I’m friends with more lawyers than I’m willing to admit to in a court of law.
It’s not for the drama of late night bourbon fueled strategy sessions, though that is appealing. I find the use of precision very interesting and important, yet nuanced as it’s applied to the fuzz of reality.
When you get corrected for asking if someone is available at 10am EST during the summer, I’ll be not-so-secretly smiling. (Pro tip, just say “ET”, it works all year round.)
Yet what goes around comes around - I tried to schedule something with an attorney friend for the “weekend after the Fourth”. Is that 7/5 or 7/12? Touché. Technically the first Saturday would be 7/5, but are you so unpatriotic as to think “The Fourth” isn’t a full weekend event?
This specific lack of clarity happens as we put backtests into practice. The trading strategy is described as “sell 30 delta puts every Friday”, but there are numerous ambiguities and embedded exceptions. Of course that means you choose the 29 over the 37 delta option, and if it happens to be Good Friday you trade on Thursday.
It’s not the attention to detail that often gives lawyers a bad name though. Or even the billable hours. For us civilians who hold up justice to be blind and independent, we rankle at the abuses of the system that force procedure and foster parasites. It’s clever when you see it in a TV drama, it’s cruft when it happens to you.
My paraphrasing will likely get me footnoted by the friend who shared this, but the gist of the grift is this. The websites of companies are considered to be a place of public accommodation, and therefore must be accessible to all individuals according to the ADA. This requires things like alt text for images, captions for videos, and has even been extended to technical standards like proper HTML structuring for screen readers.
All of that is important, full stop. Where a well meaning plaintiff evolves into a parasite, is when this law gets abused opportunistically. There are firms who specialize in crawling the web for these errors, and sending out demand templates for a few thousand bucks. Defendants quickly settle this nuisance tax because the cost-benefit is skewed against the well intentioned.
There are dozens of examples of this throughout the world of law. Try getting your property taxes lowered in Illinois and you know there are only a handful of attorneys who can get it done and will charge you half the rebate.
Reflecting on my own domain, we see many examples of this in markets too. While I vaunt them as a crucible of price discovery and risk transfer, there are plenty of kinks in that process.
Yesterday in Portfolio Design I did some analysis on how SPX spread widths have changed over time. The main story here is that markets have improved significantly, and it’s never been cheaper to trade. The cost in bid/ask spread of trading a weekly straddle has been cut by 75% since 2007.
But one of the curiosities the data shows, was how much tighter the markets were at the close on the last day of the month. Having observed dozens of month end settlements, I know exactly what happens. Everyone from the C-Suite down to the junior trader who just got PnL access is watching where the marks land.
The less liquid the name, the fuzzier this process gets. A major reason to trade SPX or any other highly liquid name is that there’s always someone interested in tightening the spread. Day over day settlements are going to be generally pretty good, they just get 10-15% tighter than average at the end of month.
But in a Tier F name, it might only be a few market makers who are watching as the clock approaches 4pm. Or just you. Getting $0.50 better on a 500 lot will add $25k to your end of month mark. Even better if you get paid that quarter. (Don’t do it against another trader in your firm, not only do the marks get adjusted, that scarlet letter remains forever.)
Just because this will eventually catch up to you - settlement is the great equalizer - doesn’t mean someone’s not trying it. Pay me today, kick the can down the road, the option is worth whatever someone’s willing to pay - and no one traded!
That $25k is a parasite’s edge. Bidding your own longs with a false mark is just cheesy - it starts to border on illegal when you fake out the other side. If you’re looking to trade out of a position, you want the best price possible, but in less liquid names you can’t show your hand.
Plenty of traders are tempted to take advantage of market structure to game this. Since so many quotes run off joiner logic, if you improve a market with enough size, someone else will likely put out an order at the same level. Looking to buy, one might nefariously enter a sell order first. When enough size accrues there, pull your offer, then lift the others.
Everyone has a right to change their mind. Markets move and inputs shift. But I wouldn’t want to defend that head fake to FINRA when they come knocking. Spoof at your own risk.
While slower moving than order books, regulations do catch up and close the parasite loopholes. One of the most significant examples was the introduction of the pro-customer rule that put active traders in the same bucket as professionals. Previously the definition of customer was ambiguous enough, firms kept their infrastructure and changed clearing status so they could take advantage of priorities given to “customer” orders.
There is a wide and grey line between good and bad edges in markets. Inside information, front running; those are diametrically opposed to fundamental analysis and liquidity provision. Paying for ultra fast market data and picking off slower orders - does that make markets more efficient or are you taking advantage of the system to extract rents? IEX and Citadel have differing opinions on that.
Getting back to specific definitions, a parasite has a distinctly negative connotation, but it simply means an organism that lives on or in another organism and survives on nutrients taken from the host. While there is absolutely a “taking” aspect here, parasites aren’t explicitly bad.
I haven’t taken biology since 9th grade, but there is research that suggests positive externalities from parasitism. Food web diversity, and improved adaption can result from host/parasite relationships.
Similarly, much of the joining that takes place in markets is actually a good thing. While you’re leaning on another’s intrepid price improvement, additional size on the market makes them more liquid, attracts customers, and provides better fills.
Retail investors who simply buy index funds are leaning on the efficient market mechanisms to help price these stocks. Their orderflow might be distorting the pricing of these, and I appreciate the arguments against the persistent bid of passive. But markets are one of the most adaptive ecosystems we have, and anything but explicitly predatory activity contributes to their robustness.
Within that grey area, there are explicit rules. Marking and spoofing are on either side of the fine line. How close you want to tread that line is a matter of judgement, and there we’ll disagree. Being a savvy operator has different connotations for each individual.
There’s no definition for cheesy in the rules, but the more you have of it, the sooner your expiration date will come. Parasites that kill their hosts don’t last for long.
It’s a moral argument, but there’s a difference between taking advantage of a system, and “taking advantage” of a system. Not only do I sleep better at night, but I believe the more robust edges are those that are constructive rather than destructive.