See You In The Machine

“I’m an up bettor!”

The year is 1999 and I am not even thirty-years old, sitting on the institutional equity desk at a Canadian bank-owned securities dealer. The voice screaming out over the dull buzz is Tony’s. He is a former TSX floor trader, a little older than me, but still young as well.

This morning the stock market is getting pounded, down size on big volume. Selling is flowing in from every direct line on the trading desk. Our institutional clients have product to pitch and there are precious few buyers.

I know Tony is long for our firm’s book. That’s our job. As proprietary traders we are expected to provide liquidity for our clients. Tony works on the traditional equity desk and I am one row over in the derivative group. Tony has been showing bids all morning long and getting pasted. And the story is no different for me. I am struggling to deal with the waves of selling in the cash market, while also trading the index futures and ETFs markets, which are at times getting even more depressed than the actual stocks. To top it all off, I am also short gamma and getting longer with each sickening wave of selling.

Amidst all this madness, Tony wants to make a wager. Not for the firm (he has already made tons of bets all morning), but for himself.

“Spooz closes up on the day” he screams out, “I want seven to one odds.”

The S&P 500 is trading at around 1,400 and is now down almost 40 handles. It’s not quite lunch and the spooz are down almost 3%. There are no signs of any buying, but here is Tony wanting to bet that the entire decline is erased in the space of the next four hours.

Tony is a great trader so his bid is met with silence from the other traders on his desk.

Although I understand the rational behind his wager, I mentally estimate the odds of him being correct. Sure, that sort of emotional violent swing has occurred in past similar situations. But is 7-1 odds the right price?

Even though I am also bullish, there is a point where taking the other side of Tony’s wager makes sense. Maybe not 7-1. Maybe not 6-1. But there is a number where it makes sense to bet against my prevailing bias.

“It comes at four to one,” I shout back to Tony.

Tony looks at me and grins. We are one in the same. Both willing to make a market in anything.

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