Memoirs of a Minyan: War Stories
The purpose of the journey is the journey itself.
Chapter 4: War Stories
If I were to pick a word that characterized 1992, it would be survival.
I didn’t scale the learning curve as quickly as I would have liked but I had a seat and that had to mean something.
At Morgan Stanley (MS), we were measured by four criteria—personal performance, department performance, division performance and overall firm performance. If any of those elements were sub-par, it would invariably trickle down.
With the recession of 1989-1991 fading in the rear-view, the mood on our desk was optimistic. The place was a printing press and our department had a monster year.
I made considerable progress, forged professional inroads and networked with customers. By the time holiday season arrived, I had pep in my step as I walked into the back office.
Jack was again waiting for me. He had a pained look on his face.
"You know," he began, "Wall Street isn’t for everyone. You’re a good kid and people like you but this may not be the business for you." He paused, choosing his words carefully. "You need to think—really think—if this is something you want to pursue. If it is, you’ve got to show us something and it has to be soon."
I tried to mask my disappointment while at the same time, appear stoic.
"I’m not going to let you down." I said, never losing eye contact. "This is where I belong. I’m not going to let you down—I’m not going to let myself down." I paused expecting Jack to say something, but he didn’t. I again spoke, this time with more emotion.
"I give you my word."
He nodded to me and gestured towards the door, confirming what I already knew. For the second straight year, my total annualized compensation at one of the world’s most successful trading operations was a grand total of $28,000.
Settling Down and Settling In
If 1991 was the year of the salad and 1992 was a wake-up, 1993 was the year I found my rhythm. In addition to taking reports and relaying markets, I traded orders given to our desk by the sales force on behalf of our clients.
The process was simple—if a customer wanted to buy or sell something, I executed the order with the counter-party and relayed the "fill" to the sales person who, in turn, gave a report to the client. That was called agency business.
If the marketplace didn’t provide liquidity at the right price, Morgan Stanley would step in and take the other side of the trade. That was called customer facilitation.
Our derivative portfolio was comprised of the aggregate positions managed as a function of customer facilitation. The risk-profile was broken down into several "books" and separated by industry. Jack traded the industrials, drugs and airlines. Tommy and Mark Neuberger traded technology. Various other traders, about ten in total, covered other sectors.
Two groups that weren’t covered on the desk were financials and biotechnology. We didn’t have positions in those names and I fielded the order flow and executed them on an agency basis.
One afternoon, several months into 1993, the floor "fell down" on an order, which is to say, they didn’t stand up to the market originally communicated and reflected to the customer. I alerted Tommy and he told me to "put the customer up."
I told my broker on the floor to take the other side of the trade and listened as he slapped it on the tape. Once I got the report, our salesman told the customer he was done.
Tommy told me to watch the position, which effectively meant that I had my first—albeit meager—trading position at Morgan Stanley. When I traded out of it for a profit, he gave me the green light to facilitate another order. That, too, was traded for a profit.
It wasn’t a lot of risk—50 and 100 lot orders which, given options have a multiplier of 100, equated to 5,000 or 10,000 shares of stock—but I traded them with discipline. As the year progressed, the cumulative profits I generated for the firm grew in kind.
When 1993 came to a close, I again sat with Jack in the back room. This time he had a smile on his face as he told me my total compensation rose to $75,000.
At 24 years old, it was more money than I knew what to do with.
Changes in Latitude, Changes in Attitude
While there was much to learn, I secured my spot on the desk. I didn’t produce the numbers other traders were but I consistently contributed to the bottom line.
Slaino was my big brother, Jack my father figure and Tommy took me under his wing. The rest of the department warmed up and seemingly enjoyed the occasional stories I shared on Monday mornings.
There were several regime changes during my time in the derivative department. Chuck retired after my third year and handed the leadership baton to a younger, more quantitative risk-manager.
I was officially part of the starting rotation. My compensation paled in comparison to other traders and perhaps that’s why I felt somewhat secure.
In terms of bang for the buck, I was the best deal on the desk.
With new management in place, my performance gained steam and with time and experience, I produced in a more meaningful manner. Every day was dynamic and different, like an ever-changing jigsaw puzzle that fit together to form a bottom line.
When a customer wanted to trade one of my "names," the order was dropped directly on my desk. I no longer had to check with Jack or Tommy; I had discretion to determine what I wanted to position. Autonomy is the ultimate sign of respect on Wall Street and once that arrived, the money wasn’t far behind.
At the end of 1994 when bonus time arrived, management pulled me in back and informed me my total compensation was $150,000.
Drinks were on me.
The Moment of Truth
Things really started to come together. I built the bank pad into one of the biggest on the Street and word quickly spread about the aggressive kid from Morgan.
If a customer had something to do in the sector, I was the call. I traded huge positions and plunked money in Mother Morgan’s till. It was a beautiful thing.
Keefe Bruyette was the biggest player in the financials on the Street and the crown jewel of my customer base. I worked hard to impress their head trader and before long, secured the majority of their flow.
NationsBank, Chemical Bank, Chase Manhattan Bank (JPM)—you name it, we traded it. I was only 26 years old but had established myself as a customer friendly producer and if you wanted to trade a bank, you came to Morgan and you would get taken care of.
The First Interstate position began like any other. The stock was trading near $70 when Keefe's head trader asked Kim Dispigna, his Morgan salesperson, for a market in the Jan par leaps (January 100 call options that expired the following January).
I checked the floor and found that the options were three dollars wide and 50 up, meaning the customer could buy or sell 50 contracts on either side of an illiquid market.
"What odd-lots," I thought to myself as I tightened the market and increased the size tenfold. "Whatever he needs," I remember telling Kim, "Just get the order."
Keefe built upside exposure for a few days and before long, I had a large position. I was short call options to my customer (which gave him the right to purchase stock) and I owned the equity to hedge my risk.
They became increasingly aggressive and I had trouble keeping up; the floor wouldn't sell any more calls and I was the only means of facilitation.
Finally, after several weeks, the customer asked what the position limit was.
"8500 contracts," I replied, "That's as many contracts as he’s allowed to buy, according the exchange." We were almost there.
To say that I was involved in First Interstate is like saying that Google is involved in the Internet. If anyone on Wall Street had something to do in the name, they knew Morgan Stanley was the call.
I had a massive position—short calls to my customer and long everything under the sun against them. I assumed the customer knew something and I went along for the ride.
I traded that monster for months. When I liked the market, I pressed my upside bet. When I didn't like the tape, I shorted other banks against it. At no point did I waver from my conviction or abandon the position.
Everyone in the room knew the story and I was sitting atop the train waiting for it to pull into the Promised Land.
Stress? Sure, but I had an edge and it was razor sharp.
Cuts Like a Knife
It was a slow afternoon when Kim's voice cut through the quiet room.
"How'ya makin' Letter I?"
I looked at her and smiled, assuming she was teasing, as she was apt to do.
I looked at my screen, not bothering to call my broker to see what the floor market was. “There’s 50 offered at 23 1/2, I'll make it 500. Whataya wanna do?" I said, calling her bluff.
"He needs a two-sided market."
I looked her in the eye, a smile no longer on my face. "21 1/2-23 1/2 500 up," I offered with a slight crack in my voice.
"He'll sell ya' 500 at 1/2" she shot back, "and he’s got more behind it."
I'm not sure I breathed the next several minutes. I slapped 500 on the tape and called my floor broker to sell some of my underlying exposure.
Unfortunately, every option trader on the floor knew the size of my position and the stock was knocked for a buck before I could blink.
The closing bell was an hour away and an uneventful session suddenly became the most important day of my career.
"Keep reflecting bids," Kim said, "I think he wants to get done today."
I needed to make sales and asked the customer if I could "get in shape" and he told me to go for it.
I sold stock, preparing to trade another slug of calls. If the customer was going to sell 8000 call options—which represented 800,000 shares—I knew I would have to buy most of them. With 15 minutes left in the session, I yelled "Figure bid for 8000!"
I needed Keefe to sell me the rest of his position so I could unwind my risk and work off the remaining exposure in the marketplace. I watched Kim as she spoke to the head trader, clenching my jaw as I held the phone tightly to my ear. My floor broker was at the ready.
"GREAT bid," she said, "He's gonna hold tight and finish up in the morning."
Sleepless in Manhattan
I was the first person on the trading floor the next day for no other reason than I hadn't been able to sleep.
At 6:00 AM, the bank trader from the listed stock desk walked over to me, smiled and said "You're still involved in Letter I, right?" My heart froze.
"You're...you're still long it, right? Please tell me you're still long it."
My mouth opened but nothing came out. The trader turned and walked away without saying a word.
I grabbed the Journal, went to the men's room and stepped into the far stall. Three minutes later, the entire trading floor erupted. I'm not sure how long I sat there it didn't matter—I desperately wanted to stay.
I took several deep breaths, left the Journal on the floor and stepped out the door.
You would have thought that I hit a walk-off home run and teammates were waiting for me at the home plate of Yankee Stadium.
Salesmen patted me on the back; traders gave me the thumbs up and friends from the Street left messages to congratulate me. The head of the department walked up to me with a sparkle in his eye and almost hugged me.
"Way to go, Toddo, way to stick it out!"
There was only one small problem—I was short. Very short, betting that the stock would decline and I would be able to cover the rest of my position for a profit.
Instead, the stock traded 35 points higher and what would have been a seven-figure win suddenly morphed into a multiple-seven figure loss.
Wells Fargo (WFC) had been in talks with First Interstate and the deal fell apart. That may or may not be the reason Keefe tried to sell his position. I didn't know and it didn't matter. Wells Fargo made a hostile bid, which at the time was unheard of in the banking sector.
To add insult to injury, Morgan Stanley was the banker on the deal and I was restricted from trading either stock. My position was taken from me on the opening. In other words, I was completely screwed.
I didn’t move 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 taunt me so.
Around 7:00 pm, Ralph Reynolds, the head of our department, called me into his office. Here we go, I thought, the end of my world as I knew it.
Someone once told me that on Wall Street, you’re only as good as your last trade. I assumed that spoke to the general direction of performance, not the literal interpretation that suddenly sank in.
I was so close to the cash register yet after a single trade, my career was over. I would have banked millions of dollars if the deal were announced a day earlier. Instead, I was going to be a sacrificial lamb. My confidence and self-esteem were shattered as I prepared myself for the inevitable news.
I explained the sequence of events to my boss as he stared deep into my eyes. My trading account was still up substantially for the year but I was certain it wouldn't matter. He measured me as if he was judging my soul. After a long pause, he spoke.
"Go home, get some rest and come ready to play the next day."
He wasn’t happy about the loss but he wasn’t going to spike my career over it. The mechanics of my swing, he decided, outweighed the results of the at-bat.
I walked from the office, took the elevator downstairs, exited Morgan Stanley’s offices and turned the corner.
There, as I leaned against a neighboring building, surrounded by strangers making their way to the theater, I began to laugh.
Within a few minutes, tears were streaming down the sides of my cheeks.
Click here for the next chapter of Memoirs, "An Officer and a Gentleman."
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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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