The Vig and the VIX of it, or what former Wall Street traders do

Our View, The Opening Print

Hey, Business Insider and FT, your stories titled Wall Street Is About To Start Bleeding Traders or today’s Goldman Stars Fall Back Down to Earth is not really news. In fact, I have been writing about it for the last four years.

You see, back in 2007 and 2009 our desk in the S&P 500 futures was the outlet to many big banks, hedge funds and Wall Street brokerage firms, but when the Federal Reserve pushed Bank of America to buy Merrill Lynch, not only did we lose the B of A desk but a few years later the head trader quit Wall Street altogether to become a stand-up comic. We’re not joking. He’re’s his CNBC Profile:

Raj Malhotra (Raj Mahal is his stage name) is a former Wall Street trader-turned-stand-up-comedian. He has worked at Wall Street firms covering three continents, including at Bank of America, BNP Paribas and Nomura. He draws from his unique ethnic background and Wall Street career to entertain audiences nightly, highlighting the struggles of the 1 percent. He can be seen at Gotham Comedy Club, Broadway Comedy Club, NY Comedy Club, Greenwich Village Comedy Club, and the Tribeca Comedy Lounge. Follow him on Twitter @RajMahalTweets. 

I remember when Raj called me to say he was quitting. His exact words: “Danny, you’re one of my first calls, I quit Nomura. When I am making money the bank tells me to trade more and when I am losing they want me to trade less. I am in an out-of-compliance (new rules) more often than I am at the desk.. I’m done!”

For me it was a clear sign that one of the biggest trading eras in history was coming to an end. Thousands of people had already lost their jobs on Wall Street, but as the new regulations hit, some of the largest bank trading desks, producing millions of stock, futures and option trades a day, were closing.

No one really talked about volumes back then because the “great unwind” was producing record volumes across the board, but 5 years later the damage on Wall Street is clear to see. All the new regulation has turned the big agency trading desk into a sales desk where is is no trading, just the customer buying and selling.

Demand for Traders Plummeting

For most of those traders there is no going back. For one thing, there are no jobs and second, even if there were jobs for, say, pit trader in the S&P, there are no orders to trade off of. Some traders moved on to go to work for hedge funds, some got jobs at prop trading firms, but most left the business after years of pursuing trading jobs. Many took sales jobs. Some, like Raj, took the road less traveled.

The Vig and the VIX of it

Most good trading desks used to pay their own way but with rates at zero and electronic trading taking over there is just less of a need for “desk” traders. The lucky traders who moved to hedge funds are finding out that they don’t fit and that is causing more layoffs.

It’s hard to imagine that Wall Street, one of the largest and most profitable business communities in the world, has fallen into hard times. (Well, if you don’t count the top execs.) In Chicago, one by one all the small firms are going out of business. What used to be over 500 clearing firms between the Chicago Board of Trade and the Chicago Mercantile Exchange is down to less than 40 firms.

It’s a difficult thing to see and it’s hard to get the heads of the remaining firms to speak about it. Like Wall Street, many Chicago futures and options firms are in denial and have no idea what to do.

For me, all I have to do is look back and remember my first time on the trading floor. The excitement of the traders jumping up and down and all the fast money being made is almost all gone and never to return.

Overnight, the Asian markets closed modestly higher and in Europe 10 out of 12 markets are trading higher. This week’s economic calendar is half of what last week’s was: only 13 economic releases, 10 T-bill or T-Bond announcements or auctions and 2 Federal Reserve bank presidents speaking. Today’s economic and earnings calendar starts with no economic releases, St Louis Federal Reserve Bank President James Bullard speech on economy and monetary policy in Palm Beach, Fla., a 3 and 6 month T-bill auction and Boston Federal Reserve Bank President Eric Rosengren speech on monetary policy to Bank of Guatemala conference in Guatemala City.


Our View : The S&P is ripping high and the VIX is under the 10-handle mark. As the S&P futures (CME:SPM14) goes up, so does the risk associated with buying at such highs, or getting caught short during a rally.

The S&P has closed higher 8 weeks in a row, up +7.6% or up 138.5 handles. On a shorter time frame the ESM14 has closed higher 14 of the last 16 and 12 of the last 13, with the one down day being just 1 tick.

I have to admit it’s not been an easy time; if you’re not willing to buy the S&P when it pulls back you’re probably not making much or you may be losing.

The VIX is nearing its December 22, 1993 low close at 9.31, there have only 9 trading days that the VIX closed under 10. The all-time lowest intraday low was 8.89 on Dec 27 , 1993. So the S&P is getting close to some critical areas vs. the VIX.

It’s a scary time but it’s not unprecedented. How long can this go on? If, like me, you learned from history and can use 1993, 2000, and 2007 as a guide, then you have to accept the uncomfortable truth about when this bull run will end: Nobody knows.

Our view today is simple: sell the early rally and buy weakness (we’re looking at you, 1943) and say hello to Mutual Fund Monday!

As always, please keep an eye on the 10-handle rule and please use stops when trading futures and options.

  • In Asia, 10 of 11 markets closed higher: Shanghai Comp. +0.03%, Hang Seng +0.73%, Nikkei +0.31%.
  • In Europe, 10 of 12 markets are trading higher: DAX +0.12%, FTSE +0.25%
  • Morning headline: “Global Stocks Markets Push to New HIghs ”
  • Total volume: 1.2MIL ESM and 4K SPM traded
  • Economic calendar: St. Louis Fed President James Bullard speech on economy and monetary policy in Palm Beach, Fla., a 3- and 6-month T-bill auction and Boston Federal Reserve Bank President Eric Rosengren’s speech on monetary policy to a Bank of Guatemala conference in Guatemala City.[s_static_display]
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Danny Riley (2085 Posts)

Danny Riley has worked in the futures and options industry for 38 years, including the CBOT’s bond room, where he worked for several of the Market Wizards. He went on to build the largest volume desk in the S&P 500 Index Futures, serving some of the largest banks and hedge funds, the UBS program trading business, and some of the world's top individual traders. As a leader and co-creator of the MrTopStep IM-Pro Trading Room, he shares trading ideas and breaking market news live from the floor with our other professional traders and new traders eager to experience the power of collective intelligence. Join us today and get the edge only social trading can give you.

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