We’re breaking the law…the laws of trading, that is! On this episode of the Derivative, we’re joined by Agustin Lebron (@AgustinLebron3), who started his career as an engineer and turned prop trader (you’d be surprised how common of a story and skill set that is) before writing his book The Laws of Trading: A Trader’s Guide to Better Decision-Making for Everyone Today, Agustin is the co-founder and manager of Esselin Research, where he helps growing tech companies make better decisions using his trading knowledge. – Jeff and Agustin dive into his laws of trading, the book, and also chat on topics like; recognizing and nabbing players in small tech companies, applying the laws in a prop firm investing in a crypto scenario, how and why trend following seems to break the law around having an edge, and so much more! Plus, tune in if you want to get Agustin’s take on FinTwit’s stop order debate —SEND IT!

______

- -

______

 

Check out the complete Transcript from this week’s podcast below:

Using the Laws of Trading to find our edge with Agustin Lebron

Jeff Malec  00:07

Welcome to The Derivative by our RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Happy Monday, people yep, that’s Maine with an E, which is where I am right now on vacation. But through the magic of technology, I’m still here with you today. And I’ll be back the next week too with our growing list of vol episodes, which may end up being back to back to back so sorry about that. But these guys are good. We gotta get them on. On to this episode where we have Agustin LeBron James Street prop trader turn tech company consultant after he authored the laws of trading, which blends his real world experience with a unique view on decision making for everyday life. We get into a hypothetical experiment on whether you should greenlight a crypto investment at a prop firm and much more fun, send it This episode is brought to you by our sans managed features group manage features are having a day people go to our CML stack comm sign up for all the great content there and pick up the phone and call one of the specialists to hear what’s going on under the hood. You won’t want to miss it. Now back to the show. Okay, we’re here with Augustine LeBron. Welcome.

 

Agustin Lebron  01:24

Thanks for having me. Glad to be here.

 

Jeff Malec  01:26

So I was gonna say it’s a very French nobility-sounding name, but I guess gathered now you told me it’s a Spanish nobility-sounding name. So what’s the background on the name?

 

Agustin Lebron  01:34

Yeah, so my parents were from Argentina. And so it’s a Spanish name, at least my first name, my last name. It turns out that way, way back in the mists of time, my family was from France, but then they moved to Spain. And that’s how the U turned into an O. At least that’s the story. I’m told. Who knows if it’s true or not?

 

Jeff Malec  01:50

You go back to Argentina ever? Yeah,

 

Agustin Lebron  01:52

definitely. Now, my family’s still there. I mean, my parents are outside of the country. But my whole extended family is still there.

 

Jeff Malec  01:58

Love it. We my sister got married in Colonia? In Uruguay, right across Nice. Buenos Aires. So we spent a couple of weeks down there and did all the way down to the glacier Mendoza. Oh, awesome. Had a good some good wine. Yeah, it was it was a fantastic trip need to go back. Right. Um, what’s their economy doing these days? What’s their currency? Well,

 

Agustin Lebron  02:18

I just talked to my mom a couple of days ago. It sounds like inflation and devaluation seems to be the order of the day in Argentina yet again, seems like for the whatever the 10th or 11th cycle in the last 100 years. So yeah, who agreed? I

 

Jeff Malec  02:33

think right. I was Wonder who would buy those bonds? Yeah,

 

Agustin Lebron  02:36

I don’t get it right. Like I mean, maybe people have wised up in the sense of now their US dollar denominated bonds instead of peso denominated bonds, but I don’t think it makes a functional difference, honestly.

 

Jeff Malec  02:47

Yeah. And how did the people deal with it? So like, how does your mom deal with it? It just like, oh, here it goes again? Or do they have strategies for protecting their money?

 

Agustin Lebron  02:55

Yeah. So yeah, it’s, it’s tough, because again, like Argentina is one of one of these countries, that still has a fairly bright divide between the haves and have nots. And so the way it manifests for the house is, oh, I can’t travel outside the country, because I’m limited on the US dollars I can buy, which is like one of these rich people problems that the vast majority of people in Argentina don’t have, it’s just like the price of foods going up, and I have less and less money to spend on necessities. So yeah,

 

Jeff Malec  03:23

and right, but it doesn’t get to the point of like bread lines, and that stuff, it just

 

Agustin Lebron  03:29

look, I mean, eventually, they’re gonna get rid of the government, and somebody else is gonna come in, and they’re gonna do something like we’ve seen this, this game played a lot of times.

 

Jeff Malec  03:38

So we didn’t come to talk about Argentina, though, even though it’s fascinating. So you started in life as an engineer from what I gathered from your bio. We’ve had a lot of former engineers turned hedge fund managers and investors here on the pod, bunch of our customers are engineer type. So just take me through, what do you think is the link there between like, people who get are engineers and people who kind of get finance for lack of a better phrase?

 

Agustin Lebron  04:06

Yeah, no, I think I think there’s probably two big links. One of them is trading and engineering, both you’re doing the same thing, which is trying to make good decisions with uncertain or incomplete information. Like an engineering when you’re doing a design, you have to you have to use your good engineering judgment, because you’re not going to be able to get all the data to really make a data informed decision. You have to sort of merge your your, your beliefs and your prior information with data. And that’s the modeling and trading for sure. And the other thing I think, is they both yield to a very analytical my mindset, at least from my perspective, and so I think that’s a natural connection as well.

 

Jeff Malec  04:40

And how did you make the jump from engineer to prop trader?

 

Agustin Lebron  04:45

Yeah, so I made kind of make the jump via poker because I was playing a lot of online poker during, you know, while it was an engineer, like at night, and I was making money and I thought, well, maybe I could do this, but I had engineer friends who did turn into poker pro poker players and it was It’s a soul destroying existence. And so I wanted to find a job that was kind of half poker and half engineering. And of course, that’s trading. And so that’s kind of the the genesis of my move.

 

Jeff Malec  05:08

And did they recruit you out of poker? No.

 

Agustin Lebron  05:11

So I just I started applying for jobs at prop trading firms and that sort of thing in early 2008, which is probably not the greatest time to be looking for a job in finance, if you’ll remember that far back. But yeah, it worked out, okay.

 

Jeff Malec  05:25

I’ve friends and prop firms here in Chicago, and they’ll actually recruit look at like online trading, leaderboards and stuff and recruit those guys to be like, Hey, you get game theory, we can teach you the trade finance stuff rather quickly and just go for it. Yeah. Although I press him because he tells all these great stories of how they got the guy and then I’ll save that in the back of my head. And like, years later, we like had that guy and like, he, he didn’t he blew out or he didn’t blow out. But he didn’t make

 

Agustin Lebron  05:52

Yeah, yeah, it’s it’s a useful indicator. It’s not like, it’s not like if you only hire poker players, you’re gonna do great. Like, Yeah, we’re good players a good starting point, and then we’ll see what else we need.

 

Jeff Malec  06:03

And do you think like the engineering, you think you’re just a blank slate, and you go, and then you learn engineering? And then that opens up your eyes? You’re like, Oh, now I want to get training? Or do you think it’s like in there? It’s in your brain, that mindset and just in school level, there’s no, you can’t, you know, there’s no avenue to express that except for maybe engineering. And then as you get older, like, Oh, cool. There’s here’s all these other avenues.

 

 

 

Agustin Lebron  06:26

Yeah, I think that’s right. I think certainly from from looking back to kind of the way I thought about things in high school was I liked all the nappy, techie sciency things that I just naturally gravitated towards that my dad was an engineer, it’s like, okay, well, I guess I guess I’m gonna do engineering, right? I didn’t really think about physics or math or anything like that. It just seemed very natural to go into into engineering. But as you say, as you sort of get out into the world, you start to discover, oh, man, like there’s a very wide array of places where this can be acquired.

 

Jeff Malec  06:56

I’m worried we’re wasting all that good trading talent on like web 3.0 projects and things that are building apps for people instead of getting in there and finding out edge and trading. So then eventually, you made it to Jane Street. So tell us a little bit about Jane Street. And what you did there?

 

Agustin Lebron  07:16

Yeah. So Jane Street is I guess, by now certainly was in 2008, when I started but by now one of the more well known prop trading firms in the world. And I started off as a trader, I traded a bunch of different products over the years, ETFs options, data, a bunch of stat ARB stuff. Over time, my career, I kind of moved in the direction of doing more research and development. I think people’s careers just sort of naturally know moving in directions. And that definitely happened to me. So yeah, I got to see a lot of the business over time.

 

Jeff Malec  07:48

And what what was their model when you joined, you put up some cash or they put up all the cash and you had to know back what no matter what,

 

Agustin Lebron  07:56

you get paid a salary, and at the end of the year, you get a bonus? Right? Okay. I think on Friday, I’m fond of saying that there’s basically two kinds of prop trading firms. The ones that have you put up cash are maybe there’s some good ones out there, but by and large, especially the ones you see, I’m sure you’ve seen them in Chicago. Like they’re they’re kind of scams, honestly. Yeah.

 

Jeff Malec  08:17

Well, there have been some good ones in Chicago, but it’s definitely uh, well, yeah, it’s it’s way better for the firm than the guy coming in as the trader.

 

Agustin Lebron  08:25

Yeah. And as an outsider, you can’t tell right? So that’s, that’s the challenge.

 

Jeff Malec  08:30

But it’s a great way for the firm to be like, Hey, I’m gonna basically a free call option and all this young talent they’re gonna have fun their their early losses, and we’re going to profit off their later successes. Yep. So I never knew and then as Jane Street’s kind of more of more into like, some market making and some different stuff, right?

 

Agustin Lebron  08:49

Yeah, exactly. J Street’s, like possibly, famously, the the big one of the biggest market makers in in, in ETFs. Around the World. Yeah. That’s kind of one of the big things they do.

 

Jeff Malec  08:59

And so tell us you got any fun juicy stories from back in the day there have been someone blowing up or then taking the other side of something big?

 

Agustin Lebron  09:08

Yeah, I don’t know so many random stories. Certainly, like the things that I think back to the most in terms of like pure pure trading was when I did trading in base metal options on the LME is a fairly closed shop. And, and so yeah, it’s very much about kind of knowing where the toxic flow is coming from, and knowing sort of how to position yourself so you’re not gonna get run over as a market maker and some huge you know, metal trading company comes in and wants to do a bunch of size very, very much the opposite of what you would think of as, as we’ll say like the modern high frequency you know, low edge done a million times kind of trading that I also did a bunch of so it’s like kind of one extreme for me.

 

Jeff Malec  09:51

So what did what do you think about LME canceling all those trades?

 

Agustin Lebron  09:55

Like if I think then that I think it’s ridiculous. I think it’s, you know, all of the things So you might see Cliff Asness, say on Twitter I basically agree with,

 

Jeff Malec  10:03

right? And then that comes into your some of your philosophy on like, how do you work that into your model, right of like, talking about like, Hey, if you don’t think it’s ever a possibility, it’s definitely is a possibility.

 

Agustin Lebron  10:14

Right? Exactly. If your career and trading is long enough, you will discover 1000 things that you’re like, I didn’t even know that was a possible way I could lose money. Yeah, it is actually a way you could lose money.

 

Jeff Malec  10:25

And I think if it had been that other way, I don’t know exactly how it would have been the other way. But the gains because we had a bunch of managers and trend following stuff that were long, rather long, one or two contracts of nickel. And may it was up enormous amounts of money, like hundreds of 1000s of dollars per contract. So it’s just this out of the blue over two days like outlier game, right, that they weren’t necessarily counting on. Yeah, it was fun to see on the beat, but you almost looked at and you’re like, is that a real print? So I can kind of see that side of it of like, it didn’t even feel real to those involved. Yeah, but as Cliff, as you point out, is noting on Twitter, like there were trades up there, there were people taking the other side. So yeah, by definition, those should have been legit.

 

Agustin Lebron  11:06

Yeah. And look, it even happened during the flash crash, like because as I’m sure you know, like people like James Street, and among many others, were down there at the bottom of the flash crash buying and providing incredibly valuable liquidity during this event. And then those trades got cancelled, right. And so, you know, maybe you bought down there at the bottom, you sold, maybe halfway back up to the recovery, your trades at the bottom got canceled yourself halfway back up didn’t get canceled. In fact, you got penalized for being a legit liquidity provider.

 

Jeff Malec  11:38

Right? And be like, hey, cancel myself. Well, we can’t do that. That was because then I have to cancel that guy’s buys in the

 

Agustin Lebron  11:43

hole. Exactly. Right. So like, where do you stop?

 

Jeff Malec  11:47

So how do you feel some of that is? I mean, in the flash crash, I don’t even know who was in charge of doing that. But that was Anna NYSC. And when it but yeah, I think it’s partly the problem of these for profit exchanges. Right.

 

Agustin Lebron  11:58

Partly, I think, also, I think that the exchanges are, by and large, always at least a few years behind of what market structure actually operates like day to day. And so, you know, and especially the noisy recognize, he’s always been kind of an old boys club. I don’t think that’s telling any secrets here. And so the idea that a bunch of guys are gonna get together in a room and decide which trades get cancelled and which ones don’t. And that that doesn’t really reflect the reality of how electronic markets work. Like, yeah, that was kind of bound to happen

 

Jeff Malec  12:32

if they’re one of the biggest market makers now, how do you view that hold space? Right? There’s a lot of your own fin twit, so to speak, a lot of talk right of like, oh, the mass of market makers, they make Gamestop do this. They make the s&p Peg gear because they have this game exposure. Having been in the throes of it What’s your view on the power of those large market makers?

 

Agustin Lebron  12:53

Yeah, so I mean, somewhat predictably, the feeling that you have as a market maker, even a large market maker is you are 100%, the person with the least power, right? Because you’re always there willing to buy and sell like you’re not moving prices you’re not taking, you’re always there providing the flow is pushing you in directions, and the whole game is just trying to like not get run over by flow, right. So the idea that a large market maker is moving stocks, is to me insane, like in my years of doing this, and in my years of talking to people I have never seen literally never seen an evidence or an instance of somebody in a market making position saying, I’m just going to move the stock to a place that I think is not fair. That’s crazy.

 

Jeff Malec  13:35

Well, I think they’ll their argument be No, it’s not them moving the stock, it’s them delta hedging their options, exposure. And in turn, that’s what moves and so it’s like a knock on effect of them trying to try and remain Delta neutral. So they don’t have that exposure, creates knock on effects where they they push the price. Yeah. And

 

Agustin Lebron  13:53

look, I think we’ve seen certainly over the course of of the years, many instances where the derivatives market pushes the the underlying market because it’s gotten too big for the liquidity that that’s available in the underlying market. But I think at that point, your model of the underlying being fair is broken, right? The fair price is somewhere between the underlying and where the derivatives are trading, right. And you see that all the time in crypto, right? Like, the idea that the fair price is in the perpetual future and not in the in the cash coin is a pretty standard thing to think. And so, you know, I think it’s more a mistake about your mental model of warfare. It’s

 

Jeff Malec  14:28

momentum. No,

 

Agustin Lebron  14:29

no, no, you’re just whoever disagrees with the notion

 

Jeff Malec  14:32

and you threw a throw away where they want to dig into toxic flow. So tell me how the market makers think of toxic flow. How used to think of that versus normal flow?

 

Agustin Lebron  14:42

Yeah, so I would say there’s definitely two canonical kinds of toxic flow. One is size where, you know, I’m just gonna like take a very stereotypical example like your your broker calls you up and the broker says, Okay, I got a client that’s got 1000 contracts to buy in this thing. And you’re like, Yeah, I can give you I can show you this price. If that probably want to do right in the show the price, you print the trade, and then the broker calls up calls back, you know, like three hours later. So he’s got another 1000 to do. And it turns out that like, he’s actually called 10, other market makers, and that you’re just gonna get run over. So that’s like, you’re gonna get run over on price impact from their sides, right? That’s one kind of toxic flow. And the other kind of toxic flow is just information. Usually it’s it’s more short, assuming it’s not like illegal information. It’s more kind of short lasting. Like, if I’m a market maker, and I’ve got a quote here and there’s information on some other exchange and somebody’s got gets that information before I do, they’re just going to take my quote. And that’s toxic flow, because I’m trading against somebody who has some information about the future that I don’t

 

Jeff Malec  15:42

or already in high frequency already has the other side of the trade isn’t sure. Yeah. But and so how do you combat that toxic flow in the modeling in the UK? Just step aside, right? Do they have limits of like, Hey, we’re only putting so much out there, because you never know when this large player comes in white to off the books?

 

Agustin Lebron  15:59

Yeah, it’s definitely market by market dependent. Certainly. I mean, obviously, as a market maker, you fade away from your position, so that you’re always kind of trying to close, right? Because inventory is just risk that you’re not getting paid to take most of the time. And so yeah, that’s kind of the natural way to do things. But also just expect, especially in the stuff that’s more human directed, as opposed to automated, it’s just kind of getting a good memory and a good feel for oh, this broker usually, you know, sends good orders is broker does not or, you know, this is the signature in the market that I see you have like a t walk order, that’s probably pretty dumb, or, you know, this is something that looks pretty smart. Like, you have to sort of have that intuition are developing over time.

 

Jeff Malec  16:41

And how did you? How do you feel it’s the, from when you were there to now? How much was automated back then, versus how much is automated? Right now, in terms of the market maker space? Yeah, look,

 

Agustin Lebron  16:53

it definitely gets more automated over time, for a given strategy or a given set of products, it definitely gets more automated over time. Like, when I started, well, let’s say like my boss, on the options to ask when he started, you know, being the market maker of like five stocks was a lot, right. And when I was doing it, like being a market maker of 100, stocks, it was kind of like reasonable or close to the limit. And now probably, you can mark and make, you know, 1000 stocks with one person or a couple people. So the level of automation for a given trade probably goes up over time. I mean, that’s inevitable. But also, there’s always new trades and new things that require at least initially a lot of human intervention that kind of overtime, get automated.

 

Jeff Malec  17:35

Some of the stuff in your books about having edge and edge is the need for a marginal player. Right? Like you don’t have an edge unless you know someone who doesn’t have an edge. Yeah. So how do all these huge firms basically coexist? Or how is there enough marginal players to feed the beasts that are? Citadel Jain Street? Susquehanna? Yeah, what are your thoughts on it? Yeah.

 

Agustin Lebron  17:59

So there’s a couple of things I might say. One is that market makers, fundamentally provide a service to the world, which is kind of this idea of immediacy. Like if I want to buy IBM stock, if market makers didn’t exist, I would have to sort of sit there waiting under the metaphorical Buttonwillow. Tree for somebody to show up. Who wants to sell IBM, right. So the service that market makers provide, you know, there’s sort of a natural profit that they should take for that service. Right.

 

 

 

 

Jeff Malec  18:27

So that’s kind of one side of it, it’s kind of hard to avoid rest of the world, the other side, especially recently, it’s like, no, that’s a utility that should just always be there.

 

Agustin Lebron  18:33

Right, exactly. No, they’re not. And the other side of I think the edges, but one thing that we know is that markets are incredibly complex, heterogeneous, the world is incredibly complex, and nobody has a monopoly on the information that goes into the value of a security, right, so you and I, like we can specialize in one kind of information. And then maybe Warren Buffett, you know, sits in his office, drinking cherry coke and specializes in a totally different kind of information. And, and there’s gains from trade for both of them trading with each other, like maybe, maybe you and I make money on that trade sort of over the short term. And then Warren makes money over the next three years, like we’re both happy to have traded,

 

Jeff Malec  19:15

right, which is the kinds of like non economic players at certain timeframes. That’s where I think people get confused. That can be a non economic player at the two minute timeframe. But yeah, economic player over the 30 year timeframe. Yeah, I want to own this regardless of price right now.

 

Agustin Lebron  19:31

Exactly. And if for example, if I’m an equity market maker, I’m, I’m just a hedge or in this booth futures, right, like, I have no edge there. I would love to be able to advertise to the world, hey, this, these are hedging trades that I’m doing, right.

 

Jeff Malec  19:46

And then you touched on that too, of like, so you’re, some of these groups are looking or building models to analyze flow and types of flow and assign a player rating essentially to that right. So they kind of know that dump flow that smartflow That’s talking flow.

 

Agustin Lebron  20:01

Like, like a very classic example, it doesn’t work anymore. But, like autoload orders used to be sort of very, very good trades to trade against, because that was almost indefinitely, almost invariably retail traders doing less than 100 shares. Right? So, but obviously, that’s not the case anymore. Like round numbers used to be a thing, it’s not a thing anymore. Like, all these things sort of get competed away.

 

Jeff Malec  20:27

And what’s the thing today? Who knows? You’ve been out of the game?

 

Agustin Lebron  20:30

Yeah. Certainly in, in, in traditional finance markets, I couldn’t tell you what the what the thing is to do today, all I will say the following. The thing that surprised me over time, as I kind of got into it more is how cyclical some things are. So some trades that kind of are good, and then they go away, because they get competed. They kind of come back and like, you know, it’s like, this whole history doesn’t repeat itself. But it rhymes. Like, I feel like trading strategies have a similar sort of lifestyle or lifespan, where they’re good, they’re bad. And then like, some weird variants of it is good again, many, many years later.

 

Jeff Malec  21:00

And hat How do you view that as of okay, this model is broken, or it’s on pause, or like as a as your have that trader philosophy, that trader mindset. And I’ll back to your some of your laws, like how do you view the model? Is the edge gone? Or just resting?

 

Agustin Lebron  21:17

That’s one of the hardest questions, I think, to answer. I don’t think there’s, I’m not aware of a universal answer to that question. It’s very, very case by case. But certainly, if you have a strategy that’s trading 1000s of times a day, and it starts to do bad for, you know, like, a couple of weeks, then probably something about the world has changed, right? Whereas if it’s more episodic, you’re only doing a few trades a day, it’s gonna take you more time to figure out that maybe it’s not doing well. So

 

Jeff Malec  21:45

yeah, which is the push to higher higher frequency, because then I have more information to feed my mom. We’ve seen a little bit of that in the volatility machine learning space over the past couple of years of like, things are happening that these models have never seen. Sure. Right. And if you’re, especially in volatility events, widely spread out, right, like one every three years. So how do you model something on those events? Yeah, with any reliability?

 

Agustin Lebron  22:11

Yeah. And I think that’s one of the most interesting questions as a trader, as a trading firm, is how to allocate the smartness between the human brain the well trained human brain that is good at one thing, and the machine that is good at something else, like sort of where does that balance lie? For any given strategy? I think is a really interesting question. There’s a lot of alpha and just making good decisions about that, I think.

 

Jeff Malec  22:33

And so where do you come down on that of like, right, there was this big rush to like, Hey, we’ve got the super duper AI hedge fund that we don’t need the humans, it’s gonna find all these patterns do all these things.

 

Agustin Lebron  22:43

I’m broadly skeptical of that. I think, I think one thing I probably believe is, if you already have good features, features that have alpha that you sort of have developed, because human brains are good at this stuff. Combining them in AI machine learning ways is probably a good thing. Like, there’s probably good ways to do that. But hey, AI, go find me some good features is very, very, very hard to do. Yeah, kind of broadly skeptical of the bill, people’s ability, claimed ability to do that.

 

Jeff Malec  23:13

And or, like finds the thing that the junior trader, just the first day on the desk was like, Hey, why don’t we do this? Right? So to me, it’s gonna find the simple stuff first, but maybe not. I think in the power those who would argue with or like, know it, right? It’ll find these. The Yen does this versus the Argentine Peso and the signal for the French bonds or whatever. It’s like, but then it’s like, okay, is that causation or just random? So there’s a lot of a lot to unpack there. You wrote the book, and then you’re doing consulting. So what does that look like? Who are you talking with who you’re doing consulting for?

 

Agustin Lebron  23:53

Yeah, so it’s interesting this, this grew out of my consulting and technical consulting, were doing a lot of machine learning, consulting, and that sort of thing. The thing I’m fond of saying is that every technical consultant turns into a management consultant, whether they want to or not, because a lot of the same stuff would come up again, and again, around hiring around management and that sort of thing. And so over time, I started to do more of that stuff.

 

Jeff Malec  24:19

They’re like, Hey, I like what you’re saying, Do you know anyone who can help us with the management side, right? And

 

Agustin Lebron  24:23

my answer wasn’t, was always like, No, I don’t necessarily know somebody, but let’s talk about the process by which you’re going to find that person. And that’s like, a lot of the time. It’s, it’s amazing how important everybody says hiring is incredibly important. But if you look at their revealed preferences in terms of how they behave, they’re, you know, a lot of companies are really behind behind the curve on that.

 

Jeff Malec  24:44

And so you’re mostly working with tech companies.

 

Agustin Lebron  24:47

Yeah, definitely. That’s

 

Jeff Malec  24:48

the intro. It’s not nothing to do with the trading side. But you kind of take some of those lessons and apply it to their business. Yeah.

 

Agustin Lebron  24:55

It’s amazing how having an experience and thinking about it markets like the market for talent is exactly the market like the market for for something else. Right? There’s, there’s you have to figure out how to, well how to buy, how to sell adverse selection, all this stuff, it all applies.

 

Jeff Malec  25:11

So take us through like some examples of how do you how do you help those companies deal with that, especially in today’s world, like, Oh, you want that developer and he costs 800 grand, and he’s got six other jobs he’s working for, and they’re gonna offer him a cool day, every Tuesday or something?

 

Agustin Lebron  25:27

Yeah, so I mean, I think one of the biggest failure modes of especially small tech companies that that I see a lot, is the idea that, Oh, we only hire a players. And so we’re gonna go off and hire some we’re going to look for some A players. But of course, these tech companies a can’t compete with with big Fang salaries. And so in fact, they’re not going to they’re never they never had a shot at the a player, the suppose it a players, right. And so thinking very clearly in a very Moneyball sort of weigh about who is the person you need? And how do you incentivize them and get them excited about your particular startup or your particular company? is a thing that there’s a lot of alpha in that and being able to tell the story of your company to attract the right people? So that they do say, Okay, well, okay, I’m not gonna go to Fang, but the reason I’m not gonna go to Fang is because I’m gonna take a lower salary here. But I believe in the upside of this company, like that’s how you sort of solve this, this kind of comp problem that a lot of small companies have.

 

Jeff Malec  26:23

But But does that just pure narrative and getting him to drink the Kool Aid so to speak? Or is it giving them equity and giving them options? Yeah,

 

Agustin Lebron  26:29

it’s I mean, obviously, it’s equity. I mean, one of the principles I always tell people is, it has to be the principle of no worse off like, conditional on them believing in the future of this company, they have to be no worse off taking your offer than somebody else. Because otherwise, that’s unstable. And some of it is obviously, you know, convincing people and convincing people that you’re convinced, but also signaling the right things in the whole hiring process. Right? How do you talk to people? How do you evaluate them? This is a process that they want to go through, that they’re excited that they find compelling that they can tell their friends? Hey, look, I didn’t get the offer of this company. But it’s, I really liked their process. Why don’t you go apply? That’s, that’s where the real good stuff comes from.

 

Jeff Malec  27:08

And do you see any of that slowing down? Or like how does right Fang, Microsoft’s on a pause? I think Apple said they’re so right now,

 

Agustin Lebron  27:15

certainly in the last six months, it’s been? Yeah, it’s gonna be there’s gonna be a reckoning, I think for tech talent. If this continues, I feel like there are a lot of people stuck in those Fang jobs just kind of doing good in financially, but perhaps not in terms of the value they provide to companies. So I think there may be another shoe to drop here.

 

Jeff Malec  27:38

And how to the stuff I’ve been reading, like these all these employees that had stock based compensation, even at the publicly traded or even in the private markets have like, a down round of like, how does, how do you handle all that stuff? Or that?

 

 

 

Agustin Lebron  27:53

Well, if if you’re a small company with capital and want to hire people, there’s probably no better time than now to pull out really, really good engineers from companies that that, you know, they’re looking for something else now.

 

Jeff Malec  28:06

Yeah. But they’ve little jaded perhaps. But yeah, to your benefit? Yeah. And so, do you never talk with like, aspiring prop traders? or do any consulting like that? You can move total?

 

Agustin Lebron  28:21

I do. I do consult with, with trading firms as well. Yeah, sometimes I get I get the end and you know, turns into good conversation. Yeah.

 

Jeff Malec  28:30

And what does that look like? They’re looking at hiring or they’re looking at, hey, the whole

 

Agustin Lebron  28:34

the whole stream sometimes? Yeah. Yeah, I think a lot of the time. prop trading is a lonely business, because it’s very competitive. And there’s not a lot of information sharing out there, unlike, say software, right? Like, you can read 1000 blogs on medium about how to build software. And you can kind of get a sense of what the industry believes about how to do this. Yeah, in prop trading. It’s, everybody’s in their own little island. And I think a lot of the time, just having somebody from the outside come in and say, Hey, we’re doing this, does this sound crazy or sensible to you is, is pretty valuable? I mean, you know, done that a bunch. And yeah,

 

Jeff Malec  29:16

so that was going to be my little game I wanted to play here. Let’s kind of instead of going through all the laws of trading and from the book, let’s do a little roleplay experiment. You don’t have to put on any costumes. The so let’s say we’re at Lane Street, Lane, change lane street prop firm, and one of the traders says they want to allocate money to such and such crypto product, maybe a yield play maybe a trader who jumps in and out at Chick coins. Yeah. So either as a consultant or you’re working at the firm and you want to apply these laws, how do you how do you kind of start to construct an idea of like, Okay, let’s move ahead with that or not.

 

Agustin Lebron  29:56

Yeah, so, I would say as a baseline, we need to make sure that that the incentive structures for people at the firm are aligned in terms of like comp and that sort of thing. We could probably talk about that forever in terms of like, what is a good incentive aligned comp structure for a trader at a firm? But leaving that aside, assuming that’s all settled, obviously, question one is like, where’s the?

 

Jeff Malec  30:18

Like, why is that gonna let you off the hook, give us that, give us two minutes on what that is,

 

 

Agustin Lebron  30:24

like your traditional hedge fund manager, that takes two and 20 obviously is incentivized to, to put more more volatile positions on then the investor is this is just like traditional hedge funds, right? Because they get paid on the upside and don’t lose as much on the downside. Unless you have high watermarks, in which case you have the risk that they’re going to shut it down and open up a new one. similar sorts of things apply in, in prop trading firms, right where you’d like you could give somebody a bonus today for a trade that’s going to realize over the course of three years, you know, they’re going to be incentivized to just kind of do the trades that only block in three years, we saw that in investment banks, there’s like there’s a million ways of screwing up incentives is all I’m

 

Jeff Malec  31:01

saying. Yeah, they have their incentives are going to inform their trades, you’re exactly right. Like, well, I get paid quarterly. So no, I’m not putting on this thing that sits there for for six quarters before it pays out. Exactly. Right. But in overall, do you think that leads to more and more risk taking? Yeah, look,

 

Agustin Lebron  31:18

I mean, it can lead to risk taking, or it can lead to the opposite. I do know of Prop firms that that don’t pay out a huge percentage and bonuses. And so you know, that trade is going to be incentivized to just do a good job, not do a great job. I did fine. Yeah, it’s the office space. Like I only work hard enough to not get fired kind of thing.

 

Jeff Malec  31:37

Like, and then just last bit on this number, like we run across, a lot of hedge fund guys start up because they were at such and such firm. And they didn’t get their bonus because they got netted out against the rest, right? Like, hey, I killed it, and that castrating and this idiot over here was trading lumber and lost a bunch of money for the firm. So I didn’t get paid out. I’m gonna go start up my own thing. Right? Exactly. Great, that feels a lot of talent out there in the industry. So sorry, I cut you off. Or anyone said, I’m

 

Agustin Lebron  32:06

getting back to this sort of specific idea, like Question one, where’s the edge? Like? What is it that you figured out that the world does not know? Or what is it that you can do that the world cannot? And that’s kind of the baseline, right? They tell me a story here. And sometimes that story is show me some data, of course, but usually it’s a little more than that. Right? Like, why is this available to us and not to somebody else? It’s quite

 

Jeff Malec  32:29

crypto, if I come back and be like, well, because look at it, we can get on this exchange. So can everyone else but look at the volatility and we can harvest? Right? To me, that’s where I’m using that specific example. It seems weak there, of like that you actually have an edge, it just looks shiny. And there’s a lot of potential profit,

 

 

 

Agustin Lebron  32:45

right? I mean, look, a lot of the times in in crypto the edge is like we’re willing to do sketchy things in somebody else. I don’t know if that’s an edge. But it’s something

 

Jeff Malec  32:54

I guess that isn’t like, yeah, we’re willing to, like literally take these things on our balance sheet and trade in and out of them. Right. Yeah. Okay.

 

Agustin Lebron  33:04

So yeah, so edge. First question, certainly. Question two is, I would say, okay, given that this is your edge, this is the thing you believe is this the most liquid instrument to be putting this trade on it? Like a lot of the times, you you think of yourself as having an edge in this one thing. We’re, in fact, like, your edge is more diffused than that. And probably maybe there’s more liquid instruments to put that on it. Like for example, I, like an equity analyst looks at this company has Oh, I really liked his company, good, blah, blah, blah, we should buy it right? Then you dig into why they think the company’s good. And it turns out, they think the whole sector is good and undervalued. It’s like, well, why are you buying this one company? Like probably you should buy like the sector ETF or something, right? And so always finding the most liquid instruments upon the risk, I think is a really big thing.

 

Jeff Malec  33:49

In this case, if I’m gonna go I really love Solana like wow, that’s really

 

Agustin Lebron  33:55

loves Solana or do really if you just think like crypto is undervalued, or do you think crypto is gonna go up? Right, and, like, why salon and not something else?

 

Jeff Malec  34:03

Right. Yeah. And that’s interesting, because the illiquidity there might drive

 

Agustin Lebron  34:08

your suppose that edge, right? Oh, I like Solana because like look at all these Axi infinity players. It’s like, Well, why don’t just buy X EToken. You know, I mean, like, it goes both ways.

 

Jeff Malec  34:18

Got it. All right. I like that one. So there’s that and what and but what’s the why and the liquidity? I mean, just to reduce friction of your edge?

 

Agustin Lebron  34:27

Yeah. You’re just going to be cheaper to trade. Right?

 

Jeff Malec  34:30

Not the case, you’re totally wrong and we need to get out of a huge

 

 

Agustin Lebron  34:34

well, so this is gonna be the next thing the liquidity thing is is for is also kind of the risk thing, right? It’s kind of the the relate right? If I have a position on how hard or easy is it for me to get out of it? A liquidity risk is I think, systematically undervalued even within trading, but certainly outside of trading. And so like, what is the risk of me having this position on when I want to get out of it? Are we all going to be rushing to the exits like all these Words of questions relate to the to the next thing, which is the risk thing, like, you know, what’s the worst case scenario? How likely is it? How can we hedge it? Is it? Is it a thing we should hedge or not? Or just take the risk? Are we getting paid to take that risk? These are sort of the risk questions, right, that relate to the liquidity question.

 

Jeff Malec  35:17

And then I think in your book, that example of LTCM had a issue that right, like it was massively into that trade. And then they didn’t know there was others massively into that trade. Right,

 

Agustin Lebron  35:28

exactly. And the thing that’s cool by LTCM is like, Oh, well, the on the run off the run trade is totally uncorrelated to the Russian bond trade, like, clearly those are uncorrelated, except for the fact that LTCM had both of them on. That’s the correlation, right?

 

Jeff Malec  35:44

And so enormous size, so when they’re one they gotta blow out the other to get out of it. Yeah, exactly.

 

Agustin Lebron  35:49

Right. So like, I created the correlation, just like in the mortgage crisis is the exact same thing, right? Like, yeah, before 2008, house prices across the United States had never gone down sort of universally, or like the correlation between different cities. metrum, major metropolitan markets was very low. Okay, well, so now everybody puts on these bets, where we’re trading these these structures that have mortgages across the country. It’s like, okay, great. Now, now, we just manufactured the correlation that we’re relying doesn’t exist,

 

Jeff Malec  36:17

or like that, where does that in today’s world? What’s the hidden? Someone’s creating the correlation? That’s gonna screw it?

 

Agustin Lebron  36:24

Yeah, that’s a good question. I think. Certainly, I mean, if one thing that COVID taught us is that there’s a lot of correlation in the supply chain that we didn’t really realize existed. That’s definitely a learning, right? Like these sort of hyper efficient supply chains with not very much slack. That makes everything very correlated, in the sense that like, a problem in one supply chain will destroy 10. Other ones.

 

Jeff Malec  36:47

Yeah. The back to crypto. I think there’s some there too, right? Oh, this Celsius blew up in it. It’s affecting all these other prices.

 

Agustin Lebron  36:55

Yeah, exactly. Because they’re owed money to everybody else.

 

Jeff Malec  37:04

So, so next.

 

Agustin Lebron  37:06

Yeah. So and then. And then sort of model things like, how are we going to execute this trade? Like, what’s the efficient way to execute it? Sort of implementation details are super important. That’d be kind of next. Right? Yeah. Kind of running down the list.

 

Jeff Malec  37:22

Yeah. And so in my crypto world that would include Okay, we got to go open accounts at all these different exchanges, perhaps? Or what does that look like? We have to send money to offshore? Yep. Back to our written that’s the cobra, they’re all intertwined, to

 

Agustin Lebron  37:38

margin margin calculated? How are we going to execute? Are we going to take there’s a take fee? Are we gonna provide there’s a provide rebate? Are we going to make more money providing than we would taking? You know, these are these are pretty useful questions to ask. Yeah. And then and that relates to the to the next thing, which is cost, right? Like what our cost of putting this trade on? Anytime I’m sure you’ve seen this, like anytime you’re trying to put a new trade on, there’s always a cost that you didn’t quite appreciate you didn’t quite factor in. You do like you trade it in small size. And you’re like, oh, wait a second, where am I losing the money? And you’re like, Oh, I’m getting like net gross on this one random fee or something? Right? Like, yeah, there’s always a cost you didn’t realize

 

Jeff Malec  38:20

I used to so I was on the Board of Trade bond pit as a clerk way back in the day. And I would pay per trade, right? So I’d have my card. Oh, I bought 10 here and sold them here. Right to kind of learn how to trade and I would always do pretty well, because I’d be down 100 ticks. Do 100 lot. Make a tick. Get it back. Right now. I’m back to even. So when I went to real world trading was like, oh, not there’s costs that I didn’t consider. There’s margin that I didn’t consider. There’s position limits. I didn’t consider like, No, you can’t just throw on this under that. So yeah, that’s very, very real. Well,

 

Agustin Lebron  38:54

yeah, I can’t like I can’t St. Petersburg paradox my way to flat like if I keep doubling every time I lose, right? Yeah.

 

Jeff Malec  38:59

I was. I thought it was the anti Monte Carlo or the reverse?

 

Agustin Lebron  39:06

Is it maybe it has multiple names. I thought it was a paradox, but

 

Jeff Malec  39:10

you’re probably right. And so in my going back up to the risks and trying to stand our grip, so if I want to, if I’m like, Oh, I’m getting into this yield farming deal, where I’m making 14% How would you think about those risks there and what those costs are that you’re not quite considered for

 

Agustin Lebron  39:27

that one for that one? It’s pretty clear. Like, why am I being paid 14% to give you my money, if it’s supposedly if my principal is supposedly protected? Where’s this 14% coming from? I think that’s the number one question that anybody should ask themselves in, like, in you will get a variety of incredibly complicated sounding answers. And one thing and look like I’m happy with the complication, like don’t get me wrong, but being really, really like, just think of like, think of like an old timey farmer. That’s just really skeptical. About everything and wants it explained like, you know, like, I’m two years old. Yeah, be that guy be that person like, I’m not getting it, can you just like dumb it down even more, do not be afraid to get it dumbed down to the point where you understand it. And if they can’t do it.

 

Jeff Malec  40:16

Yeah. And so in our hypothetical prop firm here, we’re saying, Okay, we understand that it’s a Ponzi. We understand that they’re paying that yield by getting new investors. What is that automatically off the table? Or you say, Okay, I understand that risk. As long as I’m not the last one holding the bag. Yeah, maybe we’re still fine. Getting into that trade. Yeah, that’s, that’s ignoring the moral issues there. But just on a pure trading? Yeah.

 

Agustin Lebron  40:42

Yeah, I don’t know that I’m, at least for myself, again, aside from the moral issues, I don’t know that I would be I would think of myself as having an edge and figuring out when the Ponzi is gonna blow up. It’s not the kind of edge that I have historically done well, with. Yeah. And so I would be skeptical, skeptical about my own personal ability to figure that out. Whereas conversely, if I was some, like, hyper well connected person who knew everybody, and who knew everything before everybody else, like, okay, maybe that’s a trade for me.

 

Jeff Malec  41:11

Yeah, once you hear a whisper, you say I’m out? Yes. Okay. What was the next one?

 

Agustin Lebron  41:24

Cause on specific trades, I think it’s, it’s, it’s sort of the it gets a little bit more tenuous, but certainly, there’s considerations about kind of, we’ve already talked about the alignment thing, technology, like how are we getting sort of how are we executing this progressively more efficiently over time? Right. It’s kind of a big thing. Like I started trade, maybe it’s very manual to begin with. But like we said before, how do we get to the point where this is pretty automated, because the scarce resources is human being time. It’s always the scarce resource. And so let’s figure out how to use technology to automate this thing so that we can put this on autopilot and go look at the new thing. Right. So that’s, that’s once it’s sort of been going,

 

 

Jeff Malec  42:06

right. How do you how do you view that, like, in the high frequency guys, just the Race to Zero that right? There’s, oh, you’re spending a million dollars? I’m spending 10. You’re spending 10? I’m spending 100. You get? No, you got a fiber optic line? I’m getting a radio tower. Yeah. Right. Like seemed like a Race to Zero in many ways. Yeah.

 

Agustin Lebron  42:22

Yeah, that’s, that’s definitely I mean, again, if you have a competitive advantage in that, then maybe that’s the thing for you to do. I, you know, that’s not a game, like the hyperspeed stuff is not a game that I ever played in. But yeah, it’s just

 

Jeff Malec  42:35

an interesting one to think about, like, because cool, I can do the technology. And I understand the concept of like, you need to always be improving your technology to have keep maintain your edge. But at some point, you have to bring the economics back into the picture and say, like, hey, well, I might have an edge. But if it cost $100 million in technology, and I only make $101 million on the edge, is it? Is it worth it anymore? Exactly. What was next on your list

 

Agustin Lebron  43:01

alignment, I think alignment technology. And then the last one, I think is adaptation, which is this idea that look, markets are always getting more efficient over time. That’s just the nature of the beast. And so again, like this new trade that we’re talking about, is it a stepping stone to a whole new world that we can that we can expand into, right, like, is this? Is this just kind of a one off? Or is this something that has the potential to be a beachhead for something new? Right? I think that’s an important consideration as you’re growing, where all other things being equal, you probably would rather do the one that, you know, it feels like a beachhead to something new. Because you’re, you know, that overtime, those strategies that you’re running, now they’re still profitable, are going to be unprofitable, and you’re gonna have to find the next thing. That’s the treadmill that we’re on as traders, that’s fine. You have to accept that.

 

Jeff Malec  43:51

And but how do you approach that problem? So Okay, I accept that I need to be adapting but okay, how do I adapt? What if I’m in a losing streak? What if I’m in a rut? What does that process look like? education or training or mentorship?

 

Agustin Lebron  44:02

Yeah, I mean, some of it is pretty Darwinian. Right? Like, there’s a lot of companies out there that were awesome when all trading was done in person on the floors that couldn’t adapt to the transition to electronic markets, right. Yeah, I think similarly, you know, stuff that used to be very obvious, before reg NMS like just like easy trades, and on the before reg NMS happen, like okay, well, those are gone. Now. New traits showed up because of reg NMS. So again, like that sort of this adaptation,

 

Jeff Malec  44:31

and remind us the listeners and maybe me what oh, sorry, I

 

Agustin Lebron  44:35

missed it. Yeah. So right, sorry, Regan, a mess. Is this a regulation SEC regulation that says that essentially, if you are I’m going to sort of butcher it for the sake of the conversation but exchanges listed or lit exchanges. You cannot, you cannot fill an order for a customer at a price that is worse than they could find on some other exchange.

 

Jeff Malec  44:58

Okay, right. So that that took away the whole level two so spanned it, guys, that kind of stuff.

 

Agustin Lebron  45:05

Yeah, all that stuff and other things too, like used to be being a specialist on the noisy it was just like a license to print money. Because you you would just like put the book kind of wherever you want it to. And that’s kind of disappearing are gone now to so yeah. What’s the next thing? I don’t know?

 

Jeff Malec  45:23

So basically you’re saying like there’s no, who knows if you can adapt you maybe you can’t adapt and you have to go do something else. So if you don’t know how to adapt, maybe go look for another job. Yeah. That’s the harsh we want the secret sauce of like, No, you start doing this exercise every day, and then your brain will adapt to become a better trader.

 

Agustin Lebron  45:44

Yeah, not that I’m aware of. If you find out you let me know.

 

Jeff Malec  45:47

Yeah, doesn’t exist. Yeah. And part of me on the adaption to is like, I’m always that’s one of my crypto pans is like, Okay, well, when once this becomes big enough, doesn’t Apple just say cool. Here’s our new protocol and our new thing that everyone’s already connected to, and boom, that kills like these 10 protocols that are we’re trying to build something that competes with, or Amazon or any of those big companies could just say, Cool. Thanks for taking this to the 40 yard line, we’re gonna take it the rest of the rest of the way down the field.

 

Agustin Lebron  46:16

Yeah, there’s two sides of that. One is they may not like, look, there’s endless supply examples in history of large incumbent companies that just could not adapt to a change in technology, right, like Kodak. Famously, Kodak invented the digital camera, and they still lost. Right. But which is insane. But yeah, I think you’re seeing that now. Like FTX is quite clearly consolidating in the crypto space, like buying small exchanges, buying people that are distressed, et cetera, so that consolidation is going to happen, that might not necessarily be bad for you as as a small player to kind of get somebody cut a check and just buy you out. And it’s like, okay, great. That was good. Like, I

 

Jeff Malec  46:56

yeah, I did my part, the next thing, right, yeah. And then switching gears a little bit, I wanted to ask you about trend following coming back to edge, right? We’re like, Hey, you got to have edge, the markets are going to adapt, things are going to adapt. But then here, we have this thing trend falling that’s been around for 40 plus years, or longer than that, but people have been doing it professionally and managing money with it for 40 plus years. Like how do you explain, right? There’s no real edge there. I can write