279: Saad Filali - Front-Running News Flow Trading

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Trading in the financial markets involves a risk of loss. Podcast episodes and other content produced by Chatwith Traders are for informational or educational purposes only and do not constitute trading or investment recommendations or advice. It showed them that if they gagged up on on the market, even on big indexes.

that they can do things. Who are these guys? These guys are most of them, a lot of them, many of them, uh people who work in tech, mostly in California. Actually, my nickname for them is Cali Boys, California Boys. They have huge uh compensation over there and they have more money than they know what to do with. And they are big gamblers. That's that's something that perhaps even they didn't know about themselves, and they love doing this stuff.

I'm I'm I'm still I'm really always trying to to understand and study and like try to find a way to as I said like not even follow them. I just want to avoid them. I just don't want to be in the way. I don't want to be a victim. If you remember during the G saga, uh GameStock saga, a lot of hedge funds were victims of this. Продолжение следует...

How's it going? I hope you're doing well. Tessa here, co-host at Chat with Traders. And this is episode 279. Do you ever think deeply about who you've been playing with or against in the market? And you know who those market participants are, how they tend to behave and make their decisions and why. If trading is a game that we want to stay in.

Should we be thinking about this in the same way as elite athletes do, where understanding their opponents' strengths and weaknesses can help them to strategize and sharpen their own edges and come to the game prepared? Or is it different with trading? Today, Ian speaks with Saad Filali, who for a time worked for Goldman Sachs, specializing in mergers and acquisitions.

Then he left and became a trader. Understanding the thinking and trading styles of the many different market players is key to his trading, including those of institutions, sell side brokers, CTAs, and the CDC. Retail and meme stock traders. Yes, meme stock traders. Studying how they trade the volatility in news releases helps Saad to predict market movements and calculate suitable entry and exit points in his trades.

Saud now manages his own macro fund and relies heavily on news flow and research. He looks for discrepancies between market pricing and fundamental valuations and consider the impact of different market participants.

I bet that there are great takeaways that can be gained from a very interesting perspective. Listen and enjoy. Ladies and gentlemen, please welcome Sad Filali currently in France. Saad, uh welcome to chat with traders. Thank you. Thank you for having me today. Yeah. Uh where are you at now and where did you grow up? I grew up in uh North Africa in Morocco. I was born in Casablanca.

And when I was eighteen I had an opportunity to come study mathematics in France. That's what I did. I have a masters in that. Then I've worked a little bit in uh finance and in mergers and acquisitions in MA. In London, in uh in Holland too, and in France. That's basically how I got into finance. Well tell us a little bit about what you did in MA, uh mergers and acquisitions, right?

Well, mergers and acquisitions, you have to see that as a sort of uh broker's type of job, except you're not actually selling uh apartments, you're actually trying to sell businesses. There's a tiny little bit more work involved. But outside of that, it's not really an intellectual job. It's it's a job that in which a salesman will be better.

So I realized I was no salesman, unfortunately for me. Um, but I was good with the with numbers, with thinking, with logic, with reading. And somebody just suggested that I look into trading as a possible alternative. I did.

And then I gave up on the MA route and I joined Goldman Sachs to work as a niquity sales trader for a bit of time in uh in Paris for like a year. I I did that for a year and the idea was that they would give me a book for trading. It didn't happen because um there are some uh regulations in uh in Europe, uh namely MiFID two, which uh makes allowing people to trade within the banks today like really, really complicated.

So when I realized that it was probably never going to happen or I would have to wait a long time, I decided that if I was any good at this, I should be able to succeed alone. So uh I went out of the bank and I uh got some money from a couple of friends. and uh started trading to build a a little bit of track record. This was back in twenty twenty. A couple of years later now I do have a track record and I'm managing thirteen million US dollars.

It's not a lot for our fund, but given the structure that I chose, it it works for me.

And uh w what did you learn at Goldman Sachs? Uh you were there for just a year, did you say? I was there for a year. Um Let me let me be frank. There is very little you can actually learn in there that's gonna be useful for actual trading. The only good thing is the access that I had

to uh the research department. So you can you can talk with these guys in the research department. But that's something that you can have access to today. Like the you can get access to the self site papers if you just buy a uh by subscription from this provider or that provider, you can you can get these papers and you can read them alone and that that works very well. There's no there's no problem with that. But like in terms of actually learning anything like

Basically your question should be, I think, uh are the market makers or are the traders or what's left of them within a place like Goldman Sachs any good today? Well, no, they're not. And there's a very simple reason for that. That's not what they are asked to. Most people who call themselves traders uh within these banks are not actually traders, they're just brokers. They are just here to facilitate the trading of the actual client.

well the hedge funds and the very big retail clients and so on they don't do that much trading they don't really take directional positions they don't really bet on the market doing anything what they have to do is simply manage their own uh the portfolio that they get Which is just a direct result of what trading is happening is happening or is being done by the client. So client calls this client wants this.

Uh that means that you are short that and you have to manage that exposure. You have to unload the delta if you are in the on the options side or even on the on the linear side, meaning if you did in futures, even though that doesn't really happen today in uh in big banks like that.

And because they added a regulation that says that at the end of the day, they have to be delta neutral. At the end of every day, you can imagine that the margin of maneuver for these traders is very, very, very limited.

So it's a very different job. Like when people think about traders in like Goldman Sachs, you're actually thinking about the people who were in commodities corporation before it was bought by Goldman Sachs. So you're talking about stuff that was happening in the eighties and late nineties or even up to the 2007s, if you if you are lucky. But after 08, and especially today, and especially in Europe. Uh I can assure you there's not much directional trading happening at this place.

Is that because they got burned many times in the past, or is this just a they've become very risk adverse for some reason? Mm it's because of some regulations that appeared in the US. After O eight. And then the second, uh most importantly, perhaps the shareholder base of these banks are telling them today that.

The reason that they invest in a bank isn't really to get any much equity upside or anything like that. What they want is for the investment banking business to be as stable as possible. So They are strongly, strongly uh told not to do anything uh that could create volatility. So it's just uh a a shared desire by the shareholder base of these banks. Uh it's also the direction that the regulator is uh i i is going to uh as far as the SEC in the US and in in Europe, they just copy them.

in fact in a lot a lot of times go above them. It just the way the world has turned after oh eight. They they want the less risk at these places and and that's what's happening.

I see. So uh while you're at Goldman, were you doing any trading on your own account or did you have Goldman manage any assets for you? No, I I know I didn't do that. Uh what I was doing specifically was doing it for clients. And then I was also uh suggesting a lot of trades to clients. So I was a sort of macro strategist at the same time. That's sort of how I got uh how I got my reputation uh in there.

Uh I was writing these articles. And my my boss at the time, he did promise that he would try and find a way for me to try and do the ideas myself, but it just never happened. That was really the main motivation for wireless. Uh can you give us a couple of examples of um maybe say a typical recommendation that you might make to clients um to go long or short? What what kind of product?

Uh well it was it was European equities mostly. Uh but I also dealt in US equities in futures. My ideas were the were very simple. They were something like um I think you should buy Netflix today. I think uh you should still bond today because of this, this, this, this, and that. Uh they were predictive in nature, meaning that I was taking a bet.

on a certain number of things happening in the future over a reasonable time. And then the the the the second thing that's in embedded in this kind of bets. that the price action would correspond to what I'm predicting at the same time. Because you can predict the event, but sometimes the price action doesn't correlate. That's something that just happened to me, for example, in um in in gold recently. I've taken quite a hit.

Um, because I imagined that uh the Fed would have to become more hawkish and that's what happened recently. We've even had Powell say say something along the lines of Um yeah, inflation exceeded our expectation during the first quarter and uh we won't necessarily cut this year, but gold didn't fall. So sometimes you can get the prediction right, but it doesn't mean that you will get the price.

This is like the nature of everything that I do. It's a bet always ahead of an event or ahead of something happening or ahead of a data release or ahead of a of an urgent release. Then it's also a bet on the price action uh responding.

Your bet on uh what is gonna happen and and the price action and so forth. What kind of time frame are were you looking at in these recommendations like okay in the next month, week, or in very short term? No, it goes from seconds. Really seconds to uh to a couple of days or no no more than two weeks. Uh I operate on relatively short short time frames.

I see. So uh when you were making these recommendations to the clients, I gather they had to be very quick uh to get your recommendation and and also to be able to exit the position because we're talking about very, very short timeframes, correct?

For for example, there's a non-farm payroll number that's basically the jobs number in the United States that's coming. I think this particular number will be important. And I also predict that this particular number will either miss or exceed expectations based on what the consensus is.

And I also predict that this asset class will respond in this way. So I will contact the clients ahead, maybe one day ahead or two days before, and explain all of this to them. And if they agree, they will uh they will tell the trailer or tell me to put a position for. I see. And then do they uh allow you to uh at your own discretion to exit the position when you feel it's the right time or do they have to

No no that that never happened. Uh but usually what would happen is they would uh usually like talk with me about the exit beforehand. uh also sometimes after the event has happened, uh, to discuss whether it's uh something that sh they should keep for a longer time frame or if uh they should just be happy with what they've got and uh an exit.

So you felt, uh my understanding is you started your fund uh and started trading for yourself in May of 2020. Is that accurate? May twenty twenty is when I started the phone, yeah. And so did you feel that your one year at Goldmund prepared you enough to uh be ready to take on this new adventure? The what really prepared me was reading a lot of self side research from Goldman and from others. It's really the research aspect, the the the research papers that really helped me.

And uh something else that really helped me is that by that time, uh I had been a uh listener of Bloomberg Radio for more than three or four years. And I think that's also something that that really helped me because like you get to hear everything that's happening live, the commentaries, the analysts.

um the people who are invited from the saleside banks to answer questions. They usually ask really good questions. So I think it's it these are like my my two schools for for for this. Now of course I do happen to have a the theoretical background in finance and all that. But I I don't really think that's um that's necessary or even that helpful. In fact, I would say that it that you could easily be um too small.

for uh for for trading the markets because let's let's not forget the price is the reflection A sort of average of everyone who's involved in the market. We're not talking about just um mathematical limpians who are trading. It's really everyone. So sometimes you have to give up very rigorous logic and just if not right with the trend, just accept the trend. An example for this in my case would be Bitcoin.

I understand what Bitcoin is. I could even replicate it. I can even create recreate it if I wanted. In fact I even did just for fun. Uh but I don't see why the price should appreciate. To me, the reason why Bitcoin appreciates is the same is the same reason why uh sneakers price is appreciated. It's because there are a couple of people who really love it. uh religiously so. So for me, uh buying that and keeping it for a long time, hoping for price appreciation is just contrary to what I do.

Usually the kind of thing that I do requires a direct mechanical cause. If I'm selling bonds, it's because I believe the Fed will come behind me or after me and raise rates. So that's a di there's a direct mechanism for why that will happen. So I don't believe in Bitcoin but that doesn't mean I will short it. So this is when you have to like give up and

s stand back a little and say, okay, I don't want to play this game with them. So at least I will have the insight to set out and just and just not participate instead of getting hurt if I started shorting. I think that also happened to a lot of people in in Tesla, for example. Today Tesla is falling very hard.

A lot of people feel vindicated. I've seen I've seen analysts on TV. They come, oh, I've always told you Tesla is such a shitty stock. It was overpriced and overvalued. Yes, okay, but for 10 years the thing has multiplied by 10. So you've lost money like. Even if you ca even even if Tesla goes to zero, you will make all of your money on it. So you will not even break even. So how is that exactly a win for you? I I wouldn't say that.

Uh the win will have been to just acknowledge that indeed, more than a stock, this is a sort of religion. There's uh there are some cultish elements behind it. Yes, someday, sometimes the truth may come, but I have the insight to set out, not participate. And instead focus on uh focus on stuff uh that I actually have some mastery in where there are direct Uh uh effects and causes. Like usually in all of the stuff that I trade, which which are basically all the big uh macro instruments.

I might not always be able to predict the rise, the right price action, but I can more or less 99% of the time explain why something happened.

My understanding is that you're the fund that you're running and have been running since May of twenty twenty, uh you you describe that as a macro fund, is that correct? It is a microphone, yeah. It's a very old school So describe for us, um, for our listeners, exactly what is a macro fund? What do you what type of fundamentals do you look at? Tip typically in the eighties when people um said said I have a microphone, what they really meant is that they were trading future.

Or that they were CTAs and they had managed accounts. But today the definition is somewhat different. When people say they have they have a microphone, it means that they are engaging in uh predictions about the future of things that are relevant to the instruments that they trade.

This for me is like the basis of it is that I am predicting. I'm not reading technicals. For example, in my case I don't use technicals at all. In fact I could even not use charts at all. I do have a couple of them, but I I don't really need them. I just need the prices. I have zero technical uh input. And

However, my biggest input, like um you you can really see my my my screens here, but like the seventy percent of the real estate that I have in screens is dedicated to the news flow. So the news from Reuters, the news from Bloomberg, the news from uh the SKOC. That you heard talk in uh in the beginning of the interview. Then I have several other subscribers and analysts that I that I like to read because I feel that they are useful.

And then there's the the my channel on this phone where I uh where I talk with the people who work for me or are clients with me. uh like to exchange ideas. That's that's my main input. It's really the news and that is the driver of uh of trades for me. That's what generates trades. It's when we have a data release or something just happened. And uh I see that I identify that one or many of my instruments uh might be uh impacted by it. And then I will take uh I will try and do the trade.

And so are you uh doing this um discretionarily or do you have an algo? I mean, do you use algos to m execute your trades?

It's entirely this question. Entirely discretionary. I see. And so how do you know when you're looking at a particular market? Now you're looking at the news flow here. How do you know if a market is has already factored in the prices, the expectations, or is underpriced? And w uh what determining factors do you use to go long or short?

there there are there are various situations but let's take the let's talk the easiest one The news is in question is something that has never happened before, that wasn't really on the table or on anyone's radar before. For example, uh Iran, uh or Israel rather, attacking an embassy in Damascus. Well, that's something new. Uh that really wasn't anyone's reader. And that potentially will impact oil and gold, possibly more of them.

So that's something that that's something that's very easy because uh the only thing that needs to happen is you need to be in front of the screen and awake when it happens, and then you need to click as fast as possible, even if you do the trade. And let's say you do it and it doesn't work for some reason. Maybe you misjudged, maybe other people don't care about it, maybe people don't don't think it's that it's that important.

Then in that case, what happens? Okay, you paid the spread, maybe the price even goes against you a little bit, but it's still a highly um but it's still an opportunity that has a very high risk return. Because if they do care, if it does work, it will go up sensibly, materially, let's say maybe one percent for each of them.

uh in the case of or even more so. And if it does go against you, yeah, you'll have paid the spread and it will go against you. But provided there that there's nothing else happening at the same time, uh you won't lose that much. So it's still an opportunity that you have to try. Have you ever watched a stock explode and thought, if only I had the capital, or sat on the sidelines because your account balance felt too small to matter? Good news.

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On your website, uh, you s have a quote here. It says, identify situations where market pricing diverges from the fundamental valuation for a period of time which can range from seconds to weeks. So Um, so what would be give us an example of a fundamental valuation? Uh you mentioned the gold market or the oil market. What are you looking at for fundamental valuations?

This this sentence applies more to uh forex and uh equities than uh than gold gold is a bit more complicated because um people who buy gold okay let's start with forex and then go back to gold what is forex Uh the biggest players in Forex do it for two reasons. Either for corporate purposes, because they need to invest or to buy things in a specific currency.

And as far as investing goes, it's the carry trade. The carry trade can be used to give you uh a valuation, a value for a for a for a forex. If you know the two interest rates for the for both of the pairs. And you have an idea of where they should go, then you have an idea, then you can deduce an idea of uh how much they should move, uh, provided you are right about the move uh regarding the interest rate.

Inequities, uh, it's uh the discounted cash flow method if you have a very uh especially if you have the benefit of a very precise understanding of what valuation is and what drives it. And by the way, I've wrote I've written an article about this that goes into great detail that you can find on Seeking Alpha if you type my name.

I think it's it's still in there where I describe mathematically how you get to these drivers and how important each one of them is. In the case of equities, it's uh re-rates and then the projected growth. Yeah. If something happens in the news flow that you think will affect one of these drivers, then first at least you have an idea of the direction. So you can do the trade. And once you do the trade, you can start thinking about, okay, I'm in the trade. How much is this supposed to impact?

My instrument exactly. You can never really tell, but you do have an idea. For example, uh, I've done my statistics, so I know that each time the projected growth of the EPS. Of the S P 500 goes up by uh 1% as measured by the consensus from the cell side, which you can find on Reuters. uh the SP itself goes up by three, four percent. So once you do this, have all of the pumps that you can apply to all of the instruments.

Are you figuring that the market is efficient and that it ha it's has priced in everything up until that point? So uh because you say you don't look at charts. So are you assuming the market is correct and is is not overbought or oversold.

If you are going to trade something, especially over very short terms, you have to assume that the market is efficient up to that point. However, if you are wrong about that, um then what will simply ha happen is the situation that I've described on the oil trade. You will get in. And it will not move the way you want it to move. Maybe it will move against you a little bit.

And that's when you have to understand to decide whether to give up or to pursue it a little bit. Usually giving up is the right answer because that just means that either somebody has already somebody, enough people have already paid attention to this. It means that the other participants of the market do not share your judgment with regards to the event that just happened. They might end up being wrong uh later, which happened for example with the Fed right now for me.

But at least i for the short term, it's uh it's best for you to give up and come back later. For example, when uh another guy from the Fed will come and do a speech that goes along the same direction, you can try again until it sticks.

What indicators are you looking at to see if the pr if it sticks? I mean, do you you say you use mathematics, right? So I mean you do you calculate, uh, like on paper calculator on what the price should be based on all your inputs and that the target price that you're going to use to maybe get out of your position. No, for for for the target price, as I as I as I mentioned before, I've done the statistics, so I have all of these rules of thumb.

For all the drivers, for all the insumers that rate. For example, I know that if the Fed funds rate goes down by 25 bips, that means the dollar yen needs to go down by one percent. This one is As always the case, this one is extremely reliable. So I gave you the most reliable example. So, like uh what is 25 bips? 25 bits is exactly one rate cut. So I know that if tomorrow something was said that would allow us to price another rate cut, I would know that dollar yield needs to go down by 1%.

You have another quote here on your website. You say, We observe that the market efficiently prices new information relating to macro fundamentals over time, but not instantly. So are there markets that are more efficient or less efficient at pricing these in? And uh what kind of time frame are we looking at to price this in?

There are definitely differences in efficiencies between uh markets. I would say the least efficient market is probably the equities index. Equities first and then the indexes second. Yes. And I would say the most efficient market is uh the Forex one by far. The Forex one, especially on well telegraphed events, for example, planned events, uh like central bank meetings. Uh when the change happens, even if it's a surprise, it will get priced within seconds.

Um that's frankly not something that you can uh profit from or it will be extremely difficult. Because uh the the the the problem with these sort of events is that even if you're fast, you still have to deal with the slippage uh that comes with the brokers and all. So um these are opportunities that don't really exist. However, inequities there's a lot of times where

Well the market is extremely slow at pricing, even stuff that that that uh that that should be done. And I and I there are there are there are reasons for that. It's because the the market structure in equities is very complex and very diverse.

In equities, you have a lot of volume that is options today. You have the futures, you have the equities themselves, then you have the ETFs. So for all of these things to move the right way and to go to where they have to go, the it usually uh there's usually a lag and that's why you can actually profit from

So c can you give us an example of a uh fundamental event occurring in equities, uh, say like an interest rate cut uh or an interest rate increase, and w how do you How do you make your plans to enter to go long or go short equities? In my case, I would actually predict it. So I will come before it happens and I will decide beforehand if they are going to surprise and be more dovish than expected on So if I do think that that's the case and if I after looking at

how the market has moved and what the sell side is saying that's also one way of appreciating whether a market has priced something or not it's still it's simply to look at what the sell side is saying. If all of the banks on sell side are saying that the market is already expecting a rate cut, then there's probably not much for you to do.

Because it's already been either front run or it's already done. Absolutely have to come before this stuff happens, not only before it happens, but before it becomes consensus. Because sometimes, especially with the Fed that we have today, unlike the Fed that they had uh in in like the nineties, this Fed likes to telegraph everything. So if they intend to cut, they will come several months before and they will start sending these guys to do speeches.

Where they will guide you slowly towards the outcome that they want. They will tell you, uh, we see that inflation has uh we are happy about the path of inflation so far, so we can consider a cut. Then another guy will come and say, So you can't just wait for them. You have to come beforehand. You have to understand what they care about in terms of inflation pattern. And then you have to understand the path of inflation and you have to decide whether you want to do the trade or not.

Um, so with stocks since since the Fed telegraphs um pretty early on where where they're gonna go. Uh, does that run into conflict with your holding periods being so short? Because if you want to take a position, presumably you have to do it quite some time before everybody gets on board with a consensus, right? Exactly. But yeah, sometimes uh for people to get on on board with a certain consensus, it takes like uh a week. Let's take the most recent Fed speeches as example.

This quarter we had three successive uh inflation prints that were hot than expected. However, the Fed had had misjudged but had telegraphed already in December that they would cut. Okay, before seeing the prints that we have.

So we got the first print in January and it was hot. We got the second one in February and it was also hot. And we got a third one and it was also hot. But the problem is that by the time we got the third one in in April, the Fed had still not changed its communication at all. And that's why the market didn't fall until didn't start falling until very recently.

They they should have started uh uh doing this, but they didn't. And the self-side also didn't because the um one thing that people have to understand about the self-side is these guys are not uh incentivized to take risks. In their opinion. Now, of course, you have a couple of what I like to call lunatics that are always on the bearish side or the boyish side.

Um, I don't know if you remember the Morgan Stanley guy, uh Mike William. I think he was he was he was let go uh recently, but this guy's gimmick was to be always buried. for his whole career, uh essentially, I think. So these are exceptions. But most of the regular guys, they will always try to stick to the consensus. They will never take risks.

So because the Fed itself was saying in December that we will cut, even though the data was clear to everybody else involved that they should that they should change that stance and move to something, if not more hawkish, at least more neutral. Nobody had the guts to do that. And this was an opportunity for a passion trader, uh, especially after the third print, if you just came and uh and shorted, I did that, and that worked very fine for me. Uh the Nasdaq finally started falling for what?

Uh what didn't work for me was gold. Um I'm still trying to understand why not. But yeah, these are these are how these uh opportunities form you really have to be on board.

uh always following what's happening and always aware of what others are are uh are are thinking. And I really think just to answer a question that you asked me before, just to repeat it. Um one of the best ways of understanding where others are is simply to look at the sell side. Don't try to um I don't know, look at the price or look at volume or try to conjecture something.

Just look at what the side is saying because what what you have to understand is that The sell side, every morning when they release a paper, they are calling all of their clients who are big money managers. To tell them, hey, these are our ideas. Would you like to follow them? And every hedge fund manager has his favorite cell side guy, who he copies more or less, or who he takes a lot of input from.

So they are indeed quite representative. And I would even add a little trick of mine. For every market, there are like two, three sell side banks that you have to follow. You don't have to follow all of them. For example, if uh if if it's in equities, I would say you are fine if you just follow Goldman, Sachs, and Morgan Stanley. These are the only ones that you have to follow. If you are trading gold, you have to follow UBS.

If you are if you are trading oil, uh you have to follow city. So Because they are the most widely followed uh analysts in in in the respective uh asset class. And they have the biggest clients in that specific asset class. That's why you have to listen to them because usually their clients will be in line, think the thinking of their clients will be in line with what these guys are saying.

Sounds like then you look for discrepancies uh between what the data is showing you that what should happen. And then what uh the sell side is is saying what their view is and when you see a a great discrepancy when something doesn't line up like you did recently with the uh interest rate increases. then you're more emboldened to uh be a little bit of a contrarian.

Def definitely. Oh yeah, definitely. That's the case. Especially if you sp I mean being a contrarian is is is especially hard these days post COVID because uh the CTAs are so big today. Υπότιτλοι AUTHORWAVE And these guys, they they don't really read the news. I'm not even sure they they they know how to read it. I mean, it's just robots um doing statistics-based trading, momentum-based trading, which is just some form of uh of statistics.

Um, I know they like to put a lot of words behind it like machine learning and all that, but it's just uh linear regressions more or less. And the problem with these guys is they don't read the news and they don't care about the price. They don't care about they don't care about valuation. The only thing that they care about is their own P L and sometimes volatility.

So these guys make being a contrarian very, very hard. You still have to time it really well. For example, we were talking about the the recent interest rate increases. In bonds, these interim rate increases materialized as soon as uh as January, January, February, inter interest rates were already rising. However, the Nasdaq was still going up every day. And so was gold and uh

But why? How come? Well, it's because of the CTAs. The CTAs they found a momentum trade in the Nasdaq, so they pile up on it every day. And the only way you're gonna you're gonna get them off that is if you hit their PL a little bit. But for you to hit their PL, you have to be really patient and wait for an event. In in this case, it was the speech by Powell himself and no one else. That was the only thing that was powerful enough to

move the market or to motivate and incentivize the people in the market who do care about fundamentals. So that would be the other macro funds. to come and start selling the Nasdaq a little bit, enough to do enough damage on the Nasdaq so that the CTAs themselves need to start selling. That's what happened recently. And that's why we have this

5% drawdown in SPX, which to some old timers might not seem like a lot as far as drawdowns go. But it actually, given the market structure today, it it's actually quite something. One of the uh uh you mentioned that uh you read uh Market Wizards book and one of the uh people in the Market Wizards that you followed was Colm O'Shea, a um macro trader. And he has a quote, he says, uh, trades only matter when people care.

So in this case, uh are we talking about the CTAs um who are driving the price up, irrespective of interest rates, they suddenly care because um their portfolio dropped somewhat, uh, even though they're they're not paying attention to the news and that could be a catalyst then for to get the ball rolling uh to the downside. I would I would modify his quote a little bit just to make it work for today. It's not when people care, when the right people care. Uh-huh. When the right people care.

Uh in this case, the right people, the only about the fundamentals are the huge portfolio managers. For example, the people at Black Black Hawk or the people who handle the um the the the the funds for the teachers, uh culpers in in California and then the other macro hedge funds.

What I had to understand and accept about these guys is that they are not overtraders. They hate trading, in fact. The less operations they have to do, the better it is for them because they always see through the prism of fees before performance. Since they move such a huge uh portfolio, uh fees matter to them a lot. So, in order to motivate these guys to do something, you really have to give them something big, a big scoop. So once these guys moved, the NASDAQ fell, fell enough.

So that even the CTAs who don't care about what's happening in the world saw that their trade wasn't working anymore, that they were losing money every day. And then they said, uh oh, okay, maybe I should take some off. And that's how you get the the ball rolling. Part of what I do really is to be um more and more and and I'm always trying to get better at it, it's to be really aware that there are different market participants.

uh that have different market impact. And this market impact unfortunately is not correlated to their size. For example, the retail people, the uh the Wall Street Betts guys, these I don't have a lot of money, but because of the way they trade. Since they always hit uh market trades in uh in in options, but you're not actually really supposed to do that.

Their market impact is huge given the embedded leverage in the options and just given the way they do it. However, if you think about something like someone like Culpers or BlackRock, they are huge. But the way they trade, they don't open their IBKR and say, Okay, buy, buy, buy, market rate. No. They will ask a bank to buy for them 1 billion of spoos, and this 1 billion will be bought over two or three days, and it will be done slowly along the VWAP.

And the banker will make sure that the average price that they will get w will be below the VWAP if they are buying, just to just to justify, hey, okay, you told me to buy one billion, you I did it. In the best possible market conditions. And as you can see, I am below the VWAP. So I got you on average a better price. Than uh than what other people who have been buying during the same period have had. And so as a result of that, your fees will be low.

Okay, will be lower and your uh market execution fees will be lower. This is like the sophisticated way of trading, which is based around minimizing market impact. They wanna buy with moving the market. The Wall Street Bets guy, the retailers, they w they don't care. They just buy at market rate. Actually it works for them because uh when they buy in this savage manner, that's basically how you can qualify it.

What they are doing is they pump the price and it becomes a signal for other like-minded people to come and take more options and do it even more. So that's uh that's sometimes you have to also think about this, like what signal do you want to give?

I see. And what are you seeing right now in the market? We just had a a drop here a number of days ago on Monday, April 15th. um due to war jitters in the Middle East. Uh do these um speculators that you're referring to, do they does it work to the downside too? I mean, what are you seeing them take off their positions and now uh go net short?

N no, as per uh as per what I've seen from the self-side papers from uh Goldman and uh GPM, it's clear that the latest bout of downside that you saw was the CTA's uh taking some profits in calling it a day for once. They've been along the Nasdaq for a very long while, uh more than six months for the what what a happy bunch. Um but now they've taken a couple of hits so as a result they had to degrowth.

That means reduce their exposure. That's basically that's that's also why if you look at what's actually underperforming in the market, you will see that the Nasdaq is falling more in the SPX and even more than the Russell, even though the Russell is usually more volatile than the NASDAQ.

Well, why is that? It's because the CTAs, they weren't long. The Russell, the Russell was flat year to date. I think now it's even uh negative year to date. What was winning, what was working, where the momentum was, was in the Nasdaq. So that's why you see the Nasdaq falling more than uh than the other things. And I think it was entirely due to CTAs. Now the question is, are they done? Can we get in? Uh uh probably, probably. I think if

You take a look at what's coming uh later, the events that are coming later. Next Friday, we have the core PCE, which is the inflation measure that the Fed cares about. Personally, if I was uh if I was someone involved in government, I wouldn't care about this measure at all. But that's the one they care about. It's also, we have to be honest, the one that gives them the best look.

uh in terms of what they are doing for the public. So that's the one they care about. That's what they've decided and we have to follow that. Well, I predict that this measure will probably show something close to 0.2% month on month increase. And if that's the case, anyone who I think buys uh the NASDAQ or Spooz at these levels by Friday will probably be happy. I'm gonna be trying that myself.

I see. So from what you're seeing in the data, uh you're you're th seeing that a potential oversold condition based on on potential data coming out and it looks slightly more bullish to the upside for you? exposition to the upside, be it for equities or for interest rates, which have been uh for bonds which have been sold quite a bit. The the justification for for why they've been sold is actually valid. It's just that it should happen before.

But now uh I think things are turning and it seems that inflation will indeed go down or at least go back to a path that is acceptable for this Fed. And uh that's why I think that anyone who is still short bonds uh by Friday will be regretting it if he doesn't uh take his profits. Uh and that's why personally I'm a buyer of spools, bonds. And uh I would even be a seller of the dollar against uh against certain pairs. Uh dollar yen comes to mind. But I think uh out of these three trades.

Spools and bonds would uh Nasdaq and bonds would probably be the best ones to try if you had to try any of them. Again, for this closure, I will be doing that.

Uh another quote by uh Colm O'Shea in the Market Wizards book, he says, uh bull markets are more psychological than fundamental. Uh so have you found good sources to measure uh sentiment levels, psychological levels of the market? Um to be honest I have not. And that's why I have trouble uh with uh finding the tops in the markets and I always exit too early.

Um I think it's very hard, especially for someone who is ex a Cartesian logic as me, uh, because like I can derive a medical value or range for where the market should be. Uh, but because of the CTAs, Uh that's why I would I I wouldn't you know a lot of things that Colmoshe was talking about, I don't think they apply today. This one is is probably one of them because the CTAs, they are not they are not really psychological.

It's just it's just what they do. They they find something that goes up and they buy it hoping that it will keep going up. They don't get out of it until it starts going down a little bit again. Or they have a preset stop loss if the trade never works. I think it's a very silly strategy, but from 2021, 2022.

and twenty three, it has worked really well. They've been lucky. Like i i it it was a strategy that had severely underperformed up until uh up until COVID. Uh but suddenly it's it's w it's been working for like one, two, three years. And what happens when you have a strategy that works for one, two, three years?

Well, every other fund wants to do this strategy. They say, Ah, that's what we have to do. It's wor it's it's where the recency bias is very strong in the industry, unfortunately, even though every advertisement in the industry has the disclaimer below that says that past performances are not indicative

or future performances. Apparently they they don't really believe that. So because the CAs have worked so well, there's so many of them, uh I for one would welcome the day when they die again. I don't know. What it's uh what it's gonna take to do that because um I really think they hurt price discovery a lot and I think they even uh hurt some aspects of the real physical economy for people. Let me give you an example. Cocoa prices, eleven thousand.

uh up many many percentage. Does that have anything to do with the supply situation in Côte d'Ivoire? No, it doesn't. No, that yes, we have a drought, yes. We've been having droughts everywhere in Africa. That's that that's never given us this kind of price for cocoa.

We've had way more droughts that were way more severe. That never did anything like this. What's happening? What's happening is that all of these CTAs are seeing the this thing that they don't even care what it's called. Could be called Cocoa, could be called X.

They don't care. They just see it goes up. Okay, if it goes up, I'm gonna get in. And because Cocoa is just is such an illiquid market that's not really supposed to be the host of of uh of this kind of big volume trading from the CGAs, it moves up And that's how we end up with something like this.

Same happens in Nasdaq, same happens in gold recently. That's why gold is up seventeen percent this year, even though on the geopolitical front, um it's stalled, like it's it's uh whatever was supposed to happen is dead. Uh, because Israel has more or less given assurances to the United States of America that they are not going to retaliate in a way that will cause anything anything severe as far as reactions from Iran go. As proof of that, you can check oil. Oil has already gone down.

So the geopolitical risk premium is is clearly out of the way, or at least is in the process of being taken out of the way. Yet gold is at the highs of of uh of the year. At the same time, interest rates are at the highs of the year. So why is gold here? Always there because of the CTAs.

Let's get into um uh your your funds performance. I noticed on your website that in the first month of trading in May twenty twenty, you came right out of the gate with a fantastic forty one percent return. And by August of 2020, you already had a 152% total return. What factors went into these incredible returns? Well, that's very simple. My specialty happens to be US politics and I I had just uh understood before everyone that uh uh Biden was gonna and I just put on the implications of that.

And uh which uh which was basically to buy the Russell uh instead of anything else. That's that's worked tremendously well. So so sometimes when there is something that important, uh and there is a big prediction like this, uh that's gonna give you a lot of change, uh, you can make a lot if uh if you guess it correctly. So when when you see an unusual event unfolding that is not uh you know, it's not typical, do you um change your um weighting of your position sizing?

Uh if it's if it's yeah, if it's something that's that's really strong, uh that would definitely incentivize me to to put more size on for sure. Now now one of the reasons why my my my returns have have scaled a little bit lower over the time. It's also because as a request from clients I've been told to lower volatility.

It's just uh just something that I've been requested to do. So I've been using uh less size than uh than uh than than before. And what happens is that uh among my clients, those who still want the bigger returns, they can just decide to copy my fund. But the leverage multiple applied to it. So I have some people who have three times the return of my fund or two times the return of my fund.

Provided they can uh they can manage the volatility and accept it. So that's that's that that's basically how how we work it. But yeah, if if it's something new.

And you understand that it should be important, that it shouldn't have an impact. Yeah, you have you have to put on sides. You have to be brave. I'm not the bravest trader there is. Um far from it actually. But on such I've I've had the insight and intelligence to raise to the occasions for the couple occasions that I've had. How much of your trading is, if any, is done on personal kind of feeling, gut, gut instincts versus just pure quantitative data analysis?

very little uh is on God instinct. It it's really all of it is news flow. The the I I mean People wouldn't be able to see uh uh for for people who follow me on Twitter, um they they can they can easily see that each one of my trades corresponds to a news item that I usually post about and uh sometimes with a little analysis. uh following it. So it's it's really news flow driven. Now once I have the news flow, uh I have to be quick. So sometimes it it's it's not perfect and I get it wrong.

Um, but if I do get it wrong, I just take the loss and wait for the next opportunity. The the main thing for me, especially today that I already have a bit of uh AUM, is uh is really to stay alive. uh increase AUM and try to keep uh uh returns that make uh all of my clients happy, which is something along the lines of an average of three to five percent per month on average.

Um, as long as I can keep doing that, I think uh everybody should be happy and I can stay alive and maybe even increase AUM at some point. Um that's that's that's basically what I go to. My my trading has gotten a lot less riskier than uh than it was in the beginning, for sure. Yeah. I see if it sounds like you're uh somewhat constrained by investors' request to lower risk, um, so does that hamper your strategy in any way for for the big for the big games?

I I I I definitely am, yeah. Uh today I wouldn't engage in anything like that at all. I know as soon as I do that I'm gonna have uh twenty-six messages from uh people who are either angry or scared or both. Um especially if it's not working. I I have demonstrated that I can get myself out of very heavy drawdowns. I've had drawdowns of fifteen percent. uh twenty percent and I've always gone out of them and gone back to new all time highs.

So I'm I'm personally not that worried about it, but clients don't like it. And these days I I don't think I've had more than a six six point five percent browdown in a very long time. In a very, very long time I think that and I I intend to leave it that way.

Um, have you ever uh thought about um automating your your system or is it is it possible re realistically to automate what you do? It's not. It's really not. It's really not because the the kind of inputs that go that go in are not entirely quantitative. And even if you use to and if and even if you were to use something like generative AI, like if you link it into chat GPT, it's it probably still gives some very funky results. So no, I think uh discretionary trading.

Uh unlike other forms of trading, will stay in the realm of uh humans and uh is not something that you can um replicate uh automatically at all.

I saw your uh performance graph uh from November twenty twenty twenty three till today, showing that you average about seventeen trades per day. Uh however, on on this last Monday, April 15th, uh, with a sharp market decline uh in response to war jitters in the Middle East, you had fifty-seven trades. Uh, what were the catalysts to trigger all these? Yeah, n yeah, no, what's happening here is simply that I uh sometimes send trades

over multiple trades. For example, if I'm gonna buy the NASDAQ, I'm gonna do it in four times instead of uh one time. That's just something that I've had to to do as a client size grew because some clients have really big accounts. accounts upward of one million and the broker won't let me buy um the required amount in one strike. So I just do it in in four strikes. So what you identify as like 57 trades.

is probably um you have to divide that by four to get the the the real number of what it is. Oh okay. Okay, great. Do you have any uh goals in the next couple of years um for your fund or or for this uh learning process? I'm I'm I'm always hoping you know, there are there are a lot of questions that I still can answer. For example, I I would really love

to have a better mastery of certain market participants. To me today, the two market participants that really make huge issues for me are number one CTAs. A number two retail. Uh if they could ban them from trading, I would be very happy with that. But we can do that. Um, especially since the CBUE is is very, very happy with the zero DTE trading that they've introduced it's given them so much volume and so much revenue that they didn't have otherwise.

Um, so I assume they they are here to stay. So I am I am definitely trying always to to understand or have some sort of framework or trying to build some kind of framework. Which would help me uh understand that. And as far as doing that, I am definitely closer to achieving that with the CTAs. uh who at least have rules that you can more or less guess or um replicate or approximate than uh to the retail crowd.

Uh the research crowd is really trading out of gut trading. It's uh it's entirely psychology. Um, it's group thing. Um I fail at these things. I'm not even hoping to follow them, I'm just hoping to avoid. That's that's basically my I just don't want to be involved.

in a situation where they will be against me. Because now I stand no chance given how savage they they they they hit something when they want to hit it. They don't care about price. They don't even care about the the price of the volatility or the all the calls that they are buying. As long as it works, they're fine. And that's all. Yeah, that's what makes them so potent. Did you follow the the meme stock craze? Um

I did, I did. That's that's exactly what I'm what I'm talking about. And um it it might have started with GME, but what it showed them with GME is it showed them what they were capable of. It showed them that if they gagged up on the market, even on big indexes, that they can do things. I remember a day during the Jimmy at the Jimmy saga where they decided that silver had to go up.

And they managed to send silver up seven percent in the in in in a matter of one hour. Why? Because silver is in the liquid market and we're just buying enough cotton. These guys actually have money. That's something that people don't really understand. Who are these guys? These guys are most of them, a lot of them, many of them. They are uh people who work in tech.

Mostly in California. Actually, my nickname for them is Cali Boys, California boys. Because these are guys who work in tech, they have huge uh compensation over there. And they have more money than they know what to do with. And they are big gamblers. That's that's something that perhaps even they didn't know about themselves, but they happen to be huge gamblers.

And they love doing this stuff. So they have money. Like it's easy for them to put uh 10, 20, 30, 50 grand on a call. But what you have to understand is that 50 grand on a call is something a hedge fund could do too. It's it's not that far away. You could have a hedge fund, call Goldman call Goldman or or or at the or a smaller band and ask them to put fifty grand on a car for something. That that can happen. So this is like real money.

And it's done in a way that impacts the market as much as possible. Th I'm I'm I'm still I'm really always trying to to understand and study and like try to find a way to as I said, like not even follow them. I just want to avoid them. I just don't want to be in the way. I don't want to be a victim.

If you remember during the G saga, uh GameStock saga, a lot of hedge funds were victims of these guys. Uh I think there was one very big problem in front of someone with uh huge credentials from Citadel and so on. And he got trapped and he had to close his fund.

Uh because he lost like seven or six seven or a billion trying to short GameStock. Was he right in shorting game stock? Yes, of course he was. What does that mean? A 50 billion uh retail store that sells video games today? That doesn't exist. He's still out and they are in. And in fact many of them made a report on that. So that's a phenomenon that I am more and more interested in. And you know, one of the biggest mysteries for me in in this whole uh Zoday saga is

How exactly are they being uh hedged in the market? Like who is on the other side of their trade? Normally it will be virtual or citadel plus chain street. These are the three high frequency firms that can actually do that. But how are they doing it? What are they doing with that stuff? Uh, because we know that Citadel has a hedge fund and is a market maker at the same time. Uh they will tell you that they have a Chinese wall between them and whatever, but uh that's what they say.

What are they doing with this data? How much money is making how much money is Citadel making these days? Well, turns out Citadel is the best hedge fund these days. I think last year they made 16 billion in profit. Which is huge for them. So it's uh it's it's a real mystery and I'm still trying to understand uh how how to get around it. And same goes for the CTAs. Now the CGAs I know it's a cyclical thing, it's just because they've had a good run and it's

Probably not gonna last, especially if we have uh Trump as president. Um But it's still it's still important for me. So like these are the two aspects that I'm trying to to enhance with me. It's not really the macro analysis or uh or predicting or that I think I've I've mastered that as much as possible. Today for me it's really about understanding other market participants who don't care about the stuff that I care about. Yeah.

Excuse the last interruption here. This is Tessa. We hope you're enjoying this episode so far. If you love the podcast, Please give Chatwith Traders the best review you can on whatever platform you're listening from. This will help us to keep the episodes coming. Also, if you haven't subscribed to our email list, please hop on to chatwithraders.com and click on subscribe. so we can keep you posted of information that may be of importance. Thank you. Now back to the chat with our guests.

Mm-hmm. So these market participants sounds like they're distorting uh the natural fundamental news that would give clearer signals without their participation. Oh definitely. Definitely. They are they are a problem. They they are a problem, but at the same time, um given how the legislation works in the US, uh given how much someone like Ken Griffith from Citadel has uh with so much sway over uh over the US legislators, is he's basically a huge campaign donator on both sides.

Um I don't think it's ever gonna get fixed. Which is funny because in the US they don't they they didn't even allow uh sports gambling for such a long time. And now that it's something important, they don't care about it. Why? Because the the people in charge will not go against the hands that feed them.

Uh so they are here to stay. They are here to stay. Actually if if if they weren't here to stay, they would never exist. Because in Europe, I'm I might be wrong, but I don't think so. Uh ninety-five percent I'm I'm right. There is no zero DTE in all of Europe. There's no such thing as a zero DTE option for Europe. Or if you had to do it, it will be OTC and it wouldn't be like exchange listed like in the US.

So it will be something that your banker would make for you as a favor or as a product that they sell. And that tells you something. It's because here the regulators are a bit more free and they see that something like that is going to be, as you said, a a problem to the primary or social societal function of the market, which is to give us real signals about the price.

Uh zero DT in CDAs are how how you end up with the situation in Cocoa uh and on a few other iterations, um uh such as the NASDAQ going up every day and and uh GameStock. And uh a lot of names silver at some point. And uh if if I was personally a legislator, I would get rid of it. But that's not how the world.

uh the world doesn't resolve around me. I have to uh adapt to it, and that's what I'm trying to do. So uh what do you think about uh going into business as a uh Cocoa uh grower? We can capitalize on this big run up in prices. You can definitely do that. It just so happens that Cocoa doesn't really um actually some some uh some uh I just read that some uh Swiss chocolate makers will do just that.

Uh they are getting in growing their own co because assuming the prices stay here, which I don't think they will because it makes no sense. Um they they can do it, but actually there there's a there are there's a very limited area in the world where you can grow cocoa. And I think what will really happen to the to the prices is in at most a year. or six months. Um, because uh right now I don't know if you've noticed, but the price for chocolate hasn't really moved.

Uh that much. If you go and try and buy a child bar the price they have it movies because they still have inventory, at least that's what some uh senior management in uh uh at nestle said uh and i believe him but what will happen when they have to uh sell you a chocolate bar with these new prices i think what will happen is very simple people will just not buy No chocolate for you, my son. How about some fruit?

But That's that's basically what we'd have and that's how prices will go uh will go down. Uh well I I think it'll price will have to go up a lot for me to stop uh eating chocolate. I'm pretty addicted. So

Yeah. So uh wrapping up, what do you struggle with most as a trader? Man, I I struggle with a lot of stuff. It's a daily struggle from from uh every day. Really it's it's just trying to remain consistent and to perform as well every week, week in, week out. That's that's what I'm trying to achieve. I'm not there yet.

Uh I mean yes, I have a fund that has returned more than 1000% since 2020, but I I don't believe I'm there yet. I'm still trying to improve that. And one way I'm doing that is I'm working on my environment. I'm working on um on on on commodities, on amnities, on making uh on on having a healthy lifestyle. That's also something I'm working on.

Might seem simple, but uh try to have a healthy lifestyle with uh with the hours that I'm putting. Um Sometimes you have to sort of put boundaries between uh between work and the clients in my case, because I have clients, I'm not just managing my whole money. Um that's that's basically a struggle. I'm still trying to figure out everything. And I promise when I do become something close to what I consider perfect, I will come back and tell you how I did it.

Well, great. Saad, thank you for coming on uh Chat with Traders. Thank you. I I I hope people will enjoy what I uh what I said and will learn from it. Fantastic. Great. Uh Saad, uh, how can our listeners uh get in touch with you? Oh, they can get in touch uh via my website, via email, via Twitter. Uh that's basically it. You can find Saad's contact details in the show notes. You reach the But rest assured there are more episodes. to the podcast. if you'd leave a radio that with traders.