Stewart: 40 million. That’s the number of options contracts that are traded every day. That number has doubled from just two years ago. The options market is a very effective means of risk management and it is going crazy. I am so happy to be joined by Gavin Rowe, CEO of Watershed Technologies, who’s going to give us a dissertation on options, and options trading. Gavin, welcome.
Gavin: Stewart. Thank you for having. Appreciate it.
Stewart: I’m thrilled that you’re here. Can you give us a high-level overview of the options market just as a starting point?
Gavin: Sure. It’s a fascinating marketplace. I was drawn to it. Stewart, I don’t know if we ever talked about this, but I really hadn’t intended on being a trader, but as soon as I saw what was going on with options, I was too fascinated to walk away. Speaking to your audience with the insurance market, they deal with risk every day. And really, you can conceive of an option as a term risk instrument on its own. And so, you’ve got this broad spectrum of products that trade competitively, every day, and price, at the end of the day publicly, that show in detail what the world’s view is of the economic risk. As risk rises, the value of insurance contracts rises, and the value of option prices rise. As risk drops, the reverse happens. And so, it’s a very nuanced way to get a sense of what the economic appetite is for risk in a lot of broad-based instruments, risk programs that extend well beyond stocks and stock options, start their risk pricing in the equity risk markets, because it’s so competitive and so well defined.
Stewart: When I opened, I mentioned 40 million options contracts. We have talked before this – that is not indicative of the number of orders that are entered. So just full disclosure, the way that you and I got together is we have a good friend who’s your chief technology officer named Tom Javen.
Stewart: Tom has done his best to explain options to me, and I am apparently far too dense. I didn’t realize that there are options order volume that doesn’t get executed. What does that mean? What does that do to the market? So, can you help me with that and help our audience understand that concept?
Gavin: Sure. Just to take a step back, so we were talking about an option as really a term risk product. You can make bets or hedges on the direction of an underlying asset with options, you can make and lose money whether the underlying asset price moves at all. It’s just a question of whether the risk appetite moves. And so, a good example would be for a company that’s coming up in earning. So obviously, last night we saw a traumatic move in Netflix. If your listeners haven’t seen it already, it was down about 30% pre-open this morning. You can make bets on what’s going to happen in the future and the value of that underlying asset. While the options are priced in pennies. So that if a market is $1 bid at $1.10, each one of those options goes into a hundred shares of stock.
So you’re actually paying $110 if you buy that $1.10 offer, and you’re collecting a hundred dollars if you sell that one bid. But, inside that marketplace, just because you want to buy, you may not be willing to pay the $1.10. And so you will see people send orders down where they say, okay, I’ll pay $1.05 for this option. If nobody has an appetite, then a whole series of events can unfold. A broker can hold that order for you and wait to see if they find a seller. More often than not, that order gets what they call posted at the exchanges and the exchange order book. At that point then the official public market is the now $1.05 bid and offered at $1.10. And, your $1.05 bid there is protected. If somebody trades anywhere in the country, they have to trade, and they want to trade at $1.05 or lower, they have to sell to you first.
So there is a vast quantity of orders, there are things called spreads where you put two options together, or you put an option in stock together, vast myriad combinations of these that never trade because people have an interest at a certain price point that never quite fits what the market has. And the other trick to the options is that they expire, unlike stock, they don’t last forever. So, you may have an idea that you think is good for 30 days, but if your price point never gets hit, your order goes away. So, yeah, while there are 40 million trading every day, there’s a serious multiple over that, that gets taken into that marketplace every day, on the order of 100% or 200% over.
Stewart: So for the benefit of somebody, let’s just say that somebody’s listening and they don’t really key on the jargon. When you say a $1 to $1.10 market, that means I can buy that option, which is the ask, bid to buy; ask is “I’m going to pay $1.10, and if I sell it, I’m going to get $1”. So the bid side, the side I can buy at, is $1. And then there’s a spread in between there. And so I can enter orders that aren’t on the $1.10 offer price.
Gavin: Offer. You got it.
Stewart: I can put orders in. And if nobody hits me, then those orders go away, or I can cancel those orders. And so that’s what you’re talking about. There’s a multiple of the 40 million of orders that are entered, but not executed.
Gavin: Exactly. Yeah. And you’re absolutely right. Back, I started my career as a local on the CBOE, as a market maker-.
Stewart: All right. What’s a local, I love that term. What’s a local?
Gavin: Well, this is a throwback, they’re almost animatronic now. But, back in the day before computers had really taken over to the extent they have, there were these huge pits of men and women who would stand in there and would literally make markets as the stock, underlying stock, or commodity was moving. I think we’ve all seen pictures of trading places, for example. And so, I was one of those that stood in one of those pits. And as orders came in through brokers, they would walk out and say, hey, what’s the market on this IBM call? And then, we would turn around as a group and shout out what our buying price was, our bid, and what our selling price was, our offer. And usually, it was pretty wide. We would say, we’ll pay $1 and we’ll sell it, and this is back when we use fractions. One in one, and three eighths.
And so then the broker would start to laugh and say, okay, can I do any better on the bid? I’ve got a seller here and he’d tease out one and an eighth bids. And it squeezed the market in, over time, again, trying to get the best performance for their end customer.
Stewart: And the name of that, that’s called an open outcry market.
Gavin: Got it. Yes.
Stewart: And those things are pretty much, they’ve gone away-.
Stewart: Right. Gone. Because it’s interesting, I’ve neighbors on both sides, they were both traders. There are a lot of folks in Chicago, the trading capital world. There’s a lot of folks who used to be in the open outcry pits that are no longer. So with regard to that now, in today’s world, Watershed is getting ready to go live here as we record this podcast. If Watershed is not operating today, if I enter an order, what happens? What’s the anatomy of that order today?
Gavin: Well, it’s actually a great question. And honestly, it’s something that most people don’t think about. And it’s something that I really didn’t think about until much deeper in my career. Back when I was a local, the marketplace was relatively simple, frankly. There were six exchanges. Most of the products, the equity options were singly listed, they said they were really four to start with. CBEO, either one where I was at, I was one of them. And each of the exchanges had a signature product. So if you wanted to trade IBM options, you had to trade them in Chicago. If you wanted to trade Amazon options, you would’ve had to have traded them in San Francisco.
Now, they have what they call cross-listing, multiple listing. Okay. So instead of four option markets, there are now 15 of them. And, on each of the 15, we have options that expire monthly, the traditional options, the third Friday of every month. But then there are weekly options. There are quarterly options. There are new products that are out to the point now where there are literally a million different calls and puts that are quote continuously every day, every minute on 15 exchanges. The quantity of data that’s produced by this industry now is just awesome. And there’s just really no other word for it.
Stewart: And that’s at the tick level, on a million options on 15 exchanges at the tick. What does that mean, when I say, by the way, Gavin, I’m using a term, I don’t know what it means. What is the tick level, or what’s the granularity of that data?
Gavin: Well, there’s the tick, which is the price fluctuation. There’s also sizes. So, as an example, going back to our $1 bid at $1.10. Okay. The entire marketplace is sewn together by an SEC rule called Reg NMS, National Market System. What it means is that each one of those 15 exchanges, they put their best bids and their best offers together. And they come up, what they call ‘a composite market’, the best bid, the national best bid, the national best offer. It’s called the NBBO. National best bid and offer.
So that NBBO, so let’s say our one bid, could very well be set by 3, 4, 6, 8 of the 15 exchanges all at the same time. At each one of those exchanges, you’re going to have a variety of orders coming in from the public, market makers changing their minds to the point where, and this goes back to how things changed on a tick basis. On one millisecond’s worth of trading data, we had a question several years ago, on one millisecond. So 1/1000 of a second on a fairly well-traded option. We saw six different price and size changes inside of 1/1000 of a second. So, when we’re talking about the tick now, it’s gotten to the point where it’s confusing even really what time is like, hey, is it really noon? Who’s noon is it exactly? That’s how fast this marketplace is moving, which is so different than when I started, when we were still doing trades with pencils and paper.
Stewart: But noon, to your point, noon is a lot of milliseconds.
Stewart: And when you’ve got one millisecond, six price changes, that’s the thing that boggles my mind, just amazing. So if we’ve got, if I go with my $1.10, if the NBBO, the national best bid and offer. So now, man, I’m really practicing without a license. Our readers are like, there is no way Foley knows what he’s talking about here. So the NBBO if it’s $1 and a $1.10, and I enter an order, am I going to get the NBBO?
Gavin: Depends on how you send that order. And again, this gets to be very tricky. There’s the difference between a limit price where you say, I will pay up to X price and no higher, and there’s a market price. I am on a crusade to avoid market prices on options. I have seen more financial pain inflicted with something like that than I can describe. They’re just really unsafe. And if I had my way, the industry would disallow it. Because, if you move a price 50 cents from $1.10 to $1.60, that’s a substantially different thing than if you move the price of a stock from $100 to 150 cents. You’re talking about a 60% price change against you. And I’ve seen it. I’ve been a part of it. And, it’s usually on an order that came from a machine that wasn’t entered properly.
So, setting the market pricing aside, if you tell me that you want to pay $1.10 right now, the way most orders are shot, there are two paths to the exchange. One is what they call the low touch path. It does use technology. It’s something, you get an order management system, some sort of app on your screen. You see the $1.10 offer, you say, I want to buy a hundred of those. You click send. Okay. That order is going to make its way down through a series of electronic pipes to an executing broker. That executing broker is required by rule to be your portal to the exchanges, they’re supposed to watch out for your best interest. And they do a pretty good job generally speaking. I’ve worked for several of them and they’re very good at their jobs.
They then take that $1.10 bid and they will then look on all 15 exchanges for you and say, okay, where can we go get and pay $1.10 for this? So, that way you do get that $1.10 price. Another way is to send an order, if you have particularly a big order to what they call an inter-dealer broker, I’m going to give you all sorts of acronyms here, you are going to be excellent, the cocktail parties at the end of this.
Stewart: This is going to be, if I say, when you throw out insurance and options at a cocktail party, come on, the people are just being a pass to your door, Gavin, come on.
Gavin: You have a lampshade on right afterward.
Stewart: That’s right. It’s perfect.
Gavin: So yeah, the inter-dealer brokers, they’re called IDBs. Their whole job is to try to see if they can find a better price for you than $1.10. So what they do is they start, they pick up the phone, they take your order, they’ll hang up. They’ll either start instant messaging people or calling people they know saying, hey, I’ve got this $1.10 bid. Can you do any better for this guy? And maybe they’ll find a $1.09, at which point then they’ll put your bid, the offer they found together, and what they call a cross order. That order then has to go, all option trades by rule have to go to exchanges. That rule will go to an exchange and it will print. So now you’ve gotten the $1.09. The problem is that it wasn’t as fast as the technology has, that can take care of you. And there’s certain risks that are associated with that. It’s also much more expensive.
Stewart: And that’s really interesting to me. So, you have an amazing background in options trading, you know this stuff inside out, and you’ve founded Watershed Technologies. What does Watershed Technologies do?
Gavin: It’s a very good question. My wife calls it Tinder for option traders. Well, that’s funny. I think it’s-.
Stewart: Oh my goodness.
Gavin: … it’s pretty accurate. It conjures a certain view. So what we do, our technology, that Tom is heavily involved in, plays the role of that inter-dealer broker, it’s a matchmaker. What we do instead of sending an order to someone who’s going to call, or instant message, we’ll take that order into our system. We’ll electronically fire out what they call ‘request for response’. And basically an indication of interest to our liquidity providers. Our liquidity providers are a series of 10 different trading companies throughout the country, guys that we’ve known to be reputable and good price makers. They then respond and go back to our old example, a $1.10 bid, we’ll say, hey, we’ve got a $1.10 bid for 1000. Do you care? Their systems, now it’s fast enough that they don’t have any human interaction. It’s a 15 millisecond process. Again, this is coming from a guy who used to do trades on pencil and paper.
15 milliseconds, we get response orders back from the liquidity providers. And we look to say, okay, hey, this guy wants to pay $1.10, our customer, I see some $1.09 offers, and I see some $1.08 offers. So we’re going to generate cross orders at $1.08 and $1.09. And then we’re going to send them to the exchange through an executing broker to print. So again, that process, that inter-dealer process of looking, trying to tease out better pricing. And truthfully, what we’re trying to do is replicate the old process that we saw on the floor, where the brokers were really fighting for their customer’s best interest, that $1.09, $1.08, that’s where the customer will print, not the $1.10 price. So, the interesting thing is that the only way to get inside that $1.10 offer is either to, as we were discussing before, send a bid down to say, pay $1.08 and hope you get filled, or you send it through us and you allow us to do that same process electronically so it’s fast. And then, we’ll send it down if we find better prices for you.
So that’s really where we see our value add, we see the opportunity for our customers to get pricing that’s better than what they see in the NBBO markets, a process that used to be natural to the industry, but that has gone away as computers have taken over. So, we’ll use that auction technology to get them better fill prices. And again, we were talking about how each option is worth a hundred shares of stock, for every penny you save, that’s actually a buck. So for every thousand amount, if we save you two pennies on half and a penny on half, that’s $1,500 we just saved you. So, that kind of savings that we drive back to our end users, especially as it cycles over time, really begins to add up to what their end-of-year take-home looks like.
And it’s funny. We know how failed it is because most people don’t think about this piece of it. Most people are spending, and rightfully so, a lot of their time just thinking, “All right, what’s my strategy? What am I going to get done here? What do I want to accomplish?” We talk to a lot of portfolio managers, and if they do 10% on their book in the year, that’s not a bad year. With 6% inflation, that gets to be a little bit more of a grind, this is the world we live in now. Now, if you use options, let’s say you can augment that 10% by another 4%. Great. So your gross would be 14%. Your net would be more like eight. Why would you want to give a chunk of that 8% back simply because you’re not getting the best prices you can on your orders? And what we’ve seen is, honestly it’s remarkable, Stewart, we’ve seen anywhere between 10%, 25% that these guys are simply giving away by not knowing that they could get better pricing through a different execution path.
Stewart: And that’s the thing, it is people don’t know. And when you say, and Tom said this to me, and when you say that there’s a 15 millisecond auction where you’re checking with, call it 10 market makers and seeing if anybody cares at a level that your term was inside a $1.10, which means less than $1.10, which means I’m paying less for that option, which is good for me as the buyer. And so, that 15 millisecond auction, that’s all day, isn’t it? In your world, 15 milliseconds is not, you’re not, what was the book? The Flash Boys.
Gavin: Flash Boys.
Stewart: You’re not dealing in nanoseconds here.
Stewart: 15 milliseconds is a fairly long time.
Gavin: Yeah. It is honestly. It’s a short time versus, the exchanges have auctions that are a hundred milliseconds, but it is a fairly long time. And it’s done that way deliberately. So, there is business in the option markets, just like there’s business in the stock markets, the high-frequency traders, the low latency traders, where they have a very specific idea of what they want to do. And, they know exactly where they want to go to get it done. And you’re right. They’re talking nanoseconds. And so, our process is designed inherently to screen that business away. We just don’t want that business, and they don’t want the delay. So, when we have people sending us business, the comp really is, the comparison really is against a more traditional IDBs, that can take minutes, still, while they work an order.
There’s also the risk of information slippage as they’re sending the order, calling around the street saying, hey, we’ve got this $1.10 buyer. So we can deliver that same benefit in what looks like lightning speed, but the flip side to your point is it’s slow enough deliberately to screen away some, and I won’t call it toxic. It’s just a very different business model that the low latency guys use. And that doesn’t fit what we’re doing. We are looking to put traditional order centers together with traditional risk-takers, and not so much the low latency guys in between them.
Stewart: And that’s to the benefit of both sides of that equation. Insurance companies are using options for hedging long-dated liabilities. When we are talking here about publicly traded options, there’s a private options market as well, but that’s not this market. We’re talking about options that are publicly traded and prices are quoted and so on and so forth. I just want to make sure that we’re on the same page with that.
Gavin: Hundred percent. There are definitely relationships between the two markets. There are benefits to both sides, but yes, the listed, they call it publicly listed. So, the listed option marketplace, the longest dated you can go out is about 30 months. The over-the-counter of the private market can go much longer than that. But what we see is oftentimes the over-the-counter market looks to then come into the listed marketplace and start trying to hedge its own risks in there. The longest, and here’s some more industry lingo for you. The longest dated publicly listed options are called LEAPS. They trade very similarly, they have a relationship to the rest of the equity option market. They also have a relationship to the bond market. And so, the people that operate inside those, the trading companies, like a lot of our liquidity providers, understand those relationships. The markets tend to be a little wider, but there’s a whole series of reasons for that.
Stewart: And so, industry use of options, and how does that link back to Watershed’s business model?
Gavin: Sure. So as you said, there’s the long dated piece. And when we see a long dated option where we had the one to $1.10 market on what we might consider a more short data to a normal option. In the LEAP market, that same option might be three bid at four. So $3 bid at $4. Now, the bid ask spread is a buck, fully 33% of the bid price of the asset, of the security. However, while that seems like a lot in dollar terms, options can also be priced in what they call implied volatility. Some relatively fancy math that takes the probability of risk returns and then translates it into dollars. Okay. While that $1 may look like a lot in terms of dollar pricing, in terms of implied volatility pricing, it may be only two or three points wide. So, that $3 bid at $4 is actually to a trading firm, looks a lot snugger. Okay. That might be just two or three vault points big.
Stewart: Yeah. That’s an interesting point because you’ve got, if I remember my options math, you’ve got time, you’ve got strike price, and you’ve got volatility. And two of those are known, and pricing the volatility correctly, or getting the volatility right, that’s the secret sauce, right?
Gavin: Yeah. Right, exactly. So just a quick side note, while I was on the CBOE floor, they brought the Stanley Cup in a couple of times to a great ovation, biggest applause I ever heard was when Myron Scholes stepped on the floor.
Gavin: They walked him out to the floor and the entire trading stopped and it was thunderous. Everybody appreciated what he had done as part of that Black-Scholes theory. It was really cool. You could see that he was really appreciating everybody.
Gavin: So that was fun, but yeah, it’s his math that won the Nobel Prize. And it does it. You can figure out a series of factors, including time and interest rates and that sort of thing. And everything that’s left in the price of that option is volatility, hence the implied volatility. And so, to a trading firm while that dollar wide market looks pretty broad to the end user, to a trading firm it’s not quite as broad, but to tie it back into what we do, we then take that offers, let’s say we have some insurer that wants to sell 2,500 of some set of long dated options for $3. We will take that process, that order into our process and say, hey, can you do any better than $3?
If we find better than $3, or even if we find the same amount at $3, we will marry those options up and then send them to the exchange. At which point then the insurer is guaranteed to fill at $3 or better. In the industry, they call that stopping the order enter price. You stopped at $3, you can only do better from there. And so even in that relatively narrow market in terms of implied volatility, because we’re showing our orders out to such a diverse group of liquidity providers, we feel pretty good that we’ll find at least someone willing to pay at $3.05, $3.10. Those options tend to be priced in nickel and dime increments. And then we can get better prices again, for the people who are trying to marry up and hedge their long dated liabilities against these assets.
Stewart: All right. I’m bearing my soul, Gavin, about what I don’t know here. So liquidity providers, who are they? Market makers. So, the one I know is CTC, here in Chicago. Know a couple folks over there, good people. They are a market maker. What does a liquidity provider / market maker do?
Gavin: Fair enough. And yes, CTC are good guys. Like you, I know a lot of those guys and Tom, of course, has some history there. So liquidity provider is probably the broader umbrella. Inside the liquidity provider can be a market maker, can be an off floor trader, that can be a bank, can be a hedge fund, can be a whole series of different entities, can be individuals. As a local, I used to be a liquidity provider. Essentially what a liquidity provider does is: they see an order and to have a trade happen, you have to have another side to the trade. So if you have a buyer, someone needs to be a seller. Now, one of the key differences between the options market, the stock market, is the stock market is called an order driven marketplace, where there are specialists that will make prices on the floor, but most of that market is handled by having independent entities with a bid price and a sell price coming together and trading.
There are only about 2,500 stocks that are listed in this country. And we just talked a little bit ago that there are over a million calls and puts listed, because of the difference in scope between the two marketplaces, you can’t always, even though we talked about how there are more than 40 million contracts trading a day, probably a multiple of that sitting around as resting orders, orders that haven’t traded, but may trade. You need help to make sure that, that marketplace stays orderly. And so on the one hand-.
Stewart: Stays liquid, right? It needs to stay liquid.
Gavin: Literally liquid. Yeah.
Stewart: When you say orderly, that means that you can continue to trade at prices that, liquidity is defined as you can trade without substantial price degradation. And that’s when you say orderly, that’s what that means, right?
Gavin: Exactly. It means that you can get it at a reasonable price. During the flash crash, that was a disorderly market and the prices were very sketchy, but give normal “market conditions,” yeah, liquidity is a reasonable bid price and a reasonable offer price with reasonable size attached. So, it’s not on $1 bid at $10 for five contracts each. It’s on $1 bid at a $1.10, 500 up. So now you’ve made a market where you can really start to transact inside that. So, there are entities that stream quotes, they call them two-sided quotes, bids and offers simultaneously. Those are market makers. Those are entities that post prices on both sides of marketplace for options, all during the trading day. There are also a series of non-exchange liquidity providers, trading firms, some of which used to be market makers and are no longer, who, rather than streaming quotes, bids and offers on both sides, prefer to take those phone calls from the inner dealer brokers and say, ‘Yeah, I’ll participate there. I’ll buy at that price. I’ll sell at that price.’
And so, you can tap into liquidity that exists off floor, off the exchange, as well as liquidity that’s on the floor at the exchange. And that’s really, again, at the heart of what Watershed does, is we want to take your order and tap into that non-exchange liquidity as step one, only cost you 15 milliseconds, and then run the order down so it can be tapping into the exchange liquidity at the same time. That way you get two chances of talking to people who want to take the other side of your trade and the only price he pays, a 15 millisecond bus stop.
Stewart: That gets me to the question of why are there different prices? And I think the answer is that, you mentioned the Black-Scholes model, the options pricing model, which was, I’m a self-admitted geek. I went to the University of Chicago and Fisher Black, the other person, their pictures are up there on the wall. I love this stuff. But, there’s differences in the volatility assumptions by various market makers that create these price differences. Is that fair? Is that correct?
Gavin: No, it’s a hundred percent accurate. Agreed. Yeah. That stems from a whole series of things. They could be using different models. So, post-Black-Scholes, there are a whole series of different models that have come out. Some are far more complex, in speaking to your audience, I know that there are rafts of quants that work in their shops, that are way smarter than I am. That’s maybe not the highest bar to clear, but that can-.
Stewart: Same here.
Gavin: … but look, these guys can generate models that I can’t even conceive of, that tie things together. And depending on the sophistication of the person making the price, that’ll affect which model they’re using. There are also other pieces to it, including whatever options as opposed to stock or futures traders, option traders generally don’t go home flat. In other words, they don’t go home with no positions on whatsoever. Most options traders by default, or by design, carry inventory with them. And so, depending on the inventory they’re carrying, that’s going to affect their world view on prices. And that world view on prices is going to drive down all the way to the most atomic level of any particular column put.
And so, depending on what model they’re using, how they see the world, what their strategic projections are and what their inventory is, you do get a whole series of different prices. Now, one of the tricky parts in the marketplace today, we hear a lot of complaints about this, is what they called phantom liquidity. So on our NBBO, we may see one bid at $1.10, and there may be a thousand at each price point to sell at $1.10, a thousand and buy at one. Oftentimes we’ll hear complaints that when someone tries to go pay $1.10, they won’t get the full thousand, they’ll get some fraction of that. And some of that is the exchange liquidity providers seeing that trade and starting to pull back so that they don’t really want to sell it $1.10.
And it can be very frustrating to end users. Our goal is to bring a more diverse group of liquidity in a contact with that order first. Again, this goes back to trying to recreate what we saw as some of the strengths of the old open out cry model, bring more diverse liquidity providers with different worldviews, different pricing in the contact with that order first, and then let the exchange liquidity, see it, react to it, perhaps improve on it. So it is interesting that the business model by design is intended to tap into that differential in terms of option pricing. That’s one of our explicit goals.
Stewart: It’s almost like you’re bringing virtual locals back to the options market.
Gavin: That’s actually the way a lot of our end users describe it. Now you may have to have gray hair to know what that really means, but that’s precise-.
Stewart: Well, you and I both qualify on that one. So it’s good.
Gavin: Yeah. Well, I don’t walk around with a brightly colored jacket in the loop anymore, but yeah, back in the day, that was a badge of honor. People knew what you were doing, was an entertainment culture.
Stewart: Absolutely. I remember seeing folks with the jackets on, just as, from a nostalgia perspective, not only was there a jacket, but there’s also letters sewn on it. So what are the jacket? Can you say a little bit for that?
Gavin: Sure. Yeah. So in the trading jacket, it was quite the outfit, and we used to leave them up in our office. In New York, there’s still very much on wearing actual dress coats and ties. And first time I walked on the New York Stock Exchange floor, I had to smile because it was far more formal than the ways the Chicago system operated. We did have these trading jackets, often brightly colored. And when you were in a competitive pit, look, you needed to make sure you were getting the attention of the broker. Now, we haven’t had a chance to hang out. I was laughing when you said that you’ve got former traders on both sides, it’s probably fairly noisy. My daughter calls me the loudest human being on the planet.
There was a certain natural selection that you had to be able to project your voice, but in addition to that, you had to have something that would draw their eye to you, particularly if it was a competitive marketplace, then we had these ties that were a joke that no one ever pulled, it was slung over. And some of the ties were just in horrific shape. It was pretty funny. But then you’d have trading cards packed into both pockets to make sure that you had calls and puts buys, you’d have your pencils so in case a pencil snapped off in the middle of an order, you didn’t lose it. And then you would have your trading badge, and you would have what we call a TAC, which in my trading acronym was ROE. And there were all sorts of people who, in this business today, I still don’t know their real names. I know them by their TAC.
There’s still a broker on the CBOE, Kevin Kennedy, goes by KGK, who’s just a legend in the business. And they may not know Kevin Kennedy, but if you bring up KGK to anybody in the industry, I guarantee you’ll get a reaction out of them. He’s one of the funniest guys I’ve ever met, but it was great. And it was a lot of fun. Now, look, there were some sketchy personalities in there, but for the people that were able to survive that very Darwinian experience, it’s a brotherhood and a sisterhood.
Stewart: I think that’s awesome. I have learned so much from you about options. I can’t thank you enough for being on. We just have one more question, it’s the ask me anything portion of the podcast, you mentioned you started at the CBOE. Do you remember your first day?
Gavin: I do. I remember my first trade.
Stewart: You remember your first trade?
Gavin: Oh, nope. I even remember the first market I made.
Stewart: All right. So it’s your first day and you run into Gavin Rowe today. What do you tell that kid that just walked onto the floor for the first time?
Gavin: Take more risk.
Gavin: I had a good career, and I look back on it and I wish I would’ve been willing to swing for the fences a bit more often, but I will say this, that there was a lot of rule bending around. And one of the things I’ve learned in this industry is that if you throw away your reputation, you’ll never get it back.
Stewart: God, that’s so true.
Gavin: And we, look, we trade on that here. The relationships we have in this business come so often through personal guarantees. If I tell you that this is a trustworthy place to trade, in addition to whatever surveillance, whatever else we’re doing, that’s my word. That was something that was built up over 20 years of trading. So that piece I would guard with my life, I would love to tell myself, hey, it’s okay. It’s okay to lose a little bit of money sometimes, take more risk.
Stewart: I love that. And I taught for a number of years. The reputation piece is really worth focusing on, because I used to tell my students, I’m like, all you’ve got in this business is your reputation. That’s it. You cannot survive in this industry for a long time, for all the shenanigans that get headlines. The overwhelming majority of people I’ve dealt with have been very ethical, bright, good folks. But bond trading, when you’re going to buy a 125, 150 million of mortgage pass throughs, and all you’re saying is you’re done. Can you imagine a company building a $150 million building with no contract, you just go, you’re done and that’s it. And you just wait. There’s a lot, a lot of money that changes hands over somebody just on their reputation. And it’s a really, really important point for people, particularly early in their careers to know.
Gavin: I agree with that. And they, just to emphasize that point, as we’ve gone into a more electronic world, there is that separation where, I think we see it on social media as well in terms of that kind of behavior, and I’m not on Twitter. So I have no idea, but I hear what the trolls do. But I know from watching electronic trading that things get said to each other and about people that would never have been said on the trading floor because first of all, you’d have to back that up, which may be the overhanging forehead approach, but it did at least limit a lot of stuff. The other part is that you knew that you were going to have to be dealing with this business the next day too. And so there was a long view toward managing relationships with customers.
And to your point, if you say you’re up and you’re done, and you back out of that, your career is essentially over, no one will trust you again. And so you learn to be careful about when you say that, but then when you do say that you have to own that. And again, because the guys in this firm are not 25, we have our code writers who are young enough, who are much more talented than I am, but when it comes to business leadership, we still take that ethos. And look, if we’re going to get this done for you, you’re good. We’ll write a contract, but you can take that as my word.
Stewart: Absolutely. I love that. Gavin Rowe, CEO, founder of Watershed Technologies. Gavin, thanks for being on.
Gavin: Thanks Stewart. Loved it.
Stewart: Thanks for listening. If you have ideas, email me, Stewart@insuranceaum.com. My name is Stewart Foley, and this Insurance AUM Journal podcast.