I Fought ACME9 and ACME9 Won: Part 6: Between a Rock and a Hard On

Brown was basically now basically managing two traders that he cared about and me. One, Freddie, had been around the firm for awhile. The other, Floyd, had been hired at the same time as me. He was also an ex-O’Connor guy. The three of them and I all traded about 400 specific stocks like Countrywide Financial, Morgan Stanley, and Goldman Sachs.

Here’s the boat I was in.

If I heard some news, I was supposed to inform the other three about it. If they heard some news, I had to be lucky enough to overhear them talking about it.

If they had something that they wanted to do on the opening based on something that might be happening in the market, I had to wait until they were done before I traded a single contract so that my competition wouldn’t interfere with their profitability.

One time I saw some news at the same time as they did. While they huddled in one of their secret little meetings trying to decide what they wanted to do, I went out and sold a bunch of options and made about $20,000, for which I was scolded by Brown. Speed was supposed to be an asset in my business, and I had known what to do instantly, unfortunately I not only had to stay out of the other’s way, but I had to infer telepathically what they were and weren’t going to be doing.

I suppose they could have included me in those little huddles, but that wasn’t going to be happening.

Additionally, I wasn’t allowed to trade or even know about the customer paper that was offered to the firm (in this business those are the best trades). This alone essentially put me behind them by a minimum or $5,000 a day.

Like those customers every trade I made required me to hit a bid or take an offer. The other accounts got thousands of contracts a day in their accounts which they bought on the bid and sold on the offer. This made it impossible to judge how much better they were or were not actually trading than me.

Since my account was about a sixth as large as each of theirs, it also opened me up more to the devices of fate. If some stock made a big move and I had a position in it, it would inevitably affect my little portfolio way more than their big ones; my account by the nature of its size was less diversified than the big accounts.

Additionally, although their accounts averaged about $13 million dollars in risk, that was a fluid number, they could pretty much trade as much as they wanted to. If my risk ever went over $2 million dollars, I’d get a risk violation. A risk violation, which you could get for any number of reasons, was a one day suspension that you spent not trading and doing office work instead, filing perhaps. If you got three you were fired.

Other ways of getting a risk violation usually arose from taking too much risk in a specific name. One of the ways this was measured was with risk slides. I’d been promoted to senior trader so I was allowed to risk up to a $350,000 theoretical loss in each individual name (IBM for example) given a 20% move in the underlying stock.

Big moves in specific names were the land mines of the options business. The statistical models that traders price options with don’t really take huge unexpected moves into account. The chance of a big move made most options a little expensive. 90% of the time traders make their money selling really expensive options. It’s like selling insurance. The problem with just selling options though is that you can lose enough the other 10% of the time to put you completely out of business.

So you can’t just sell options, you have to begrudgingly buy them too. The idea is to buy options in the names that look relatively cheap and sell options in the ones that look relatively expensive.

The problem with this is that the market isn’t totally stupid, in fact, it’s pretty efficient. Options that look more expensive than they should are probably trading that way because there are rumors rampant that something weird might happen.

The game is to sell things that hopefully won’t blow up in your face. If something weird happens in just one individual stock, it’s a matter of luck whether it will make your month or ruin it. If the whole market goes insane, then you better hope that the options you bought in certain names save you from the options you sold in other names. Keeping these things balance was why they had risk rules and managers who monitored the risk of individual accounts and the firms’ accounts as a whole.

Anyway, I was capped at $2 million worth of risk, while just about everyone else got to trade to their hearts content. You might wonder what happens when I reach $2 million dollars in risk. I did too.

A traders’ capital is the same as a banks’. You want it to be working for you. If you have $2 million dollars to trade with you want your portfolio’s haircut (risk) to stay pretty close to its limit.

Now if you are a trader with two million dollars, you mostly just keep an eye on how your positions are doing. If things move back into line, you can trade out of some positions and put on new ones, but every time you do this you are paying the bid ask spread so you do this only if things really change a lot. About a third of your portfolio expires every month, leaving you room to put on new trades.

Clearly, it’s impossible to remain as busy doing this as it is to remain busy trading as much as you want. The guys who work for themselves joke around with each other, play solitaire, or surf the internet, but I don’t work for myself. I work for a firm and I have to try to constantly look busy, which as anyone knows is the hardest and most onerous part of any job.

This turned out to be impossible for me to do. There’s nothing more stressful than trying to look busy when you know the best thing for you to do is absolutely nothing. So while just about everyone else had tons of work to do, I took a lot of smoking breaks, and eventually caved in and spent some time reading things on the internet. Mostly, I just sat and watched to see whether I was making money or not.

It wasn’t hard for Mr. Brown to see how much time I was spending trading and how much time I was spending watching, and I wasn’t hiding it either. My risk was capped there was nothing I could do about it.

This was fine as long as I was making money and for the first couple of months, I did. In fact, somehow despite my competitive disadvantage, I outperformed the other three.

You’d think I’d be lauded for this, but instead it just irritated Mr. Brown. His group was being outdone by a guy, who he didn’t think was working very hard. He was basically laying in wait for things to turn around so he could pounce on me.

Brown was a decent hard working guy, but he was obsessed with the aforementioned attention to detail. While other managers seemed to let their traders joke around a little, he mostly wanted us with our faces in our computer screens scraping out ways to make money.

He was really anal about what he thought was the right way and the wrong way to work. You could find oil on Brown’s property and he would yell at you for getting it on his carpet when you came inside to give him the good news.

He was a notorious Monday morning quarterback. One time he and Freddie disagreed on a position going into that name’s earnings report. Freddie thought the stock would move a lot, Brown wanted no part of it. As it happened Freddie had the next day off, during the morning it appeared that Brown’s opinion was correct. Freddie was down about $30,000 and Brown complained about him vigorously all morning long. Nevertheless, as the day continued the stock continued to move. By the time Freddie came in the next morning the position had made him about $50,000, and Brown acted as if nothing had even happened.

Like a lot of managers at the firm Brown didn’t see much of a reason to ever lose money, even though the smartest guy in the room would have to admit the amount of luck involved. Because of the amount of luck involved, he was extremely superstitious.

For example, he absolutely refused to trade Phillip Morris because he’d once lost a lot of money in the name. Thus, he never touched it and left it to Freddie and Floyd.

This was a shame because I absolutely loved trading Phillip Morris, and I constantly made money doing so. Customers would constantly overpay for options in Phillip Morris. Stocks usually make big moves when they announce earnings, so customers usually bid up options right before earnings. This happened in Phillip Morris too, but luckily for people who sold those options, Phillip Morris almost never moved on its earnings reports. Selling options right before Phillip Morris earnings was about as easy a way to make money as there still was in the business.

Instead of moving on earnings, Phillip Morris moved based on the results of cigarette lawsuits against the company. These moves were fairly easily timed and manageable, which made Phillip Morris a great stock to trade, but Brown refused to touch it thinking that someone had put a voodoo hex on him in the name.

One day Freddie and Floyd were away from their desks doing something extraneous. They owned a ton of Phillip Morris options (God only know why) and customer demand was bidding them up. I knew that it was time for them to sell their positions out and told Brown about it. Of course, because it was Phillip Morris, he refused to do anything. By the time the others returned, the opportunity was gone. His superstition probably cost the firm about $50,000, and instead of being a hero for pointing him in the right direction, I was the guy who irritated him and made him look bad. What a great role I had with the firm!

I Fought ACME9 and ACME9 Won: Part 7 Fixing What Isn’t Broken