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Add Redemption Agreement Template mark

welcome to smarter markets a free weekly podcast featuring stories from the entrepreneurs and icons of commodities capital markets and technology ranting on the inadequacies of our systems and riffing on ideas for how to solve them together we explore the questions is capitalism in crisis and will building smarter markets be the antidote and now here's your host eric townsend welcome to the ninth episode of smarter markets a weekly podcast that explores how financial markets could be redesigned and improved to better serve market participants and society as a whole smarter markets is made possible by a grant from abex technologies i'm your host eric townsend several of you have told us that you particularly enjoy our commodity legend sub series of guests who are multi-decade veterans of commodities markets and it does seem to be a curious law of nature that commodities guys almost always have interesting war stories to tell from their careers this week's guest is mbf trading founder mark fisher mark has been an active participant in commodities markets for decades and began as an open outcry pit trader we'll discuss mark's career including a war story or two and then consider how markets could be improved to better serve market participants and society as a whole my interview with commodity legend mark fisher is coming up next [Music] and now with this week's special guest here's your host eric townsend mark thanks so much for joining us on smarter markets i've got a problem i need your help solving because uh we had robert friedland come on and tell our listeners the story about playing camel polo in the snow and so far nobody's been able to top the story but i happen to know that although i've studied trading and risk management you're the only guy in the industry who uses the hudson river as a risk management tool please tell our listeners how that works well eric i'd be happy i'd i really like to know who told you that story but anyway growing up in new york there was the uh off track betting site it was called otb and they still have it in new york and otb has a slogan bet with your head not over it and one of the first things i try to instill in all the interns and new traders that we get is is exactly what's your risk reward i mean is is the bet worth taking what you're risking is it really worth what you're gonna get and especially with with with kids in the ages of 16 to 25 and i've started training people as young as 12. you know that concept to be able to bet with your head down over it is something you really need to get ingrained in their head so typically what would happen is because back then when i was in my 40s and late 30s and you know i was pretty good at a 40-yard dash because if you know a 40-yard dash is not really about running it's just about getting off the line all these young kids that would work for me would think that you know there's no way that we can lose we're going to bet bet with him on a bet and every time that i would make this bet i'd make the bet where if i lost i'd pay them money i know they wanted to go out in new york city that night they wanted to go to dinner they wanted to go someplace which is a little more how they say this risque than dinner i didn't really care but what they lost was they had to do something that was embarrassing to me embarrassing meant okay it's middle of january you got to jump in the hudson river right by the new york market exchange you cannot believe the number of people who ultimately went on to become successful hedge fund managers who work at big banks hedge funds who at one point or another ended up in the hudson river and that lesson of teaching people really what are you risking i mean is it worth what you're gonna what you're gonna make that whole that whole you know bet proposition is something that i think that i try to instill in everybody as soon as they get to know them and that's how that hudson river happened so in the example you're talking about it was i know it was like beginning of february i had a bunch of uh you know kids that really knew they thought they knew what they were doing i made them again the same stupid bet i always make of course i beat the kid that i was gonna race in and of course i had to get six kids in the middle of february jump into the hudson river right by the old nymex the new nymex building at the time of course i had to get the new york fire department that i was friendly with and a police boat to come help us and that cost me a couple of thousand dollars and probably seven thousand people who were in the world financial sign that got you know a good laugh but you know it was worth it for them it was fun for them and it actually turned out to be a good lesson for everybody involved but that's just one of a thousand stories tell us a little bit about how you got involved in this business i'm particularly interested that it sounds like you know starting a trader at 12 how did you get involved in this business and why i can already tell that helping young people realize the shortcomings of youth and recognize how to start to understand risk responsibly sounds like something you're passionate about how did that come about well i started training people at 12 because that's when i started when i was i grew up in a middle class neighborhood and i kept seeing someone who lived down the block for me come home with nicer nicer cars every month so basically one day i went to bang on his door and i said you know what do you do for a living you know i'm you know i'm marketing down the block and he said what do you care and shut the door on my face but lucky for me one of his sons that i was friendly with how she said needed help in school being tutored and everything and i went back with a business proposition i told his dad if you transfer your son to my school i guarantee he'll graduate you don't need to send it to boarding school to another school and he said okay what do you want in return i said i want to come work for you he said i'm you're 13 years old i said okay whenever i can i can't and that was my introduction to the trading floor where this gentleman ended up being one of the two largest silver brokers for the hunt brothers and my career started at 13 working for one of the two largest silver brokers during the entire silver craziness of the 70s and 80s true story now you were in the markets at that time 70s and 80s this was what you saw depicted in the movie with uh with dan aykroyd and uh and eddie murphy trading places where it's a bunch of screaming guys in a pit you know trading commodities the old-fashioned way you've lived through the transition to electronic markets i'm very curious how you as an old-school trader perceive it because frankly in my opinion as a former software designer what i see that we've done is we've computerized and automated the same old paper systems without really doing a whole lot of new innovation in terms of designing smarter markets that actually do things the old system didn't do how do you perceive this how do you see the current electronic market systems compared to the old pit systems that we used to have well obviously in terms of trading abilities obviously the people that generate code and are able to go ahead and digest a lot of data and the high frequency traders they've obviously created a huge edge for themselves as opposed to when the markets are trading in the pits but the real the backbone of these of these big trading firms off floor today and the hedge funds are still humans and i'll give you a perfect example eric if you gave me two individuals in 15 minutes i could tell you which one will be a successful trader or who will not be a successful trader and basically i i tell a funny story that i had a i had a guy that came work for me who graduated from harvard law school brilliant brilliant person but he was one dimensional he was that you know he he can only do one thing at one time at the same time there was a guy who uh was a very smart guy who was a a street vendor who ran an ice cream truck who you know would basically i could see a hundred kids go up to him at the same time to order ice cream in the middle of the summer and he could basically keep track of 100 orders at once and he knew exactly what everybody needed and he didn't get you know he was able to keep his composure he was funny he was quick and it came down to four things how quickly you can accumulate data how quickly you can analyze decide and then implement and those four steps really determined in my mind your trading career and that guy by the way from the ice cream truck ended up being a trader who ended up coming to the floor i convinced and he probably made over i don't even know something crazy over 200 million dollars trading while the guy who was the harvard genius very very smart guy ended up leaving the trading community after six months and ended up working he's a big lawyer some big firm in new york city so again the markets have evolved obviously for the pit obviously the edge in the pit is weight is all gone the edges and the pit is gone now to the people who are the fastest to the screen with the fastest to the um to the location who have the best code who are the best code writers who've got the best algo designers but there's still a tremendous opportunity for people who can manage risk who can understand who can multi-task and who can do those four steps collect information decide analyze decide and then implement the better you are at it using risk reward you know departments whether or not you can have a career in trading i want to talk about how we got to this point because i agree with you what's happened is we've gotten to the point where the the people that are most talented with respect to coding and technology are the guys that have the edge but it's not because they came and made the market a better place it's because they're using computer technology to game the market and to create an edge for themselves against people who don't have that advantage i have not seen very much innovation in this industry in terms of using computer technology to make the market itself work better than it used to what i see is automation of old paper systems and very little more than that and i frankly you know if you look at the purpose for which these markets are allowed to exist it's not supposed to be a casino that allows high-frequency traders to get rich the idea of capital markets is supposed to be to facilitate the efficient formation of capital to support the expansion and growth of business and the creation of employment and prosperity for all of society in the case of commodity markets it's supposed to be to provide efficient price discovery so that we can run the economy on all the raw materials that are needed to do it and you know what we get to is there's lots of ways i think to use software technology to make the markets more efficient at achieving those purposes for which they're allowed to exist but instead we use software technology to invent high frequency trading and latency arbitrage schemes in co-located servers that have tiny little millisecond advantages that are used to essentially just scrape money off the top without really providing any benefit to society it seems to me that the the purpose of these exchanges you know in the old days the exchange was like a utility but these days it seems that the exchanges are all for-profit businesses and they seem to be beholden to their best customers which are the guys that do the most transactions and that's the guys like high-frequency traders who have the least to do with the purpose for which the markets actually exist in the first place would you agree with that and do you think that needs to change or do you think it's okay the way it is couple things i don't really know if i would call what the machine learning systems do gaming i mean i'm not really i'm not i don't agree with that 100 percent but but you hit the nail on the head when the exchange went from not-for-profit to for-profit which by you know i'll plead guilty that i was involved in getting the new york worker exchange to do that okay the utility function of the marketplace of the exchanges disappeared because once you went ahead and flicked the switch to make these exchanges not utilities but for-profit vehicles right now you have shareholders to answer to and obviously your largest customers whoever they may be and obviously the largest customers all the hfts and the co-locators and the scrapers as you call them and so it's not that the marketplace has lost what it's supposed to be about it's that the exchanges have a new master well have you have had a new master and that's you know the shareholders and you know and the bottom line so how do you go ahead and make the markets you know better for everybody okay i mean i have some views about that but it's it's it's a much more complicated issue now when you have to answer to to not just first of all the regulators secondly shareholders and then really the market consumers or you know the beneficiaries markets really come last you said you have some ideas about how to make the market better go ahead and hit us with those what can we do to improve these markets to make them better serve both market participants and society as a whole see i think that i would i think that i would slow everything down a little bit i think that i would slow everything down you know by a millisecond or two so that people could go ahead and said that the advantage of the hfts would would be less i think that also when you look at a price on the screen like right now i'm looking at i don't know january cruise trading 46 13. it's not really trading 4613 because there's a there's by the time it's on my screen it's already delayed right and people don't realize that what you see on the screen so if people if market participants or hedgers just use the screen then with your naked eye you're not really seeing the real market especially when it gets really busy i also think that what should happen to the markets is that if i'm a buyer and i'm adding liquidity then i basically should go ahead and not have to pay to trade because i'm adding value to the market if i'm a market maker and i'm basically trading around that order well then i should be the person that has to pay more so i think that people that add liquidity should be should basically trade for free or or get paid and the people that take liquidity or the market makers or the hfts should pay the entire freight so at least in that case if i'm um if i'm a hedger or if i'm a farmer or from a uh an oil company or if i'm a um an exporter and i'm adding liquidity to the market i don't think those people should pay the trade i think it all should fall on the people who are making the markets around them well i certainly agree with that and i mean i'm on on the trading side of this you know i think that market should exist to serve society by allowing the economy to work and if guys like you and i are going to figure out how to make a buck on the side of that is fine we provide extra liquidity we help the market get better in the process but the purpose of the market should be to facilitate commerce and to allow efficient price you know the reason to have the crude oil market is to allow people who need to buy crude oil and people who need to sell crude oil to do those things guys like you and me who speculate and buy paper contracts and settle them without taking delivery we do add liquidity we're providing some benefit but the market doesn't exist for us it's just something that we can benefit from that's it but that's a tough question to answer because you know today everything is about to some degree about the bottom line so what you're basically saying is it may be time to start a uh a not-for-profit market go back to have have another exchange where how much it makes doesn't really matter you know maybe that you know just like you said for social good and social welfare but the way the markets are constructed right now it's all about speed like you said it's all about edge it's all about you know reacting and i think that's a tough sell for the mandate to revert back to what it was you know 30 years ago before these exchanges were for profit i'd like to run some ideas that i have passed you for how i think we could make these markets serve the the marketplace better but but first to set this up i want to make sure that we explain some concepts to our listeners so let's go through a hypothetical scenario suppose that you are a hard-working farmer and you go into the futures market to hedge your current crop let's say you're a soybean farmer you're going to sell soybean futures when the price is right when it's profitable effectively locking in that price for your crop so even if the price goes down between then and when you ultimately sell your crop you're going to be okay you you have essentially protected your profits so that you know you're going to be able to be a responsible businessman pay your employees meet your payroll and go to bed at night knowing that you're a responsible guy now suppose that meanwhile i'm a a complete cowboy reckless psychopath who is going to go into the the market using the same broker that you use i'm going to go in and i'm going to be writing naked calls on vic's futures that's one of the strategies that uh you know these guys that are target store managers have left their targets to our job to go and do and it works beautifully until the day that it doesn't and then you blows up spectacularly if i do that i don't think it's any surprise to most of our listeners that i could blow up my whole account and lose all my money by trading in in reckless ways like that what i don't think a lot of people and and frankly you know as a series three futures trader this is not on the test i don't think a lot of professionals know this if i blow up my account if i really screw it up really badly i can blow up your account the hard-working farmer can lose his money because another guy who's a client of the same futures broker does something reckless and stupid explain how that's possible mark because i don't think a lot of people understand it okay i'll explain that and then i'll even go one step further so what ends up happening is when a customer trades his money is deposited into a customer segregated pool at an fcm a futures commission merchant so if the pool of money that's in their futures commission merchant okay for one reason another just like you said a customer blows out and if the customers let's assume that customers in total have you know have two thousand dollars two hundred thousand dollars two hundred million dollars it doesn't matter the number and if a customer blows out and if the fcm does not have enough capital of itself to backstop what the customer lost ultimately what ends up happening is it becomes an issue who eats that loss is that loss an issue of the clearing firms that make up the you know that all participate in the guarantee from the exchange or does it fall to the customer and what's happened in certain times i mean if you look at what happened in mf global okay it wasn't even a customer that blew out it was the fcm that was trading in you know european derivatives that blew up the firm and i think the the best way to describe this is that basically when people go ahead and put their money into a commodity account they don't have cipic insurance like you do in securities basically relying on the credit worthiness and the and the amount of money that the fcm has behind it and then ultimately what does the guarantee fund pick up in terms of if if that fcm has a problem but ultimately really i think the way to address this if you really want to do this is for the exchanges themselves to have more skin in the game if the exchanges were on the hook for a large share of an fcm default number one it would protect the farmer or the customer a lot more and number two it would make the fcms pay even more attention not that they don't pay attention they obviously spend a lot of time doing it because they'd have more skin in the game and obviously you know the more skin you have in the game the more you're going to protect your you-know-what so to me most people don't realize that when you go ahead and have money even if it's in a segregated account and if you train farm futures and it's in a non-segregated account it's even less protected okay that's where that's where you can have a big issue and i think that the best way to solve that is to have the exchanges themselves on the hook to the customers of an fcm if that takes place let me run an alternative by you because i i think that i certainly agree that that having the exchanges take more responsibility makes sense but these exchanges were designed back you know when you had the trading places scenario with a bunch of guys in a room and little paper tickets you didn't have computer technology now you've already described how people have brought computer technology into these markets for the purpose of creating machine learning trading systems and so forth so they're making a buck by having that edge what i'm talking about is why not have the exchange have high-speed computers so that as soon as that reckless guy as soon as his account goes margin delinquent and he drops below his maintenance margin you start liquidating those option positions instantly you force him to buy back those contracts that he's short and maybe that blows up his account it wipes them out but with millisecond accuracy the exchange addresses that risk as it starts to threaten other people and actually takes action about it as opposed to saying the way the system works today well all you fcms you brokers and some of them are little mom and pop shops that don't have very sophisticated software systems you guys monitor this yourselves and if your customers start to blow up you can liquidate your customers but that usually requires human intervention it's not very efficient and we've seen through actual experience that it doesn't always work you get to situations where before the fcm even figures out that they've got a customer blowing up the guy's already 50 million dollars you know negative equity in his account the exchange could have liquidated those positions automatically as soon as the account went margin deficient if the exchanges were designed completely differently than they are today is the kind of change that i've just described is that what we need to get to or are there maybe you know negative aspects of that that i haven't thought of well the negative aspect of that is that under the current cftc guidelines a customer has must be given a certain amount of time to meet a margin requirement a margin call so if if mark fisher goes and you know has a margin call and i can't meet it within the time that my fcm tells me yeah then i should get liquidated on the other hand the way the law is written right now i have some amount of time to meet that margin call so the system the way the rules are set up now because i can have you know i have to the next business day or whatever to meet a margin call or they can liquidate me you know if i know i can't meet it right away you know it's much harder to put into practice what you just said because of the fact that a margin call can be met and that could take a couple of hours could take up to the next morning and and to satisfy a call so it's not that easy you know it's much harder it's a much more difficult discussion than what you just laid out i think what i would propose mark is that you'd change the rules and admittedly it would require changing some of the rules for how these markets trade but i would say there should be a requirement for everyone to say you've got to have some kind of risk management strategy which is automated so that under certain circumstances when certain things happen you're going to liquidate positions in your account and the exchange can provide a default algorithm that does that for you that closes positions in your account if they reach a certain point or if your account equity drops below maintenance margin levels or whatever the threshold is and you could have the opportunity as the customer to say hey i want to write my own piece of code i want to replace that with my own algorithm that's going to decide it's going to liquidate the positions that i want to liquidate first not the ones that that might uh you know have some other adverse impact on me but that there's going to be a requirement that any customer have an algorithm in place either a default one that's supplied by the exchange or a customized one that they create themselves that deals with a situation where their account is going below maintenance margin levels and to provide some automation for that it would be a change in the rules absolutely is that a desirable change in the rules or would you envision that maybe a different direction is needed in order to improve the market so there's an easier answer than what you want to do the answer is limit leverage right now the average futures contract has between seven you know is as much as anywhere between six and nine percent of the uh of the underlying lim if you limit leverage you're going to have a lot less blow-ups you're going to have a lot less need for these margin calls and you're going to end up solving half the problem you want to do and you could do it under the current rules there's no reason why just like in bitcoin features right now okay to trade bitcoin the exchanges require a much larger deposit the fcm is required sometimes double margin so basically there's really relatively not that much leverage in bitcoin from from the long side and if you're short side i would even require more margin so the answer to your question the best way to solve this problem is to decrease the amount of leverage that the exchanges and the fcms allow the customer to have because if you had that the blobs on the customer level wouldn't happen so often that's what i think what about providing every customer with tools that make it possible for them to set thresholds to say look if the right now we have stop loss orders that's really the only direct mechanism of risk control in terms of things that are supported by the market itself what if you had the ability for anybody to have their own piece of software their own piece of code activated as a risk management algorithm that says if there's a trigger event say margin dropping below a threshold or a certain increase in liquidity that it triggers a piece of code that the customer can either write themselves or use a default version provided by the exchange that either reduces their risk or takes other action to to hedge against a market event well i know certain fcms have have in place that if you want to they'll say if my account drops to a certain level just liquidate all at the market but on the other hand this software most people won't understand it most people will will then blame it if something negative happens to their account it's it's a much difficult much more difficult fix than what you say i think really what ends up happening is a customer who's trading has to have less leverage in their accounts and by having less leverage you have less blow ups think about do you really hear of any stock stock accounts blowing up no because it's 50 50 margin yes you can have a crash and you can have some issues right but you don't even even in the options world in stocks you don't really have the you've never heard stories like you've heard like a couple years ago when we had knocked gas go up and and there was a big problem because people were short not gas options or when people are short you know vix futures and the whole you know vix options then the whole thing blows up i think the real it's a simple answer decrease the amount of leverage that and increase the amount of margins and 75 of the problem of potential trading blow-ups will go away that's what i think what else do you see in terms of problems in the market that need to be addressed where we might be looking for ways to design smarter markets well for instance you know all the position limits that the exchanges and have said don't seem to make much sense to me if i have let's say you and i were trading our own accounts and we would set you know we shared the same office in the last three days of trading we could you know we would be able to have x amount of position limits let's say i don't know whatever if it's uh that guest we could each have a thousand lots each of a thousand lots and let's say you had a million dollars in your account and i had a million dollars in my account right on the other hand a trading firm that employs 50 people trading under one ownership structure can only have a thousand lots while 10 independent traders with much less capital can have 10 times the amount you know that's to me that makes no sense the second thing that i think has to be improved upon is you know the whole issue of speed being the ultimate decider of these you know who makes trades has to go ahead and be taken care of i think that to some degree the way you do that is there's a throttle mechanism that the exchanges can in place it's sort of like the circuit breakers that they put in when the market gets really crazy why not have the market throughout to some degree to make it i think more transparent to the average person who doesn't have the hft capabilities who doesn't have the co-location who doesn't have you know who can make sure he gets the same chance getting filled at a price as as the uh the more sophisticated money has right now what other tools if you were going to provide beyond the simple functions that exist today in these systems if you wanted to provide everybody to level the playing field in the way you're describing what else would you give them in terms of tools to you know give them a fair chance against the very sophisticated traders that we have today the problem is that any tools that you give them the more sophisticated traders are going to out sophist are going to out to you you know you can only deal with what the knowns are the knowns are speed the nodes are um you know co-location but in every market in every business people you know figure out edges because of their you know how much money they throw at the market how much money how much manpower they throw at it and that's why you see like firms like facebook and and the big and the fang stocks take over you know half the world because they have just the economies of scaling and have the mass capital so the other things that i would i would do for the individual trader okay is that recreate a market maybe where the only people that can trade in that market are individual traders right now that may be a situation where you know the market may be less liquid but you know that the only competition in that market right are people like yourself and by that way you're leveling the playing field because you know the person you're trading against is a let's say a retail trader he's not an hft or he's not a as sophisticated that you know that to some degree that that may or may not work i'm not really sure but it's everything you describe me here is is what everyone's frustrated about with the market but the solutions are not as obvious to me at least not to me mark i want to move on to another subject which i think is to my thinking a place where we really need improvement which is is you get into a lot of things that are traded in the over-the-counter market today in commodity futures there are some things that are traded on the screen is as people call it on the exchange but frankly a lot of deals really get done by you have to know somebody so if i want to buy a thousand contracts of crude oil for immediate delivery i can do that on the screen but if i want to to do what is actually a more realistic commercial transaction of buying a thousand crude oil contracts for delivery a year and a half from now you got to know somebody because there's no liquidity in the market and if you don't know the right person you might not get the right deal they might try to take advantage of you they can smell it coming if you if you're not experienced and you're not really in in the market they'll try to exploit you is there a way that we could improve the market to make those things better it's funny you say that because i've been pounding the table for the last couple of years that the marketplace needs what i call anonymous rfq or what i call can't see can't trade what that means is eric you need to buy a thousand heating oil contracts a year and a half out because you want a hedge uh you want you're a hedger for an airline or whatever it may be and right now your alternatives are go to the screen and try to you know buy them on the screen good luck doing that in the liquid market going ahead going to an over-the-counter broker where he goes out to his four or five counterparties and makes you a market which is just to those four or five counterparties or going bilaterally via swap you know to a big bank or a big institution all those threes don't really get you the best market the best market would be if if uh eric could go ahead put a request for quote in that everybody in the entire marketplace who has the capability to trade the size of the order so for instance if you put an order in for a thousand these 22 heating oil anyone with a var requirement and the margin capability who can trade a thousand these 22 can respond to your rfq and you then would go ahead and create a market where the entire marketplace could see the order you're the initiator of it the market would come in and if you if there was a bid or an offer that was good enough you'd hit it it'd be completely anonymous you wouldn't be exposed to just five people you'd be exposed to everybody and at the same time what would happen by doing this order you'd still be you know put in as a block trade so the only people that would know that you're actually the order took place that there was an execution for five minutes or whatever it may be would be the buyer and seller and this way the problem with doing what i just said is that basically you're opening up the central limit order book of all these exchanges to block trades and nobody really has done that at this point nobody wants to open up the crude oil market so that you know you're opening up the entire market to everybody yes there's a there's an rfq market now on the exchanges that's most of it's directed so that i can go ahead and you know basically get a quote from my five most reliable dealers but what happens if i'm i don't know if i'm a bunch of people that have a you know a big backing and i'm sitting in baltimore maryland where i know there is a group and i want to go ahead and compete for delta airlines or american airlines or anyone's or you know mexico's hedge business i have no in i have no idea but on the other hand if there was an rfq market which was exchange wise and my markets are tighter better more efficient i would be able to trade with delta not even knowing i traded with delta right and the marketplace would be tighter more efficient and you know seamless the the pushback of doing this if the marketplace would do embraces is that you put 85 percent of the over-the-counter brokers out of business because what would you need an over-the-counter broker for you'd be able to input your own trades you know on the screen and you'd have your audience of who could respond would be 50 times as much as what it could be now and basically what would happen to the over-the-counter market at least in futures is what happened to the trading floor in the pit when the market went electronic it'd be become a dinosaur within a couple years help me understand why the the current system doesn't seem to be used because in the cme direct platform that we have today there is a create rfq function so if you want to say hey somebody make me a market i i you know i want to buy a thousand dec 22 heat there's a way to do that but it seems like nobody pays attention to it and if you want to get that quote the only way it really works in the real world is you got to call somebody who who will make that market why doesn't that system of creating an rfq in cme direct ever get used because i think that's well first of all let's see me direct so most most uh front-end systems don't have the access to those to those rfq's i don't believe and i also think that you you'd have to do it through the tts the cqgs of the world to go ahead and create this you know especially with cqg because i know they they've been looking to do this with us for a long time right to go ahead and create this rfq that basically goes out to everybody who's got the var limit most of the most of the business that's done except in options and options is a different story but in futures right it's directed rfq business and i think to some degree right because people don't have access to the rfq function on cme direct or on ice whatever they use right it's not used i think this would have to be more of a front-end development where basically fcms would tie into cqg tt whoever else they want to use right and create this model right to allow this anonymous rfq to take place i mean to be honest with you you know cqg has one thing they can roll out tomorrow i i've been working with him on it for two years we just don't have you know the right partners to do this with but it's it's it's there it's it that it's gonna happen it has to happen because it's too it makes too much sense it's too efficient but it's going to go ahead and and change the over-the-counter market in a way that i don't think most people are ready for well it seems to me that there's something fundamentally wrong with the design of this market because the way it works today as you say you know you you call the broker you find the guy that can do that block trade and then you book the block trade in the system so the exchange is processing the trade if you book it with clearport but wait a minute why does it ever make sense for you to go buy a thousand dec 22 heat futures without giving everybody in the market the chance to see what price that's about to happen at and offer you a better price that's exactly what i'm saying i mean there's an argument making that if you can't trade to the size of the order then you shouldn't be able to see the order so like for instance if you're a 50 lot trader and the orders for a thousand lots you know there could be some noise around that so maybe you know it would be limited by the initiator by the rfq initiator say i only want this order shown to everyone who could trade my size or contribute half the size of the order but again you're 100 right why shouldn't that order be open to everyone that can trade the size and not just to the five most favored nation clients of the broker or whatever the case would be and the market's eventually going to go this anonymous rfq system it has to you know they do this in equities in europe to some degree and i think that you know all these dark pools that you know to some degree are trying to accomplish this in equities but not really the right way because you don't control the order once the order gets in but here the initiator goes ahead and is adding liquidity is looking for the marketplace and again i think that these the initiator if it was you if you were looking for the market for the thousand these 22 heating goal and you hit a bid or you took an offer you shouldn't have to pay anything the other side should have to pay everything you should be able to trade basically for free because you're the one that's actually you know hitting a bid or taking an offer you're the one that's usually the more unsophistic kind of counterparty and you're the one that's adding to liquidity and adding to what the primary function of the marketplace is supposed to be about to begin with now i would imagine that if there's a an otc broker listening to this podcast saying hey wait a minute if you do what you're describing mark what you're going to do is you're going to put the otc brokers out of business and that means you're going to lose the skill and talent that they bring to the table they have a network of guys they know who to call they can make deals happen they i'm sure at least according to them they're providing value that you're going to be forcing out a business that is going to cause as they would see it something to be lost there do they have a legitimate argument that something is being lost or if the system works the way you envision it the really the skill that they have isn't needed anymore no i think the skill is going to still be needed the skill is going to be needed for complicated option structures i think there'll be still a lot of customers that will want the broker himself to initiate these rfqs for them or to respond because they don't have the expertise in how to respond to them i think you have a lot of people's stream orders against it i think the market's going to evolve in a healthy way just like it was healthy for the market to evolve from the pit to electronic trading i think it's you know i i don't see the argument how can you go ahead and say by paying by by paying less by being more efficient by being more transparent that's a bad thing i don't think you can mark i want to ask you about what happened in the may west texas intermediate crude oil futures contract i was fortunate enough to be short on that day we got to the point where we traded to negative 37 and i suppose you could make an argument that says okay the market is broken if the price of something valuable like crude oil can trade negative that deeply or you could make the opposite argument to say no that the market is designed to find a clearing price and in a situation where storage space was scarce that was a negative price is what it took now of course that was really if you look at what happened there i think it was just a really stupid trader in china not understanding that going into the penultimate close you know long in size was crazy in in that environment is the market broken does the market need to be fixed or is the fact that it was designed to find a clearing price even if it was deeply negative a good thing i think i think that the market isn't broken i think that to the exchange's credit there was a lot of publicity and a lot of information put out by the exchange itself that because of the storage issues around around crude oil at the time that the price could go negative i mean if you were to say to anybody it's going to go negative 37 i think everyone said you have your head examined too but again you hit the nail on the head it's a matter of how many buyers versus how many sellers were left at the end of the day right and and again i i mean i can tell you stories the opposite way i'll go back up one of my favorite stories is the december heating oil story on december 31st in heating well back when the pit was open i remember the highest that heating oil ever traded was a dollar two ever the history of the contract and i was basically training crude at the time and he always you know there were some issues of delivery and ego was trading 94 cents and i went over to the heating oil pit for the last couple hours of expiration and people were trading it and you know i kept seeing brokers coming in asking for you know where's the market where's the market where where size and i can tell that there was nervousness in the market that what are people waiting for the last minute to get out like craziness and eventually there was a technical formation called the point c pivot that's that we use and the market did this so i got you know i got long a number of contracts and sure enough in the close of december heating oil the market went from a dollar up to two dollars and twenty cents but the exchange lowered all the prints to 1.70 the market went up 100 percent in a minute and a half and it changed again because people waited till the last minute how someone waits till the last half hour to go ahead you know when you have a lot of seismic seems to me to be irresponsible just irresponsible well to me the crazy part about that story was the press never really covered it everybody knew that the the oil fund in china was was long what was it 350 contracts or something just below the position limit what nobody ever seemed to ask in the press is why in the freaking world would a non-physical market trader stay long way past opex into the penultimate close and the only answer i can come up with is the the fund manager had no clue what he was doing unless he was a market maker that was experienced in the market there's no business for that guy to have been in the market none you're 100 right i mean i haven't i remember i have in my office my other office down the hallway here i still have the trading card of sugar back in the 90s when on in january which was not this which is not an active month where the opposite happened again with january when sugar was trading three cents and it was the last hour a half hour of the day and uh a broker came in and and some speculator had to sell it was stuck with a lot of you know jan sugar and they started selling the market down and he sold the market down from two and a half cents you know two called 250 ticks you know i bought stuff we bought stuff at one tick not one penny one tick from him it didn't go negative we bought it one tick and i said to myself you know i'm not gonna have a delivery issue here if worse comes to the worst is just sugar i figured i had to get a truck there and the bag had to be worth more than one tick you know eventually the market rallied 100 points so we got out but these things history seems to repeat itself over and over again where the same mistakes seem to be made by people that have no business being in the market that close to expiration well in that particular case you know the exchange i think does do a pretty good job of explaining that after opex day the reason position limits go into effect is really the market is for physical delivery traders at that point and they give guidelines they tell people when to get out that guy was running a long only basically you know speculate on the price of oil mutual fund in china and i think he just didn't get it i think he he waited till the last day because it was the last day and he had no idea that you're supposed to get out of those long positions on opex day if not sooner and um i don't know how you fixed that i mean the guy just didn't do what he was supposed to do you know there were a lot of issues with different firms that they couldn't handle negative pricing you know that their screens didn't print negative pricing you know these issues will all come out but again i think really it comes down to is if you're not a sophisticated trader if you're not a sophisticated and you're basically a passive investor you know to some degree the speculator or the or the in this case the china fund that had had no business being there why didn't they roll two days beforehand i mean what was the objective what was the problem you saw after this whole thing happened that the that the gsci index and the bloomberg index all quickly adjusted and got themselves out of spy crude and rolled much sooner so they would not suffer or could not even you know have the same issue that these other firms had i mean also to some degree now that it happened once it'll probably never happen again mark final topic before i let you go one of the things that we're looking at with this podcast is new directions that people are taking using distributed ledger blockchain technology that kind of thing you're doing a very interesting project that has to do with prescription drug coupons and blockchain how did that come about tell us all about it well when i was when i was growing up my dad owned two small supermarkets so i used to go ahead and be in charge of the coupons that were coming to the store and mailing them into getting reimbursed for them and if you know when you when you have a coupon and you cut it out of the newspaper is the coupon a security no can anyone when you bring it to the cvs or to the supermarket to redeem it they're not broken dealers and you can go right online right now on ebay and you can sell coupons and buy coupons up to a thousand dollars in value every month and get paid money so a coupon is really a nothing it it's just a it's a piece of paper that has really never been addressed by the sec or anybody at the same time in the late 80s when genentech ran into some trouble where they needed some financing they did these contingent value securities whereby they issued people securities where the speculators would put up let's say 50 million dollars and in return genentech would say if our drugs get approved by the fda you're gonna get you know x percent ten percent five percent six percent of the gross value of of the drugs that we sell so that came the idea with us is of to go ahead and create what's called contingent value coupons what they are would be basically to create instead of ico's initial coin offerings to create initial coupon offerings where biotech manufacturers that are in phase two and phase three they need to raise you know anywhere between 20 and 60 million dollars that can't get the financing to develop you know to get them passed into these drugs would go ahead and be able now to issue again these contingent value coupons that basically are sold where if these drugs get passed that the the hold of the of these coupons whether it be patients foundations insurance companies get x amount of free medication x number of doses of free medication for x period of time and what this would do is this would be a non-dilutive way for biotech firms to raise a significant amount of money this would open up the marketplace for new technologies and for to be discovered much faster at the same time in order to use these drug coupons the manufacturers would have to agree to price cap these these drugs that they're using the coupons for for the entire public for a period of five to seven years so basically not just the coupon owners would get you know free medication but everybody who's in that space would benefit because the manufacturer would go we would have a guaranteed cap on what he could charge for the drug as part of the contractual obligation of creating this drug coupon so the holy grail in prescription drugs is how to go ahead and cap prescription drug prices while at the same time still allowing for innovation and creativity and not stifling development and i think this concept of contingent value coupons solves it and by using blockchain to keep track of these coupons and the decrement and who owns them and what type of alternative exchanges holds these coupons and then how do they deliver to the pharmacies to the pbms of the world this is uh really going to be a way for us to develop and create incentives to create to develop many more blockbuster drugs in a much more efficient way in a way that will will limit the amount of um of hoarding and pricing that goes on right now think about it eric if you go to a hospital okay and a teaching hospital wants to compete for mark fish's talents a teaching hospital doesn't have 40 million dollars there's no way that a mark fisher is going to go work for teaching hospital as opposed to big pharma or to a speculative farmer who has the money but now if these teaching hospitals can issue these drug coupons this use this finance mechanism then all these not-for-profits can go ahead and enter the same space to develop drugs hiring the best talent because now they can raise the capital without having to go ahead and that they can never access before so i think this is a win-win for you know whether you're a republican whether you're a democrat whether you're a martian whether you're an alien i firmly believe this is something where technology and finance are going to solve an issue that's going to create wonder drugs that you know much faster than we ever would have done before mark for our listeners who might want to find out more about that is there a website that they can look at we're in the process of creating one there's a there's a couple of papers white papers written out about it and uh if you go to dcm.com i believe we're going to have a whole white paper out about that in the next week or two mark thanks again for a terrific interview my guest next week will be kirsten stewart who heads up the shaping the future of media department and is a member of the executive committee for the world economic forum where she leads a team working with the ceos chairs and other c-suite executives from more than 40 global media companies including google facebook tencent nbcu bite dance and more we're going to talk about the expanding role of social media in finance and in society generally and consider the influences social media had taken on and consider whether and how it should be governed listeners please help us get the word out about smarter markets it's not every day you come across a podcast with guests of the caliber you've heard here on smarter markets and we have a veritable who's who of industry legends lined up for interviews in coming weeks your ratings and reviews on apple podcasts and other podcast platforms mean the world to us as does your help spreading the word about smarter markets via word of mouth for the macro voices podcast network i'm eric townsend see you again next week for another installment of smarter markets [Music] that concludes this week's episode of smarter markets for free episode transcripts visit smartermarketspot.com smartermarkets is 100 listener driven so please help more people discover the podcast by leaving a review on apple podcast or your favorite podcast platform smarter markets is presented for informational and entertainment purposes only the information presented on smarter markets should not be construed as investment advice always consult a licensed investment professional before making investment decisions the views and opinions expressed on smarter markets are those of the participants and do not necessarily reflect those of the show's hosts or sponsors smarter markets its producers sponsors and hosts eric townsend and abex technologies shall not be liable for 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