter-trade them). Also btw Wall Street can easily differentiate trades made by big players versus hordes of retail traders, because the banks and HFT firms are who executes the trades from retail brokerages. Retail brokerages like Robinhood don't have the authority to execute trades. They subcontract to a HFT firm who then uses the order flow to seek alpha (i.e., countertrade and run circles around clueless retail traders).
> Is that another way of saying that retail traders buy on the offer and sell on the bid while HFTs buy on the bid and sell on the offer?
This is market making which is the bread and butter of HFTs. This is the one thing they do which helps, not hurts, human traders.
They can do thousands of trades in the time it takes your nervous system to react and click the mouse. They parse a news headline many seconds before it ever shows up on the internet. They rent satellites to count how many trucks leave factories. They have access to person-to-person dark pool trades that never show up on the normal exchanges.
Algorithmic trading is a secretive black box, but who knows. These are just my speculations from hearsay and random research. If they can make a fraction of a cent from messing with you, they will. It can scale up infinitely. It's just software--there's no marginal cost to do so, provided they are properly hedged.
> This is the one thing they do which helps, not hurts, human traders.
Providing liquidity is their job, and it benefits the market as a whole. If market making by HFTs is a good thing, it’s difficult to malign those same firms for, well, making markets.
> They rent satellites to count how many trucks leave factories.
This isn’t their business model in the slightest. Quant funds certainly do this, but HFTs look for alpha in market microstructure.
> They have access to person-to-person dark pool trades that never show up on the normal exchanges.
Institutional investors can use dark pools to minimize market impact when trade large blocks. HFTs don’t benefit from having limited information on these flows.
> Algorithmic trading is a secretive black box
Algorithmic trading != HFT in the same manner that a rectangle is not a square.
> It can scale up infinitely.
HFT strategies don’t scale. ‘Scalable’ strategies support a large amount of capital. HFTs run high sharpe, low capacity strategies.
You contradicted your sentences. I do know Robinhood gives zero commission trades by selling order flow data to hft and market making hedge funds but I don't think those funds execute the orders themselves. The orders still go to brokerages I think (may be wrong about this) or just hit Prime Services from non hft hedge fund books.
Either way, those hft firms definitely like retail order flow data. My guess is they're easier to "pick nickels in front of steamroller" kinda trades than institutional money which may cause extended one way moves that hits high frequency balanced traders adversely.
I'm also entirely talking out of my ass in the last paragraph. I don't actually know that any of what I said is true. Just speculation.
> selling order flow data to hft and market making hedge funds but I don't think those funds execute the orders themselves
The order flow data is worthless (because the orders come from uninformed traders) the value is in filling them without the risk of being shortchanged (because the orders come from uninformed traders).
1) order flow data is not useless because it comes from uninformed traders. It depends on the model being used. Most hft models aren't even concerned about the inflow of big trades from institutional money. Most of their models are simple short period time series forecasts they trade around. Which means the model is pretty agnostic on where the trades come from as long as enough back tests show that their predictive power is good enough.
2) even if that were not true, hft works on volumes. So I contradict my previous speculative comment by saying this but volumes of institutional flows absolutely dwarves retail flows. You'd have much more opportunities trading around institutional money than retail money.
Surely the order flow is mostly going to look like noise, random. But things like local information and employee information would provide some signal - correlated trading patterns - that indicates there could be some information available to inform a trade. Allowing one to either trade on the meta-signal or seek the information behind it (and then trade).
So if you've got a company and the city in which it's headquartered just gets a strong buy signal, sure that could be random but I'd imagine ...
Surely having the meta-data on who is trading and linking that to trades is the primary benefit?
I would hope that spying on trades of employees of specific companies would be illegal, but it would not surprise me if Wall Street does use that information.
it isn't illegal and you can do it yourself, there are websites that show in (near) real-time interesting moves by employees/directors of companies liquidating or acquiring shares in their company.
Case and point, just five years ago Redditors figured that out that by upvoting a post of image of a potato titled "Gaming Console. If you upvote this potato it will show up on Google Images when people search for Gaming Console." It even borked their news algorithm - https://i.imgur.com/A0zLPSR.png
Their right hand side doesn't mention it, so I'm intrigued whether this sub-reddit pre-dates Language Log naming almost this same type of mistake an eggcorn?
Specifically an eggcorn involves an erroneous analysis, in the name example a person figures an acorn does look rather like an egg and so maybe that's why the name for it is "eggcorn". Likewise "tow the line" mistakes the metaphor as involving pulling a rope rather than standing against a chalk mark ("toe the line") and "free reign" assumes it's about some analogy to absolute power of kings rather than controlling horses.
AFAICT the overwhelming majority of posters on WSB are basically burning money. Make enough bad trades and eventually one will accidentally make a bunch of money, but it's definitely not the norm.
Honestly, I'm convinced that most know how to hit F12 on Firefox and edit HTML pages to 'prove' that they are buying meme stocks. I have zero expectation that their 'proof' is even proof.
All modern web browsers have a debug mode that allows you to easily edit HTML.
Most of the screenshots are from Robinhood mobile and real. Who's actually posting what is the difference and you only see the big gains and losses since they're exciting and not the thousands of people losing money daily on bad trades.
Sports gambling culture operates almost exactly the same way. The guy who shows you his $1000 at beginning of the season for the Chiefs to win the Super Bowl is already $100,000 in the hole from other bets.
This sounds like the plot to an old comedy film, just with new technology. Like some schmuck somehow gets into a fancy Wall Street party and everyone he talks to assume his idiot ramblings are genius financial advice.
Most (theoretically all) automated trading is going through some sort of risk checking software to prevent it from doing just that. The broker dealers are only allowed by regulation (enacted after the flash crash) to allow the algorithm guys to respond so aggressively (the limit is usually an internally set one but you gotta be within it or the feds get on your case) to changes in the market.
> Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen.
Not an expert but I'd be surprised if one trade like that triggered anything, could easily be a hedge.
A lot of automated trading is arbitrage and market making, where such a trade would not really be an issue.
Regardless, option trading tends to have human traders behind the wheel, and they're trained to figure out what's going on (trading options is similar to playing poker).
A reasonably sized trade of wing options (far-OTM calls or puts) should be expected to move the volatility implied in the prices of options at and around that strike. I would call this "vol impact" or "skew impact." Go buy 5k AAPL Jul 250P tomorrow morning, and see what happens to the implied volatility of the offer on that contract by the time the market closes that same day.
Market makers are sensitive to wing trades, precisely because pricing skew is more of an art than a science. Trading away from spot can have a substantial impact on the way the implied volatility surface looks. And this can affect trades of other maturities and strikes.
Trading options, for me, is nothing like playing poker. Poker doesn't have an underlying storyline the way companies do. Nor are there catalyst dates in poker.
5k contracts is a massive trade my dude. At a multiplier of 100, that's a notional volume of 500k shares. That ought to move anything. Even AAPL as market makers balance their books. But I mean, generally these are one leg of a 4 leg option trade strategy. So it won't actually be a big net notional exposure in most cases (apart from having trades on the underlying to hedge themselves out).
It can make a big visible bump in a volatility surface, but experienced option traders are trained not to react like robots, but think instead of following blindly (otherwise it would be very easy to fool them, since it's a relatively illiquid market in which anyone can have a lot of leverage).
In that sense it's similar to poker; you don't have all the information to analyze what other players do. In this particular case, is it an informed trader or a noise trader?
I don't see how the weird corollary the comic mentions could work. if you were to pick stocks that consistently underperform the market and someone used your choices as a metric of what NOT to pick (with the idea of thus outperforming the market with their choices) they'd be much more likely to simply pick a majority of mediocre to average stocks instead of special winners, since the selection of stagnant or only modestly growing stocks is much bigger than either the selection of underperformers or major growth choices.
While amusing as hell, the answer to the question posed by that XKCD is 'yes'. It's trivial to give away arbitrage opportunities, so the average expected loss – especially net of transaction fees – can be substantial.
That can't be done just by buying shares at market price, right? Would require some combination of options or short sells. Or setting stops on a highly volatile stock in a way that basically guarantees you lose money.
I wonder why this wouldn't work. If 90% of retail traders lose money, then why doesn't Etrade and Robinhood bet against its worst performing customers? Is there some law against this?
IIRC there was a scandal not so long ago with a forex broker that was just not executing trades from dumb clients, sitting on the other side of them itself instead. I don't know if it's exactly illegal in a direct way, but it's a bad look, and I think there was a fine in this case.
There are many of them in Europe and the smaller ones change names quickly.
Turn off adblock and go to finance and forex oriented sites. You will see many ads for them at least in Europe.
A common marketing strategy for them is to offer heavy affiliate comissions and this leads to make-money-with-forex type of affiliate sites. That's another sign.
Bigger ones would be someone like Saxo Bank which started as a bucket shop in 90s and now is medium sized and somewhat legitimate now.
Another sign to be aware is the use of Metatrader software. Up to version 5 now.
I am sure there are turnkey solutions offering a whole bucket-shop as a service.
Even if there are honest bucket-shops you are still betting against the house not against other players in the market. Might as well bet on horses or sports then.
As I understand it, this is effectively what CFDs (Contracts For Difference) are, which seem to be offered by a lot of discount brokerages etc. (at least here in UK, not sure if CFDs exist in US)
A bet between trader & brokerage that the price will move a particular direction, with no actual trading or stock ownership occurring
The Kelly criterion provides the optimum bet size given the chance of winning. The adversarial brokerage could use the Kelly criterion and only make a wager commensurate with the likelihood of the trader's failure. It should be profitable. Suppose the brokerage just puts 5% of their cash toward this. It could be a nice profit center without risking everything.
"Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen."
Unlikely. Automatic trading systems will not see their trades. Most (if not all) of WSB trades are done through the Robinhood app. Robinhood users are not charged transaction fees executing their trades, they can do this because they sell their flow (these orders) to HFT firms. HFT firms are willing to pay for Robinhood's flow (trades) because the average user is not an insider, has no idea what he's doing and is most likely gambling. If you're an HFT you'd rather trade with a common person, then an informed investor because maybe they know something you don't.
So you start by saying automatic systems won't see their trades and finish by saying automatic trading systems are in fact seeing their trades and playing against them?
>Most (if not all) of WSB trades are done through the Robinhood app. Robinhood users are not charged transaction fees executing their trades, they can do this because they sell their flow (these orders) to HFT firms.
Doesn't this make it more likely, rather than less likely, that HFT algos are affected by WSB madness?
I'm guessing that they are implying that the HFTs already know that these trades came from robinhood (because of order flow feed) , and therefore would discount them heavily on having inside knowledge.
Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen.
This appeared to happen when WSB were meme-ing on TSLA and a whole bunch of them bought $1000 call options when it was $400. Shortly afterwards TSLA skyrocketed in value.