I Fought ACME9 and ACME9 Won: Part 13 Spivey Goes Down!

The bloom had finally started to wash off of Spivey’s rose. It’s a tough industry, and I’d like to think that I’d never wish someone to lose their job, but I wasn’t exactly broken up over his newfound troubles. Essentially out of jealousy, I’d always kept a little track of Spivey’s trades, and I found out exactly what I’d always suspected that he was a disaster in the making.

I’d look at his positions and I’d see that they were all gigantic. If I would have done something 300 times, he would do it 3000. There were a lot of issues where it looked like there was a lot of edge, but having watched the way their options routinely traded, I knew that they were to be avoided. Spivey had huge positions in all of these, too.

Finally, a couple of his positions went South in a big way. To make it worse, Spivey had garnered a couple of risk violations that he was sort of caught trying to cover up.

Here’s one of the more inane policies ACME9 had. Let’s say that you were allowed to take $1,000,000 in risk and you accidentally wind up say $10,000 over. Brown and the other partners didn’t want anyone making these kinds of mistakes. Even though it was an error that would only cost about $500 on average to get out of, the ACME9 employee was expected to fall on his sword and tell his manager immediately what he’d done, which would of course incur a one day suspension and put you one closer to the three strikes and your out rule.

Obviously, anyone who actually did this would be an idiot to such epic proportions that I wouldn’t even trust him with my money. Spivey didn’t do anything everyone else hadn’t done when he tried to cover up his error, he just happened to do a really conspicuous and bad job of it.

Then the bomb dropped. Spivey had a huge position in a biotech company that had an announcement of some kind coming up. This was something that Spivey knew was coming and was making a bet on. Making a bet like this is often the least statistically sound thing that traders in the option business do, since the pricing model really breaks down in these situations. You’re really just making a hunch that things are too cheap or too expensive. Instead of earning your money slowly and safely, you’re going to have a big profit or loss tomorrow morning. Well, Spivey was making a big bet and he lost big time.

The stock opened down 50% the morning after the announcement. Spivey lost $4,000,000 and was immediately fired. The next day Marsellus announced that our firm would no longer be trading biotech stocks, because we didn’t understand them very well.

What I couldn’t understand was who was keeping an eye on Spivey? This is a business where people are supposed to have an eye on risk management. That day I looked at the company’s research report on the company, and it noted that they gave the company opening down 50% about a 10% chance of happening after the announcement. It was an enormously risky position, and any risk manager would have had to have been blind not to notice it. Anyone with even a minimum of knowledge about the stock knew that this announcement was coming up, and that Spivey had a one in ten chance to be fired the next day when he went to sleep that night.

Freddie was the one who was supposed to have an eye on Spivey, and I never really did find out whether he thought the position was reasonable going into the announcement or if he just wasn’t that aware of what was going on. Neither was a really good excuse. Of course, Freddie was supposed to be covering twice the amount of people as had previous existed at the company, and they were filling most of his day up with recruiting new people and planning for the future of their huge trading force. It was a huge lack of risk control all the way up the ladder.

Soon after Spivey was fired, Brown asked me to go through his smaller positions and make suggestions about the way they be handled. What I found shocked me. Spivey had a ton of huge positions that I would just never make even with a gun in my ribs. These positions didn’t show up as being really risky according to the normal metric, but they were massively silly positions. Spivey was flipping coins for huge amounts of money with basically no edge whatsoever. In fact, in a lot of cases he had such weird opinions that he paid up and put them on for negative edge. I was completely aghast at what I had seen, and these were his SMALLER positions! It was clear that Spivey had been out of control for a long time, and that nobody had really been paying attention.

I discussed this with Brown and he acknowledged that their risk management had been horrible. We even discussed the following, which makes Spivey look even more incompetent. The way Spivey was trading, he was sure to either make a ton of money or lose a ton of money. If he lost a lot of money, he’d lose his job. Now this might have been a worthwhile gamble if Spivey would have received a significant portion of his upside had he been successful. This just wasn’t the case. Had Spivey instead made a fortune, ACME9 would have only given him a slightly higher bonus and a pat on the back. The way the firm was currently set up, it was an incredibly stupid bet to make.

Here’s what drove me crazy. For a solid year, I’d been making small bets with a small amount of capital and these guys had constantly been up my ass. Spivey was making huge bets with a huge amount of capital and they just assumed that he knew what he was doing.

You have to give Spivey credit, though. Nothing got that son of a bitch down. I would have been in counseling, but Spivey was throwing himself a going away party at a local bar. Out of curiosity, I went and talked to him, and he was out and out delusional. He still had no idea why he’d been fired, and maintained that Marsellus himself had come down and apologized to him for having to let him go. Even though our research report had put what happened at about 9-1, Spivey acted as if it was a complete million to one shocker.

This was an aspect of the business that I was terrible at and Spivey had apparently mastered. Always walk around like you’ve been hitting nothing but home runs, and you are completely in charge of your surroundings. It always buys you time to turn things around, because most of the time people are too lazy to see just how badly you’ve been doing.

I Fought ACME9 and ACME9 Won: Part 14 The Bottom Falls Out!