Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 




It was somewhat surprising to read in the Federal Reserve’s Semi Annual Financial Stability Report that it was warning about the growth in “Meme” Trading as one of the two major factors most concerning to them regarding the stability of the US Financial Markets.
For those who may not have yet viewed this month’s LONGWave video you need to appreciate that Meme trading is centered on Options buying, employing the use of Gamma.

Gamma is a term used in options trading to represent the rate of change in the option’s delta. Delta measures the rate of change in an option’s price compared to the underlying asset while gamma measures the rate of change in an option’s delta over time. Though most traders understand Alpha, Beta and to an increasing degree Gamma, few truly understand Theta which is what now controls the markets as Options Trading and Hedging explodes. We explore what this means below.

The questions to keep in mind as you read the details below are:

    • Who are those actually responsible for regulating all this?
    • Where are they and what actions are they taking or are we caught between regulatory responsibility?
    • Possibly worse, is this actually being allowed because it serves a political, monetary or economic purpose?


What I found particularly interesting in the FSR report is the Federal Reserve specifically identified two major destabilizing concerns. Both highlighted concerns are what we at MATASII have currently been focusing on for awhile now:

    • Potential China Real Estate Contagion,
    • The advancement of “Meme” Trading.

Here is how the Fed described the problem:

“In addition to eliminating commissions, retail brokerages have shifted how retail investors access and communicate about equity markets by introducing mobile trading apps. While the services offered on some of the most popular apps are similar to those provided by a traditional stockbroker, these apps:

    • Make investing more accessible, in part by offering a wider range of products, including the opportunity to easily trade fractions of equity shares or cryptocurrency assets.
    • The apps also make trading more visually appealing. Many apps have color-coded graphical layouts that highlight stock movements, mark trading milestones, and have animations celebrating a user’s first stock purchase.
    • With their ease of access and engaging graphics, such apps can make trading seem like a game, particularly for younger or less experienced investors.
    • Consistent with this interface style, among users of trading apps, the average age of account holders is 30 years, and nearly half of them self-identify as first-time investors.

This Federal Reserve chart supports our thesis in this month’s video that the growth in household “Meme” trading has been highly focused on the Options Market. Specifically, the above chart illustrates that the ‘household’ willingness to take on Risk does not match stock ownership. It is being directed somewhere else! Notice below the collapse in volume.

    • The widespread use of large, open social media platforms has also shaped how some retail equity investors communicate about markets.
    • Recent academic papers have shown that social media can increase the information flow to retail investors as well as the amount of “noise” in markets from retail investor trading.
    • In addition, social media can contribute to an “echo chamber” in which retail investors find themselves communicating most frequently with others with similar interests and views, thereby reinforcing their views, even if these views are speculative or biased.
    • More generally, social media platforms allow a single comment or post to reach millions of people and potentially affect market sentiment dramatically within a short period.”

They in no way actually state what is actually wrong about this?

It does become a little clearer when they describe who is controlling the game via where the real money is made by the professionals (not the Meme Traders?) It is about Order Flows or Payment for Order Flow (PFOF).


“Many years of growing revenues from payment for order flow (PFOF) helped set the stage for this development. PFOF is the compensation that brokerage firms receive for directing orders to venues for trade execution. Retail investor trading flows can help market makers facilitate the execution of institutional trading flows, thereby promoting market liquidity”

“Over the past two years, the PFOF paid to some of the largest retail brokers was in large part paid by these off-exchange venues” (see figures B and C below).

The Fed doesn’t say what these Intermediaries, who are paying for order flow, are actually doing to make money. They are “off-exchange” and not actually themselves doing fulfillment. They may in turn be selling the intermediation data to?

Who is actually regulating all the players in the process chain or are they like ‘Shadow Banks” that aren’t fully under the purview of single entity like the SEC?

“The structure of the current market for order flow was heavily influenced by a series of regulations adopted between 2005 and 2010 that allows retail brokers to choose the venues where customer orders are executed so long as customers receive the “national best bid or offer” price or better.7 Since 2010, several off-exchange venues, including those run by Citadel, Virtu Financial, and others, have emerged and thrived.”

Giving someone the best price when the best price is set behind closed curtains is one thing, but frankly not the real issue here. The problem in options is what does the transaction price actually mean when it can and does change with theoretically no trading volumes even changing hands? It can and does change with time only. That is called THETA. How exactly does time decay work with price, volatility, and volatility change rate all moving?

Everyone knows options decay with time but few seem to fully appreciate just how the decay rate changes continuously with THE RATE OF CHANGE OF VOLATILITY (VVIX)



“Aggregate PFOF levels for the retail brokerage firms in figure B (above) have recently fallen below the record highs from earlier in 2021, as have trading volumes. However, on a per-share basis, PFOF (not shown) has continued to rise, which in part reflects a shift in the volumes mix toward options trades, where per-share PFOF is highest“.

…. and where might the per-share PFOF be the highest?


“The January 2021 meme stock episodes offer a case study for the interaction of social media and stock prices. Twitter posts spiked in late January on days when daily trading volumes for GameStop (GME), as well as other meme stocks, rose sharply (figure D). These spikes also coincided with a jump in intraday volatility, as the daily standard deviation of one-minute price changes increased more than 10-fold from less than 0.25 percent to greater than 2.5 percent. Coincident with the dramatically higher price volatility, intraday trading flows for meme stocks (such as GME and AMC Entertainment Holdings [AMC]) became much more correlated, as illustrated in figure E. Higher flow correlations have the potential to amplify liquidity shortages in equity markets and may lead to price dislocations if sufficiently large.”


Many ‘Meme Traders’ may be making money (4% of Americans Say They Have Quit Their Jobs Thanks To Their Crypto Gains), but they have little idea just how much money is actually being made off their high risk trades by those taking no risk.



The term Theta refers to the rate of decline in the value of an option due to the passage of time. It can also be referred to as the time decay of an option. Theta is generally expressed as a negative number and can be thought of as the amount by which an option’s value declines every day.

    • Theta can be high for out-of-the-money options if they carry a lot of implied volatility.
    • Theta is typically highest for at-the-money options since less time is needed to earn a profit with a price move in the underlying.
    • The value of Theta is at its highest when an option is at the money, or very near the money. As the underlying security moves further away from the strike price, i.e. the option becomes deep in the money or out of the money, the Theta value becomes lower.


Tesla for example has been one of the most extreme movers, but very few of the “new punters” have ever bothered reading about how options work and even less understand how you trade options and manage options related risks.

The Tesla November 1200 call has gone from almost zero to 90 and now back to 17ish in a few days. Most didn’t sell the highs and will have nightmares about how “THETA” hit them hard.

Left are the short gamma dealers, now puking shares they grabbed with both hands only a few sessions ago as they delta hedge the book.

Daily even hourly volatility has major impacts on the repricing of an options value. Though most know this is occurring, they have no idea how it is actually calculated!


Sophisticated games have evolved to strip money from the uninformed, improperly armed with the necessary technologies and without real time algos.


These are options trading strategies that capitalize on the fact that the prices of options decay over time. Instead of trying to predict if a stock will go up or down, you simply play the time game– collecting premium which turns to profit as time goes by, then rinsing and repeating.

Here are the 4 popular theta gang strategies:

    1. Put Credit Spread
    2. Call Credit Spread
    3. Naked Puts / “The Wheel”
    4. Short Iron Condor


Buy CALL Options while Shorting the PUT Options

BELOW: People have currently loaded up on calls and shorted puts in size.



The Fed concludes its FSR with the following recommendations which IMHO is more about being on the record that those being fleeced should be warned and properly informed by professionals (under full disclaimer) that traders are taking responsibility for all risk of losses! Fleecing is all right, however just be sure when it blows up you have advised your clients. However, continue to take their money and sell the Order Flows!

They suggest:

“A few areas should be monitored.

First: Younger stock investors tend to have more leveraged household balance sheets. The median leverage ratios of younger retail investors are more than double those of all investors, leaving these investors potentially more vulnerable to large swings in stock prices, as they have a larger debt service burden. Moreover, this vulnerability is amplified, as investors are now increasingly using options, which can often boost leverage and amplify losses.

Second: Episodes of heightened risk appetite may continue to evolve with the interaction between social media and retail investors and may be difficult to predict. A potentially destabilizing outcome could emerge if elevated risk appetite among retail investors retreats rapidly to more moderate levels.

Third: The risk-management systems of the relevant financial institutions may not be calibrated for the increased volatility or financial losses that could result from the trends highlighted here. More frequent episodes of higher volatility may require further steps to ensure the resilience of the financial system.”



In Big Bold Letters!


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