Rates of Interest

The Beginning

In order to understand the world, one has to turn away from it on occasion. ~Albert Camus

This is the beginning of my blogging/learning expedition. I am embarking on becoming professionally engaged in the rates, credits and FX markets. I have been attempting to learn how to trade for over 4 years now, specifically since the summer of 2008. It has been a humbling experience to say the least. I didn’t even know what short selling was when I started, a typical retail loser. I started out in equities as most do, and quickly realized that it just wasn’t for me. In my mind the amount of work that has to go into one equity isn’t worth the amount of work and risk involved, fundamentally speaking. I made a little profit in my first dip into trading. Then in 2009 I moved on to FX, I found it more interesting and I had come to find out during my first semester in college how much I really enjoy Economics. So why not? Totally bombed that endeavor. But hey, that’s part of the process… Right? Of course it is. I kept plowing little amounts of money into that little micro-FX account and I kept bombing it. All good though it’s still open with about $25 in it.

After my the first 3 semesters in college I had to go work in Afghanistan, as a civilian, due to losing employment stateside. I am an individual with responsibilities so I had to work, so why not there? The money was good and that gave me plenty of time to get my math skills on par for when I got back to school. Take advantage of the time I did. I read a ton of books regarding the markets and math. The trading stopped and I attempted to immerse myself in fundamental knowledge that I was lacking. Come 2010, my year overseas was done and I decided to transfer out of college in PA to move back to NYC. The institution in PA was a million times better academically, so it hurt me a lot, mentally, to come to an institution that focused more on sports than academics in NYC. Needless to say it was not Columbia/NYU. It was greatly reflected in not only in the curriculum, but also in the professors at the institution. Anyways, the goal was to come to NYC and network my behind off into a hedge fund. Did that, not in the space I wanted, but I did it. It was a healthcare equity L/S fund. I learned a shit ton. Mouses are not needed for computers, valuation isn’t everything all of the time, be nimble in your views, I really hate equities, and that I hated being an analyst a whole lot more. This all happened after I got to the new school in NYC during the summer of 2010. There was this little “investment club” at my school; I went to a few meetings, but they were talking about equities. However, a lot of these guys traded equity derivatives, something that I had not dabbled with before nor thought of ever trading at the time. A new door was opened. I then began to knock that stuff out and put it in the knowledge bank as best I could. Still far from an expert though, given that I ended up not making that a sole focus. Anyway, there was this guy that started to come to the meetings, but he traded futures and was trying to learn about options. This was the first time I had ever heard about futures and he explained it lightly. Not enough for me to have any interest in it since I was already engulfed with learning options and still had school stuff to do.

At this point in my collegiate career I had changed from Finance to Math, because as I mentioned earlier the b-school faculty was below sub-par, relatively speaking. The workload for a Math major is ridiculous, and there is no cutting corners in that subject, so I felt I was better off if I was to attempt to get a job on the Street as a hedgie and not be from a top school, along with my networking abilities. Come the summer of 2010, I had been networking hard and I had made a few contacts. I was able to work a few interviews. One at a prime brokerage and one at the hedge fund, which I ultimately ended up taking. Thing is, at the prime brokerage interview I was asked if I was familiar with futures, not for the position, the interviewer just wanted to know if I knew about it. I told him not really and he recommended I look into it. I told him I would. He told me how you could make tons of money and all of that, but fact is I just enjoy the markets in general. The money is a way to keep score. It’s all a matter of how you rack up points.

Anyway, this is where it begins for me. I took his advice and looked into futures. This opened up a whole new world for me as far as the markets go. It was really what I had been looking for as far as finance and economics goes. I opened up an account and started by trading oil and silver mainly, this was February 2010. I had a broker that I assume most rookies have, TOS. I have always been pretty good understanding geopolitics and how it plays out in markets so having a thesis for oil and silver at the time was pretty easy given all that was happening at the time. The problem for me in trading has always been execution. You have to remember I have been doing this all by myself this whole time, this is not taught in schools, and I have never had a trading mentor. Trading has been a “stick you foot in the water if you want to” type of thing for me. I always have been the one to make the correct calls on fundamentals but have had a hell of a time executing. This was a lack of understanding technicals, which I started to learn during the same time that I started to pick up equity derivatives, but I must say that I am very fundamentally biased with my views. This can be a bad thing I came to find out later in December 2011, a story for another time.

I blew up my 1st futures account with TOS, after flipping my money almost 3x. It was bound to happen in hindsight, given the way I’ve been learning this trading process. After I did this is when I began to understand the futures markets, somewhat… The structure of the contracts, how they are used by specs and commercials, the implied leverage,etc. I didn’t last 4 months trading that account I don’t think. Come summer 2011, I’m still playing analyst at the L/S equity shop and I can’t stop thinking about how I blew up my account. That had been driving me ever since really, and I started to put school on the back-burner. I became engulfed with the markets and the trading process. Eventually, there came this guy to the shop that was looking to start a branch out fund as part of the fund, so an arm of the fund so to speak. He would call out his trades as a habit, and I started to ask him questions, he would answer and this is how I began to put the pieces to the puzzle together. I started to figure out what I had been missing in my trade execution just from asking simple questions. He traded spoos (E-Mini S&P futures), this is what I reverted to in order to get a process down. Something that I was lacking come to find out.

It was a high volatility environment and I didn’t understand that. So eventually I’m killing it and not understanding that the VIX being above 30 has something to do with that. I was getting the hang of day trading and thought I was the shit because I was keeping my losers small and my winners were huge, but that had everything to do with the volatility (vol). In other words, a 4 point move in spoos isn’t a normal occurrence within 15min in a market with the VIX <25. Anyways, I was killing it from July to pretty much December 2011 paper trading, and finally opened up a real account. I couldn't make a bad fundamental call. I opened up a new account with a different broker in November, had cheaper commissions, flipped my money 10x, and life was good. I did this in 6 weeks, mind you. It was meant to end badly, I didn't really understand market structure at the time. So short covering of the Euro future became the stake in my heart. It shrunk my account from 10x to about 4x. I didn't understand what happened because the Euro was supposed to go to zero and that trade has never not worked. Haha what a rookie I was. And still am in a million ways. I feel that I have come a long way, but know that I have only begun. I engage in conversation with various individuals that I follow via twitter. I am able to inquire about various things on top of being able to learn from what they post in 140 characters or less. A very fair proposition, in my opinion.

That's a little about me and where I come from trading-wise. I have eventually moved away from trading spoos, oil, and other priducts and now focus mainly on rates and currencies (ccy). I think that credit markets are important also if I plan to trade those the aforementioned two not only professionally, but successfully. For example, today there was a rally in Spanish government bonds. Why? Well there is something called the Bond-CDS basis, which is the CDS spread of a bond minus the bond spread, I will go over the specifics in a future post as I am still learning this material also. The key here is that arbitrageurs take advantage of the basis when it is negative; i.e. when a bond is trading cheaper than its protection, the CDS, you buy the bond and buy the protection to lock in a "risk-free" carry. You can read more about it here, this is where I first learned about what the ‘basis’ actually meant.

So in short, I will focus on US/UK/GER/Eurodollar rates (T-Complex/Gilts/Bunds futures, options, yield curve accordingly), FX (futures and spot for now, as well as swap spreads among other things that I’m not sure of) and credit (CDSs, Swaps, etc) markets, along with fundamentals and technicals of curse. I will be posting my journey of learning all of this material here. It’s time to get serious. Hopefully you’ll join me and I can help those who want to learn also. I look forward to feedback and suggestions as well.

Thanks for reading.

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