In Praise of Hand Raisers

Vol #28 - March 5th, 2021

Imitation might be the highest form of flattery, but in the pits you were just called a hand raiser.

Hand raisers were the traders who didn’t do the work to lay markets, but copied what everyone else said. When a broker comes to the pit and asks for a quote, market makers are expected to respond with their best price and size. The rules and practice generally said that the fastest and loudest would get the biggest part of the trade.

Being the first to lay a market didn’t come without risk. If you flubbed the price, your frenemies in different colored jackets would quickly pick you off, taking both your pride and dollars.

The hand raisers would avoid the risk of making a bad market, and simply wait for someone else to give a price. If this price was acceptable, they would raise their hand to try and squeeze on the ticket, riding the risk taker’s coattails. Being called a hand raiser was certainly not a compliment, and leaning on this too many times was a professional - if not physical - risk.

In an auction scenario, pure competition from independent agents will deliver the best price. Hand raisers were not only taking potential trade allocations away from the traders doing the work, but their failure to contribute a unique opinion was a form of sludge, mucking up price discovery. The wisdom of crowds can quickly become groupthink.

While traders might be particularly independent and sharp elbowed individuals, across all domains we praise the striving geniuses for their vision and discovery. History records the stories of movers and shakers. The media heralds the bold investors who take large and vocal positions, brandishing their wit and their capital. These actors play a crucial role in markets - we need individual risk takers to help ferret out price inefficiencies and drive appropriate valuations.

Hand raisers are seen as a threat to the system that rewards hard work and incentivizes creation. They enjoy the fruits of others' brilliance and innovation, without contributing to its development.

If we’re being honest with ourselves, most of us have probably raised a hand, mimicked an idea, or borrowed a witty phrase. That’s because to copy is to be human. We’re social animals after all, and sharing powerful ideas helps our society prosper.

In his book “Humankind” Rutger Bregman proposes a novel thought experiment borrowed from Joseph Henrich. If we imagine two societies, where Geniuses are 100x smarter than Copycats, but Copycats have 10x as many friends - who will profit most from innovation? While more Geniuses will figure out the task - only about 20% of the overall population will profit. Copycats on the other hand, are able to share the wealth of fewer problem solvers, resulting in near total dissemination of the discovery.

While it doesn’t make you friends in a pit - trading is distinctly different from investing after all - being a hand raiser is a very profitable strategy for investors. Market indices provide the perfect benchmark to achieve this.

The beauty of the market index is that by its very design, it will always hold the largest and best performing companies. It will also hold some losers, but through systematic rebalancing, the wheat is methodically separated from the chaff.

When you combine the power of options strategies with benchmark indices, the results are powerful. Investors can profit from the long term fundamentals that drive the equity risk premium, and lean on the collective power of the market to find the best companies. They also get the benefits of further customizing their exposure, because after all - other’s objectives are not your own.


Thanks for joining us,

Mark Phillips
CEO

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