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!
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
Jeff Malec 00:07
Welcome to the derivative by our 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 and trend talking through the past year involved in sharing some of the vibe from hedge fund week down to Miami. Then we recorded an excellent live Lunch and Learn session down there in Miami at Smith and Wollensky is right there on the canal overlooking the water. And we’re gonna 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 Rabari and Rodrigo Gordillo 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 an outsourced trading? What are you doing and cap intro? Mutual funds fund to funds ETFs The list goes on and on. So head over to our Sam Altstadt comm slash about to see just what RCM does for investors and managers alike. That’s RCM alts.com/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. 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 wanks because it wasn’t just one big trade, like short energies and 14 it wasn’t just one big macro move like Oh wait 22 to me was unique year and that different sectors within trend showed up at different times. And overlapping times, which made for a much smoother experience. Typically in a big up here, everything looks 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 writing those trends, pun intended, then nearly seamlessly, which was interesting part moved on to the long dollar short bond trades, that’s a 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 and bonds. So anyway, it was a rather unique setup where from what I’ve seen over the years, and that bonds and currency trade stepped up at exactly the same time as commodities reversed. So it was more about 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 by 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 and cotton you drag a trend in euro currency, you grab a trend in rates, you’d grab a trend in oil. Right? That’s not just one big trade like we saw in the aforementioned GFC. In 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 commodity is 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, you’re in the first half, they would have done better but the second half of the year and the big sell off and 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 we’re sailing along quite well though. To talking about 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 you know over 25% on the year. This is usually just paranoid managers being paranoid. But the more nuanced view is that trend started so well and 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 posts we did. Commenting on the comments of a tweet by a 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 Matt’s tweet was rhetorically asking why investors are so under allocated to 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 firstname.lastname@example.org 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. But that brought the comic crazies out saying things like I bet these don’t include fees. That’s cheating. Without a log chart, you can’t get this in taxable accounts, volatility seems high, not all trended well forward 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 role and a CFTC regulation, you know, 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 to saying not all trended well, because I’m Andrew like 14 do well is confusing trend with managed futures, a very common mistake that a lot of people make. Here’s how that 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 with 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 met, whatever Dukes endowment, I’m putting 10% into venture capital 10% in real estate 10% into 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, si t A’s, with the NFA with the CFTC. And then inside of that bucket, managed futures umbrella registered CTA is 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 Ford that was mentioned in the comments does many things, but generally does not concern themselves to be a trend follower. They’re a registered CTA, they’re squarely in the Managed futures bucket, but not trend. That’s the confusion. But to be hesitant to allocate to trend, because you see other managed futures managers doing poorly in because they’re way off the trend index performance, maybe they were down last year, just doesn’t follow me. They’re not doing the same thing. They’re not trying to do the same thing. So you gotta be careful of what’s on the label. Is it manage features? 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 man’s futures umbrella, you got to make sure that you don’t always equate managed futures with trend three. The typical fees for trying to come down with most other hedge fund strategies. There’s training programs available for as little as 50 pips 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 point seven 575 pips 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, no, 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 and a half percent 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 to 118. Because you’ve already been to 120. The fees only when they get back above the 120. That’s what we refer to what we call high watermark. Last paid here. There were a few comments about the volatility seeming high. Now granted, MEB was showing done and some others who had quite a bit of all and then 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 falls to the upside and get 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 vol. Many use the Sortino ratio when analyzing trend following programs because it’s essentially a sharp return over volatility but only considers downside volatility, too, we ran the numbers in the blog post and since January of 2000, the sock Jen 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 and 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/blog to read it all yourself. Onto vol some quick thoughts on volatility and 22. You’ll hear on the pod next week. A few of the panelists talking how vol wasn’t that weird? And you should could go back and listen to our pod with Wayne Himmelstein at the end of last year. The bottom line from both of those conversations in my experience is this wasn’t so much about weird vol year as highlighting that how we think about volume the VIX and its relationship to equity prices is the weird part. Vol as most of us know it 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 do 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 mic market grinds lower. That’s just how it works. It can be at 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 the 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 losses much or more than s&p, the thing they’re designed to protect against the winners from RC and 22. In the ball space were three types of managers. One, those long gamma an 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 kinds of guys did well to those doing complex options, which I kind of like to think of as sort of sports parlay betting, paying it out if stocks if bonds if the Euro all go down payout 10 to one 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 fall or currency ball, 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 are those structurally with some shorter sort of option structure that short Deltas 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 meals hundreds of dollars every other cars hundreds of 1000s 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 MFE context connections 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 connections, learned a lot of good stuff. In years past there been a steady increase in all the crypto funds and crypto vendors at these conferences sponsoring everything from both 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 met with doing interesting things in and around managed futures. 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 habit 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. Coming up next, we’ll hear the first part of our Miami event two weeks ago with Nasdaq Kevin Davitt talking through embracing uncertainty, which I sort of like the sound of thanks, guys.
We’re gonna start with Kevin Davitt, head of options content at NASDAQ is gonna 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, oh, let Kevin take it away.
Kevin Davitt 16:15
Awesome. Thank you. They got me. miced 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 MDX products that are all European style cash settled and should benefit from 1256 tax treatment. The flagship product is the full sized MDX options. That’s like 1.2 million and notional exposure for each option. There’s a 1/5 offering, and then x and d, which is a 1/100 of the size. So that product, we’re talking about 12,000 In notional exposure. So from an advisor standpoint, I would argue that xn d could find a home in nearly any accounts, particularly if you are trading QQ Q options, and managing NASDAQ 100 exposure at the moment. I also work to help grow the recently launched vowel Q futures and options, which give end users the ability to position based on at the money, NASDAQ 100, and 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 lunch. 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 slide show 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 CBOE 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 then that’s how you can ask questions to open outcry. This is required for legal purposes, but I’m going to make a reference to it very shortly. All right, so I have 1520 minutes or so. And philosophically speaking, I believe that time is our most precious commodity. Jeff. I told you I was gonna keep it high level, right. So I spent, I spent it bear a bit of time thinking about anytime I’m going to make a presentation and a couple of weeks back, I’m walking around thinking about this event. And I’ve tried 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, right? So for those of you that are attending, like hedge fund week, or the I connections event, you’re going to be inundated with forecasts with ideas about what you are your clients need. And business cards and you’re gonna forget most of it, because you’re human, and time creeps in and life creeps in. And you’re gonna 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 and 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 is 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, changes, good, some changes higher, some is lower. Overall, the NASDAQ 100 has gained 185% over this timeframe. 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 timeframe, 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 clients 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 invest it 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. So, options are rooted like essentially everything else in the world around us in physics. Sorry, Jeff. So 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 with the with 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 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, we’ll talk about just 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 two 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, 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, dammit, was she Right? Right. So if you start with a 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, right? 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 timeframe. 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 and 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 portfolio’s probably have exposure to them. The companies that I’m referencing kind of lead the US 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 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 US equity markets, and it continues to reverberate to this day. We’ll see tomorrow if they move down to 25 basis points in the future, what that looks like, but they were forced to be reactive. I think about my my Stone Age days on the trading floor, and situations where I was forced to be reactive and generally speaking, they weren’t 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 is a better approach. And if we can help explain any of that, great, I know the guys that are CME 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 in the last couple of minutes, I want to talk about investing in relationships. And this last point, just second, is probably self evident to any of the IRAs I’m sorry, our AI A’s, or Wealth Advisors in the audience. It’s kind of the key driver for you growing your business managing those relationships. But investing in relationships is more than just inviting somebody to lunch, right? It’s 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 going to 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. And I 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 Steele, who we had dinner with last night, or Jason in 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 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 vowel Q index, and there are vowel Q futures and options in partnership with the CMA vowel Q 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, VIX, 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 relationship hips appropriately. Jeff was a high level enough. Thank you for listening
Jeff Malec 35:11
don’t have any questions out there? I’ll throw one at you. Retail option volume. Yeah, increase dramatically. Yep. Do you think that’s a good, bad or indifferent thing?
Kevin Davitt 35:24
I mean, I’ve worked for an exchange where where volume is good? Yes is good. What surprises me is when I think about the how the landscape has changed over the past two years. So I think the uptick in 2020 made a lot of sense. There was a 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 risks that you’re assuming, or the risks that you’re offsetting. That’s my take. Yeah, here. Here’s right.
Speaker 2 37:24
Question in the back. A quick one, I’m not gonna ask you to tilt on when the Chicago Bears went to Worlds when when the Super Bowl,
Kevin Davitt 37:29
Hey, we’re headed in the right direction, the gamma is positively you
Speaker 2 37:32
Chicago. You talked about degrees, and ideally when session minis were disaster, but there’s something maybe happened where that becomes a conversation, maybe bring it back?
Kevin Davitt 37:45
Interesting question. Um, I’m going to answer that philosophically. And it’s okay. Yeah, sorry. So, Eric said that overall, and if I’m misconstruing this correctly, that the new product rollout or new offering in terms of expertise have been embraced wholeheartedly, but offering smaller products has been what was your term? A disaster? Okay, I wouldn’t share that. 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 future 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 if it’s, 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 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 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 were 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 it enough, 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 of 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.
Speaker 3 40:20
Good question. Because you’re older like me. And you mentioned
Kevin Davitt 40:25
less hair, though. No.
Speaker 3 40:33
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 days and open outcry? My personal belief is because I could call them like, no, Bill holdoff. You look, we lose that today. So that most probably having that human interaction that used to be there. Yep. Did it. Yep. has actually made volatility probably higher today. We’re losing that. Eric, do you think that or not? Because probably you can’t handle the volume today, even if you want to do on the other pits, because it’s just too great.
Kevin Davitt 41:12
I agree with you there the volume would unequivocally suffer. I think that man that’s an interesting relate to
Speaker 3 41:22
that. Because I remember when the stock market crash I’m sending Canopus to London for at 10 o’clock. The mortgage removed sort of points who was 22%? One, right, and the 30 year bond moves
Kevin Davitt 41:32
eight and a half points. All right. So the familiar Yeah, and we’re willing to drive
Speaker 3 41:36
these things all day long. So I was the taper until 1am.
Kevin Davitt 41:40
Industry, the industry has put in some bumpers to make that less likely. Yeah. I also would point out that there are exchanges, one of which is NASDAQ owns that maintain a floor and the old approach a higher touch business for the reasons that you point out they don’t do it for old times sake, they do it because there there is demand for that and people that value.
Kevin Davitt 42:18
There’s still human interaction if you want to circumvent them, particularly on the index options side of the business. Yes. And if you want to talk more about that way from that from I don’t want to eat into the panel discussion and 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.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.