Monopoles
Volume #141: August 10th, 2023
Clos des Ducs. Château-Grillet. La Romanée-Conti.
The sole ownership of a designated vineyard is a rarity. Of the 1249 climats drawn and named on the golden slope south of Dijon, owned by over 4000 producers, there are only 50 “monopoles”.
Absent a lick of French or any business wit, a monopole’s value is obvious. The exclusive right to cultivate and label a unique vineyard’s production gives your cellar master an incredible opportunity to display her prowess absent any competition but herself.
With the two small exceptions this is a Burgundian phenomenon.1 The grand Dukes of yore banished gamay and declared that only pinot noir and chardonnay could be planted. The variation and differentiation would come from subtle shifts in granite and schist, sunshine or protection from rain.
Terroir is what separates the Grand Cru from the village. The one quarter hectacre on my side of the combe is sufficiently different in soil composition and solar exposition from yours to merit a different labeling of the bottle. Prices double when you go from a general “Bourgogne” to a named village, then double or treble again at each rung of the ladder up to premier and grand cru.
The vineyard often speaks louder than the producer. La Romanée has a storied past long before the Societe Civile known as DRC began tending its vines. Louis XV’s cousin and close military advisor the Prince of Conti bought the land in 1760 and surreptitiously began supplementing the local soil with his own.
This is also true for vineyards that are not monopoles, but closely associated with a single figure. According to Matt Kramer’s legendary (out of print and difficult to find) “Making Sense of Burgundy” - “it is impossible to discuss Musigny without also discussing the Domaine Comte de Voguë. This producer dominates Musigny to a degree unmatched by any other producer in any other commune, even that of the Domaine de la Romanée Conti in Vosne Romanée”.
Christies, Sotheby’s, Hart Davis Hart - they all love this dynamic. Nothing rings cash registers like an exclusive cherry nosed juice matched with purple regal history. Monopolies have pricing power. You learn that walking down Boardwalk.
Buyers and sellers meet over price - usually without the wine pairings - and both sides want to exert control. A monopoly works because the very important negotiating tactic of being able to walk away doesn’t exist for the customer. If you want to taste that unique viognier coming from vines clinging to the cliffs above the Rhone, there’s only one French billionaire waiting for your cash (M. Pinault, who also owns Chateau Latour).
For average buyers of AAPL 0.00%↑ calls and sellers of BYND 0.00%↑ puts, trading is akin to stopping by your local wine shop or supermarket and picking up a decent selection from one of twenty regions of the world that suits your fancy. There’s plenty of liquidity and always someone there to take the other side of your order.
Monopoles can happen in at least two ways in the options markets. DPMs and specialist rights are where the exchanges play INAO (the French wine authority) and give certain firms the exclusive rights to trade a product with the heightened participation rights and the quoting requirements that come with it.
While there are sixteen different exchanges where products can be listed, being the duke of one of these cotes does confer advantages. There are little market structure carve outs for orders below a certain size, where the specialist can eat the whole thing. One and two lots tend to be uninformed, and they add up.
Far from a monopolist's pricing power, the specialist also typically only gets 40% of the orderflow if they’re on the quote. That leaves other participants to split up the rest, but size also matters here. Many other participants will have bigger risk tolerances than a DPM and claim outsized pro-rata shares.
Every product has a specialist or DPM, but there are only a few gems that are still singly listed. The ISE spent over a decade suing the CBOE over their proprietary products SPX and VIX, but the ball has always remained with Chicago. Exchanges are happy about exclusive pricing, and traders love that there is only one orderbook.
Prior to 2000, every order book looked like this. To trade Chysler you had to route to the CBOE. When there were only a couple exchanges, the wink nod oligopoly functioned well. The DOJ didn’t like this though, and ever since then anyone working for an exchange is required to maintain a 50 foot distance from their competitor2.
Beyond just disrupting industry functions, this anti-collusionary reaction has a chilling effect on cooperative rule making. Simple coordination problems like strike listings turn into a morass for market participants because for some products the PHLX lists strikes at $2.50 intervals while the AMEX lists at $1 and for others it’s the opposite. At least with a monopoly you only get one set of rules.
What is ironic about the dynamic is that oligopoly has just been pushed further into the complicated weave of market structure. Now the largest firms simply dance around each other so they each get a DPM or specialist allocation somewhere. Sure exchanges with 20% market share are better than 2%, but if you can always route yourself the small lots, de facto not much has changed.
Big players can exert their dominance in other ways. Comte de Vogue has no monopoles, but their Musigny prices still rival those of La Tâche. For high touch orderflow, you didn’t need to be a market maker, let alone specialist to exert pricing dominance.
A pit is a physical location where you know there will be at least one person willing to make a market. To the extent that you have a network of brokers and traders also always willing to make a market, this can all take place upstairs behind a cushy wall of screens. Even further, if as a broker you have one phone call you can make that will always give you a market, could your job get any easier?
Firms would often try to position themselves as the one stop pricing shop for an order. By convincing a broker that they were the easiest and best place to trade, they could not only lock in the edge on the opening order, but be the logical place to close.
Painting this picture is not so difficult. Of course it’s easier to just call one place for a quote, but the customer also benefits by getting a quick fill. If that dealer has proven to be responsive and consistently willing to commit capital, what’s the harm?
Because it’s a market, things are always moving. There may be orders that dealers can’t trade for a dozen different reasons. Whether they don’t trade the symbol, the bid is too big even for them, or their star trader is on vacation, one point of failure is still one point of failure.
If you’re going to demand exclusivity, you also have to take the risks of mispricing. Most liquidity providers would rather be “on a print” where they are willing to parcel up with trade with competitors because of the safety in numbers. If a hailstorm hits Volnay, at least it’s not just the Marquis who’s making weak juice.
Splitting the ticket means everyone is in about the same position if this order was just the tip of the iceberg. It confirms the value you’ve priced when your peers are willing to do the same thing in about the same size.
Peter Parker must have been talking about DRC when he said that with great power comes great responsibility. The weight of a monopole is heavy, and comes with the olfactory glare of a thousand snobbish nostrils. While there is no other 2023 being produced, the tasting notes of the 1945 will last forever.
Carving out unique pieces of opportunity and micro corners of dominance give players of all sizes an edge. And as with anything in trading, which strategy works best depends on you, the product, and the phase of the moon.
Special shout out to Matt Amberson of ORATS for starting a thread on LinkedIn with old pictures of the floor. The connection between monopoles and DPMs came from the serendipitous timing of the tag.
Here’s my contribution, from the NYSE-AMEX’s “Blue Room” circa May 2012.
A note from our sponsor at TheTape.Report :
This week’s series on Trading Opportunity with TheTape covered:
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Château-Grillet makes a white Viognier in the heart of Cote Rotie’s baking spice Syrah country. Nicholas Joly makes a Savennières-Coulée-de-Serrant in the Loire region from Chenin Blanc. Both are ethereal.
A joke, but not really. The fear is deeply ingrained, and very evident.