00:37:27 · Alex Micalizzi
[00:37:27] S2: Yes and no. I think there is still a market. There is way more liquidity in the US capital markets than anywhere else. And looking at this from the lens of trading in Hong Kong and Australia, there are real two, three, five year equity markets that are hedgeable. I would say ultimately what drives issuance is the direction of the market. I would say if we do go sideways and there's less order callables or we go down, you're just not going to get the demand for more or historically demand tails off. And that does also create a very interesting dynamic in the market. So the example of, I think we moved it from a one year trade to a five year trade. So the dynamic that we're seeing in the market is we've got typically with the US registered, we've got three to five year maturities with expected life of two years, you're selling two years. If the market goes down or the worst of goes down, the chance that this goes to five years becomes a real thing, right? And so all the vegas there. So that dynamic will mean there's no new issuance, but I'm now short this two year trade and I never had Vega there. I used that position as a proxy for the 5U. And so that term structure also changes where you can get the stuff that's depressed in the market having a higher value because you've just got your short hedge on and now you've got exposure to the 5U. And again, conversely, we get markets go back to all-time highs. I'm just left short the 2U and that's another reason it can go up. And when we look at this stuff and we model it, we call it, you know, peak Vega.
00:39:15 · Joe Weisenthal, Alex Micalizzi
[00:39:15] S1: So what happens if like, all right, people, you know, again, we're in this bow of like, oh, it's the AI, boom, is it coming to an end or something like that? What happens if we really get some real, I mean, these moves aren't that big yet. Semiconductor ETF, I guess it's down, I don't know, maybe 10% from its peak or something like that. It's not that big. What happens if we're like, wow, you know what? We're really going to reprice the AI trade in a meaningful way for some theory, the ROI is up there, whatever. What happens to these products if we're like, all right, we got some moves here? [00:39:50] S2: So if we get really large moves in terms of, again, the client has, in effect, there is a directional component to this trade, right? They are short of put. So in extreme situations, in these cases, there's $ 100 potentially at risk. And there's a point where, depending on the type of put or how it was structured, that the dealer can be on Instead of being long gamma because of this put, it's really a put spread. I'm on the other side of the spread because it's gone too far. Now that's another Greek word just introduced. I'm now short gamma, which means that I'm more susceptible to market moves and I exacerbate the market moves. I have to buy when market goes up and sell when market goes down. That's gamma. Big short.
00:39:50 · Alex Micalizzi, Joe Weisenthal, Tracy Alloway
[00:39:50] S2: So if we get really large moves in terms of, again, the client has, in effect, there is a directional component to this trade, right? They are short of put. So in extreme situations, in these cases, there's $ 100 potentially at risk. And there's a point where, depending on the type of put or how it was structured, that the dealer can be on Instead of being long gamma because of this put, it's really a put spread. I'm on the other side of the spread because it's gone too far. Now that's another Greek word just introduced. I'm now short gamma, which means that I'm more susceptible to market moves and I exacerbate the market moves. I have to buy when market goes up and sell when market goes down. That's gamma. Big short. [00:40:37] S1: Do you see like, all right, let's say a bunch of people bought these notes that don't take any hit until they're 40% down or something like that. Are there things that you see in the market when like a bunch of these things are 38% down and they're getting close to that barrier or whatever? Are there fingerprints on the market? It's like, wow, it looks like a bunch of structured notes. We're getting close to some of these levels. What would I expect to start to see happening? [00:41:06] S2: In all fairness, we haven't really seen a down market where those books have been there. We see it on the knockouts more. Because that's probably, it happens once every three months rather than once every five years. But the concept is the same. So it's a digital, it's a call spread. [00:41:22] S0: Yeah.
00:41:22 · Tracy Alloway, Alex Micalizzi, Tracy Alloway
[00:41:22] S0: Yeah. [00:41:22] S2: And either this product is going to survive and go on for at least another three months or it's not. So the fact that it's a put spread or a call spread, it depends what side I'm on, whether or not I'm long or short gamma. So the same thing on the put, if it's a knock-in put especially. Depending on which side I'm on or approaching it, you get a gamma profile that can be short. That you being the dealer. Yeah. And so- What that means is you can get exacerbated moves around those levels as a result of being close to those levels and having this binary outcome near those levels. So we see it often on the knockouts just because there's more of them and we face them more. But yes, in a period of these things are down wherever the strike is, I think we said 40%. As we approach it, you'll start to deal a short gamma. And then when we're on the other side of it, you'll get the same sort of aspect. [00:42:20] S3: Which is more painful, the slow decline or the big overnight fall?
00:42:20 · Tracy Alloway, Alex Micalizzi, Tracy Alloway
[00:42:20] S3: Which is more painful, the slow decline or the big overnight fall? [00:42:26] S2: That depends. I would say the virtuous cycle is that the product markets go up and we get new trades and everybody's happy because there's a coupon. Both of your scenarios, there's many ways to die and that slow grind down. And again, it depends on your hedging and what you've done. can be painful because we've got this dynamic of hedging with two, left with five, wrong hedge, volatility is going lower, the skew is flattening. That can be painful. And what can also be painful is, hey, I've hedged and I described a put spread or call spread and I've just done an outright position. So locally I'm hedged, but on a large move, I'm not because my call spread or put spread only gives me X amount of value, whereas the thing I've sold has value beyond that. So there's a scenario where that's horrible too. And it really depends on, again, how these things have been hedged. [00:43:32] S0: I have one more question. [00:43:33] S3: Some of these products are very creative in both their design and their hedging. Do you have a favorite that you like to point to and go, hey, this was extra creative?
00:43:44 · Alex Micalizzi
[00:43:44] S2: Yeah, I'd say a popular product now, so we talked about the worst of, we talked about daily observations, and we talked about what an auto callable is that we observe it, and the worst performer has to be above that level to knock out. So one of the more creative auto calls we've seen is one with a knockout auto call feature. So say you've got three stocks, and you've got observation dates that are daily. You can have one of these stocks... that rallies 20% on day one, say the other two are down 10%, it's now considered knocked out regardless of what happens next. So then you've got two names left and the first stock is down 30%, kind of irrelevant, but the other two, or just let's say another one goes up, it's gone. You're now got a position where the original stock, which was up 20%, is now down 40% and the stock A, If it just rallies a little bit, the whole product disappears. And this thing is way down, like the stock that was up 20 is now down, you know, 50%. It's going to be like, it's going to have real put value, but that put value is all destroyed if this last guy gets knocked out. So I now have this, this way in the money put, which can disappear very, very quickly. And so I've got this massive vol of vol position where If everything just rallies now, it's done. I need everything to fall. And it creates a really interesting dynamic. And I think it's what we're seeing in the very front in single stockings.