Welcome to “From the Trader’s Desk” for the 2nd Season of Billions! The original concept of these posts was to recap of 2-3 episodes from my point of view as a trader, and to help with any confusion with “fin speak”. However, “Risk Management” was so meaty; I had to dive right in. So now, without further ado….
”Trading is gambling, legalized gambling.”
Those are words I spoke to Damianista on our first meeting. I think she asked me how I got into the financial industry, and I told her I loved to gamble, and found a way to do it legally.
How fitting then is it that we open Season 2 with Axe sitting at a racetrack! Now, I’ll admit, I didn’t know it was Yonkers Raceway. I thought it was Belmont Park, a place my grandfather would take me to as a kid. Axe tells Bach “this place made me”, and I totally understand.
My grandfather was a bookie. I grew up around betting and gambling my whole life. By the time I was in middle school, I knew all about points spreads, over/under and reverse bets. I knew you only bet a three team parlay if you were down from the early NFL games. By the time I was in high school, I was helping take the action, and betting as well. When Axe says he started looking at the board instead of the gate, “you figure out where the action is”, I knew exactly what he was talking about. My grandfather taught me when it came to betting baseball, you bet the pitcher, not the team. That’s a plan. Axe knows that without a plan, your odds of winning diminish greatly. So what better place to set his plan in motion of taking down Chuck than at place where he learned you needed a plan to win?
It should not be a surprise that someone whose job it is to buy and sell stocks would have a background in gambling. You get that same rush when you take a position on a stock as you do when you place a bet on a team, in a casino, at the track etc. You’re putting your money down on something that you believe will win. In a way, it’s a reflection of you and your abilities. “I know everything I need to know about stock X”; “I know everything I need to know about team X”. Same plan. And when your team wins, or the stock you short starts to decline, that winning feeling is the same. Is it about the money? Partly. But it’s about being right, about the winning. And Axe is nothing if he is not winning.
I think it was also fitting that in the first episode of Season 2 we have Axe telling us basically that you need to know the players, not just the game. There is a similar scene between him, Danzig and Ben Kim in “Pilot”. The theme: Axe sees what others don’t.
When everyone is finally let back into Axe Capital, they are gathered in a conference room, and Axe goes all George Patton on them!
“The entire hedge fund industry is under siege”
I’d love to say Axe is wrong, but he’s not. The hedge fund industry is going through massive changes. The past few years have seen some of the biggest and best performing managers have terrible returns. The combination of low volume and low volatility in the market has made it harder and harder to produce returns similar to prior years. When you are on average, charging clients a 2% management fee, and taking 20% of their profits, you need have great performance.
Clients are now looking at alternative investments: quant funds, passive investing as opposed to active managing, or playing it safe and going to a long only fund. These types of investments have lower fees and more consistent returns, so the outflow of money into them is hitting the industry hard.
A few definitions before we move on (all definition are in our Billions: Glossary)
A quant fund is an investment fund that selects securities based on quantitative analysis. In a quant fund, the managers build computer-based models to determine whether an investment is attractive. In a pure “quant shop” the final decision to buy or sell is made by the model. Axe Capital is more of a fundamental shop. They research companies and make trading decisions based on the fundamentals of the company (potential revenue and earnings growth, management, etc.). I trade a quant strategy, a fundamental strategy, and a hybrid of both.
Passive management vs. active management: passive management is when your investment goal is to mimic the performance of certain index, where as in active management your goal is to outperform the index. A passive approach is safer, and costs less, but you will never outperform the index. The reason active managers charge high fees is because you are paying for their expertise (and analysts) in order to get higher returns.
“Trust almost killed Axe Capital” and Axe will not let that happen again, hence all the crazy new security and crazy new rules. But, in any relationship, if you don’t have trust, what exactly do you have? I also wonder, was that “I will avoid my fate” speech more for the employees or for him? I did see a bit of Henry VIII in that scene, and not in a good way.
With the King in war mode, well who better than good old Wags to try and get some fresh ideas from the troops? (As an aside here, I have to say, I want to hate Wags, but I just can’t. That pinky ring was everything this week!). The poor analysts: buy an algorithm? No! Go to cash? No! I’ll build a model! NO! This scene was funny to me since those are the same tired, old, conservative ideas you consider when you are in a defensive position. Axe wants new, fresh and certainly aggressive ideas!
Zero Cost Collar. What? Yes, I know. Everyone except me (and other Wall Street types) all thought the same thing “what the hell is that?” That is what I’m here for! When things get in the weeds when it comes to “fin speak” I’m your girl!
Mafee needs to sell 5M shares of a stock, and he needs to get $40 a share. He tells Taylor it trades “by appointment”, which means that it is a low volume stock. If you sell too many shares at the same time and flood the market on a low volume stock, you will put pressure on it, and the price will decline. Mafee has come up with the plan to sell 1M shares with 5 different brokers (who don’t know about each other). Taylor knows that is not the best plan. It will be obvious to the brokers what’s going on, and will payback Mafee one way or another in the future.
Taylor suggests a zero cost collar strategy. This means that to protect the downside of your trade, you would buy puts (a put allows you to sell a specified amount of an underlying security at a specified price within a specified time.) and sell calls (a call allows you to buy a specified amount of an underlying security at a specified price within a specified time). It’s zero cost due to the fact that the price you pay for the put will be the exact same price you sell the call. It’s not mentioned how much the options would cost in this case (option prices vary depending on how close the strike price is to the current price and how close or far the option is), but let’s say the $40 puts Taylor suggests to buy are $1.00. Mafee needs to sell $45 calls for the exact amount, $1.00. Zero Cost!
It’s a basic way to protect any downside, as options are used like insurance. Now Mafee can take his time in selling the shares at the price he wants, not put pressure on the stock, and not piss off any of his brokers!
Now to the trained ear, I had a bunch of questions: What is the current price of the stock? What time frame are the options (month, week, etc). I’m going guess it would have made it even more confusing if Taylor had gone into more detail, but I wanted more!! 🙂
You may ask, “Mafee works at Axe Capital. Why is an intern telling him this basic strategy?” At first I thought the same thing. In reality, Mafee would have passed that order over to his trading desk, where someone whose job it is to trade stocks would have executed the trade. Also, Mafee is an analyst/portfolio manager. His job is to pick stocks based on his research. He probably knows the strategy; it just doesn’t come to mind at that time because it’s not his focus.
I do think this was a nice way to introduce Taylor (I can say this now, knowing what I know from seeing Episode 2 at a screening last week). I had read that Taylor was “brilliant”, and was slightly disappointed when I saw a basic options strategy as the evidence. But I’m proven wrong (save that because you won’t see it a lot!) in the next episode. This Lady Trader loves Taylor.
I applaud the writers for having the guts to bring in a gender non-conforming character (and actor) into the boys’ club that is the hedge fund world. We see Mafee accepts Taylor and values their insight. We know Axe eventually does as well. But can you see Dollar Bill being so tolerant? Wags? I really do hope the writers explore some of the issues a person who is different from what some think is the “norm” will have and how they react and deal with them. As a 17 year old, blonde girl wanting to work on Wall Street, I knew what it is like to have to deal with sexism. My approach was two-fold: 1. Just work my ass off and prove my value, 2. Since I knew my way around sports and such, I could be thought of as “one of the guys” and be a bit more excepted. Things are much better now than they were back then (I could tell you stories!) but it’s not where it can be. Showing Taylor deal with this type of adversity, overcoming it and succeeding would send a very positive message!
And finally, I have to give my 2-cents about the Axe-Wendy “session”. I know I’m in the minority, but I just don’t get why Axe feels he needs her! As we know, young Axe at Yonkers Raceway learned to “figure it out”. I’m pretty sure that is way before he met Wendy. His decisions on 9/11? Again, before Wendy. Axe was Axe before he met her, and I just don’t understand why he feels the need to have her as a crutch. Not to mention the fact that I just don’t believe in the whole concept of a “performance coach”. I’ve been trading a long time, and yes there have been times I’ve felt I lost my “touch”. But you know what I do? Go for a run, listen to some Black Sabbath or Iron Maiden, and even step away from trading for a day. There are plenty of ways to get off the schneid. If you need someone to motivate you in this business, you’re in the wrong business. Just my opinion.
Random observations and musings:
The hedge fund manager Wendy gives a presentation for is Todd Krakow. This character reminds me of Martin Shkreli. Shkreli was a hedge fund manager and the CEO of a biotech firm called Retrophin, but is most recently notoriously known for raising the price of a drug the company bought from $1.50 to $30. He is currently awaiting trial after a federal indictment on running a Ponzi-like scheme. In other words, slime. They way he talks, the way he looks, even his height screams Shkreli. I may be wrong. Billions writers – am I close? 🙂
And finally, I cannot put into words how beautiful some of the shots of lower Manhattan have been on this episode. It’s the place I worked when I was first starting out, and it will always have special place in my heart!