Billions: Solving Taylor's liquidity challenge with Quantitative Trading

This BILLIONS deep dive is about market liquidity. How do you execute a trade that is 14 times the size of the average daily trading volume? To solve the challenge I interviewed Joe Wald, an entrepreneur in electronic execution and renowned expert in algorithmic trading (currently co-head of electronic trading at BMO Capital Markets). He explains the liquidity issue in the stock market and how to solve them. Full interview: • Algorithmic Trading De...
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Financial concepts in this episode:
👉 Market liquidity
👉 Algorithmic trading (algo trading)
👉 Liquidity Risk
👉 Derivatives
👉 Trading volumes & Bid - Ask
TRANSCRIPT FROM JOE WALD
The marketplace today is highly fragmented and trades in. Very small size. So average trade size on an exchange is probably a hundred shares or less. And the average order size of an institution is, 10,000 shares
Electronic trading and algorithm trading is really the methodology in which institutional clients leverage their access to executing a trade. To put it simply institutions tends to need to buy or sell large amounts of stock.
When you've got a fragmented market where you've got multiple places where you can execute and you also have high-frequency trading trying to, get an edge based on what they're seeing in the marketplace. It becomes an incredible challenge for an institutional client to be able to execute their orders without signalling or creating a lot of market impact or creating information leakage.
Using different quantitative strategies or different benchmarks to be able to execute that in an efficient and positive way for that client to get a great outcome.
An institutional client that's looking to trade electronically to execute a large block it is leveraging a strategy. Depending on what they're looking to do potentially a liquidity sourcing strategy, that's going to, work the order based on a quantitative kind of, arrival price kind of strategy. It's also gonna look to see if there are any large blocks of liquidity that take place in some of the dark pools or some of the venues that are at midpoint.
So what would happen if Axe Capital was a client of Joe’s and was passing the order to his team?
Now we've got this order. We understand the client's objectives. They've chosen a strategy of ours that they're going to use and, it's our job to make sure that the strategy performs optimally and that, we're picking the right venues and the right order types and watching what's happening in the marketplace really closely to make sure that we're executing as best we can and ultimately delivering a great outcome for the client.
ABOUT THE BILLIONS SERIES
Emmy® and Golden Globe® winners Paul Giamatti and Damian Lewis star in a complex drama about power politics in the world of New York high finance. Shrewd, savvy U.S. Attorney Chuck Rhoades (Giamatti) and the brilliant, ambitious hedge fund king Bobby "Axe" Axelrod (Lewis) are on an explosive collision course, with each using all of his considerable smarts, power and influence to outmanoeuvre the other. The stakes are in the billions in this timely, provocative series.
ABOUT THIS CHANNEL
FintechOrama is a channel that helps you discover and understand the world of fintech and modern finance
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Podcast Channel / @investorama_podcast The Fintech Files
#Billions #liquidity #riskmanagement

[@sedditguy1836]

Kudos on being so passionate to learn about finance even in face of criticism. I really admire it.

[@InvestOrama]

Your comment has made me think deeply. I think it's the justified criticism of finance that made me want to share. Because "it's too complicated" should not be an excuse (like it was during the 2008 crisis). Makes sense?

[@sedditguy1836]

@@InvestOrama Absolutely! I personally wouldn't criticize someone harshly. I'd rather be helpful. But, those who are harshly critial simply help us at the cost of their own mental peace. It's better to cash in on it and fill our gaps of knowledge. Noone knows everything about finance. Even Jamie Dimon didn't know what were CDOs when a reporter approached him at a baseball game in 2007. Hence, every time we find out something we don't know, instead of feeling small, it's amazing to cash it as an opportunity for growth.

[@jaywantjagtap9186]

Fix the music vol mate, its distracting. I like your content

[@InvestOrama]

Thanks for the feedback

[@frankchuck3398]

@@InvestOrama I second his comment. The music is distracting. Go for simple atmospheric music (with no beat) and lower the volume.

[@InvestOrama]

@@frankchuck3398 Thanks a lot for the suggestion. I will take into account for the next one. I'm not very good at picking music, but I followed suggestions about lofi hip hop on this one kzbin.info/www/bejne/m2TSdHqarbRkd6c (and lower volume!)

[@frankchuck3398]

@@InvestOrama Yes, the music in that one works well. It's there as white noise but doesn't distract.

[@Sapientiaa]

@@InvestOrama music is too loud and distracting. It’s ridiculous.

[@Machireddy]

One strategy I have seen predominantly in my old company, is they create liquidity to pump it above 40(as in the video) day till 41, seeing massive volumes many enter trade that's when algo offloads in small bunches, and whenever price reaches 40 again it pumps with large volume of fake orders creating false push and dumps. It's not a single day job but happens over a period. Catch is they won't sell until sufficient volumes are present for the day above ur price. So sometimes u see recommendations on news suggesting to buy on fresh breakout, instead retail is stuck while institution is out. Good content by the way

[@InvestOrama]

Nice but if you have already 5m stocks how much more do you need to buy to bring it to 41, then sell?

[@Machireddy]

@@InvestOrama let's say u wish to exit @40 and ltp is near to it, how much can u offload of ur 5million before raising flags and alerting SEC or SEBI about ur transactions. Consider the price to be brought near breakout and pump the price further, u will be surprised by the number of people entering the trade even as they know it's risky to do so.

[@johnmonrow9981]

This is market manipulation.

[@InvestOrama]

Good point...

[@frankhu5418]

I really like how u actually got an algo trader on to discuss!

[@InvestOrama]

Thank you! That's just what I do!

[@rakeshwasnik9327]

I like your content. Please cut down on the background music or increase your voiceover volume

[@InvestOrama]

Much appreciated thanks I thought I had worked it out but I need different vol parameters

[@InvestOrama]

Don't like the audio? Use captions! RESULTS are you like the external experts and I need to lower the background music! Expect more of that coming soon (i.e. more guests, less background music)

[@rakeshwasnik9327]

Yes but please the background music vs voiceover volume

[@saib7231]

Bro plz teach S1 ep1 intro deal of Bob axle rod I didn't understand clearly.

[@InvestOrama]

@@saib7231 You've come to the right place, I've got 2! This one's about the deal itself kzbin.info/www/bejne/nJPFdHiMlqdoe8U

[@InvestOrama]

@@saib7231 This one's about how Axelrod brain works kzbin.info/www/bejne/qJutl4Cjbr6KrqM

[@karenandrews4224]

Guest expertise is a welcome addition

[@judyl.7811]

4:00 fragmentation is you need to look for liquidity in many places. 4:15 dark pools: facilitate block trading. ...

[@InvestOrama]

Any questions - let me know please

[@wongzehang2506]

Finally i understand this scene! On that note, could you cover the natural gas scenario? That one where their systems got hacked?

[@InvestOrama]

Sorry where is that scene? Or do you mean real life events?

[@wongzehang2506]

@@InvestOrama If I recall correctly, it was season4 episode 4, where a natural gas plant was hours away from exploding.

[@InvestOrama]

That's amazing I didn't know. There was a real hack recently. Let's see if we can do something with that.

[@wongzehang2506]

@@InvestOrama Hell Yeah!

[@lilgee2530]

@@wongzehang2506 whats the name of the seria ?

[@mr.goldfarmer4883]

This is probably why there are so many predatory moves in the market. The number of false break outs or stop hunts is just effing STAGGERING. But even so if one takes a look at the volume spreads and internals, you can deduce what is happening. Just like the most recent false break out of the SP500, it was quite predictable.

[@InvestOrama]

Predators like fragmentation

[@parzivalcreations]

You are doing a great job here! Don't mind the haters! Keep it rolling.

[@InvestOrama]

Thanks my friend

[@fychannel851]

I just found this channel hehe. I love billions and finally I can relate everything in the show

[@InvestOrama]

welcome on board hope you enjoy the rest of the episodes as well

[@fychannel851]

@@InvestOrama yeah. I just started watching. I regret not buying tesla in season 2. There's a cameo on tesla stock which is only 200 usd =(. Now it's even more

[@InvestOrama]

@@fychannel851 we all do, but I also regret not selling at $1100 (got a couple of $tsla videos)

[@Flamemanjr]

Hey man love the videos and I want to know, when is the course going to be finished?

[@InvestOrama]

Thanks. Have you signed up? June (a ton of work before that!)

[@valeenoi2284]

As a non-trader or someone who's into QT or market much, I've always wondered how these big whales unload their large amount of shares. Like let's say I have $2 billion worth of crypto, or like Elon Musk needing to sell $10's of billions worth of Tesla stock. Obviously, they'll probably do it over a few weeks or a few months, but then on the third day, everyone would probably discover their shrinking position and take them to slaughter house. So in that case, what do you do? Find a few big whales, institutions, investment firms, etc. and sell them big blocks on lower price off the exchanges? What if they get a hint from each other that this is your goal and end up again taking you to slaughter house? Fragmentation and algorithmic trading (whatever that means) sort of intuitively makes sense, but what exactly is that AT anyway? Or one should ask, can you provide an example of it?

[@InvestOrama]

Lots of good questions, thanks! For now here is a video on Elon musk's trading that may answer some of them kzbin.info/www/bejne/mYe9h56qi9eDq80

[@rockefeller13]

Been waiting for the answer to this problem

[@InvestOrama]

Me too haha I didn't know the answer when I posted the first one

[@karenandrews4224]

Lol I knew it would have to be a private block trade at those volumes! Great video

[@InvestOrama]

Boom!

[@Voracle]

No, this doesn't solve it at all. That's just saying that you push it through a contractor and have them deal with it. You still incur the cost. They might not take the job, or realize that the canyon is too large. The solution here is to go one step deeper and enlarge the volume pool. To move these shares you'd need to convolve multiple correlated share performance. This won't work for an island, but if the business has inputs and outputs, it should correlate with others, especially if it is part of an existing sector. It is possible to risk hedge the ripples if you control the waves, and shift losses against gains to move the volume. Analogously, it is the paper clip problem.

[@InvestOrama]

Love the fact that there's still a debate about this. I made a second video about this kzbin.info/www/bejne/nmKod5-omdJkr5I but maybe I need a third!

[@harrybergin9201]

Two speed range accrual ?

[@InvestOrama]

sounds interesting

[@andyr359]

ive always wondered why more funds dont just buy puts ahead of liquidating a big position. they could literally make a ton especially if they do it on an expiration date like a friday afternoon. is there regulation against doing this? say you buy 41 puts expiring in a few hours and then put a limit of 39 on your sell order for the original position. dumping the stock all at once will for at least a few minutes increase your put position by probably 50- 200 percent, and you could put a limit order on that put position to get that spike up quickly. yes you will lose some on dumping your original position all at once but the premium spike on those puts will go bonkers. you could easily manipulate the market doing this and almost guarantee a big return. i actually guarantee ackman does this all the time after listening to him talk over the years and him pump and dump shit on tv all the time.

[@InvestOrama]

Interesting point. If they are doing it - they probably won't tell us about it. It also links to the point that Joe Wald is making: market fragmentation. That makes it easier to manipulate the market

[@tirexgignn]

When you buy puts, it's the same effect as selling stock. Because the market maker who sold the puts to you would be effectively long the stock. He would have to go into the market to sell the stock to hedge his position, pushing down the price of the stock. So you buying puts would push down the stock the same way as you selling the stock.

[@InvestOrama]

spot on - making a video about that

[@lucassherbrook211]

This^. It’s all about Delta hedging.

[@gregorympearson]

Sell deep itm calls expiring asap?

[@InvestOrama]

I think the key is to not send any signal to the market until you execute. And how much premium would that get you?

[@camvacations-2067]

Would liquidity still be an issue with blockchain technology? The trade would settle instantly using Blockchain.

[@InvestOrama]

I like very much the suggestion - blockchain could bring a lot of improvements in settlements ... but not the liquidity. If there aren't many people willing to trade you can't improve the liquidity by improving the settlement

[@madzzzey]

The background music is too loud, kinda unnecessary.

[@InvestOrama]

Thanks for the feedback - kinda mess it up

[@binoyd13]

Love your videos!! Can you share the name of song/music you use in your videos in the background?! I loved it in the Ben Kim video

[@InvestOrama]

Blunt - yt audio library

[@0d3gree0]

Excellent content!

[@InvestOrama]

Much appreciated!

[@cap00]

Hi, if I wanted to study this in Uni what course would best fit trading?

[@InvestOrama]

I see you are already subscribing to the right channels! My guess is that trading is becoming harder to get into as a career because robots are taking over but going for something quantitative would be a good bet.

[@raghavkapoor3227]

The financial market course would fit best. But this very advanced stuff so you’ll need to read and accumulate more knowledge outside any college course.

[@win-algo7783]

Institutional dont open the cards they look for natural or participate the vol or use vwap orders spreading order during whole day , simple 👍.

[@InvestOrama]

well yes that's something they can do on their own. Even retail platforms allow to d o that. Here we're talking about the next level, when you need to use the same techniques that high-frequency traders do across multiple venues

[@sac856]

Nice one!

[@InvestOrama]

Thank you! Cheers!

[@bhizzou]

What's the song of this beat?

[@InvestOrama]

Blunt (free yt audio library)

[@1lyf]

What show is that?

[@InvestOrama]

Can't remember either. Is it hundreds or thousands? (Maybe it's in the description)

[@deskejtx6211]

billions, you should watch it, its a very good serie

[@ddstar]

1. Call around to large banks asking if they have liquidity to sell 5 million shares. Then hang up after they say no. 2. Put out a press release on how good the future of the company is and set a high price target 3. The next day unload your shares into the frenzy (gap up for dumb retail traders).

[@InvestOrama]

Why put out a press release? I'd put it on Reddit for more impact 🤣

[@ddstar]

@@InvestOrama That'll work too.

[@AnonymousanonymousA]

10,000 shares in clear or dark pools?

[@InvestOrama]

🌑

[@AnonymousanonymousA]

@@InvestOrama dark pools evade Price Doscovery the very essence of a free market, so they bought in a clear pool raising the price the sell in a Dark Pool at a profit ... and every institution from banks to brokerages etc. Have access to dark pools everyone but retail charges, it's cheating and quite frankly slavery

[@InvestOrama]

@@AnonymousanonymousA Slavery ... are you sure?

[@AnonymousanonymousA]

@@InvestOrama everyone needs money which has purchasing power, 80% of the market trades are done in Dark Pools where the market can be manipulated, institutions can also steal our purchasing power by money creation sent directly to stocks they select as what happened during covid creating inflation.

[@trader9926]

Awesome videos man!! But lower the background music please

[@InvestOrama]

got it

[@JasonHartmanEmpoweredInvestor]

Good video but music is annoying

[@InvestOrama]

You're right. Appreciate the feedback

[@gab_borges]

music is too loud bro

[@InvestOrama]

Got ya. I love Jorge Luis, is it your grandpa?

[@gab_borges]

@@InvestOrama yes sure. The video is good, it’s just a feedback relax

[@InvestOrama]

So so relaxed and I'm really a Borges fan

[@Awais12384]

Cut the background music mate

[@InvestOrama]

gotcha - see the top comment. improved on the next one kzbin.info/www/bejne/m2TSdHqarbRkd6c

[@bretharley7480]

Ever see that scene from Scanners where the guys head explodes?

[@InvestOrama]

sorry i don't get it

[@Achilleus003]

Interesting content just get rid of the annoying background music

[@InvestOrama]

Got the message

[@thementor9764]

Try lofi hip-hop maybe?

[@InvestOrama]

yes!!! excellent idea I will try that on the next video! thanks

[@AnonymousanonymousA]

That shi* won't happen with a regular trader with *1 SHARE*

[@InvestOrama]

correct

[@cristiancorjan4587]

A very poor advise for anyone who is not an institutional investor. Dark pools are only available to institutions. What about retail investors? This is an actual question.

[@InvestOrama]

If you are not an institutional investor your amounts shouldn't move the markets. Now what if you are a million individual investors ($gme) then it could be 'devil takes the hindmost'

[@rocar38]

Darkpoools are offered by ibkr, lightspeed, centerpoint, and others.

[@rocar38]

@@InvestOrama my orders move the market but in the opposite way from me. I cannot just buy 1000 shares of apple at once on td. If price is raging it will stop dead in its tracks and turn right around. I can avg down over time. But soon as my avg price is reached the prices rejects bad. Again and again long or short. In the morning not so much cause its volatile. .

[@InvestOrama]

I noticed that trading platforms like saxotrader offer algo trading

[@TheLambo123254]

coool

[@InvestOrama]

👍

[@Alfieliu78]

Just dump it in Dark Pools, that's what Dark Pools r for!!

[@InvestOrama]

splash!

[@AnonymousanonymousA]

It won't do shi* about volume it will manipulate the price

[@InvestOrama]

that's the issue

[@atol71]

Eat money does that fill up the TUMMY???? Energy!!!!

[@InvestOrama]

Or sandwich?

[@atol71]

@@InvestOrama Energy in sandwich might be actually yer OWN ASS.... HAVE A NICE DAY

[@atol71]

@@InvestOrama AND THE LOGICAL ASSOCIATIONS....

[@mdogzino]

For educational content that music is really annoying & overpowering dude. Wholly cow

[@InvestOrama]

got it

[@colinoche]

Are you using an AI generated voice ? Great video by the way !

[@InvestOrama]

Yes - monotonous but based on my voice

[@jeffshackleford3152]

@@InvestOrama Keep the voice, I think it fits well with these types of videos.

[@thementor9764]

Your videos are top quality but audio is trash don't even mention the music one of the worst bro get a nice microphone wat is wrong

[@InvestOrama]

It's an AI voice 🤪

[@mojojojo911]

Dude. Disliking the video. Can't understand shit. Please turn the music down

[@InvestOrama]

☹️

[@mojojojo911]

@@InvestOrama ugh sorry! I took the dislike away. But can you please re-upload a video with either lower music or no background music?

[@GuitarMan1497]

Your voice quality Is terribile

[@InvestOrama]

it's me but artificially intelligent