Introducing the Product X Case Study

One of the features that differentiates Trader Construction Kit is the use of a single, highly detailed case study that incrementally incorporates and applies the lessons learned in each chapter (described in outline form here), as seen in this excerpt from the book:

"My goal is to explain the common strategic building blocks that are applicable to all markets. In the interests of being useful to the maximum number of readers I have attempted to present the material in a product-neutral fashion. This would be challenging (if not impossible) if I were to draw the preponderance of the examples from my personal experiences in the energy market. Conversely, using a broad range of examples from currencies, equities, and fixed income would ensure that I was frequently pontificating on subjects of which I had no practical knowledge. 

I have attempted to resolve this dilemma by creating a highly detailed case study describing the market for a fictional commodity called Product X, complete with underlying market fundamentals, historical prices, and a global balance of trade. The Product X case runs through the entire book, and will be incrementally examined and interpreted with the tools developed in each successive chapter. The reader will get to see, start to finish, how to analyze a market, develop actionable information, evaluate trading strategies, and select the optimal means of implementation. 

Working through the process as a trader would when approaching a new market will provide a depth of understanding of the material impossible to achieve with dozens of individual stand-alone examples." 

The initial set of Product X market data is evaluated via the same analytical process that would be applied to real-world financial products:

JPEG Figure 0.1 Flowchart Of Decision Process.jpg

Figure 0.1    Flowchart of an idealized trading process. 


The Product X case study is truly immersive, as seen in the following snapshots from Trader Construction Kit:

Global fundamental supply/demand considerations and projected future trade balances impact both the general level of Product X prices and the fluctuations in the spreads between country-specific markets:

JPEG Figure 3.8 Product X Supply Graph.jpg

Figure 3.8    Historical and projected Product X production by country. 


JPEG Figure 3.10 January Prod X Global Basis.jpg

Figure 3.10    Current Product X imports and exports by country. 


The second part of the process of developing a view involves conducting a detailed technical analysis of the Product X futures markets, part of which can be seen here: 

JPEG Figure 7.10 ProdX Fibonacci MA & Bollinger Bands.jpg

Figure 7.10     FEB ProdX chart with moving average, Bollinger Band, and short- and long-term Fibonacci retracement studies. 


Once the trader has a perspective on the future of prices, they evaluate a variety of directional, spread, option, and quantitative trading strategies and select the most efficient means of expressing their view of the market. Here we see one possible implementation of a time spread using Product X futures contracts:

JPEG Figure 9.20 DEC Vs JAN+1 ProdX Spread.jpg

Figure 9.20     The DEC/JAN+1 ProdX time spread as a relative-value play. 


To create the Product X case study, I began by generating a set of simulated price data, wrote the description of the participants in the market, then created an initial set of supply/demand conditions. From that starting data set, I analyzed the market as I would for any other product. By not starting with the "answers" and working backward from there, I ended up with a much more interesting, realistic process. Not every trading strategy I would have wanted to do was possible, given the constraints, and I had to search for creative ways to implement my view. Just like a real market.

To read more, click here. To purchase Trader Construction Kit, click here. To see future updates, follow @TCK_JRubano on Twitter.


All material from Trader Construction Kit Copyright © 2016 Joel Rubano. All rights reserved. No part may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by reviewers, who may quote brief passages in a review.

Blockchain Is Not Kleenex, Cryptocurrencies As Options & The FOMO Index

As a relative cryptocurrency n00b, I have been putting in work on the Twitters following the launch of Bitcoin futures to try to understand the relative merits (and therefore the relative valuations) of Bitcoin, the important but second-tier Ripple, Litecoin and Ether, and the swarming hordes of Alt-coins being created and ICO-ed by seemingly every sketchy nineteen year old with an fsociety hoodie, laptop and free WiFi at Starbucks. Three observations on this nascent market: 1) There is a difference between coin and technology, 2) Crypto market positions can have option-like risk/reward characteristics, and 3) My newly-created FOMO Index.

1) The tradable instrument is one thing, the technology that allows it to exist is another, probably much more significant thing. Bitcoin is a pretty cool tool to punt around on with your spare cash (which can apparently run to a half-billion or so, if you happen to be a Winklevoss or Silicon Valley VC), but one more store of value or virtual casino chip is not nearly as interesting as a secure means of exchanging payment information that could eventually revolutionize virtually every global industry. If, and this a tremendously big if, they can find a way to somehow scale it in such a way that it does not consume a horrifying amount of energy and get the transaction time down to where large users (think banks, exchanges, and according to some commercials, producers of tomatoes) can accommodate their billions of records a day. 

This is the real battle. Who can deploy a secure technology that can scale, not who’s newly-hatched PwnCoin (Is that a real thing yet? It must be.[1]) happens to have doubled/halved on a given day. People, myself included, sling around the term “blockchain” the way we do “Kleenex”, as a brand name that has somehow become default designator for a whole range of similar, but not equivalent, products. As the crypto space continues to evolve, it is very probable that it will converge on the technology that finds the sweet spot on the Venn diagram between security, speed, and affordability. That one, the VHS solution, will Betamax every other technology in rapid fashion (look it up on your smart watch, Mr. fsociety) regardless of their relative technical merits.

2) It seems like every time a Very Rich Person shows up on the financial news to announce a freshly accumulated gigantic cryptocurrency stake, they are met with a fusillade of side-eye rolling and snarky Tulip Bulb jokes by the anchors and pre-arranged Opposing View panelists. I think there is a fundamental misunderstanding of how (some) professional traders and portfolio managers employ high-risk, ultra-high-return instruments: they think of them as long option positions. Obviously, a position in either futures or underlying asset does not have the same non-linear Greek risk characteristics as a derivative security, but many Cryptocurrencies do have similar extremely skewed return properties. Traders frequently employ option strategies as risk-limited leveraged long positions, where they know at the inception of the exposure the maximum of what they can lose and expect that, if things play out as they intend, that they can possibly earn a multiple of that amount. Nobody buys 1,000,000 shares of Microsoft and says “I am comfortable if this goes to zero”, because there is a vanishingly small chance that MSFT goes up 10x-20x during the course of the year to justify risking the entirety of the exposure. Many cryprotcurrencies have done this, and may continue to do so in the future, allowing a trader to plausibly assert that buying and HODL-ing is a productive strategy.

Consider the aforementioned (and as far as I know) fictional PwnCoin. If it were currently priced at $1.00 and a crypto-trader realistically thinks it can go up $15.00 in value during the course of the year, they don’t need particularly good odds of that happening to justify the trade. Traders calculate and obsess about the probability-adjusted risk-reward ratio of the exposures they are contemplating. If the trader thinks it is a 50/50 probability that the PwnCoin finishes the year at $0.00 or $16.00, then the net present value of that bet is +$7.00, yielding a fantastic 7-to-1 risk/reward ratio (with the reward expressed first, then the risk, as is convention). A 25% chance of favorable outcome yields a 3-to-1 ratio. Most traders will seriously consider any trade with a better than 3-to-1 ratio, particularly when the downside is fixed and known pre-trade. Again, this is assuming that the trader is willing to lose 100% of the value of their initial position. Any sort of risk mitigation strategy designed to preserve capital through a stop-loss will skew the risk-reward ratios higher and require a lower probability of success to justify the trade. 

3) Introducing The FOMO Index. As a way of contextualizing the incredibly rapid price appreciation potential of cryptocurencies, I decided to calculate the change in value of a basket composed of $1000 initial positions in Bitcoin, Etherium, and Litecoin starting on Thanksgiving Day (when I had my epic pro-crypto convo with family over stuffing and cranberry sauce) to put a number on my rising Fear Of Missing Out. As of 1/9/18 that amounts to:
Initial Investment:    $3,000.00                 
Current Value:         $8,211.88                 
Weighted Return:    174%                
FOMO Index:         $5,211.88                 

I will update the FOMO index (and weep softly onto my keyboard) in any subsequent posts. 

Disclosure: As the previous section should have made clear, I do not own and have not transacted any Bitcoin or any other cryptocurrencies. My perspective is one of a highly interested market observer attempting to understand and contextualize these (relatively) new instruments against the backdrop of more traditional financial products.

[1] Apparently there are PawnCoins and PwnyCoins, already. Just like speculative fiction based on mutants and superheroes fighting in a post-apocalyptic wasteland, apparently all the good ideas are already taken.

2018 Trader Construction Kit Academic Review Program

The 2018 Trader Construction Kit Academic Review Program is now open for professors seeking a practical guide to developing the skills and techniques employed by professional traders at banks, hedge funds and other financial institutions. There are myriad experiential memoirs written by market heroes and countless desiccated math texts available, but until now there has been a dearth of basic, usable information that shows students how to develop a robust trading methodology that distills information into an actionable perspective on the future of price, evaluate implementation strategies, and develop a disciplined plan for accumulating and managing positions. If you have struggled to find an academic text that fits within your trading or market-related curriculum, please feel free to contact me at or use the form available here.

More Bitcoin Musings During the Futures Launch

Following up on my initial post on the nascent Bitcoin futures market (which can be found here), a few additional thoughts:

1. Given what I conjectured to be a small to non-existent cadre of naturals/hedgers with a vested transactional interest, I asked the question: Does anyone need Bitcoin? Given the design of the futures contracts, and indeed the properties of futures markets in general, the same question can easily be asked of the CBOE and CME products. One argument that has been made is that miners can use the futures to hedge production of Bitcoin and other entities can use them to lock in exchange rates for future payments in Bitcoin. They could, but the better question is whether or not they should.

Consider a Bitcoin miner that expects to produce one Bitcoin in January, but that likes the current December price and wants to lock in that value. The miner establishes a brokerage account and sells one Jan CBOE futures contract for $18,000. The initial margin required to hold a futures position will be a function of the exchange mandated minimum, plus any markup/adjustment demanded by the clearing broker to compensate for the riskiness of the counterparty and the product. The problem for the hedger is not usually the initial margin (though for thinly capitalized players, it certainly can be), but the variance margin that the clearing broker will require to cover the day-to-day fluctuations in value.

If on the second day the Bitcoin contract closes at a new high at $20,000, the miner will owe their clearing broker $2000 of variance margin. If they don’t pay, the clearing broker will close the position and the miner will be on the hook for the losses. Though the value of the future Bitcoin the miner will produce has also increased in value by $2,000[1], they will not be paid until they sell it in January. This mismatch of cash flows is called the Hedger’s Dilemma, and if taken to extremes can easily bankrupt a firm that has, theoretically, made a smart decision to mitigate their price risk.

2. A secondary question around the utility of the futures contracts is whether or not players accustomed to the totally anonymous, unregulated characteristics of Bitcoin (and the cryptocurrency space in general) would have the desire (or capability) to set up an account in a highly visible, highly regulated, dollar-denominated product.

3. I’m also curious as to the market-expanding effects of the futures contracts. In my prior post I attributed the rise in price of Bitcoin to the inflationary effects of an increasing amount of money chasing an (effectively all-but) fixed volume of supply. A futures trade requires both a buyer and a seller, but the potential open interest is theoretically unlimited. Willing short players could end up facilitating the participation of a large number of unrequited buyers desperate to establish long exposures.

4. Good poker players hate playing against novices, as they do not tend to react in predictable ways and often refuse to throw in their hand when logic suggests that they should. I wonder if this same skill-based dichotomy might manifest itself in the Bitcoin futures, which could ultimately end up as a trap for the highly anticipated barrage of “traditional” financial players eagerly anticipating their opportunity to short what they feel to be an insanely overvalued market. If the same buy-and-forget mentality starts to manifest itself in the futures markets, the pros could find themselves shorting into a wave of doctors and dentists who have no intention of closing out of their positions under anything other than catastrophic circumstances. So, if the long side of the market is basically pot committed with their Bitcoins, then who are the shorts supposed to buy their positions back from? Their only hope is to bid up the price to entice in other professional sellers. This could easily lead to a rather violent rolling stop out, if the market were able to gather a respectable volume of open interest and make a protracted move to the upside that would be painful to the financial participants with V@R and stop-loss limits to worry about. I’m certainly not saying it will happen, but the necessary dynamic does seem to be present in the market.

In summary: Based on the unique characteristics of the cryptocurrency space, it seems that the most obvious utility of the futures is as a secondary speculative instrument, not necessarily a hedging vehicle.

Full disclosure, I do not own and have not traded any Bitcoin, Bitcoin futures, or any other cryptocurrencies. My perspective is one of a highly interested market observer attempting to understand and contextualize these (relatively) new instruments against the backdrop of more traditional financial products.


[1] Which may not be true, given the futures-to-cash basis, which will not be a constant.

Bitcoin Musings on the Eve of the Futures Contracts

Based on the fact that I spent 30 minutes discussing Bitcoin’s utility as a store of value and the relative merits of the underlying blockchain technology at Thanksgiving dinner, it seems logical to collect and summarize my thoughts on the eve of the highly anticipated launch of the CME and CBOE futures contracts. In the interests of full disclosure, I do not own and have not transacted any Bitcoin or any other cryptocurrencies. My perspective is one of a highly interested market observer attempting to understand and contextualize these (relatively) new instruments against the backdrop of more traditional financial products.

There are a few key differences in how the CBOE and CME chose to define their respective instruments, the most significant of which are the contract sizes (1 Bitcoin for the CBOE vs. 5 Bitcoins for the CME), the intraday trading halt levels (10% and 20% vs. 7%, 13% and 20%), and the initial margin requirements (30% vs. 35%). On the surface, the CME seems to have designed a contract for larger, more sophisticated financial players with deeper pockets and an ability to manage intra-day risk, while the CBOE’s product seems geared toward smaller firms and/or individual investors. 

In Trader Construction Kit I assert that to be long run viable, a market must have a diverse group of participants, including natural players (frequently called hedgers) with a need to buy or sell to mitigate organic exposures, financial intermediaries like banks and merchants that facilitate transactions and transform risk for a fee, and speculators that seek risk for profit. Most markets are initially driven by the day-in, day-out transactional needs of hedgers, which are serviced by the banks and merchants, ultimately drawing in speculators that seek to profit from the inevitable price fluctuations. The cryptocurrency space (seems to have) evolved in reverse, with the speculators arriving first, then the banks and merchant players drawn in by the demands of their clients to participate in the space. The question remains, who are the naturals? In the early days of the market, it was possible to argue that the Bitcoin miners themselves were the naturals, with a long position that needed to be hedged. Given the reduced mining output relative to the total volume of Bitcoin extant, I am not sure that this is as operative an assumption now. Going forward, who needs the ability to transact in Bitcoin to facilitate their core business? 

Traditional market participants bemoan Bitcoin’s lack of fundamental information to analyze to develop a view on price. How do you trade a product with no fundamentals?!? Bitcoin does not have no fundamentals, it just doesn't have the same fundamentals as traditional currencies. For an instrument that is converging to a fixed volume of tradable supply, the key variable is money flow into/out of the product. For those with a long memory, this is the same inflationary force that drove oil prices from the low $60.00 range up to $145.00 in 2007-08 as the formerly $50B market tried to digest an incremental few hundred billion dollars of investment from pension funds desperate to increase their commodity allocations. Also worth considering, when those same funds re-allocated away from commodities after the financial crisis, the price of oil immediately crashed back down again. So, the first thing to watch is the relative money flows into/out of the space and the number of accounts opened up at the exchanges. 

A second variable worth considering is the relative percentage of Bitcoin held by “investors” vs. “traders”. According to recent media reports, the Winklevoss twins claim to have never sold any of their initial $11M investment in the space, which is currently valued at around $1B. Given the relative level of zealotry endemic to some of the early market participants, I am sure they are not the only ones in for the long haul. Given that, how much of the approximately $250B of Bitcoin is actually available to the market to absorb incremental buying and selling? Trying to purchase $1B of Bitcoin will have an entirely different price response if the available transactable volume is $100B vs. $10B. 

The law of one price has yet to be fully enforced by arbitrage agents in the cryptocurrency markets, leading to potentially significant simultaneous exchange-to-exchange price differentials. This makes sense, given the relative developmental state of the market, as much of the recent activity has been driven by the entrance of a large number of retail (i.e.: small and unsophisticated) accounts that will likely participate in and transact on only one exchange, which can lead to isolated pockets of intense buying/selling pressure that locally distorts price. The introduction of the CME and CBOE contracts may actually short-run exacerbate this phenomenon, but should in the long run help to stabilize prices via increasing the participation of sophisticated financial players for whom multi-exchange arbitrage is a standard business practice.

I am extremely curious to see what effect introducing the futures contracts will have on the existing cryptocurrency markets. Many members of the “traditional” financial markets view Bitcoin as an insane speculative bubble and assert that the ability to freely enter into short positions afforded by the futures market will instantly crush valuations. While it is certainly possible, I do not believe that an instant sell-off is as obvious an outcome, particularly given the (likely) small relative size of the futures market compared to the “tradable” portion of the volume held at the largest Bitcoin exchanges. There will likely be a protracted struggle to determine which is the tail and which is the dog, going forward. I also suspect that the fragmented high-volatility, low-liquidity Bitcoin market will provide unique challenges for financial players, particularly around survivable position sizing, efficient entry/exit execution, and institutional risk management. One distinct advantage of being an “unsophisticated” buy-and-forget individual investor oblivious to the minute-to-minute price fluctuations is not being forced out of the market when their overly-large position blows through their V@R and stop-loss limits fifteen minutes after they put it on. Given the prevailing level of volatility endemic to the cryptocurrency space, this is an all-too realistic possibility.

CBOT futures go live December 10th, with the CME futures following on December 17th. Bring your popcorn.

A Comparison of Current Academic and Industry Pedagogies for Developing Traders

I have published a paper on Social Science Research Network (SSRN) that compares the current academic and industry pedagogies for developing traders, which can be found at:


There is a gap between the knowledge and skills present in graduates of top-flight finance programs and the demands of a modern trading desk. This paper compares the development methodologies common in industry and academia and proposes incremental modifications to existing finance curricula that would produce stronger graduates more able to move directly into commercial positions at financial firms. Changes to introductory finance classes, real-money portfolio management courses, and market simulation programs are discussed.

Though the paper principally addresses the academic community, it will be of interest to industry practitioners and students aspiring to a career in the markets.

How to Prepare for a Trading Interview – 2017 Edition

For current university students and recent graduates, preparing for a trading interview will involve a substantial amount of industry and company-specific research. The candidate must, at a minimum:

1.    Know the Industry.
2.    Know the company and its primary business.
3.    Have a sense of the immediate evolutionary challenges the firm is facing.
4.    Know the people they will be speaking with, their backgrounds, the markets they inhabit, and the products they trade. 
5.    Know as much as possible about how the market is traded at the target firm, and how the candidate’s skills make them a good match for that product.
6.    Prepare for some of the obvious questions they should expect to be asked.
7.    Prepare for the programming & data science requirements of the job.

Know the Industry
The opportunities available and the types of business transacted are, to a great extent, determined by the evolutionary state of the industry. Early-stage markets offer the most opportunities for rapid advancement for candidates with an entrepreneurial mindset and a willingness to innovate in an evolving operational environment. Fully-evolved markets have established career paths, with measured progression based on the mastery of and deployment of established knowledge sets. A candidate needs to know the evolutionary state of the industry they are targeting to calibrate their expectations of the potential career progression available to them, and to understand the company’s expectations of their initial and to-be-developed skill set. 

Know the Company
In Trader Construction Kit I focus the majority of the second chapter on describing the market activities of four categories of market participants: Hedgers, Merchants, Financials and Speculators. Each category participates in a market for specific reasons, engages in different types of risk-shedding, risk-modifying, or risk-taking activities, and hires traders will different skill sets to implement their business plan. A candidate must know what type of firm they are speaking with and understand the basics of their core business and corporate culture. 

Have a Sense of the Immediate Evolutionary Challenges the Firm Faces
There is a lot of change going on in the world of finance and trading, at the moment. The Europeans are grappling with the implications of MiFID II, the British banks are trying to plan for the continuity of their business under all of the possible permutations of Brexit, the Americans are navigating a sea change from an environment of increasing regulation to one of possibly decreasing oversight, and everyone is dealing with the accelerating impacts of technology (AI, algorithms, blockchain, cryptocurrencies, etc.) on their core businesses. While a candidate will not be expected to be a subject matter expert on every last regulatory nuance, they will be expected to have a general sense of what is coming and how it may impact the business unit they are interviewing with. 

Know the People and the Markets
In a Google and LinkedIn world there is no excuse for a candidate not having a basic familiarity with the backgrounds of their interviewers. The person arranging the schedule will generally provide a list, if asked nicely by the candidate. The candidate must know each interviewer’s position within the company to understand their function, their implied perspective, and develop a sense of what sorts of questions to anticipate. A risk manager with a Masters in physics and a PhD in quantitative finance will have entirely different concerns and ask entirely different questions than a proprietary trader with a background in the crude oil pits and scars on his knuckles. The candidate must find a way to be relatable to both.

A candidate should expect to speak to the head trader, their lieutenants (one of whom will probably be the hiring manager), a junior person to provide a skill-set comparison with a near-peer, and potentially members of the risk, analytics, and compliance groups. If that sounds like a lot of people, it is, and an aspiring trader should expect a full day of half-hour to hour long conversations with one or two people at a time. It can be difficult to maintain focus, but in the vast majority of cases the candidate must leave a positive impression on every interviewer and really shine with the one or two shot-callers they meet.

Know How They Fit In as a Candidate
In Chapter 1 of Trader Construction Kit (which is available here), I list the positive characteristics of successful traders and the negative traits of unsuccessful ones. The candidate must accurately assess their unique strengths and weaknesses and how they apply to the demands of the trading environment at their target firm. If the candidate wants to build bleeding-edge algorithms at an industry-leading quantitative hedge fund, they had better really know how to code or they will be laughed out of the room. Ditto for an unassertive pit trader, a non-mathematical option trader, a disorganized market-maker, or an indecisive directional trader. There is no shame in being a poor fit for a particular job at a particular firm. There is a tremendous amount of shame in showing up for the interview either not knowing that, or attempting to pass oneself off as something they are not. 

Prepare For the Obvious Questions
A current student or recent graduate with little to no practical trading experience to be quizzed on should expect the standard probability and logic based questions. Read up on the Monte Hall question, basic conditional probability problems, and (my personal favorite) the TV Question. The candidate should expect questions about sports played, team activities, and their propensity for gambling and other risk-taking behaviors. In lieu of actual experience, the traders will want to see that the candidate can logically process information and make decisions quickly under stress. At some firms it is very fashionable to manufacture an artificially stressful environment to test the candidate, others will prefer a more collegial, conversational approach.

The candidate should also have at least a superficial familiarity with the benchmark informational resources for the market, both in terms of the standard educational texts and the book/blog/site/news of the moment that everyone is currently reading or talking about. Giving a blank stare to an interviewer who name-checks Nassim Taleb or references The Big Short is a big negative. A list of some common resources that an aspiring trader can investigate to help them prepare for an interview (Trader Construction Kit among them) can be found here.

Prepare For the Programming & Data Science Requirements
In 2017 the incremental must-have skills on the trading desk are programming and data science. Python is far and away the platform of choice for most on-desk development, and its large library of pre-existing code modules like NumPy, Pandas, and Matplotlib make it relatively easy to manipulate data and produce usable results. Firms that employ AI, Deep Learning, or any sort of non-traditional data set analysis will employ significantly more esoteric and powerful tools. While it is true that most of the heavy programming work will be done by highly specialized CS and Data Science graduates, on a going forward basis not being able to code will become akin to not being able to read or write. I believe that this evolution will happen very quickly, and that as trading becomes increasingly machine driven, the person most able to transform data into actionable information will be the person seen as adding the value to the organization. One relationship that will not change in the future is that adding value = getting paid.

Fluency in Python and an aptitude for Data Science will also serve as a valuable safety net in case the candidate is not hired as a trader. It is very common for even a top-notch candidate from a strong academic program to be hired into the firm in a non-commercial support position, either as an assistant trader, analyst, risk-manager or deal structurer. Support functions typically serve as a combination apprenticeship and extended interview for the trading desk. Making the transition from a support role to the trading desk presents its own set of unique challenges, which will be the subject of a follow-up post.