AMA: Managing Partner at a Options Trading Firm

Morning guys and Happy Friday!

I'm currently the managing partner at a Chicago based options trading firm. I've been here for five years. Prior to this I was a Trading Analyst and then Trader at a large Chicago based prop firm.

Ask me anything! The weirder the question, the better!

Region: 
United States - Midwest

Comments (96)

Jul 6, 2018

In whole honesty, do you think there is future in options market making considering how competitive it has become?

Jul 12, 2018

I'd say the business model is in an extremely difficult position right now. Ten years ago you could definitely make money just being a traditional market maker. By that I mean just being on the bid and offer of whatever the prevailing market was, and not looking to take a specific position.

Today, I'd say the business has changed to the point where "market making" is more a cover for directed, risk-seeking operations. What I mean by that is, you represent yourself as a market maker to brokers so you can see all the order flow, but ultimately you're looking to put on a specific position.

The "future" in options trading is going to be further automation and application of algo strategies that where once only applied to futures markets. Without getting into too much depth on that, I'd say this is becoming more possible because of the amount of automated trading. Kind of a positive feedback loop.

Jul 12, 2018

what do you make of big players leaving the options business last year?

Jul 13, 2018
remylebeau1337:

Today, I'd say the business has changed to the point where "market making" is more a cover for directed, risk-seeking operations. What I mean by that is, you represent yourself as a market maker to brokers so you can see all the order flow, but ultimately you're looking to put on a specific position.

My thoughts exactly, except I have come to a conclusion that in order to make meaningful amounts of money you might as well be asking for markets instead :) That's why I am a PM-ing instead of running a prop book in a smaller shop - you get to direct more capital and it's less competitive (since you're not under pressure to produce Sharpe of 3+).

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Jul 6, 2018

Perfect timing! First of all, thanks a ton. I'm still in B school and I'm definitely looking for a career in the buy side. I'm strongly considering working for CTA upon graduation. I decided to get some skin in the game and started trading on a retail options account. Naturally, I've been looking into building my knowledge on trading options/fx/futures . I've noticed anything online options trading related is litered with furu, technical fibonacci BS. Where could I start building a solid foundation with options trading? What should I be focusing on to get ahead ?

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Jul 12, 2018

CTA meaning "Commodity Trading Advisor"?

This is just one opinion, but I'd say the first step is to start thinking in terms of implied volatility. Instead of looking at strikes and options prices and trying to predict what an underlying might do, I'd start looking at the implied vol of at the money options and decide what you want to do from there.

I know ETrade has an option screening tool that lets you search for specific options chains based on implied volatility. Be careful using that platform to trade however, their fees are absurd.

My advice would be to find an underlying you think will be volatile (could be a currency, commodity, whatever...) and buy a at-the-money straddle. They try and scalp the underlying based on your changes in delta every day or week.

The easiest way to learn is to start doing, just be careful with how much you're risking.

Jul 13, 2018

Would you be able to point me in the direction to further understand this strategy? book video commentary whatever. I'm Very NEW to option trading / trading in general I come from a PE background so it may just be the terminology. Could you give commentary regarding scalping the underlying? Is that just taking a position long or short on the underlying?

Jul 7, 2018

How transferable are skill sets between somewhat non-related products in regards to trading seats? For instance, if you came in with a background in commodities, how likely/unlikely are you to make the move to a TA role in equity derivatives, fixed income, forex etc.? Do these lateral moves happen often, or are you locked in from the start?

Lastly, how heavy does your firm (or from any of your work experiences in Chicago shops) weight coding skills over advanced finance knowledge (option theory, greeks, vol pricing, VaR/risk metrics)? Is it more worthwhile to sharpen the latter or focus on developing coding skills coming from a non-CS/engineering background?

Thank you for doing this!

Jul 12, 2018

To the first question about lateral moves, I'd say they are fairly common in your early twenties and get harder as you get older. If you're in a larger company (Peak6, Belvedere, DRW, Citadel, etc...) it's fairly common to move desks at least once. Maybe 1/3 new hires will have been in two groups after a few years. (Just making these numbers up, but I think they're accurate).

It obviously gets harder as you get more experience. Same reason as in any other industry, you become more expensive and it's easier and cheaper to train up a fresh 22 year-old from a target school. Also, your network tends to shrink as your former peers leave the industry. In your 30's, I'd say it's more common for people to move from a trading role to a risk management or general management role. Less common to go from being a commodities person to a fixed income role.

From my experience, CS and coding skills are and will be far more important going forward. I was a finance guy in college, and I learned more in the first six months on the job than I did in 4 years of undergrad. Bottom line, it's pretty easy to teach options and risk to new hires. Teaching someone to be a good engineer is far more difficult. I'd focus on that.

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Jul 7, 2018

I have some day trading experience (+1.5yrs). My plan is to read The Options Playbook by Brian Overby then start looking for safe strategies that can be utilized by some with 5k in capital.

Questions:

Any advice what strategies I can look into and how do they differ with larger scale strategies (like the ones your firm does)?

Am I doing it right? Is there a better way to learn options?

Is there a way to combine python coding and options tradings?

Thanks for doing this. SB'd

Absolute truths don't exist... celebrated opinions do.

Jul 12, 2018

I haven't read The Options Playbook, but based on the pictures on Amazon it seems like an okay tool for learning structures and break-evens. Like I said to another WSO member, I'd focus on starting to think in terms of "Implied Volatility". If you don't know what that is, it's basically an input into the Black-Scholes model that is the defining term on whether an option is "cheap" or "expensive".

I'm a firm believer that the best way to learn anything is by risking your own money, and 5k (in the grand scheme of things) isn't a ton. So if you lose it, you're not going to ruin your life or anything. I'd say start taking some risk. Be careful about paying commissions though. Try and find a platform with low fees.

As far as coding goes, I'd highly recommend learning Python. I see a lot of firms using that in various capacities. Combing coding and trading (in terms of automation) is a huge project. It can be a massive undertaking. I wouldn't recommend trying to automate anything when you're starting out. It's kind of like learning to code by trying to build an MMORPG. There are much better ways to go about it.

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Jul 7, 2018
  1. What are the most unusual backgrounds of people you've seen come through your prop firms? Do you see that continuing as the industry matures?

1a. Follow-Up: Do you know of many people who have come in at a very junior level with S&T experience? I feel I have a "normal" background (STEM double-major at a Top-5 school, few years experience in S&T in technical products), but because I'm not straight out of school or actively managing a book myself just yet, it still feels I'm in a weird zone of experience, and most of my friends in the industry said they're not aware of anyone coming from BB S&T. I'm happy to break new ground, but I find that hard to believe and I'm wondering why you think that would be, if that's the case?

  1. Can you comment on the degree to which different strategies attract different types of people (for example options market-making vs. ETF arbitrage)?
  2. Do you think more new firms will continue to be in Chicago/New York, or do you see new shops possibly opening in other cities (i.e. SIG opened in Philadelphia mostly for a founder-specific reason, as I recall)?

3a. Follow-Up: Why would someone prefer to trade in New York vs. Chicago vs. elsewhere in the world? I understand the historical reasons regarding the exchanges, but I'm not sure if there's a huge difference in the ecosystems. My roots are in Chicago but I like New York a lot, too.

Thanks for doing this.

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Jul 12, 2018

Unfortunately, I've only met one high ranking partner at a trading firm that had a traditional blue-collar background. The stories of guys starting in the mail-room and becoming CEO like Ace Greenberg just don't happen. A lot of times you hear "old-guy stories" of starting trading copper futures out of their dorm before becoming a hedge fund mogul. It sucks to hear this, but the only way that works now is if your dorm is at Harvard, Stanford, or MIT and you have a 3.7 GPA to go with it.

As far as your background goes, I don't see any reason it would be a hindrance if you're trying to move to a prop-trading or buy-side position. As long as you're willing to take a reasonably junior position, it shouldn't be a problem. I think the key is to network and try and make contacts. Sending resumes and cold-calling just doesn't work well, in my experience.

With regards to personality type, I'd say market making can be more high-touch and involve meeting with brokers occasionally, definitely speaking with them over the phone or IM regularly. An ETF-arb strategy would be close to fully automated, and the team running it would probably function more like a software company than what you would envision as a "trading" firm.

I still see Chicago & NYC being the most common places for firms to set up shop, however if I had to pick a city where teams would relocate it would be San Francisco, due to the depth of coding talent there. I've never been a fan of Susquehanna, so I don't put much weight in anything they do. Just a personal thought.

Being a Chicago guy I'd love nothing more than to go on a wild tangent about why Chicago is better than New York, but in the interest of time I'll say it just comes down to personal preference. Chicago is growing as a tech hub in the United States and I see a lot more tech based businesses moving here.

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Jul 12, 2018

Thanks for doing this AMA! I am enjoying it.

Why don't you like SIG? I was unable to land an offer there and I am curious why you dont view them highly. From my perspective, it seems as though their edge is perhaps very reliant on technology and infrastructure.

Do most successful prop trading firms these days have some type of firm-wide edge, or does edge mostly come down to individual teams and individual traders?

Jul 8, 2018

How is experience from same asset class but different markets valued in your firm?

Where do you see the increasing automation eventually taking the industry? Do you believe that within the next five years the job will mostly be done by machines and one or two 'traders' per desk to supervise the algos?

Array

Jul 12, 2018

Most firms are always looking to add groups that make money. It doesn't matter what market or asset class or product or whatever. A track record is what sells. So if you have one, you should be golden.

It seems like market making operations are heading to full automation, but I don't think that means a necessary reduction in head count. The shelf-life of a profitable algo isn't forever. Markets dry up, traders adapt, and algos that were once a boon can become losers. The job of the quants and traders is to perpetually come up with new ideas.

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Jul 12, 2018
remylebeau1337:

It seems like market making operations are heading to full automation

Is this across all assets (not just options)?

Jul 8, 2018

What are the top 3 S&T desks that feed into options market making? Hardmode: can't name any vol desk

What are the pros and cons of options market making when compared to traditional BB S&T?

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Jul 12, 2018

Not sure what you mean by the first question, but the pros and cons of option MM vs traditional S&T is the same as buy-side vs. sell-side. In option market making you can make a hell of a lot more money, but the stress is near constant. In S&T, if your customer loses everything, you tend to have another customer that is doing well, so either way you make a commission.

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Jul 12, 2018

Thanks for the response. My first question was asking about which desks on S&T you think are best for an eventual lateral to an options market making prop shop, not including vol desks.

Jul 12, 2018

how is options MM any different to options desk in S&T?

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Jul 9, 2018

Best piece of advice you'd give to someone wanting to pursue a similar career path?

Jul 12, 2018

The two hardest parts of a career are getting your foot in the door, and having an exit strategy. In between those two points, life is a lot easier. I would say the key to both of those is networking. I think I read somewhere on this site that life after college is more like high school than college. And that's very true. Instead of fretting over whether you have a 3.6 or 3.7 GPA, you should be much more concerned with maintaining friendships and contacts that can help you down the road.

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Jul 9, 2018

What trading strategies would you use if you had to trade by yourself at home with your own money?

Jul 9, 2018

I too would like to know. In addition, are there any books that really helped you get started? Thanks in advance.

Made ya look

Jul 12, 2018

Just letting you know I did respond to these, it's been a couple days.

Jul 12, 2018

Tough to say. If I can get around this question I would advise you to first get a job trading someone else's money. Make them take the risk for you to learn how to be profitable.

If I have to actually answer it, I'd recommend learning how implied volatility works and then finding cheap out-of-the-money options on an underlying you think will have a large move.

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Jul 12, 2018

Been trading with this exact strategy for the past two years -- helped pay for my undergrad education. Thanks for this AMA.

Jul 9, 2018

What do you think of buying VIX options right now?

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Jul 9, 2018

Short the VIX..... duhhhhhh

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Jul 12, 2018

I definitely wouldn't sell them, haha.

I do like it. Things are getting pretty weird almost everywhere.

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Jul 19, 2018

Im really hoping people didnt take my advice serious... Its a troll meme

Jul 9, 2018

How do you like your eggs?

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Most Helpful
Jul 12, 2018

I like you!

Short answer: over-easy.

I think everyone should know how to make some decent chilaquiles. It's probably my favorite dish, of any meal. If you have a cast-iron skillet and your oven has a broiler, you're golden. Buy a rotisserie chicken on Friday and pull the meat and refrigerate it Friday night. Saturday morning mix tortilla chips, salsa, and chicken in the skillet, then top with chihuahua cheese and diced onion and throw it under the broiler until the cheese melts and has some golden brown spots. Top with cilantro and diced onion (again) and sever with two eggs, over easy.

If you were out last night and there happens to be a potential love interest in your bed the next morning, they'll love you forever.

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Jul 9, 2018

Hi, I am an undergraduate interested in S&T. what do you think are the necessary skills/internship experiences to start out in this industry?

Jul 12, 2018

10 years ago, a good resume was 75% finance related, 15% CS, and 10% other competitive interests. Now it's closer to 65% CS, 25% finance, and 10% other.

Don't know where you are in your career, but I'd focus on learning to code, demonstrating some interest in finance, and networking to meet people in the industry. Make friends with people a couple years older than you who can help you down the road.

Jul 11, 2018

Because you are a managing partner, does that mean that you are personally putting up the capital that the prop shop trades with?

Is there a typical path for a prop shop trader to become a partner of the firm? Is this a result of staying and being profitable for many years?

I have seen traders leave the equity option trading firms for BB management or similar market making seats at the banks. Have you also seen people successfully transition from the prop shops to the banks? What strengths or skills enables these people to be successful in their transition?

Array

Jul 12, 2018

Yes, I personally put up a large portion of the capital we are risking. We also have revolving lines of credits with other financial institutions.

I wouldn't say there's a traditional "path" to partnership. Things get a lot less transparent a few years out of school. Also, partnership "purges" do happen. I know of several people that were partners in large trading firms or hedge funds that were forced out. You certainly aren't "set for life" once you make partner.

However, I would say that making money and demonstrating vocal leadership are the two most important factors. I think the mistake most young guys make is thinking life is like an RPG, where if you check all the boxes and do all the right things you eventually become King, Lord, Head of the Mages Guild, or whatever.

It doesn't work like that. You're dealing with people, and they have to want something from you to let you into the circle. You need to be indispensable.

People constantly flow from trading firms to hedge funds to BB trading positions, so don't think that you're set in any one silo. Like I've said to other members here, networking is key.

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Jul 12, 2018

I really hate to be "that guy," but it's supposed to be "AN options trading firm, not "A options trading firm." Come on, guy.

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Funniest
Jul 12, 2018

I would expect nothing less from the guy working in Audit.

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Jul 12, 2018

It's just such an obvious error it blows my mind how you didn't catch that beforehand. Do better there, bud.

Jul 12, 2018

Do you think if there is a room for non-algorithmic traders in future?

Jul 12, 2018

Definitely, but it all comes down to how well you can sell yourself. Generally speaking, the more complex the products, the more difficult it is to automate. So, being a basic futures trader is pretty much not a possibility. But, running a relative value fixed income / CDS book is definitely possible.

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Jul 12, 2018

What's your favorite MMORPG?

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Jul 12, 2018

Great question!

To be honest, there's about a 12 year gap in my MMORPG gaming career. My favorite all-time would be Ultima Online, which came out in 1997 (Long live Lord British!). After that I mostly played action RPGs like Diablo (online) or Might & Magic 6, or solo RPGs like Oblivion and Skyrim.

Recently, I got back into the MMO genre with The Elder Scrolls: Online. It's okay. Good community of players who are generally helpful and nice to play with, but the game has some mechanics I don't like.

What should I check out?

Jul 13, 2018

Did you ever try a game called Tibia I think that was based on Ultima - I wouldnt start it now though I have not played it in like 10 years but Ive heard it went serious downhill

Jul 12, 2018

Hi, first off thanks for doing this! Currently working in a financial consulting internship as a rising senior Econ major. I was wondering if Econ majors ever make it into s&t out of school or if people ever pivot from consulting?

Jul 12, 2018

Econ majors definitely make it into trading right out of school, my advice would be to bolster your resume with anything related to computer science or programming. Even just learning a language like Python on your own would be great.

Pivoting from consulting would be difficult. I can see it happening in your first year or two, but after that it would get increasingly difficult. Like anything, who you know is more important than what you know. Make friends and drinking buddies while you're in college that are going to help you down the road.

The middle-road would be to try and get a job in Ops or as a Business Analyst at a large trading institution like Citadel. Then try and move to trading or Risk Management.

Jul 12, 2018

are yall hiring?

Do you ever feel burnt out with trading/or you aren't accomplishing as much?

Any hobbies that you enjoy to take your mind off of work?

Jul 12, 2018

We're always looking, but it's extremely difficult to find people that you simultaneously believe will make money and are also trustworthy. It's a lot like dating, when you're taken (have a successful job) everyone wants you, as soon as you're single (unemployed for whatever reason) nobody will give you the time of day.

Do I ever feel burned out? Yes, all the time. But it's about learning to manage it, much like having a chronic illness like anxiety or depression. It never goes away, but it can be managed. Obviously, it tends to be much, much worse when you're losing money.

I was at my worst in my mid-20's, now I'm in my early 30's and it's not nearly as bad. I find that meditation and being outdoors help me a lot. I have a couple apps on my phone ('Headspace', and 'Stop, Breathe, & Think') to help me remember to meditate daily. I'd also recommend doing something outdoors on the weekends: hiking, climbing, skiing, snowboarding. Doesn't matter what, just stay away from screens and try to be around positive people. Isolation fosters depression and burnout.

Jul 14, 2018

Honestly that sounds like a real bummer of a job. Do you actually like it? Also with all the emphasis on coding I guess that's a large part of your work? Or it used to?

Jul 12, 2018

PM'd, thank you.

Jul 12, 2018

delete

Jul 12, 2018

Do you wet your toothbrush before or after putting toothpaste ?

Jul 12, 2018

I wet my toothbrush before putting on the toothpaste. I'm not a goddamn barbarian.

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Jul 12, 2018

Also are you french by any chance? If yes, what do you prefer between Pain au Raisin or Pain au Chocolat and what is your favorite wine. If not then whats your favorite beer?

Jul 12, 2018

What do you think is a good aim for someone who starts out on a repo desk? FI isn't my first choice, have always had more interest in the algorithmic or quantitative side of things, however I don't quite have the background that's quite necessary for that, hoping to self-study my way in. Is likely to get pigeonholed to FI after starting in repo? Or is there a bit more opportunity to try to jump product classes in a prop firm vs. a bank or HF? I suppose they're all different, but would be interested in hearing your thoughts for someone who starts off in that role.

After seeing you speak about burnout - wondering if you live downtown, in an outlying neighborhood, or in the suburbs. Living in the city for even a short while has already started to grow old, difficult to clear your head & relax often times. Also difficult to enjoy being a car enthusiast. Seems a lot of people I've met in the business choose to live farther out precisely to get away from the extra energy that comes along with the city when not at the office.

"When you stop striving for perfection, you might as well be dead."

Jul 13, 2018

I think it depends on the nature of the company you're working at. Some larger banks have Repo desks that exist solely in the treasury operation and aren't really considered "Front Office". Other firms, usually smaller, combine their overnight funding operation with their short term rates trading. In these groups, Repo traders are very much considered Front Office in the same way any Delta One trader would be.

If you're in the first group, step-1 would be to find a mentor to get you up to speed on what a prop trader does. Then start coming up with some trading ideas and "soft-pitch" them to your mentor or traders you have a good relationship with. By that I mean, bringing them up in casual conversation. "Hey, did you see where this 2yr-5yr-7yr fly settled yesterday?"

If your peers already view you as a "Trader", that makes it a lot easier. The key, again, is finding a mentor to help you out. Most people are caught up in their own worlds, trying to figure out their next move. They're not worried about yours. So just studying and hoping to get noticed isn't going to happen. If your firm has a fixed income algo operation, start chatting those guys up. Make friends, invite a couple out for beers, always buy the first round. Generally, I'd say bigger companies mean better chances to move from one group to another. Most will have internal transfer policies. If you're not sure, try talking to someone in HR about how it's done.

I live in the city, but in a quieter neighborhood on the north side and go running along the lake most weekends. I would never live in The Loop or River North, or something like that. Too loud, too much activity. It would drive me insane. If you're you're still single and in your 20's I definitely wouldn't move to the suburbs. I'd say find a quiet street in a quiet neighborhood (maybe west lakeview, near the brown-line). I absolutely struggled with the noise and burnout when I was in my 20's, took me a long time to figure out what worked for me. I listen to guided meditations on the L to and from work each day, and run the lake on weekends. Works for me.

Jul 17, 2018

Thanks so much, greatly appreciate the insight.

My firm is quite small, so I suppose moving around could in one sense be easier...thinking more prop firm, less bulge bracket bank. What you'd describe at the end of that first paragraph is essentially how it works.

I think, as you say, finding a mentor will always be the important part in jumping from one point in your career to another. I suppose it's a lot easier once you're already inside as well. Much harder when you're still on the outside just trying to get your foot in the door.

River North is basically a giant bin full of drunk millennials, just can't do it, I agree. North side has always been appealing, I'm in old town now and I do like it. But I miss having some semblance of a yard. Used to live in Lakeview both south towards Lincoln Park and north practically next to the stadium, and I liked it quite a bit. Might try to get back there someday too.

"When you stop striving for perfection, you might as well be dead."

Jul 13, 2018

I left a longer reply as well, but this seems like some good advice:

https://www.wallstreetoasis.com/forums/how-to-go-f...

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Jul 13, 2018

What do you think of starting a career in risk management vs. trading? Does risk management have a better/more stable outlook than starting out on a trading desk, at least in your space?

Jul 23, 2018

I think starting a career in Risk Management is a great option. Probably more stable than a job on a trading desk, but still puts you in a position to move up into management down the road, if that's what you're looking to do.

Either way can work. I know guys who start out trading for a few years, then want less stress and move to a middle-office, or risk management role.

Jul 14, 2018

Tell us more about your background.

Jul 23, 2018

Went to a Big 10 school, studied Finance, got my first job with a Chicago trading firm. Stayed there for 5 years before starting off on my own.

Jul 15, 2018

I'm going to ask this here instead of reading echo-boxed responses from previous posts but is point & click trading completely dead in the institutional side?

Jul 15, 2018

whats the institutional side?

Jul 15, 2018

May have caused confusion there. I just meant traditional S&T @ at BB, or a legit PT firm with the right capital, infrastructure, etc. Not one of those bucket-shops that make you deposit money, and pay for "training." I've been told that these gigs are really just market-making now, and the math tests are extremely difficult when screening. Doesn't seem like the traditional, directional naked chart trading behind a screen.

Jul 23, 2018

Not necessarily, depends on how you can sell yourself and if you have a track record. There's a more detailed response up higher.

Jul 15, 2018

were you in a fraternity? what was your best time during college?

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Jul 23, 2018

I was. Absolutely had some awesome times in college, none of which I want to detail here, haha. Honestly though, despite all the parties and nights going to the bars, one of the best times I ever had was during a massive storm that kept everyone home on a Friday night. My friends and I just had a few drinks and sat around talking about deeply personal stuff. It's strange how you can spend so much time with a group of people and come to realize you don't know much about them.

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Jul 15, 2018

Which firms are the biggest in options market making? Virtu seems to be big everywhere else but there--any idea why that would be?

Here is an article that talks about firms exiting options market making. Do you think that this will cause spreads to widen? Especially if volatility returns to normal levels.

Jul 16, 2018

More of a winner takes the all. Citadel and SIG are big in equity options. Optiver and IMC for CME options (mostly index). I am very confident those 4 companies made a lot of money this year, mostly due to the XIV squeeze in February.

Jul 23, 2018

Not sure who's the "biggest", but the usual suspects are here:

http://www.traderslog.com/proprietarytradingfirms

Jul 16, 2018
Comment
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Jul 23, 2018
Jul 23, 2018