****Official BFI Book Club - Trading and Exchanges: Market Microstructure for Practitioners****

Trading and Exchanges: Market Microstructure for Practitioners

Available as an e-rental for about $20, so hopefully price doesn't hold anyone back.

For structure, I'm going to divide the book into sections, and each week we can discuss a new section. We can of course continue discussing sections from previous weeks. If you want to discuss a future section, please use [SPOIL][SPOILER][/SPOILER][/SPOIL] tags. I'll try to keep it around 100 pages per week.

Chapters for the week ending:
7/28: 1-5 (pg 111)
8/4: 6-9 (pg 221)
8/11: 10-12 (pg 277)
8/18: 13-18 (pg 393)
8/25: 19-22 (pg 483)
9/4: 23-29 (pg 600)

discuss.

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07-18-2018 , 06:44 AM

d7o1d1s0

Coach NLHE

Join Date: May 2010 Posts: 2,459

Ordered, quickest I could get it delivered (to UK) was the 26th so I'll prob be late the first couple sections at least

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07-18-2018 , 07:58 AM

glenrice1

grinder

Join Date: Jun 2009 Posts: 653

I read this book 5 or 6 years ago. It was very worthwhile.

One of the more interesting points in the last third of the book is that losing traders actually help markets operate better. Winning traders have to be compensated to do research by someone otherwise there would be no incentive for them to put in the work.

The book does a very good job of explaining the market like an ecosystem. It spells out the role each market participant plays in making things function properly.

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07-19-2018 , 12:36 PM

iraisetoomuch

banned

Join Date: Aug 2013 Posts: 37,488

Quote:

Originally Posted by glenrice1

Sounds like the poker ecosystem too.

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07-19-2018 , 01:29 PM

Spline

stranger

Join Date: Jul 2018 Posts: 2

I'll be following along too, thanks for organizing.

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07-19-2018 , 05:41 PM

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

Quote:

Originally Posted by glenrice1

In order for this to be true you need to accept the reverse, that winning traders help the market operate better. I tend to think they do, but probably there could be a fraction of the profit up for grabs while keeping markets running smoothly.

Similar to poker, eventually operators realized you only needed a fraction of 'liquidity providers' for games to run.

Quote:

Originally Posted by Spline

I'll be following along too, thanks for organizing.

Thanks, eager to hear your thoughts!

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07-23-2018 , 12:48 PM

gangip

veteran

Join Date: Jun 2008 Posts: 3,087

I ordered this basically as soon as the thread went up and its expected delivery date is July 28, so I too will probably miss the first week

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07-23-2018 , 03:06 PM

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

Alright, since a couple people are waiting and no one else has confirmed purchase yet I'm going to delay the start date until at least 2 people confirm itt that they have started reading.

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07-23-2018 , 09:20 PM

mullen

Carpal \'Tunnel

Join Date: Oct 2008 Posts: 17,632

Just ordered, should arrive 7/26.

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07-24-2018 , 07:48 AM

#10

BoredSocial

Pooh-Bah

Join Date: Mar 2009 Posts: 5,018

Quote:

Originally Posted by ibavly

Alright, since a couple people are waiting and no one else has confirmed purchase yet I'm going to delay the start date until at least 2 people confirm itt that they have started reading.

I've started, but I doubt I'll be finished with the first hundred pages by friday.

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07-24-2018 , 11:08 AM

#11

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

ok, well we will adjust as necessary, consider the OP to be a starting point. I'm reading on kindle so there are no page numbers, are there a lot of words per page?

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07-25-2018 , 05:50 PM

#12

XTYME

banned

Join Date: Sep 2014 Posts: 145

I ordered but still reading your beginner recommendations first. Btw I have a hard time to force myself to read, even tho I’m so glad when I do. it’s like forcing myself to go to the gym. Know it’s great but harsh process to actually go, wake up ride car transit time waste yadaa.

Any tips to find motivation to read more? Also, you know what’s the optimal hour(s) after wake up to read? Read while intermittent fasting? (Question like for gym x) How much time or how many pages is optimal per day?

Do you have link of article or book that can answer this theoretically? Or what’s your experience or someone’s avid reader experience that you know?

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07-25-2018 , 07:45 PM

#13

jukofyork

Carpal \'Tunnel

Join Date: Sep 2004 Posts: 11,749

Quote:

Originally Posted by XTYME

Not exactly what you're asking for, but "How to Read a Book: The Classic Guide to Intelligent Reading" is worth a look.

Juk

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07-26-2018 , 04:54 PM

#14

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

I find the book's description of providing liquidity as being similar to writing an option to be quite interesting. It's the only advantage you have while trading on your own money, but its a big one.

It also kind of points out the big flaw in black-scholes. If you're hedging stock by crossing you will end up getting killed on the spreads, but if you're posting stock you're giving up all the optionality of your position for free.

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07-27-2018 , 05:38 PM

#15

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

Page 25, description of an options trade

This blew my mind because it makes so much sense but I never thought about it. The reason there are January options so far out is because that's a convenient product for tax purposes. You can lock in stock gains before year end without realizing the capital gain until expiry.

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07-28-2018 , 06:47 PM

#16

MadScientist

veteran

Join Date: Jan 2006 Posts: 2,795

Agreed . The value of options as a way to lock in profits and potentially wait across the year and a day threshold to a long term cap gains rate is powerful. I think I'm right that you can do the above if your position is not yet a year and a day.

Sent from my SM-G965U1 using Tapatalk

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07-30-2018 , 05:25 PM

#17

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

Got through all the example trades. I get why they are there, but nothing really surprising or discussion worthy imo

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07-30-2018 , 09:12 PM

#18

MadScientist

veteran

Join Date: Jan 2006 Posts: 2,795

Quote:

Originally Posted by MadScientist

I'm wrong about the above. Though you can move a long term gain to another year if it has been held a sufficiently long time already.
Another book that I recently read gives a simple question to find out if someone understands something about trading as "what is a trade instrument and what is a trade type?" The beginning section explains both well.

Sent from my SM-G965U1 using Tapatalk

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07-31-2018 , 04:35 PM

#19

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

Can you clarify how are you wrong? If you bought a position 1 month ago, and today you but a deep put for Jan 2020 against, you will hold both positions over a year.

Slight out-of-date mention in the book. Claims that in 2005 we will switch to T+1 settlement. In reality we only recently switched to T+2.

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08-01-2018 , 03:21 AM

#20

Pinkmann

old hand

Join Date: Nov 2014 Posts: 1,487

Its a hedge, but it can cost quite a bit. I'd imagine in a lot of cases the hedge would cost more than the difference in long and short term gains.

Example - we bought 100 shares of the feb dip in Apple at $150, and now the stock is ~$190. Thats $4000 in capital gains. A Jan 2020 200$ put controlling 100 shares trades now for about $2500.

Last edited by Pinkmann; 08-01-2018 at 03:35 AM.

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08-01-2018 , 10:24 AM

#21

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

Quote:

Originally Posted by Pinkmann

Thats not the point. We were talking about taxes and the OP said it doesn't work if your position is not already a year and a day.

Regarding your point, the hedge doesn't have to be expensive. in your example you're taking an option that has a lot of extrinsic value, so its not costing you so much as putting on a different position. The $300 put traded for 102 this morning when stock was at 198.3.

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08-01-2018 , 12:25 PM

#22

Pinkmann

old hand

Join Date: Nov 2014 Posts: 1,487

Just pointing out that protective puts to lock in gains is an expensive insurance policy.

That 300 Jan 2020 put for $102 is for one share, multiply by 100.

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08-01-2018 , 02:19 PM

#23

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

Exactly, so in your example when stock was 198.3 you had 4830 in capital gains. By buying those puts you lock in 4800 in gains. $30 is not an expensive policy. Especially if you defer taxes for year, move from short term to long term, and you have some tail upside.

Note: I'm ignoring interest here which can be substantial

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08-01-2018 , 02:57 PM

#24

Pinkmann

old hand

Join Date: Nov 2014 Posts: 1,487

Are you high?

Take the price you see on your screen and multiply it by 100. Thats the minimum cost for the trader to participate in that market. If a put has a 30$ ask, it really costs $3000, each contract is for 100 shares. So for a 100 share example and $4-5k in gains, thats a $3000 insurance policy. Thats car insurance for an alcoholic.

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08-01-2018 , 04:26 PM

#25

ibavly

2010 PSOP Champion

Join Date: Feb 2010 Posts: 24,513

Hey pinkmann, lets try to keep things civil. No insults in the library

You need to remember that once you buy a put, your profit is determined by the strike price of the put.

In case you don't buy the put:
Sell now 100 shares at 198.3, paid 15,000 for the stock, collected 19830 now, locked in profit of 4830.

In case you buy this 300 strike put:
Pay now 10,200, in 2020 sell your 100 shares at 30,000. Paid 15,000 for stock, paid 10,200 premium, collected 30,000 in 2020. Locked in profit of 4800. Difference of $30.
You also continue to collect any dividends over the next 1.5 years.

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