War Stories From the Trading Desk
Any trader worth his or her salt has been on the wrong end of a painful day.
--Lou Mannheim, Wall Street
Things were finally starting to come together. After joining the Morgan Stanley Worldwide Equity Derivative desk as a wet-nosed kid in 1991, I did the types of things that earn a young man stripes.
I arrived each morning at 5:00 AM to "write up" positions for the head of the department, Chuck Feldman, and spent the rest of my day clerking, quoting, fetching and running. It was modern day pledging minus the niceties of the college experience or the rewards of young co-eds.
I didn't mind as I had my eye on the prize and knew that if I was gonna play, I had to pay.
A few years later, a random order in Chemical Bank morphed into a small set of positions. None of the seasoned traders on the desk followed the banking sector and I inherited the group by default. I wasn't allowed to facilitate customer order flow (take the other side of client transactions) but I slowly earned the respect of my peers and the latitude of management.
In time, I took floor markets and expanding the size to capture customer order flow. I “caught” orders from all over the Street as institutions lined up to do business with the aggressive kid from Mother Morgan (MS).
Keefe Bruyette was the biggest bank player on the Street and the crown jewel of my fledgling customer treasure chest. It didn’t take long for the relationship to gain traction—I took a ton of risk through my aggressive facilitation and they rewarded me with a slew of new business.
NationsBank. Manny Hanny. Mellon Financial. You name it, I made it and we traded it. I was only 26 years old and suddenly established as a customer friendly producer with nerves of steel. If you wanted to traffic in a bank, you came to Morgan and left with a smile on your puss and some jingle in your jeans.
The First Interstate position began like any other. The stock was trading around $70 when Keefe's head trader asked Kim Dispigna (our Morgan salesperson) for a market in the Jan par leaps (January 100 calls that expired the following year).
I checked the floor and found a market that was three dollars wide and fifty up (meaning that the customer could buy or sell 50 contracts on either side of the market). “Man, what odd-lots,” I whispered to myself as I tightened the market and increased the size tenfold. "Whatever he needs," I yelled across the crowded floor "just get the order."
After a few weeks of steady accumulation and my attendant facilitation, I had a pretty sizable “Letter I” position. I was short the leaps to my customer and long stock (along with any other options I could get my hands on) to hedge my short risk.
Keefe became increasingly aggressive on the buy side and I was having trouble keeping up. The floor wouldn't stand up to their offers and it was all me, all the time. Finally, they asked me how big the position limit was. "8,500 contracts," I replied, "that's as big as you’re allowed to get."
We were almost there.
To say that I was involved in Letter I is like saying that Google (GOOG) is involved in the Internet. I was the "ax" and if somebody had something to do in the name, Morgan Stanley was the call. I was short massive amounts of long-dated calls and long a truckload of stock and assorted options against them.
To add spice to the mix, chatter began floating around that the stock was a takeover play. The sharpest bank trader on the Street—my customer—was position limit and I wasn't going to miss the party. This was my chance to make a statement and the size of my risk was matched only by my bravado.
I traded this monster for months. When I liked the market in general or the banks in particular, I pressed my bet on the long side. When I didn't like the tape, I shorted other banks against my book or slapped on an index hedge.
Through it all, I never wavered from my conviction or abandoned the position. Everyone in the room knew the story—heck, everyone in the Street knew the story—and I was sitting on top of the train, patiently waiting for it to pull into the Salvation Station. Stress? Sure, but I had an edge and it was razor sharp.
It was a slow afternoon when Kim's Brooklyn accent cut through the quiet room. "Howya makin' Letter I?" I looked at her and smiled, assuming that she was joking as she was known to do. Without missing a beat, I looked at my screen and cuffed the market. "The floor is showing 50 at 1/2, I'll make it 500. What do YOU want to do?"
"He needs a two-sided market."
I looked her in the eye, my smile now gone, and played the game. "21 1/2-23 1/2 500 up,” I screamed, trying to sound confident despite the slight crack in my voice.
"He'll sell ya' 500 at 1/2" she shot back, "and I’ve got 8,000 behind it."
I'm not sure if I breathed for the next several minutes but I took the order, slapped 500 on the tape and asked Kim if I could “get in shape.”
“Sure,” she said, “Lemme know when you can play.” I called my NYSE broker to sell some of my underlying stock but by the time he got the order, every option lemming was already hitting bids. They knew the size of my position and before I blinked, they had already knocked the stock for a buck.
And you wonder why option traders get a bad rap?
The closing bell was an hour away and my uneventful day suddenly become the most important session of my career. I managed to unload a slew of stock at lower levels and, with my soaked shirt matted against my back, bid the customer for more calls. "Keep reflecting bids," Kim said, "He wants to get done today."
The stock stabilized and I continued to parcel out of exposure. Finally, with about 15 minutes left in the session, I stood up and yelled to Kim "Figure bid for the balance!" I watched Kim converse with her customer as I held my second phone tightly to my ear. "GREAT bid," she said, "but he's gonna hold tight and finish up in the morning."
It wasn't the first time I had "legged" out of a position but it was certainly the most sizable. I got to work early the next morning for no other reason than I hadn’t slept all night. It was about 6:00 AM when the listed bank trader walked over to me and said with a smile "You're still involved in Letter I, right?"
My heart froze. "Yeah,” I said, “Why?!?" His face hardened as he watched the color drain from my expression. "You're... you're still long it, right?"
When I didn’t answer, he looked into my eyes and opened his mouth to speak. Then, without saying a word, he turned and walked away.
I glanced over my shoulder to see my desk chewing through their daily morning routine. Unsure how to react, I grabbed the Wall Street Journal and scurried to the men's room. About three minutes later, the entire trading floor erupted in a furious frenzy as laughter and joy poured under the crack of the bathroom door.
I'm not sure how long I sat in the last stall but it didn't matter—I didn’t want to come out and face my teammates. I summoned the courage and made my way to the sink, splashing water on my face with hopes that I would awake from the nightmare. I took several deep breaths, straightened my tie, put on a brave face and entered my eminent domain.
You would have thought that I hit a walk-off home run and my teammates anxiously awaited me at home plate. Salesmen patted me on the back as I walked by. Traders gave me the thumbs up from across the room. Multitudes of friends from around the Street left voice messages to congratulate me.
The head of the desk walked up to me with a sparkle in his eye and hugged me tight. "Way to go, Toddo, way to stick it out!" There was only one small problem, a minor point of protocol and positioning.
I was short. Very short. And the stock was trading up 35 points.
The losses were well into seven figures. Wells Fargo (WFC) had been in talks with First Interstate and the deal fell through at the eleventh hour. That was likely the impetus behind the customer’s attempt to sell his calls but it really didn’t matter—he held on to his position.
Wells Fargo turned around and made a hostile bid which, at the time, was unheard of. To add insult to injury, Morgan Stanley was the banker and I was immediately restricted in the name. That meant that our compliance department assumed my position on the opening print and I was no longer allowed to trade the name.
I don't think I moved from my turret all day. I didn't go to the bathroom. I didn't eat lunch. I didn't make outgoing calls. I didn't do anything but stare at the flickering "I" that continued to wink and blink and giggle green. On top of it all, I made a $100,000 error while executing an agency order.
Everyone I told the Letter I story to was coining massive amounts of money while I was suffering the wrong side of a multi-million dollar swing. I knew that the call would come but I didn’t know when.
Finally, around 7:00 pm, the head of my department called me into his corner office. Here we go, I thought to myself, the end of the world as I know it. I was so very close to the upper echelons of Wall Street wunderkinds but, after a single trade that took less than an hour, my career was over.
I heard of the adage “you’re only as good as your last trade” but I never thought it could happen to me. I couldn’t fathom that the stars would align and catch me on the wrong side of my biggest position. I never knew that the trading gods had such a vicious, unforgiving sense of humor.
As I explained the sequence of events, he studied my eyes as if he was judging my soul. I was still "up" on the year but I didn’t think it mattered. I would have banked serious coin if the deal was announced a day earlier but instead, I was pleading for my professional existence as darkness set in midtown Manhattan.
I walked him through every tick and each thought of that fateful sequence, looking for mercy despite knowing it was undeserved and unlikely. I had taken a major hit and my confidence and my self-esteem was shattered. My white knuckles gripped the sides of my seat as I waited for the inevitable news that would officially end my Wall Street run.
But it never arrived.
"Go home, get some rest and come ready to play tomorrow," he said, no longer making eye contact, “and take it easy on the risk for a while.” After listening to my story, he decided that the mechanics of my swing outweighed the results of the at-bat. That, despite the loss, I was to remain in the line-up.
While I twisted the knife in my own side for many months thereafter, I dug down, found my groove and made back the losses and then some. Slowly, with trepidation at first, but with lessons learned and experience in tow.
While it took some time to regain my composure, I knew that trading “not to lose” was the quickest way to do just that. And when you look into the abyss as I did on that fateful day, the only thing you know is that you never want to see it again.
As fate would have it, I was promoted that year and became the youngest vice-president at the firm. I share that fact not to champion my personal achievements but to make a rather important point.
Any trader worth his or her salt has been on the wrong end of a painful day.
We all take pride in our performance but must learn to absorb the losses and balance the process.
While it's true that we're ultimately measured by the magnitude of our bottom line, we should remember that there are fresh opportunities to prosper if we’re disciplined in our approach and true to ourselves.
The sooner we realize that dark days happen to the best of us, the more enjoyable the journey will be as we find our way to better tomorrows.
May peace be with you.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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