Thumbs Up

Vol #189: August 8th, 2024

SCUBA is a great excuse to go to the beach. 

While a good book and toes in the sand are appealing, after an hour I’m itching for something to do. Diving sites are almost always beautiful, so there’s something for everyone. 

Learning the craft requires a little bit of study (barometric calculations you’ll never need to do again), a little bit more time in the pool, and finally some check out dives. The hardest adjustment is breathing. Our land lubber brains just can’t get over the fact that oxygen is streaming in when you’re submerged. 

Beginners will rip through air tanks because they’re constantly subconsciously checking that air keeps coming through. Nervous and panicked breathers use a lot more air. After you’ve found equilibrium with your mouth piece, you quickly realize there’s another uniquely aquatic problem - communication. 

Exploring  the underwater universe, it’s both fruitful and necessary to engage with guides and fellow divers. If someone sees a unique fish or plant life, please share. Also if you’re getting low on air, or otherwise need to surface, that requires planning and signals. 

Just like breathing, you need to rewire a few intuitions here. Thumbs up doesn’t mean “cool” or “I see that too’”;  it means you’re ready to ascend. The move you’re looking for is an old fashioned “okay” sign, where the thumb and pointer finger form a circle. 

Use either of these on land, and things might be confusing. The okay sign has been drafted by fringe political groups, and in other cultures “thumbs up” means “up yours”.  Context is key here. 

When both feet are on terra firma, I regularly find myself using the thumbs up gesture as a confirmation. “Yup, I heard you.” “That sounds good.” Across the yard, in a busy airport terminal, on a Zoom call - anywhere the line of sight is better than the acoustics. All the roger, no 10-4. I suspect my inter-gesticulators find it a tad smarmy, but it works. 

Trading pits are sleepy these days. When you can hear your frenemies mouse clicks, there’s no need for flashing signs. But the SPX and VIX options pits remain a buzzing source of open outcry trading. There can be several trades happening simultaneously, with brokers pushing and pulling the vol surface as market makers try to thread the edge needle. Hand signals still persist here. 

The moves to buy and sell are easy - pulling your hands in, or slamming them down. Just be careful - that implies the full size quoted. Retorting “sold” accompanied by a downward chop is also a colloquial way to tell your buddy he’s full of caca. Numbers are flashing sideways fingers, and April is an easy calendar month to spot with the twinkling fingers of rain. 

There’s a way to slur any form of communication, but hand signals provide clarity in environments where it’s distinctly lacking. An unambiguous gesture between engaged participants communicates succinctly. 

Where safety and accuracy is prized, a thumbs up does all the talking you need. Bends is the monster under the bed nightmare of every SCUBA diver, so there’s no messing around when it comes time to ascend. A trading error where you bought a five hundred lot instead of a five lot could be the end of your career. 

One of the jobs I got stationed at early in my trading career was running short crosses for AMEX traders. The firm had a convoluted but effective system for selling stock short when a trader was having a hard time getting a fill. A centralized desk on the P-Coast collected these orders from the pits in the form of barks, squawks, and typo pocked rage texting. 

A down ticking stock where every pit in the country just sold puts is not the place to mess around with bad quantities or the wrong symbol. The ticker you accidentally typed is guaranteed to have a fraction of the liquidity and cost you a pound of slippage. 

Our guy in San Fran was unique in a city where that trait isn’t lacking. You never know what kind of extra color he might provide, but you did know the order was going to be run back precisely how you dictated it. Alpha, Alpha, Peter, Larry. 500? Five Hundred. 

This felt infantile and especially redundant. Until you make a mistake that costs a guy more than lunch. Good luck getting him to explain the nuances of trading a hard to borrow stock after the close.  Double check everything - make sure the data, delta, and dollars are all correct. When sifting through randomness to find edge, control absolutely everything that you can. 

This need for control breeds specialization. There’s no such thing as a full stack finance guy. (Sorry macro bros.) Fixed income is an entirely different universe, but even corn or cattle options are enough of a different breed to equity options shops. Index trading firms have only a small intersection with multi listed equities specialists. And even in the mania of the SPX pit, there are firms that only focus on a certain months. 

You can’t just fake it here, because people's savings and jobs are on the line. Getting an order exactly right, and making sure the left side matches the right is the only objective. Absolutely correct as soon as possible is table stakes, don’t sacrifice either. 

This presents a curious problem for artificial intelligence. We all know about the hallucination problem. Sure ChatGPT can produce working code for a report, or even cite sections of the local building code. But sometimes it’s just making shit up. 

A large language model will do great at replicating the nonsense articles about “why did the market go down”. But it’s very far from demonstrating enough trustworthiness to handle real financial operations. 

This concept has recently been well explained by Alexander Campbell in his article “California vs. New York.” Move fast and break things doesn’t work well when you’re managing money and have to show your work. Not just in a quarterly report to investors - the regulators are watching over you too. 

An enormous part of the business of finance is just making sure things are right. Wrong and strong is a short career path. On the stock ex desk, mistakes were going to be made. It’s a big game of telephone. Far far worse than making a mistake however, was trying to sweep it under the rug. 

The intraday break report will find that there are extra shares of BIS, and the DIS trader is asking why his deltas are off. Because upstream the risk manager was asking him. Prepare your CV if this lasted overnight after an earnings report. 

Processes keep humans accountable. A couple extra syllables at execution means there’s no guillotine waiting for you at HR. They also protect us from ourselves. Not only are we fallible, we make emotional decisions too. Investment strategies with defined check points and rules about when and how to make decisions is a valuable lesson from behavioral finance. 

If you want to prevent a problem down the line, clear communication, with a double confirm is the cheapest form of insurance you can buy. I still read back every options order I execute for the best one man belt and suspenders possible. Imagine how many times I read blockchain transactions.

The redundancy is what allows for excellency. Close enough doesn’t work for the nitrogen in your blood or the Texas hedged put you just bought. So the next time I flash you a thumbs up, know it’s the good faith that’s been beaten into me. I’m hoping the next signal is a hang ten.