Pop-Quiz: Terms of Trade

Cassandra Does Tokyo is a former hedge fund manager and ex NY Trader, who is now living abroad.


Terminology is important but often abused. Some employ it to obfuscate the truth. Others to legitimize something that oughtn’t be. I doubt this Pop Quiz will ever be given to MBA students but I reckon it’s worthy of a go….

Instructions: Choose the Word, Phrase or Answer that best describes its preceding passage:

1. It’s nearing the end of the fiscal quarter. The CFO is concerned that leverage ratios are too high. You’ve located some friendly (reasonably-rated) counterparties who’ve more cash than investment opportunities and who are happy to take the other side of temporary financing trades that will reduce ratios to levels that won;t offend analysts, provided you guarantee the counterparty they will make their spread and not lose money. This is termed:

(a) Balance Sheet Reporting Optimization
(b) Window-dressing
(c) Lipstick on a Pig
(d) Repo 105 (tnx WT!)
(f) Rather Illegal
(g) Bigger (unearned) Bonuses All-Around (Again)
(h) All the above

2. You are the senior manager of an Equity Trading desk at a large Investment Banking firm. Amongst your activities, you act as agency broker for customer flow, employing some algorithms that fill customer agency orders at the prevailing best bid or best offer. In addition, your high-frequency trading desk, using it’s co-located servers, market-maker status and memberships on multiple-venues and dark-pools, has tools that allow your desk (with a very high-degree of certitude) to execute inside the spread. Many of your customers give you discretion (assuming execution risk) yet, you always fill customer orders at the prevailing best-bid or offer – always keeping the spread achieved on internalization of orders for The House . This is termed:

(a) Advanced Customer Facilitation Algorithms
(b) A conflict of interest
(c) Great business (if you can get it)!!
(d) Stealing and Questionably ethical
(e) The funder of your coveted house in the Hamptons
(f) Within the letter of the law but not the spirit
(g) All of the Above

3. You started an FX bucket shop that offers an electronic trading platform and extremely high leverage to retail clients. The platform gives the impression you are executing their trades in a a large central and open marketplace. You use all manner of advertising to entice the punters in. Initially, of course, you did execute their trades in the marketplace in order to hedge your risk, but you found that the life expectancy of the average small-time retail FX punter to be measured not far beyond nano-seconds, and that they are, en masse, usually wrong. As a result, you’ve stopped “hedging” and now more or less take the other side of all their risk, despite little regulation, oversight or capital adequacy. This situation is termed:

(a) Optimal Use of Scarce Risk-Capital Resources
(b) Dead clever
(c) The logical thing to do
(d) “a Bonnie Situation” (*)
(e) Less than ethical
(f) An accident waiting to happen
(g) disingenuous for not adequately disclosing the credit risk of acting as principal
(h) Eponymously…The Sting
(i) All the above
(*=”Bonnie Situation” as seen in Pulp Fiction)

4. For your investment bank employer, you structured a fantastic deal (meaning your bank made lots of money when it was inked!). While the initiator of the deal was its impetus, you easily found counterparties for the other side of the deal requiring only a smidgeon of truth-stretching, the normal amount of obfuscation and truth-dodging, in addition to the requisite amount of white-lying necessary to get it done. Sadly the deal went raaather pear-shaped for The Bank, the Buyers, The American People, and indeed you – everyone except the initiator (who subsequently became a folk hero, not to mention richer than Croessus). From your view, it’s best termed:

(a) Sacre Bleu!!
(b) An Ethical Wake-up Call
(c) An erreur of judgement (in use of e-mail and bravado)
(d) A montagne out of a molehill
(e) Being Hung-Out To Dry
(f) Being The Scapegoat
(g) Poor Disclosure in not Insuring all representations are embedded in the fine print of the fine print of the Prospectus

5. Your company has a quality problem. As a result of – quite literally – the company’s good luck, you will make TOO much money this year, and though questionable, you decide that you want to defer a portion of it over the next several years, since you know The Street has an inexplicable preference for “growth and stability” to “feast and famine”, irrespective if both leave you in the same financial place. Just as fortunately, as it would happen, one of the richest men in the world can help you do this (for a price, of course) as he is as sweet, as anyone there is, with words as they relate to the letter of the law (not to mention The regulators and Politicians) . This is best termed:

(a) Temporal Income Statement Classification Optimization
(b) Do As I Say, Not As I Do
(c) Conservative Earnings Management
(d) A Public Relations Disaster
(e) Business as Usual
(f) Criminal Fraud
(g) Finite Reinsurance
(h) All of the Above

6. You lucked-out and that little software widget you wrote has turned into a multi-billion-dollar company. Your 25% stake in what is ostensibly a wildly-overvalued company is priced by the market at over US$ 300 million – most of which you’d like to “bank” (though, being a skeptic, not literally). One catch: the shares would immediately tank if you sold, so you arrange long-term structured collars, that you can borrow against and which lock-in your sales price within a price corridor. Fortunately you don’t have to file anything with the SEC until the derivatives are exercised – likely years into the future. This is termed:

(a) An executive hedging transaction assisting portfolio diversification
(b) A de-facto forward sale
(c) Bona-fide smoke and mirrors sale
(d) A sham trade
(e) One that looks like a sale, smells like a sale, but ABRA-CADABRA!…It isn’t!
(f) A regulatory free lunch

7. The private investment management company you founded has done well for investors and ostensibly yourself, and has grown into an international multi-billion dollar business. Clannishly secretive by nature, trying hard to avoid the spotlight , you wish to protect your profile by preventing any public dissemination or discussion of your investment performance by investigating and prosecuting someone responsible for alledged indiscrete violations to so-called privacy entitlements despite the huge number of external investors – many of whom have their own transparency and disclosure necessities. This is termed:

(a) Enforcing Contractual Rights to Keep Private Information Private
(b) Being a First-Class Bully
(c) Hilarious
(d) Ludicrous
(e) Pedantic
(f) Hilarous, ludicrous, and pedantic.
(g) Oh, and Pointless – since any Competitor with the faintest urge to know can easily find out if they want

8. As a lawyer for a major Government regulatory organisation, you investigated and filed charges against a major Investment Bank for market abuse and trading transgressions in which they were, as the saying goes, caught “red-handed”. Yet you have negotiated a proposed settlement of the charges for a payment of a large (though not excessively painful) sum of money, but as is customary with such settlements, the accussed will “neither admit nor deny guilt”. This is termed:

(a) Realization of a Positive Expected Return From a Regulatory Gamble
(b) No-Fault Financial Regulation
(c) Spoils of Rent-Seeking
(d) A Travesty of Justice
(e) A Bloody-Good Deal (for them)
(f) Not Biting the Hand…(That Will Feed You When You Leave the SEC)
(g) All of the above

9. You like Peter Lynch before you, are the manager a now-massive-sized public fund. While you are not bigger than the market, you are often the largest marginal player. You’ve cultivated a public persona and use your soapbox to influence investor opinion to help shift your positions in sizes that would otherwise be impossible to move without eating all of your incremental return, rather than for the sake of bona-fide improvement in public-policy . This is termed:

(a) Free Publicity & Excellent Public Relations
(b) Talking your book
(c) Do as I Do, Not as I Say
(d) Beware of pseudo-“acquaintances” bearing seeming gifts
(e) Less-than-ethical
(f) Caveat Emptor

10. You ran a Hedge Fund (or commercial bank, or investment bank) that racked-up good returns (for a while), and then imploded due to amongst other things: hubris, overconfidence, mis-calculation and mis-extrapolation of equity and credit availability, common credit exposures, stupid and illiquid investments, excessive leverage, and subsequent negative impacts due to the redemption and liquidation cycle . Since the implosion happened when you were at your peak asset base, one can honestly say that you lost more money than you ever made, even if in the unlikely case early investors got their original investments back. Nonethless, despite your investors getting hosed, and remaining side-pocketed, you banked $100mm – FREE AND CLEAR!!. This is termed:

(a) Nice Work If You Can Get It
(b) I Wished On The Moon
(c) No Regrets
(d) Don’t Explain
(e) These Foolish Things
(f) Strange Fruit
(g) Mad World


Originally published at Cassandra Does Tokyo

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