Exploiting a trading glitch to make millions

Summary

A former junior options trader shares a gripping tale of a missed opportunity that could have earned him millions. While market making in a new product with minimal volume, he stumbled upon a rare pricing anomaly, potentially making the firm $10 million in minutes—and earning himself a $2 million bonus. Despite seeing the opportunity, his caution prevented him from pulling the trigger, leading to a $50,000 gain instead. The story reveals the high stakes, risk, and psychological pressure of the options trading industry, leaving him with lasting regret about what might have been.

Takeaways

• 😀 The trader recounts a missed opportunity to make $2 million in just seconds due to fear of risk and a malfunctioning software scare.
• 😀 Options market making involves quoting prices and providing liquidity, but new products often have low volumes, making them risky for traders.
• 😀 The trader's firm had a 20% bonus agreement where they earned 20% of profits, which incentivized performance but also created high pressure.
• 😀 The trader was cautious when a fellow market maker reversed his quotes, leading to an opportunity to profit, but did not fully capitalize on it.
• 😀 The trader made a small profit ($50,000 for the firm and $10,000 for themselves) but realized they could have made millions if they took more risk.
• 😀 The software the trader used could automate trades with pre-set conditions, but the trader failed to activate it during this opportunity.
• 😀 The fear of software malfunction and the possibility of losing a large amount led the trader to trade conservatively, missing a massive potential windfall.
• 😀 The trader could have become a 'legend' within the firm, known for making millions in seconds, but opted for a more cautious approach.
• 😀 The emotional aftermath was intense—feeling regret, loss, and questioning the decision long after the opportunity had passed.
• 😀 The lesson learned was about risk-taking: in high-stakes environments like trading, taking calculated risks can lead to massive rewards, but fear often holds traders back.
• 😀 Despite the regret, the trader reflects that sometimes in the industry, large firms with deep pockets may not even notice small mistakes, leading to potential 'what ifs' about the outcome.

Q & A

What is the story about in the transcript?

The story is about a junior options trader who had a chance to make a significant profit ($2 million) within seconds, but hesitated to take full advantage of the opportunity due to fear of making a mistake or risking too much. The story reflects on the dynamics of trading and the emotional impact of such high-stakes situations.

How did the trader make money in the story?

The trader made money by exploiting a mistake made by another market maker, where the competitor accidentally reversed their quotes. The trader took advantage of this discrepancy by buying at a lower price and selling at a higher price, making small profits on each trade.

What was the trader's bonus structure?

The trader’s bonus structure was set at 20% of the profits made for the firm. This bonus was contractual, meaning the firm was legally obligated to pay it, and the trader would receive 20% of whatever the firm earned.

What was the significance of the new product the trader was working on?

The trader was working on a new options product that had very low trading volume, which made it difficult to generate significant profits. The product required market makers to provide liquidity, and the trader's firm received rebates for doing so. However, due to the low volume, there wasn’t much opportunity for large profits.

Why did the trader hesitate to take a bigger risk during the opportunity?

The trader hesitated to take a bigger risk because they were a junior trader and wanted to protect their career and track record. They were worried that if the software malfunctioned or they made a wrong move, they might lose a significant amount of money and face repercussions from the firm.

What was the potential profit the trader could have made if they acted aggressively?

If the trader had acted aggressively and used the automated trading system (referred to as 'the eye'), they could have made millions of dollars for the firm and $2 million for themselves in a matter of seconds. The opportunity was substantial due to the other market maker’s reversed quotes and auto-reloading market depth.

What is 'the eye' in the context of options trading?

'The eye' is an automated trading tool that scans the market for favorable conditions. It is set to automatically execute trades if the potential profit (or 'edge') surpasses a certain threshold, allowing traders to capitalize on opportunities without manual intervention.

What emotional impact did the trader experience after the opportunity passed?

After the opportunity passed, the trader felt regret and anxiety, reflecting on how they missed the chance to make a significant profit. The trader was deeply affected emotionally, feeling miserable, unable to eat, and even physically stressed, punching their pillow in frustration.

Why does the trader consider this story one of their biggest regrets?

The trader considers this story one of their biggest regrets because they feel they missed a rare chance to make an extraordinary profit. Despite having the potential to make $2 million in a few seconds, they chose a conservative approach out of fear, and in hindsight, they wish they had taken more risk.

What lesson does the trader share at the end of the story?

The trader shares that regrets are a part of life, but it's important to learn from mistakes and move forward. They reflect on the dynamic nature of the trading industry, where opportunities can be both immense and fleeting, and how decisions made in the moment can have long-lasting effects.