Retail traders versus Wall Street, with derivatives expert Benn Eifert

Transcript

Whenever you hear someone talking about, you know, democratizing anything and, you know, offering it to the little guy, that really has got to put your sort your put your radar up, right? That what's really going on is somebody's looking for suckers to make money off of. And I think, you know, 99% of the time that's actually the case. >> Hello and welcome to Milk Road Macro, the podcast that knows that leverage trading is a powerful tool if you're trained to use it. If not, it can be a powerful way to hurt yourself. I'm your host, John Gillan. Today is Wednesday, October 15th, and today we are joined by Ben Eert. Ben is the managing partner and founder of QVR Advisors, where he oversees the firm's multistrategy business focused on quantitative volatility and options trading. Ben holds a PhD in economics from UC Berkeley, where he also taught financial

engineering, and was previously the head of quantitative research and a derivatives trader at Wells Fargo. Ben is going to teach us a lot about the world of financial derivatives. So, if that sounds good to you, make sure you like and subscribe. Share this episode with someone who's going to enjoy it. And as a reminder, our Milk Road Macro Pro team serves up a lot of great content and alpha on macro. Every month, we drop a pro report that breaks down what's going on, what's moving the markets. Uh the last report was packed with over 50 different charts all about what it means to be running it hot. Uh so, if you want to get in on the alpha, join our pro community today. Full report is available on our site and the link is below in the show notes. Uh and without further ado, welcome to Milk

Road Macro. Ben, how are you, sir? Hey, thanks John. I'm really glad to be here. This is going to be fun. >> Okay. Well, I'm I'm really happy to have you on the show. I think this is great timing. We've we've seen a lot of cascading liquidations in the crypto markets. Um and so I want to kind of get your thoughts on some of those things, but before we get there, I thought we would start kind of at a high level. Um what is a volatility focused derivatives trading fund? Um and what does that do? What does it involve? And what value is that bringing to investors? >> Sure. I mean, I'll speak for us. I think probably every volatility and derivatives manager has a little bit different take. Um but I think the pure idea of volatility trading is that it's not focused on the direction of

underlying assets but rather on what you know what you would call higher order moments of the of the distribution. In other words, the volatility the tendency of of an underlying to move around or you know things like you know skew how much more assets move around to the downside than the upside or in crypto and vice versa. Uh you know things like this. So that are all kind of always neutral to the direction of price, which you know is a little bit unusual because most other strategies in the world you would think of as one way or another kind of buying an asset and hoping it goes up or shorting an asset and hoping it goes down or some combination of those things. And so in uh in you know volatility trading we do that but with with volatility rather. And then you know in our case I think the you know

the important concept is everything really has to do with the uh everything really has to do with the uh the nature of dislocations in derivatives markets that emerge from flows and transactions that aren't really done by arbitrage market participants that really know how to think about price. But really they're done by end users of derivatives. You know big pension funds or retail investors that are just doing stuff in derivatives markets without thinking about it. And those markets need participants that can understand relative price and understand relative value and kind of warehouse uh warehouse risk in a in a market neutral intelligent kind of way. And that's kind of long tail. So that's really what we do.

>> Gotcha. Okay. So you're not so much focused on whether something's going to go up or down, but around different kinds of market behavior and and trying to capitalize on that. Um I think that there's a a huge galaxy of things that fall under the category of financial derivatives. Uh and I know you taught financial engineering. Um, but just so our audience has a understanding of some of the basics around these things, could you explain some of the difference between like what a futures contract is, what options trading is, um, and some of the different ways that investors might want to use these products? >> Sure. You know, so a futures contract is one of the simplest derivatives and one of the oldest derivatives you could think of, you know, corn futures that farmers used to, you know, hedge their their price impact, right? So a future

is just a linear contract that, you know, gives you effectively exposure to the price of something in the future. Um, you know, traditional futures have a fixed maturity date. So, you know, here we are in October. It might be a December futures contract on corn. You buy it, uh, and effectively it's just like owning corn, except for you don't have to physically own the corn. Uh, you know, somebody else is going to deliver it to you in December. Um, a, you know, crypto kind of created this innovation of perpetual futures, which don't have a maturity date, um, but rather have kind of a funding charge that gets paid between longs and shorts every day based on supply and demand. That's a really neat innovation. you know we might talk about that a little bit later. Um so these are very simple um structures. Um you know that sort of the next level of

complexity in derivatives you would think of as options which you know a lot of people might be familiar with options because of for example like employee stock options that someone would get. But an option just gives you the right but not the obligation to you know buy or sell a security in the future at a predetermined price. And so that doesn't give you a linear exposure to the underlying. Uh so for example, you know, say Bitcoin's at 100,000. Uh you could buy a a a strike price 110,000 Bitcoin call for, you know, no for December. That would that if Bitcoin went up above 120,000, you could, you know, maybe you could buy that call for a,000 bucks or something. And so if Bitcoin went to 130,000 by the maturity date, uh you you can buy it, you know, at 120,000 for

just just having paid that 1,000. you're going to make 10 times your money, right? So that gives you a very asymmetric return profile as opposed to kind of the linear return profile of of a future. So options are very flexible instruments that you can use to achieve a lot of different kind of different objectives you might have. >> Gotcha. So uh traditionally these contracts were usually between larger institutions um and they were used by well they were used in a number of different ways but uh recently there've been there's been a much broader adoption of these and in a lot of different interesting ways. There's been some regulatory changes that have allowed that. Um but a lot of this has moved on to exchanges uh and retail traders have gotten heavily involved in this market. Um particularly in options trading as of this month um zeroday

options trading account for somewhere between 50 to 60% of total S&P 500 options volume uh which is up from less than 5% back in 2016. So there's been a huge upurge in in the amount of uh I guess like financial derivatives products that retail is trading. How did options trading and derivatives products become so popular with retail investors? what's drawn them to this particular uh product. >> Yep. So, this has been really a huge change in markets that started I think really in earnest around 2019, although some of the roots uh of it came earlier than that. Um you know, you really have had a broad-based big upsurge in the interest of retail investors more generally in kind of

aggressive trading across a lot of different kinds of products. In uh in 2019, we sort of had the first meme stock, which was Tesla. Um attracted a ton of attention, a lot of narrative around Tesla, a big kind of fan club around the company. You know, you saw retail traders showing up on Twitter with like Tesla in their handles talking about Tesla all the time and, you know, creating this big momentum surge in Tesla. And that started involving options as well as just stock ownership. um in part because options, you know, buying call options uh kind of gives you more leverage than just buying, you know, fully funded buying the underlying and and then that started to metastasize and then and then we hit 2020 hit we hit the kind of global pandemic and one side effect of the global pandemic I think

was really accelerating this mega trend, right? Where you all of a sudden you had a lot of people who were stuck at home, you know, their bosses weren't walking around looking over their shoulder and you know they could have their laptop up alongside, you know, alongside them working remotely and they could be, you know, day trading. they could be getting into investing and you know they there was the spread of a lot of um a lot of kind of social aspects of of trading right more and more um you know people getting into discords and getting into group chats and it becoming kind of a group thing right um and then you know the growth of brokerages like Robin Hood that really targeted these kind of people and you know gave them I mean in Robin Hood's case very kind of gamified uh you know trading experience with like

you know confetti blasting across the screen when you lift the offer on an option and all this kind of stuff, right? And so it it really just kind of was this freight train of a social dynamic that grew and grew, right? It wasn't just like in the oldfashioned investing anymore. It was kind of this fun, you know, it started to resembling much more like sports gambling in a sense, right? Or or this kind of thing where part of it was really entertainment. And I think it's a, you know, then you hit the meme stock boom in 2021 with GME and everything. Obviously, we, you know, we all remember all this stuff and it's just kind of snowballed ever since. >> Gotcha. So, this has been, like you said, a a relatively new phenomenon, but it has really gotten a lot of adoption and traction. Um, I have a lot of

questions about this, but I think the first thing I'd like to know is like, how has this changed the derivatives market in your mind from, you know, your your professional um quantitative volatility fund? How has this changed the derivatives market? Has this been a boon? Has there been drawbacks? What are the changes that this huge retail adoption craze has brought to that market? >> Yeah, very much so. I mean it has certainly been a catalyst for a huge increase in volumes um which inevitably is very good for you know different kinds of derivatives market participants you know so for market makers for example obviously it's highly profitable because market makers met you know they make their money on the bid ask spread and um you know and on volume and you know the more transactions are happening in the market the better um people like

us make our money on you know derivatives market dislocations and we love obviously the higher you know volumes are the more things are moving around, the more interesting trades set up for us and also the better liquidity that we have, you know, when we trade, you know, um, in the markets. And so, you know, we can get 10 times bigger positions at better prices, uh, you know, leaning into bigger dislocations. Uh, and so, you know, that's all, you know, really bene beneficial for us. Um, it's certainly created, you know, it's created a market in which liquidity is a lot better, volumes are much higher. Um, there are certainly crazy market dynamics that emerge from it. you know, things like GME, which um you know, you really hadn't seen before in the same way. Um you know, we've certainly seen short squeezes before in the market.

That's a thing, but this dynamic was really unusual and how you have to think about it and obviously have how you have to risk manage it. If you're a hedge fund, you know, long short equity hedge fund, you could think of Melvin Capital, uh where, you know, they were a bit um you know, perhaps overly arrogant about their short positions in GME and you know, the GME retail crowd really just ran them over and blew them up in a very spectacular way, right? So obviously as a hedge fund you have to think about that uh you know that potential dynamic when you're you know when you're putting on positions. >> Gotcha. Yeah. Okay. So there is uh obviously there's been a lot of changes in this dynamic but one of them that stands out the most to me is sort of what you described of like the prior way

that people used to use financial derivatives like futures contracts was to sort of like hedge out some uncertainty in and long-term operations you know industrial activity. Um and then what we've seen with some retail adoption in in recent years is much more like entertainment like gambling. Um, can you tell me a little bit about your thoughts on this? Are are is Wall Street by making these things more available to retail? Are they democratizing access to finance or are they really like setting up retail to just be exploited and taken advantage of? Like where is the balance between this in your mind? >> Yeah. So I have I have pretty strong views on this and you know it's all a continuum to some extent but um I do think that a lot of the narrative when whenever you hear someone talking about you know democratizing anything and you

know offering it to the little guy that really has got to put your sort you put your radar up right that what's really going on is somebody's looking for suckers to make money off of and I think you know 99% of the time that's actually the case. Um I do have you know a really I think my view on this is look um probably the best thing that you know your average individual investor can do to benefit from markets over the long term is to you know buy and hold equity index you know maybe some Bitcoin who knows depending on your views you know a diversified portfolio and sort of not mess with it too much and you know that's likely to have pretty good outcomes over a long period of time uh and be very low cost and there's very good products for that generally the

more aggre there's a ton of evidence across the world and across all asset classes that the more aggressive, you know, day trading like behavior that you see among inves among retail traders, like the worse they tend to do. They tend to lose a lot of money. That's obviously why brokerages make money. Um, and you really have to be careful about this. Now, that doesn't mean it doesn't suit any one individual. That doesn't it's not, you know, every case is different, right? But I think that's certainly the evidence on average. And so for me, I guess how I think of it is look um a lot of this the big boom in you know trading and uh you know across crypto across tradi um and you know is kind of fun. It's gified. It's social.

It's entertainment and that's kind of okay in a sense as long as people know what know as long as that's a shared understanding, right? It's kind of like going to Las Vegas and and you know playing the blackjack tables. I love Las Vegas. It's a lot of fun. and I kind of have my budget of like what I'm willing to lose and like everybody's having a good time and you're like having a martini and like that's great as long as like we all agree that's what it is. Nobody in Las Vegas is telling you this is like a very likely way to get rich and make generate residual wealth for your children, right? But you know Vlad Tenev at Robin Hood is kind of trying to tell people that, right? And say look, we've made option markets accessible to the retail investor. You're going to

sort of make a ton of money. This is great. We're democratizing this. You can be just like the hedge funds. And like that's a terrible narrative, right? Because by the way like options are very complicated and the technology and systems and information and skills and institutional knowledge you have to have to make money intelligently over time in you know derivatives markets is very very high bar and it like retail is bringing sort of like a you know a floppy herring to like a nuclear war and like and Vlad is just sort of serving people up on a silver platter to that. So I think it really depends on what you're talking about. um uh you know in general uh the the the narrative of democratization of fin of of finance and financial tools and stuff I think is is is more predatory than not.

>> Yeah. And I think that there's an awareness of that but maybe not enough. Um but I don't think it's necessarily I know I know you don't intend this but I I don't want to like try to single out Robin Hood for this by any means, right? I think that this has become pretty widespread. Um something that >> Yeah. Yeah. No, absolutely. But it's this is sort of my concern and one of the things I want to talk about. Um you talked about per perpetual futures contracts. Um this has been something that has been created in the crypto industry which again has been very retail focused retailled um as an industry since its beginning. Um I just explain to our audience a little bit about what a perpetual futures contract is. Um these have gotten really popular with retail. Um and many people are now

saying that this might start coming to the equities markets to ETF markets. Um yeah, just just tell our audience a little bit about what these are, why they were created, um and and where you sort of see these going, what your thoughts are on this. >> Yeah, absolutely. You know, perpetual futures are, I think, one of the most interesting kind of technological innovations to come out of the the crypto space from a from a treadpipe perspective. Um so, first let's just start with what a regular futures contract is. So, and we talked about this a little bit, but again, the futures contract just uh basically if I buy a corn future from you, it means that you agree to sell me, you know, a certain number of bushels of corn in the future on some particular date. So, call it you know, December 15th. Today's

October 15th, so in two months um and you know, I'm going to pay you pay you for that. And then of course in the future the price of corn might be different than it is today, right? And so you have some kind of linear exposure to the price of to the price of corn. Um, now if you want to just own own corn via futures for a long period of time, because there are those maturity dates, it means when I hit that December maturity, I need to do what's called rolling my futures from December into say March, which means I have to sell my December contracts by March contracts, you know, pay some transaction costs. There might be some arbitrageers who know that I'm going to have to do that and who are going to frontr run me. And so it's generally expensive to have to

do that mechanically. So perpetual futures are are this neat innovation that came from crypto where there isn't actually maturity date on futures contract. um the you know within what what there is is effectively a supply and demand driven mechanism that creates an instantaneous funding rate where if I want to buy those corn contracts or and somebody else wants to sell those corn contracts we end up meeting on the exchange there's a certain kind of balance between supply and demand at a particular point in time that drives what the that funding rate is and you know intraday maybe every hour or every you know multiple times a day the longs might be paying the shorts you know a certain instantaneous financing spread or vice versa if you know demands on the other side. So you don't have to roll contracts in a particular month like this is a you know it's a really nice

kind of structure actually that you know Trady didn't come up with at all. Um and but exactly as you alluded to so these are already uh you know these grew up in crypto but they're already being brought into equity markets and so you think of Hyperlid has a big platform that's starting to do this. Actually one of my really good friends Mattie Lit works for Vest Markets that's a Jane Street backed exchange that's doing the same thing. you know, think of starting with equity indices with like the mag seven names and the popular momentum names, you know, oil, gold, all this kind of stuff. Uh, you know, it's, I think, a really interesting dynamic and those volumes are already growing really, really fast.

You know, again, people are familiar with the product from crypto. There's a lot of overlap between people trading crypto and people trading, you know, popular technology stocks, for example. And so, I think you're, you know, you're gonna, I think this, honestly, I think that space is just going to blow up. I think that's going to be a hugely successful product. And you know, my personal view, I mean, I'm an options guy. Um, if you know my Twitter, I think one of my core, you know, simple messages to everybody on Twitter is like one, stop trend trying to trade options. This is hard, right? Like options are really complicated and that doesn't mean like there aren't use cases for options, right? But like you really have to educate yourself. You really have to be careful. There's a lot of pitfalls and complexities to options and ways to lose

money. you know, people buying call options on GME and GME going up and then losing money because like well actually implied ball was 700% and this that and the other thing and like this is complicated, right? Like a perpetual future is a really easy thing and the you know uh it's just gives you you know a a sort of cashefficient way to get linear exposure to a thing and you don't have to worry about you don't have to worry about financing or sorry you don't have to worry about convexity and gamma and theta and all this kind of stuff. So I actually think many retail investors would probably be better off, you know, trading something like a perpetual future instead of instead of trying to trade options.

>> Yeah. So I think that there's a lot of things you bring up here that I want to kind of like highlight to our audience. The first one is not just like the education that is required to use these things like learning all this different galaxy of Greeks and what they mean and what it implies for your your your option or your your futures contract but also something you touched on in your prior answer which I I forgot to highlight but um just the amount of uh backing in terms of other operational support institutional grade systems and and just the the amount of of things that goes into being able to effectively leverage these. um it does require an institution to do that and and that's one of the reasons why retail is so illquipped to operate in these these um in these markets or with these products

in a financially responsible way and I think sometimes people underappreciate that that just because they have access doesn't mean that they're necessarily equipped or educated to to properly use this uh for their portfolio management. Um so something I want to ask about here as far as per futures go. I agree this is a growing market. It's already about a trillion dollar market just in crypto alone. Um but one of the things that these contracts offer um investors is leverage and in some cases very high leverage. So we we talk about Robin Hood a little bit. There's a platform called Aster that offers uh users a 101x leverage on their accounts. Um and I've just been very concerned about this the growing use of leverage in in just retail investor uh behavior. uh how does this so in crypto the the the crypto

assets are highly volatile already and the application of leverage increases the risks to a person's uh I guess investments in that situation I'm rambling a little bit but just tell me a little bit about your thoughts on the use of leverage how should uh investors think about this especially retail investors >> yeah absolutely you know I mean leverage is is very much a double-edged sword right it on the one hand you know in lower volatility periods is when markets are trending up, you know, leverage can make you look like a hero. Um, but but the problem is leverage can wipe you out, you know, really, really quickly on the downside, right? And, uh, it really comes down to, you know, how much risk can you tolerate? How much, you know, how well capitalized is your account?

Um, you know, how are you approaching this? You know, I think we we talked a little bit, but just this last Friday, we had a big sort of leverage wash out in in crypto. And you know, part of the issue here is, right, um, you know, you might make you might use a bunch of leverage and make 10 times more money than you did than you would have otherwise in some kind of big runup, but when you're when you are leveraged, the the problem with the downside risk is you can't hold on to the position, right? So, you there's kind of this this notion of, you know, diamond hands or I'm a true believer in Bitcoin or whatever it is, right? And you're like, I'm just not going to sell and so I can ride through the volatility. And if you own an unleveraged position in Bitcoin,

nobody can ever force you out of it, right? Um but if you're, you know, if you're running a 50x leveraged Bitcoin position, obviously the whole point is, you know, relatively small move, you can get entirely wiped out and it doesn't matter how much you didn't want to sell. Like by the way, you made the decision to to that you would be forced to sell by applying that much risk, right? And that's really the danger. And I think people really have to find the right balance there. Uh it's one thing to say look I'm willing to tolerate a lot of risk but you really have to kind of do some sensible modeling and stress testing and checking around your position and are you going to be able to hold your position through you know a period of of increased volatility and you know in a lot of cases the answer is

no with the amounts of leverage that you know people will apply. >> So this uh specific incident that you you referenced that happened last Friday um this has really spooked a lot of people and really damaged the crypto markets a lot. It didn't spill over into the larger equities market. Um, you know, you talked about low liquidity environments. A lot of this happened, you know, after the close or yeah, after hours on Friday. Um, so the equities markets were closed, but cryptos traded 247. You know, we spoke a little bit about how the innovation that's come out of this and the progression of of financial derivatives has led to perpetual futures, which is something that Trady never really thought of, but is now starting to adopt. Do you think that there's a risk of something similar to this happening once these perpetual futures contracts start to come into the

the equities market and and get more broadly adopted by the Trady system? >> It it's certainly possible. You know, I mean, Tradfi itself obviously has found ways to have ridiculously high levels of leverage that have caused problems in other ways. We don't need perpetual futures for that. I think they're just sort of like another another trick in the in the bag. But um but uh you know the I think it depends. It's interesting like when you think of there were various attempts to list single name equity futures in the past that didn't really take off but I think part of that maybe was just a lot of those efforts were at a time where there wasn't as much retail interest in kind of trading and in leverage and all these sorts of things. I think it's likely to you know take off much more so now. Um so yeah I

mean I think there absolutely are risks. I think it comes down to a combination of you know education for investors and traders about like how to take an appropriate amount of risk and to risk manage more carefully you know potentially you know potentially to you know regulation around around these kind of things. You know generally I I generally am a skeptic of of regulation where it just comes down to you know letting people do what they want with their money. But I do think um ultimately the part of the issue with leverage is it can ca kind of cause these cascading waterfall effects and sort of negative externalities right and in the limit obviously if that leverage is concentrated like in the banking system it can be a big problem right because you have these you know huge impacts on lending and everything you know generally if it's just leverage

exposure for individual traders it's you know it doesn't have as much uh spillover effects but you do you do have to be careful about these things so yeah I wouldn't I would not you know rule out that there's some risks uh associated with this um but That said, you know, right now retail investors are getting a lot of leverage by doing things like selling, you know, zerodt, you know, zerodt options on single names and stuff, which is which is even scarier. So, uh, I think it's all, you know, to some extent, um, again, kind of comes back to pe people are very very interested in this casino, which is, you know, aggressive trading. Um, they're already doing lots of dangerous things, using lots of very complicated instruments that they don't understand. You know, my I think my view view on the perpetual future stuff is

that given that context, they're actually kind of simpler and safer than some of the things that are doing now. People the things that are doing now, that doesn't mean they couldn't be abused. Um, but I think it's that's kind of where the balance lies. >> Gotcha. Yeah, I appreciate the nuance on that. Um, so a question that I had and something I've been thinking about, I don't really know how I feel about this, so I want to hear what you think. Uh in equities markets, they have the concept of a circuit breaker to shut down the markets if things start to get wild and and you know, you've kind of blown out the bids and the asks. And the the value of this is it it stops the market for a bit and allows the bids and the asks to catch up and then they can sort of

restart trading and it kind of helps prevent some of these like highly volatile um low liquidity environment crashes, flash crashes like we saw on Friday in crypto. Do you think that there's an opportunity to bring something similar to that into crypto? Do you think that would be like even viable at all in something like a hyperlquid or is there that like not practically possible to do in that asset class? >> Yeah, I think there's a couple dimensions to that. Um there's I think there's likely some subtle kind of technical aspects to that question that I don't know the answer to and that you know that other people would be better to opine on. But I think just conceptually uh you know it would make a lot of sense right because part of the issue with these cascading liquidations in crypto right are that protocols have

very aggressive uh you know liquidation um mechanisms in order to protect uh in order to protect themselves and you know you get large positions being sold and liquidated at really terrible prices and low liquidity pushing things down and creating kind of a cascading waterfall. Right? Nobody has time to recapitalize their positions. You know if you had circuit breakers part of what a circuit breaker does, right? is it just puts a hold on this market for whatever it is 15 minutes or or something like that. It gives liquidity bids and offers a chance to to get reestablished. In principle, it gives people time to like get to push more money into their accounts to support their positions if they want you know all these sorts of things and just creates a little bit more order to the you know to the system. So I think from

a you know conceptual and practical perspective uh it makes a ton of sense. uh you know there may be some technical aspects that I'm not aware of in terms of how you would need to manage this you know on on chain and everything but uh but I think it would be really interesting to take a look at. >> Yeah, I would like to see some more attention given to that and then just you know having exchanges have more insurance funds um because a lot of like trady exchanges use that as well to kind of like secure themselves and their users. Um so there's I think a lot more to explore there. Um you know we talked a little bit about retail investors being educated and equipped enough to to properly leverage these products and engage in these markets. I'd like to hear your thoughts on those. But first,

the education piece, like how do you think we as a society really, I guess, or as an industry need to go about this this problem of educating retail investors about these things? Is this something that falls on government, on regulators? Is it something that falls on like product providers, exchanges? Where where does that happen in your mind? What what's that look like to you? >> Yeah. No, that's a great question. I mean so there are when when you look at educational efforts in the space by the product providers for example I mean it would really be ideal right if brokerages and exchanges um were producing a lot of good educational content and they do produce a lot of content and some of it is okay but you the problem here really is incentives

right so brokerages and exchanges make money on volume right and uh in some cases is brokerages when you think about actually the way the economics works I mean a bro most brokerages these days uh are going to generate most of the revenue from payment for order flow right so they're partnering with market makers like Citadel Securities and Jane Street and they are getting paid a certain you know percentage of the spread kind of back uh in exchange for uh in exchange for that and what that means is they're they're not only incentivized to generate the most volume possible they're also actually incentivized to generate the volume that of of a type that is most profitable to the market makers, right? And so does that mean like they're going to go and educate people in the best possible way

from like a fiduciary perspective? Like let's really help these people know what they're doing or does it mean they're going to encourage these people to do just ridiculous stupid And it turns out it's the latter and that's just like a basic function of how brokers work. And this is not new, right? This is not a Robin Hood thing. There's this is like goes all like watch Wolf of Wall Street. Like it's the literally the same thing, right? It's like from the beginning of time, all these guys want to get you to do is trade as much as you can and lose as much money as you can and that's how they get paid, right? So, you're not going to get good good educational content about this. See, like you I think some people do an okay job. You think of Tasty Trade actually provides a

lot of educational content on options and some of it is good like just teaching people what the structures are, how they work, but at the end of the day they are really encouraging you to do like all these 4x4 crazy weird option spreads that you roll every two weeks and stuff because that generates the most commissions, right? And so ultimately I think you have to look beyond that. Um you know I would you know it would be great for for government to do education but just government is rarely and I'm I'm you know a pretty I'm a pretty kind of leftwing guy. I sort of believe in government but it's just hard for like government to do a good job of doing like options education right. It's just like so far out of the core competency of what governments are ever good at. Um you know so I don't really know the

answer. Um you know honestly the biggest the main things that I do on Twitter are just are things like education. Although I would say I'm probably most of what I do is well I mean I suppose there's a combination but um I really do try to do some basic educational stuff and try to point out the pitfalls of a lot of what the that marketing content is where people are telling retail investors misleading stories about how they should be trading what they should be doing and I try to kind of be out there with content that says no like listen to this like these guys are coming after you here's what you need to think about. So, you know, I think ultimately it kind of is on, you know, people in the space who, you know, are professionals and can be helpful and want to give back, you

know, to some extent to try to um, you know, even if it's not in our direct interest. Like, I mean, that's my one of my thing. You know, people will ask, well, why the hell are you, you know, don't you want people doing crazy things and creating dislocations? Don't you make more money? And the answer is yes. But like I, you know, look, I I don't that's not the one way that I want to be making money. Like, I want to take money from Goldman Sachs. I don't want to take money from, you know, retail investors doing stupid things. And that's just just sort of who who I am. >> Um yeah, I think that's a very uh balanced view of this. And you know, I I think it's something that I'm struggling with as well is that I think we've you know, in prior generations, we had a

struggle of converting uh people who were savers into investors. And now it seems like we're we're struggling to turn what are effectively gamblers into investors. Um and it's it's a different kind of of education. I'm not sure how to skin that cat either. Um I think something I've been thinking about as well that I'd like to get your thoughts on. uh there's this notion of an accredited investor in in our society and there's it's somewhat of a barrier around access to certain financial markets. Um do you think that there's a version of that but like you know people have railed against that as well saying that that's you know limiting access and so forth. So how do you think about like barriers around some of these products or or some things that might be helpful to protect investors versus what is actually just like precluding them from

markets like what is your thoughts on that spectrum there? Yeah, again I think it's a kind of a subtle and tricky issue where um on the one hand, you know, if you if you're not an accredited investor, there's restrictions on what kind of, you know, private investments you can make, for example. Um but the trick is, you know, when you look at who who is the loudest about getting rid of incredions, they are uh you know, people who want to dump dump really lowquality bags on retail, right? Um and it's 100% every time. It's all about sort of democratizing and what but what do they want to do? like private equity firms that want to raise money from from retail investors to dump like the companies that they can't IPO for the last 15 years that are, you know, why their funds are all illquid. So, I think

it's really tricky. Ultimately, um ultimately most people um have jobs, they're busy, they're doing stuff, they're not sort of specialists in in finance. And you know, I understand the perspective that um you know, they would be much better off just kind of like owning some index funds that rebalance and where they don't have to like worry about a lot of these details and not trying to like invest in companies that are m doing some kind of scheme to truck soybeans to some place and then sell them on the blockchain or something and like you know lose all their money. Um on the other hand, I kind of believe you know on the other hand I kind of believe people should be able to do what they want at the end of the day and like why are you saying that they can't do this right? So, like for

me, I think it's a complicated issue. Um, and I don't know the right answer. I think that I certainly wouldn't say that we have the right regulations and we think about it the right way. I'm sure that we could do a better job all thinking about it together. But I think I do think it's tricky because I think you drop those regulations and the first thing that happens is everybody's much worse off because retail ends up buying a bunch of really lowquality crap that's pushed on them by sharks. >> Yeah. And I don't think that either one of us knows what the right solution to this is. But my one of my goals with this conversation, Ben, was just to bring on somebody who is a bit more of an expert in this world and to just sort of ask some of these questions because I

think having our audience think about these things more deeply for themselves is maybe the first step here. And the most important thing is that, you know, if you're an investor in these markets, you have to kind of reflect on these things and figure out what your goals are, what your risk tolerance are, uh, and just think about this for yourself right now because, you know, that's the best we got at the moment. Um, so I want to talk about the future of this, right? So, um, and I do want to say this too that one thing that really has been amazing that's come out of all of this retail access has been enormous amounts of innovation. You know, we talked about perpetual futures, but we also got decentralized finance. We got stable coins. You know, all these like meme coins have also proven sort of the use

case for tokenization of assets. There's there's a lot of innovation that's come out of this. Um, and you know, without asking you to speak on everything, um, I'm interested to hear your thoughts on the future of like financial engineering and derivatives products because I think like you said, this is a huge and emerging, um, aspect of the market. Where do you see this going from here? What is the next steps look like and what are you most excited about in terms of innovation here? >> Yeah. No, absolutely. I mean, there's, you know, obviously been tons of really interesting things going on in crypto. I mean, we've always thought it's a fascinating space. Um, you know, I think again, you know, nuanced, you know, there's lots of scammy, fraudy stuff, but there's also some really interesting stuff and some really interesting technology. Um, you know, we are we are,

uh, currently kind of starting to get involved act very actively involved in crypto derivatives, you know, bringing in a looking at, you know, bringing in a top team and everything. So, I think we're super super excited about the space. I mean, I do I do think perpetual futures are a really interesting direction. I do think that's a, you know, a really good product. Um you know I do think uh I do think that you know in derivatives markets um 95% of new products are probably unnecessary and uh you know a distraction and many of those don't work and you know some of them do um but you know on the margin every once in a while something really interesting comes along that allows people to manage risk better transfer risk better you know the VIX the VIX options and futures that whole complex is a great example of

that you know and again I think also perpetual futures um it's it's really hard to know where you know where all of this goes. But I think we're uh you know, we're just really excited to be, you know, involved around the way. Like our I think our world focuses a little bit less on kind of knowing what's going to happen and positioning for it in advance and more in just getting really good at understanding who the market participants are, what they're doing, seeing how that's impacting price and relative value and learning how to kind of be one of the people to take advantage of that and, you know, sort of restore balance to the markets in a sense.

>> Gotcha. Yeah. Well, Ben, look, I really appreciate you sharing a lot of thoughts on these things. Um, I think, you know, there's a lot of other questions I could ask on this, but I think the one I want to come back to here is, uh, we talked about education. Um, but then the the equipment aspect of this, like being equipped to properly engage in these markets. Um, a lot of people, I think, are not, um, what would you tell a retail investor who has been engaging in these markets, kind of maybe feels like they're getting fleeced a bit, um, but wants to get, you know, aligned with somebody who's more equipped to help them navigate this. How should a retail investors go about thinking about that?

Where should they start? What what would the first steps be on that? >> Yeah, so I think there's a couple different aspects to that. Um the first thing is to be very careful about um you know influencer style people and you know YouTube course offering people who are you know telling you uh what you should be doing in the space and getting paid for that one way or another. Uh these people are generally kind of charlatans taking advantage of you. there's a you know there's there's this whole thing about like selling options for passive income um that's very predatory that's you know all of the narrative around this is very misguided and very misleading um you really have to recognize that uh you have to really recognize incentives in the space and

understanding you know who's actually trying to help you and who's you know trying to take money from you right so that's the first thing is where do you get your information um in terms of where you should get information um I you know I wish it was better there obviously so one thing that I do. Again, I try to do a decent amount of education, but I also have like some Twitter threads that people have contributed to that have lots of good reading materials, resources, all their favorite um you know, content associated with it that you can just kind of go through all of that and you know, make a make a list of things to read. I think that kind of thing is a really great start. Um and then you know in terms of uh in terms of other resources yeah like you know learning learning to think

about you know what brokerages to use and what um what pluses and minuses there are there. Really learning to think about execution and how you execute in the market is really important because options aren't like stocks. You know stocks have extremely tight bit ask spreads and like there's almost nothing you could do to screw up like trading a stock unless it's a micro cap, right? put in a big sort of market order and it just doesn't really matter that much for the most part. Um, in options is totally different, right? A lot of options have like a non-trivial bid ass spread and if you're just going out and lifting offers all the time, like you're actually just paying Ken Griffin a ton of money and you don't want to be doing that. So, learning about like how to put orders in midmarket and watch them, um, learning

how to even use like interactive brokers and use orders that actually move themselves with the market and things like that is actually really, really important. >> Ben, I really appreciate you coming on and sharing this with the audience. I think that you've given people a lot to think about and and some helpful perspective on some things that you know nobody like I said nobody knows the answers to but that people need to to think deeply about if they want to be an investor in these markets. Uh so thanks for being here. Where can we send people to find more of you and your work online? >> Yeah. Um so take you can take a look at my Twitter handle uh there. You'll find a lot of stuff there. Um and then we have a website you know I run QVR advisors. Um take a look there. Uh you

can just Google Keep your advisors will come up and there we have a whole kind of content and research uh page that has a ton of different stuff that you can download and read. So take a look. >> Dr. Eford, thank you so much for being on Milk Road Macro. >> Hey John, this was really fun man. Thank you for having >> Absolutely. It's my pleasure. I hope we can have you back again soon. All right, and thank you all for joining us. Uh so look, until next time, please stay safe, stay educated, stay bullish, and we will see you all on the next episode of Milk Road Macro. Thanks for being here, everyone. Bye. Want insights on what's really moving markets and how we're trading each event? Subscribe to our channel, then join the Milk Road Macro and Macro Pro newsletters. This show is

for educational purposes only. Nothing we say is financial advice. Investing is risky. Never invest more than you can afford to lose.