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Binary options are gaining traction with retail brokers. The product is easy for the average Joe to understand. Has anyone seen these sites? Are they even legal? I imagine a security based on publicly traded stock must be governed by the SEC?
http://www.startoptions.com/options/

http://www.anyoption.com/jsp/index.jsf?s=2&gclid=C...

The site works by you selecting if the price in exactly one hour will be above or below the current price.

They are really a rip off. The pricing is really bad. Payouts are around 70%, for both a bear or bull trade. Obviously in a perfectly fair market without transaction costs there should be offsetting payouts on either end. i.e. if payout for above a given price is 70% return then the payout below the price should be 130%. The sites are acting as the market maker I guess, and making killing.

The other ethical issue is they advertise "make 70% in an hour!" but they forget to mention "lose 100% in an hour."

Comments (72)

  • Revsly's picture

    Wow, I never saw this before. Crazy. I have no idea, FX makes sense because its unregulated, but I would figure the equity based options would be regulated by SEC and commodities by CFTC... anyone know what's up with this?

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • creditderivatives's picture

    Couple of things

    1) this is a beautiful scam. They give u a 70% return if ur right and 10% "refund" if ur wrong.
    in other words, a 70% return for a correct guess and 90% loss for a wrong outcome.
    You can do a nice little simulation in excel. In about 10-20 trades, the poor sucker is always at $ On a $1000 investment lol.

    (here try it, pretty cool)

    Instructions:

    1) Enter 1000 into Cell A1
    2) Enter this formula into cell B2
    =ROUND(RAND(),0)

    2)Enter this formula into cell A2:
    =IF(B2=0,A1*(0.1),A1*1.7)

    3) Copy Cell A2 and B2 down till about A20 and B20
    Here are some results:

    1000
    1700 1
    2890 1
    289 0
    28.9 0
    49.13 1
    83.521 1
    141.9857 1
    241.37569 1
    24.137569 0
    2.4137569 0
    4.10338673 1
    6.975757441 1
    11.85878765 1
    20.159939 1
    2.0159939 0
    0.20159939 0

    I was down to $0.20 in about 17 trades lmao!!!

  • cheese86's picture

    I don't argue that this is a losing proposition but does your excel calculation account for the fact that some people may have reason to believe that they are more than 50% likely to be right? Albeit, not much over 50% given what can happen over a one hour time frame. What if market makers start using these trades and then dump huge blocks on the market to drive the price down? There must be a maximum bet size.

  • In reply to cheese86
    LTV's picture

    cheese86:
    I don't argue that this is a losing proposition but does your excel calculation account for the fact that some people may have reason to believe that they are more than 50% likely to be right?

    For the scenario creditderivates gave (70% return, 10% refund), you actually have to be right more than 56.25% of the time. If you're a trader for a BB or HF, wouldn't you be right more than that usually?

  • Revsly's picture

    Keep in mind that (as far as I can tell) these are daily... so you not only have to be right about direction, but about the direction within 6-8 hours max.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • creditderivatives's picture

    The key is time frame, I've never seen hedge fund clients use digitals for a few hours, much less At-The-Money digitals expiring in a few hours.

    Most frequently, you'll see digitals employed for 2-week to 3-month time frames, further out of the money, because then our sell-side desk can harp on the fact that the purchaser can obtain a payout 8.5 times the cost (based on the parameters).

    So no, I can safely argue that hedge funds do not use digitals to bet on being right in a few hours, digitals are ill-advised for such a short horizon.

    unqwertyfied, it doesn't quite work like that.

    Example:
    70% profit on wins
    90% loss on losses

    Here's a simulation where i was right 4 times out of 5 (80% correct) and still lost money:

    Start with $1000.

    First trade: Win----------Balance: $1700
    Second trade: Loss----Balance: $170
    Third Trade: Win--------Balance: $289
    Fourth Trade: Win------Balance: $491.3
    Fifth Trade: Win---------Balance: $835.21

  • creditderivatives's picture

    Revsly, lol can u stop beating me to the punch??

    But yeah the key is definitely time frame! And given the payout conditions, you have to be right well in excess of 80% of the time to be right in this particular scam

  • creditderivatives's picture

    Cheese86, that is a concern even without this scam. On any exotics desk, there is always concern that after a hedge fund enters into a barrier exotic (such as this), there is a fear that they may attempt to go into the market and smash the bid to trigger the option in their favour, Revsly can probably testify to this.

    It's really quite cool, you'll see market makers and hedge funds battling in the market place in defense or attack of a given barrier. (just ask the traders who are heavily short volgamma/vanna)

    And no, as i indicated above, under these circumstances, you have to be right much much more than 50% time, just to break even. Approaching 90%. And remember when you try to move a price in your favour that often, and given the size needed to do that, other players can burn you quite easily.

    Not to mention the cost of pushing a price (because in this case, you are acting as market taker, not market maker)

  • In reply to creditderivatives
    Revsly's picture

    creditderivatives:
    Revsly, lol can u stop beating me to the punch??

    But yeah the key is definitely time frame! And given the payout conditions, you have to be right well in excess of 80% of the time to be right in this particular scam

    Haha sorry man, at least we are in agreement!

    Another thing to keep in mind is bankroll. Sure the associated win probability with an expected value of zero might be 56% (I'm assuming you calculated it correctly), but since the individual investor likely has a small or at least rather limited funding, the actual probability you'd have to be correct is much higher.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • FXTrader's picture

    Yeah, unqwertyfied is off a bit in his calculation. I'm running it too and I'm generating a histogram here. I can't even break even when I've been right 85% of the time.... it's awful!

    But just looking at it would tell you: in your head, change the 90% loss to 99% loss and you realize that ANYTIME you are wrong, you're essentially bankrupt. All gains you ever made were wiped out.

    One must be correct near 90% of the time to break even in this case

  • LTV's picture

    Ah, fair enough. I was assuming that all bets were the roughly the same size (probably not a good assumption I realized), and so calculated % hit-rate to break even {0.7x + 0.9(1-x) = 0}.

    This almost seems like blackjack with a large rake and small refund to keep you coming back...haha

  • In reply to LTV
    Revsly's picture

    unqwertyfied:
    Ah, fair enough. I was assuming that all bets were the roughly the same size (probably not a good assumption I realized), and so calculated % hit-rate to break even {0.7x + 0.9(1-x) = 0}.

    This almost seems like blackjack with a large rake and small refund to keep you coming back...haha

    Agreed, and like at a Casino, its limited equity vs relatively unlimited. Survival is not likely for the player.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • In reply to FXTrader
    LTV's picture

    FXTrader:
    Yeah, unqwertyfied is off a bit in his calculation. I'm running it too and I'm generating a histogram here. I can't even break even when I've been right 85% of the time.... it's awful!

    But just looking at it would tell you: in your head, change the 90% loss to 99% loss and you realize that ANYTIME you are wrong, you're essentially bankrupt. All gains you ever made were wiped out.

    One must be correct near 90% of the time to break even in this case

    The reason you're losing so much is because this program reinvests the whole sum back in a binary option.

    Assuming you lose even once, you would need to win the next 4.34 times to break even.

  • Revsly's picture

    Keep in mind max account open is $5000, max bet size is $500 and min is $30. So once equity dips below $30 you're done. I've been playing around with it a little.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • breakinginnew's picture

    not to defend this stuff, but the simulations you guys are building are biased...you assume that the investor (gambler) only has as much money they wagered the first time and will always wager the entire amount they have...

  • FXTrader's picture

    Yup, I did that just to provide some uniformity, but the reailty is even if you TRY to pocket the earnings and only reinvest principle, the same problem arises:

    So Average Joe says he's only ever gonna use $500 of the account balance:

    Account Balance: $1000

    1st Trade: $500---Win: $Account Balance: $1350
    2nd Trade: $500--Win; $Account Balance: $1700
    3rd Trade: $500--Win; $Account Balance: $2050
    4th Trade: $500--Loss; $Account Balance: $1600
    5th Trade: $500---Loss; $Account Balance: $1150
    6th Trade: $500---Win; $Account Balance: $1400
    7th Trade: $500---Loss; $Account Balance: $950
    8th Trade: $500---Loss; $Account Balance: $500
    9th Trade: $500---Win; $Account Balance: $850
    10th Trade: $500---Loss; $Account Balance: $400

    At this point, we run into the problem where u have to start making smaller trades...(i.e. invest the entire principle).
    You can see where this is going.

    General conclusion, no matter how you break up the invested principle versus the entire balance, the conditions of this particular digital option force the user into bankruptcy.

    It won't be long before an average investor runs into this problem.

    I'm running it over and over changing various parameters
    -constant principle
    -increase principle after a win/decrease after a loss; vice versa

    The win ratio changes depending on how you adjust it, but the overall result is the same, for THIS kind of time frame, no one in their right mind would dare trade these digitals

  • breakinginnew's picture

    just ran a simulation for 20 bets (10k iters) and you get an expected loss of about $200...i think that makes more sense

  • breakinginnew's picture

    FXTrader--I agree with your points...I was really commenting on the person who said you need an 80% chance of being right...if you gave me a 60% chance of being right I'm pretty sure I'd happily make these bets.

  • FXTrader's picture

    CD was talking about 80% of the time if you invest the entire principal each time, which is completely accurate.

    And as for being right 60% of the time, theoretically you'd have to know how you were going to structure your principle. In other words , on which bet would you risk $500 or more, or less.

    The problem is two or more straight losses (depending on your structure) can force you into a situation that wipes you out.

  • Revsly's picture

    So I created a kind of complicated test, Starting account size of $5000, would bet $500 if account equity available, if not $100, if not $30. I ran it through 10000 trades, with 60 simulations of this. I then calculated number of defaults (account blowups) and expected value. Sticky area is about 58-61% as far as I can tell.

    If anyone wants to see it feel free to PM.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • creditderivatives's picture

    Just to provide some perspective on how badly these are priced, here's how my desk would price the following vs. how these guys would:

    Scenario

    Stock: $100
    Expiry: 8 hours
    Volatility: 20%
    Notional: $1000

    Desk:
    Premium ( % bid/ask): 49.15%/50.95%

    These Guys:

    Premium (% bid/ask): 41.2%/58.8%

    The problem is clear.

    breakinginnew, your 60% chances would just put you over the top (marginal profit) given their estimated bid/ask.

    The only thing we have to factor in is that the investor has "limited capital" so the permutations, or order of
    occurrence is of great importance (what FXTrader was getting at, too many losses in a row)

    CD~

  • creditderivatives's picture

    Revsly, that makes perfect sense, given that my estimated offer price for the trade is 58.8%

    lol nice!

    (send the simulation on)

  • Revsly's picture

    http://www.mediafire.com/file/kji4iygt0mw/Binary%2...

    It's kind of big because of all the rand()... so its slow sorry!

    My estimation of 58-61% was pretty unscientific. Educated guess looking at the profile after refreshing a bunch of times. Pretty cool that it lines up though! I think most of it should be correct, I did it rather quickly though, so not sure. Either way, it just goes to show the power of simulations, even if they are pretty rough!

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • Revsly's picture

    To be fair, the expected value doesn't really make much sense now that I think about it, since it will be correlated with time. So I'd largely ignore that.

    Perhaps it could be spread over a per trade basis.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • creditderivatives's picture

    Yeah, furthermore, the fact that you sometimes default, skews your expected value. Unless you took account for that and kept calculating as they dug themselves deeper and deeper in "debt".

    Edit: and i realize you didn't, if i put in 15% probability, the E.V is the same as like 50% lol

    In the end we all agree that to win in that particular trade long term..... u've got to beat a literal coin-flip a hell of a lot more than is theoretically possible

  • jhoratio's picture

    The problem with binary options is they're almost impossible for a market maker to hedge. Near the money binary options close to expiration will experience discrete price movement for an aribtrarily small move in the underlying. The delta changes almost infinitely quickly in these situations.

  • creditderivatives's picture

    lol it's not that "big" of a problem, except when expiry approaches. As you described, Volgamma and vanna certainly become headaches.
    But other than that, we love doing these trades because it's quite easy to overcharge and hedge effectively, especially in the FX space

  • In reply to creditderivatives
    Revsly's picture

    creditderivatives:
    lol it's not that "big" of a problem, except when expiry approaches. As you described, Volgamma and vanna certainly become headaches.
    But other than that, we love doing these trades because it's quite easy to overcharge and hedge effectively, especially in the FX space

    Yup, if you want to hedge you can run a spread and move the strikes so the upper is at the binary's exercise (overhedge). Between that and the spread you collect over TV, they are nice.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • In reply to creditderivatives
    m.c.trader's picture

    creditderivatives:
    Couple of things

    1) this is a beautiful scam. They give u a 70% return if ur right and 10% "refund" if ur wrong.
    in other words, a 70% return for a correct guess and 90% loss for a wrong outcome.
    You can do a nice little simulation in excel. In about 10-20 trades, the poor sucker is always at $ On a $1000 investment lol.

    (here try it, pretty cool)

    Instructions:

    1) Enter 1000 into Cell A1
    2) Enter this formula into cell B2
    =ROUND(RAND(),0)

    2)Enter this formula into cell A2:
    =IF(B2=0,A1*(0.1),A1*1.7)

    3) Copy Cell A2 and B2 down till about A20 and B20
    Here are some results:

    1000
    1700 1
    2890 1
    289 0
    28.9 0
    49.13 1
    83.521 1
    141.9857 1
    241.37569 1
    24.137569 0
    2.4137569 0
    4.10338673 1
    6.975757441 1
    11.85878765 1
    20.159939 1
    2.0159939 0
    0.20159939 0

    I was down to $0.20 in about 17 trades lmao!!!

    Again I agree this is an attempt at a scam, but assuming that stock A's motion is purely Brownian is inherently flawed. There's not normal distribution is stock price in hour trading, and it surely doesn't diffuse about a discrete one dimensional lattice as you have modeled.

    Likewise, if you buy a binary in the morning, let's say this morning, for MS to be down by 10:30 AM you would have been right.

    Any idiot would have known MS would be down steep in the morning with the accusations that hit the news shelves last night regardless of how it would finish by 4. Regardless of the price of the contract, your risk exposure is extremely low since it's a binary contract; almost like stacking the deck in gambling.

    It makes the valuation completely non-diffusive and contradicts the Excel routine.

    I'm not trying to be preachy I just think finance gets a bad enough wrap for over simplifying this kind of stuff. The routine is completely irrelevant to valuing these binaries, though a good way to show that it may likely be a scam.

    Someone smarter than these idiots could actually make a killing off these contracts, and I bet there is some HF out there that does so. I guarantee you their valuation model is ridiculously predictable and fundamentally wrong.

  • creditderivatives's picture

    First things first, this is exactly why digital options are extremely illiquid on single name equities. What time this morning would you have tried to get a digital on MS, 7,8:30,9am?.... what price would they have used as the "current price", certainly not yesterday's close given the news. We wouldn't have made you a market at that time,. Howeer, if you came to me at 9:30am, then I'd make you a market and by 10:30am, MS had ticked up quite a few bps... you would've lost if you bet on a drop.

    So, for these guys, I guarantee you they are only making markets on these digitals DURING market hours, to avoid "any idiot" being able to arb them like that.

    Risk exposure being "low" on a digital is a relative term. If i have $1000 and i put all of it into a standard binary contract and I'm wrong? You lose the entire premium. Sure my risk was "limited", but it's still everything I had. So I hope that is clear. You'd be a good salesman though, you might convince some sucker that digitals are low risk propositions. We could use a guy like you.

    I'll answer the other part in a bit, but there is nothing , absolutely nothing complex about pricing a digital. It's probably one of the quickest things we can price. (no knockouts, no triggers, nothing... very simple and its ok to simplify these products)

    CD~

  • MissingNo.'s picture

    Well, this gives me something else to do with a quick 500 if I can't make it out to an indian casino due to work.

    Still not sure if I want to spend the next 30+ years grinding away in corporate finance and the WSO dream chase or look to have enough passive income to live simply and work minimally.

  • In reply to blastoise
    IlliniProgrammer's picture

    balbasur:
    Wouldn't these be exploitable if a hedge fund knows that are about to dump big blocks of a selected stock?

    Remember the max bet is $500. For $500, is it really worth the time?

  • In reply to IlliniProgrammer
    Revsly's picture

    IlliniProgrammer:
    balbasur:
    Wouldn't these be exploitable if a hedge fund knows that are about to dump big blocks of a selected stock?

    Remember the max bet is $500. For $500, is it really worth the time?

    And the max account size is 5000, so it would make zero sense.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • UncleKevin's picture

    Anyone want to touch on the legality of those sites?

    creditderivs, "There's not normal distribution is stock price in hour trading" - this may be true, but wouldn't you agree that there is a 50:50 shot of that stock going up or down in an hour? If you can call these things considerably more than that than you must kill it on the street. Or is that too much EMH?

  • In reply to UncleKevin
    IlliniProgrammer's picture

    BCbanker:
    Anyone want to touch on the legality of those sites?

    creditderivs, "There's not normal distribution is stock price in hour trading" - this may be true, but wouldn't you agree that there is a 50:50 shot of that stock going up or down in an hour? If you can call these things considerably more than that than you must kill it on the street. Or is that too much EMH?


    I'm just a quant, but in the absence of a highly opinionated trader, I'll take a stab at this.

    That's not necessarily true. The market is supposed to be semi-strong form efficient to people who aren't traders. That said, the stock market can still be perfectly efficient if the stock has a 20% chance of going down $10 and an 80% chance of going up $2.50 in the next hour. In the shorter-term, stock prices aren't always normally distributed; you might not be able to make money off of trading stocks on the technicals, but that doesn't necessarily mean you can't look at a stock and say that it has a higher than average probability of going up (even if it has a more severe downside than upside.)

  • creditderivatives's picture

    Acknowledgements first:

    IlliniProgrammer hit the nail on the head when he said: "but that doesn't necessarily mean you can't look at a stock and say that it has a higher than average probability of going up (even if it has a more severe downside than upside.)"

    This is why I reiterate, no hedge fund is going to trade hour-long digital options.
    I've seen this question above: "wouldnt a hedge fund trade digitals, then try to slam the stock or push it up?"

    My answer was a resounding yes. But I added, while hedge funds may aim to push a price in one direction, the sell-side desk will defend the price level with equal aggression. Otherwise this would be a heavily profitable strategy and the hedge fund would seldom lose.

    As for these retail digital options dealers, I doubt they have the wherewithal to prevent such an aggressive move and thus a hedge fund could easily take advantage of them.

    BUT here's the trade-off. Hedge funds would realized that these things are so badly priced against the investor, it's probably not worth it to pay the cost required to move a stock, simply to spite these guys.

    BCBanker, yes that was my point, its essentially a coin-toss within an hour. If you can call a 4-hour move greater than 50%(+spread) of the time, then yes, a regular digital options trade (with a real desk) is your best bet because you can make money long-term. The problem is if you convert the conditions listed in this retail deal, to a standard digital option, you realize that you actually need to be right just above 60% of the time (given that you pick the right principal value, i.e not your entire balance).

    Summarized, these are the general points i was trying to make:

    1)Betting on an At-the-money digital expiring in a few hours is in effect a coin-toss

    2)As IlliniProgrammer said, hedge funds dont normally look at a stock and say it has higher than average probability of going up; still a coin-toss in their opinion....

    3)Hedge funds realize it's fool-hardy to bet on a coin-toss in a few hours, not to mention, the cost required to move the stock in their favour may outweigh the benefit. Thus, they trade digital options with at least a 2 week time frame

    4) The mispricing on these retail products is so awful, hedge funds would just go to an institutional desk where they get a better price anyway because that makes more sense than trying to spite some scam retail artist

    Any questions please ask. It's great that we're discussing this

    CD~

  • creditderivatives's picture

    PM me for questions you dont want to bombard the forum with

  • FXTrader's picture

    Good on you, CD. That was well-expressed.

  • BillyVanBarzini's picture

    Thanks for posting this. The way in which you have all analysed this as an investment opportunity is very interesting, especially as I've never really looked into Binaries. Just goes to show how more I have to learn before this summer!

  • mylifeishell's picture
  • In reply to UncleKevin
    m.c.trader's picture

    BCbanker:
    Anyone want to touch on the legality of those sites?

    creditderivs, "There's not normal distribution is stock price in hour trading" - this may be true, but wouldn't you agree that there is a 50:50 shot of that stock going up or down in an hour? If you can call these things considerably more than that than you must kill it on the street. Or is that too much EMH?

    Not a 50:50 shot at all, it's completely Chaotic, there's a million different things controlling the price of that stock. Remember Chaotic motion and Brownian Motion are entirely different things.

    In a black box, yes, it is either above or below the current price, which implies 50:50 but thats not the case. Looking at the Level I and Level II spreads makes it pretty clear where the stock is going to be in an hour, throwing basic stats out the window.

    Using something you'd learn in Statistics 101 is not going to help you make money in these kinds of contracts, they are way more complex, remember the other principal of statistics 101: less time = more uncertainty.

    If you're stupid enough to chance $500 bucks on this shit trade off news and Level Is and IIs on your PA.

  • MarkyMarkWahlbergWasAwesome's picture

    Just saying, this thread kicks the shit out of just about anything I've seen on WSO in the last like 3 months.

    ------------------------------------------------------------------
    "I just want to be a monkey of average intelligence who wears a suit. I'll go to business school!"

  • UncleKevin's picture

    mctrader, I'm not clear on your conclusion. Are you saying that different demand at different price levels can show you which direction the stock is going in the next hour? Do you think you could profit from the binary 1 hour trade?

  • m.c.trader's picture

    I think you can out play these guys, yes.

    I just don't think the upside justifies the play, and I wouldn't advise anyone to go for it, because you have to really pick one or two stocks each day that you are sure will be up or down at x-time due to something happening off the exchange, and study their inter-day trading before placing a bet, don't do it at 9:30 when the markets open.

    Any option for greater than 2 hours is a different story and I wouldn't play that game. If you've spent enough time as a market maker observing how the Quote systems tell you where a stock is going to be in 30 minutes to an hour you can play this game and probably clean a profit.

    Everyone was quick to jump on this as an impossible game and a scam, but you can't over simplify a derivative contract with one-dimensional Brownian motion and expectation value; stock price, ESPECIALLY given how volatile the market is today, is not that simple and never will be.

    That's why all the Math and Physics PhDs are in a few places (Ren Tech, Optiver, Citadel, Shaw), and those places are making the most money. We don't simplify pure math for aesthetics, and we don't jump to conclusions using processes learned in our Undergraduate Freshman courses.

    Wall st. needs a serious quantitative make over, or we can only expect more poorly valued derivatives and over simplified algorithms that will loose someone TONS of money in the long run.

    If any of you still in college have the chance, pick up a Math minor and get to know your professors. Talk to them about how crazy they think it is that people are using math to do things like was done in this thread, it'll really change your perceptions of Quant. Finance.

    If any one wants to chat more about Math or Physics feel free to PM me, I'd be more than willing to talk to you about both fields and answer any questions you may have about my posts on this thread.

  • FXTrader's picture

    http://www.wallstreetoasis.com/forums/summer-analy...

    M.C.Trader on May 6th, 2010

    "I've got a good question, and hopefully some of you have experienced this:
    I'm a grade ahead and as a rising senior will only be 20 all summer. What do I do when it comes to to "go have a drink" I mean obviously I drink, and obviously everyone around me drank in college or high school before they were 21, but what if I get shut out of a bar, get carded, etc, etc. Is it better to not go out, to get a fake ID, or.....grow out my beard and where a hat and sun glasses and a trench coat.
    F me in the A
    Any advice?"

    M.C.Trader, before you continue speaking as if an expert on the matter, I suggest you explain which desks you've worked on, in your awesome career thus far as a 20 year old who still has a year left in college.

    There are three of us on this thread who have all worked on FX Exotics/Equity Derivatives desks (some of us are returning as fulltime analysts/associates). I just think it only makes sense that before people approach you for further discussion, you qualify it for them.

    I mean I'll be upfront, everyone knows Revsly works at Credit Suisse, CreditDerivatives at Morgan Stanley and I'm at Deutsche Bank. So please, come clean.

  • m.c.trader's picture

    I've never sat on a desk, I never said that I did. All I do right now is research, and this is what my research has been in.

    I'm not the only person out there who feels the same way, and most academics will say the same things that I have, even the ones that teach Quant Finance at big schools.

    Miami has one of the best undergrad Physics departments in the country, we wrote the book on computational physics (literally), I'm doing numerical research in Brownian Motion, fractal randomness, diffusive systems, and DLA clusters with the Physics and Math departments. I'll be interning this summer at a MM.

    I really stand by what I said from a pure mathematical stand point, and I'd be more than happy to chat with all of you guys about it.

    I may find this summer that I don't even like finance and just get a pure PhD in Math and Teach.

    Again, if you wanna chat PM me I'd be more than happy to share with you some of my research and debate all this, but it's off topic for this thread. And I do encourage everyone in college to take the path I did and get into the hard sciences and Math before they get into Finance.

    I think Wall St. would benefit from having more people out there who understand the stuff, and that's not to say that either of your three don't, I don't know anything about you guys.

    That's my story, and I've never lead anyone to believe anything else, if I did it was maybe because I do actually know what I'm talking about. You don't have to be a trader to know these things, academics probably no more than Traders ever will; hence my reference to the above firms and how they are filled with academics and people with backgrounds like myself and are making tons of money.

  • Revsly's picture

    I'd be happy to read some of your research, send it along. I'll save commenting until I have an idea of what you're talking about.

    To be fair though, all of our banks are stocked with Math, Physics, Statistics, etc PHDs, so I don't think that's much of an issue.

    Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
    -30 Rock

  • In reply to Revsly
    m.c.trader's picture

    Revsly:
    I'd be happy to read some of your research, send it along. I'll save commenting until I have an idea of what you're talking about.

    To be fair though, all of our banks are stocked with Math, Physics, Statistics, etc PHDs, so I don't think that's much of an issue.

    I agree, I know there are, but there is this perception out there that those people are told by their MDs to make models 'look' a certain way, whether that's the case or not I have no idea, but that is the stigma that firms have gotten.

    When I get back to schools next year I'll be trying to get published a couple of times, so hopefully I can get my stuff out there, I'd be happy to send you some of my stuff now.

    Apologies if anyone felt accosted, I'm still a bit indoctrinated having been only on the Math/Physics side of things where I'm told that this stuff is "black magic" day in and day out; I'm sure that I'll see that change after working this summer.

  • FXTrader's picture

    Good, let me describe my background so you can see that you are exactly where i was in 2004.

    2001-2005: Bachelor of Physics: UChicago
    2005-2007: Deutsche Bank FX Exotics Analyst
    2007-2010: UChicago MSFM (Masters of Science in Financial Mathematics)
    Starting July 2010: Deutsche Bank FX Exotics Associate

    Let me explain something to you, our clients are the exact clientele (quant, PhD traders) you are referring to. Who do you think buys our exotic options? (better question, who do you think is pricing the options?) We know exactly how they trade and what they look for.
    And I can tell you, that hedge funds do not buy overpriced digital options, look at level 2 spreads and try to arb us. You know why? because we are the ones who see the flow deeper than anyone and even we wouldn't be arrogant enough to say we know where the price will be in an hour. These things are VERY dynamic.

    Speaking as an academic returning to the desk, in reference to your quote "academics probably know more than traders ever will".
    Relax son, there's a reason academics teach and traders trade. Not everything in the textbook applies on the desk. I can attest to this and I certainly hope that's the first thing you learn this summer. The ones who do make the successful transition from the academic realm to the desk learn this very quickly (I count myself among them).

    M.c.Trader, every model you will derive from first principles has to be adjusted to account for the realities of the market. Heston-Nandi models of volatility are a classic example.

    There's a reason our desks make "tons of money" as well. Because our equally brilliant sell-side quants are here working day and night to ensure that once we find the arbitrage-free value in the academic world, we can adjust it for the real-world then mark it up to make a profit. So please, dont act like people on the exotics desk are art history majors who talk a good game to clients.

    A word to the wise, do not take that hard-nosed academic stance into your internship, it is a turn off to someone who has to breathe these markets in concrete terms (not some 10-page proof) day in and day out. You'll learn a lot if you drop the academic defense, trust me.

    I hope its clear that I'm not biased, I've seen both sides of this argument firsthand. And my 3-year MSFM was quite annoying at times because I'd spent 2 years on the desk and realized that so much of what you are tought needs to be "fudged" or you will get killed in the business.

    if YOU have any questions about how this really works, give me a shout, but seriously go in with an open mind or you wont enjoy it

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