P&L from 20 years

This blog is defunct. I realized that in revisiting these old posts, I am a better fire starter than a kiln keeper. I find energy and excitement in creating new things, not making sure the lights stay on. This will *probably* be the final post here, even though, similar to my time on the floor/screen, we may have already missed the expiry

Pain & Lessons from 20 years

Graduation, marriage, honeymoon, 2nd reception, moving into an apartment, get settled, get on the floor. May 4th through June 18th, 2001. 

That’s the hook, that’s how it all started. My first assignment was to be a rail clerk in the QQQ’s at the CBOE for a prop shop out of NYC. Occasionally I was shuffled around to other spots, we had traders in lots of other pits, it was the beginning of the handheld age, and I was a tech savvy college grad. I was always on the move. On 9/11, I was on the top step of the SPX pit, handling our 5 traders and two Merc headsets. 

By 915 we had fled the city, hearing only the sound of scrambled F-16’s flying overhead. This was followed by the long silence of a workless week. We spent time taking walks and trying to finish Thomas Kinkade puzzles. 

When we returned, the firm was up huge. Nearly 8 figures. Our teenies were all nuked, our gamma was golden and our P&L was perfect. Those traders swung biggly and crushed for the next 2-3 weeks as our book continued to print substantial amounts of cash… then we went bankrupt.

AA flight 587 went down in Queens on 11/12/01. Certain it was another attack, those same traders bought 3x the volatility and prepared to get richer. No one on board survived the accident and it was ruled pilot error. Within 3 days, the firm had given back every bit of the year’s profits and an additional 9 million. Virtually everyone was fired before the end of the year.

LESSON #1:

Buying on the news event is a losing proposition. Trading the news is for defending your existing position and for hedges.

The summer of ‘02 was bleak. The experienced traders were gone, the bougie office overlooking I-290 was gone, 7 of us remained. 3 grizzled vets, 3 clerks, and the IT guy. The problem was that our firm had traders in 50+ equities. Our job was to go around, clean up the mess and make back a little P&L in the process. I was ordained a trader on a mission to do cleanup. 

I wound up in the Tyco (TYC) pit, where I traded Coke, Bank of America, and various other lesser names. I was a back row trader that rarely got more than a 5 lot of anything. Most of the traders verbally assaulted me on the hour or whenever I mustered up the courage to make a market. I was quick, I still had decent body mass, I had a sharp tongue, I fought back, and it rarely mattered.

In the early autumn, a hefty, wandering Goldman broker came into our pit and said he had some size to move in Tyco. At the time TYC was hovering around $23-25 a share with the monthly expiration about 12 days. He asked for the $10 puts expiring that month. In all honesty, the $12.5 had a zero value, so clearly the 10s were a great sell at a $0.05, right? The DPM sold him 7.5K, the big locals piled on and all sold 1K+ each. Being a piss-ant, I got 500.

Less than 72 hours later, Dennis Kozlowski, Tyco’s CEO, was indicted on $100M worth of fraud and embezzlement charges. The stock opened under $9. It was my first blowout.

LESSON #2:

Never be short wings without having a bullet or two left in the holster. O’Hare trades are for gamblers without risk parameters, don’t get caught with your pants around your ankles, begging for an out.

LESSON #3:

Goldman will fucking gut you without remorse and they’ll never get caught or punished for their transgressions. Get used to it or don’t trade with them. If you choose to engage with Goldman, know that they don’t lose.

It would take some time, but I found myself working with an older trader who lived out of state. He would fly in for the middle of the week, I would handle the book on Mondays mornings and Friday afternoons when he would commute home. In trading terms he was a small local, well liked, and was very sharp. He knew options and risk and was always incredibly calculated. We were constantly long gamma, buying low and selling high and paying theta.

About 14 months into our relationship, we were getting set for the monthly Unemployment Friday. We were long a small amount of gamma and vega, nothing huge, perhaps 30 total straddles. The pit opened at 720 and as we waited for the data at 730 another local turned to my partner and mentioned that he felt the number was a non-event and if we wanted to sell him a few straddles to cover his shorts, he’d take us out 2 ticks better than settle. My partner sold him a 50 lot. It would be extremely costly as the data came out blistering and the bonds sold off almost 2 full points. We lost $100K that day and it was one of the deciding factors in my partner’s decision to resign. 

LESSON #4:

Trade your own book. Don’t allow someone else’s opinion to trump the work you’ve put into building your position. They don’t have skin in your game, they don’t pay your mortgage or your bills, they don’t have your best interests in mind…ever.

I stayed in the bond options pit. Found a new local to back me. He was dynamic, one of the three largest local traders. His 6th sense was his ability to acutely understand where the combo (risk reversal) was at and where it was going. He was never short gamma, to this day, he is still the most whorish gamma buyer I’ve ever known.

My addition to that team was timely as it was the beginning stages of converting the legacy CBOT products to be co-listed on the electronic markets. We had an old school MS-DOS based risk software that we paired with a newer platform and then ran it all into excel and BOOM, we were quoting electronic trades! I was on the screen, he was in the pit. Whoever got the edge, the other guy tried to exit in their respective market. 

HIM: “Sell 25 straddles, but do the strike below at the money, we need the deltas.”

ME: “Sure, one sec”
HIM: “Did you get any of those sales? I just heard 25 went through on the HARD offer, did we get some? 

ME: “No… shit, I bought them. OK, I’m going to reverse it and sell them out, even if it’s for a tiny loss”

HIM: “Did you get any of those? They traded again…”

ME: “SHIT, I bought them again… FML”

LESSON #5:

Know your product, practice the trades, do the work on paper before you hit go on the big stage. Failing to prepare is simply a failed trade. It’s akin to a roll on the craps tables. This isn’t a ‘play your way into shape” world. Be ready or don’t show up.

Two years later we broke up, painfully, but it was necessary. I found myself alone, staring at excel worksheets while working on trades that were similar, but not the same. An old friend offered me a seat at her trading desk and it propelled me to the next stage of evolution.

We were Fed Funds traders, spreaders. We were essentially the boogie board riders snaking monster waves from the surf crew at Pismo Beach. I was super nimble and kept it tight. I began writing basic auto-spreaders and algos to help us quote multiple months. Super fun work environment, a group of young, exciting traders all plowing away at the same task of eating the paste found between the wall and the wall paper.

May 6th, 2010. I was just back from Prison Chicken with a 5 piece and was standing at my desk. I was running auto-quotes out at least 18 months, even in some thinly priced futures. The screen flickered and a gasp hit our room… We realized our 8 traders in the office were the only market makers quoting the funds. It was just us, everyone rushed for the same button:

CANCEL ALL  

Within 90 seconds, the Flash Crash happened. We traded like rock stars and our office killed it. But it was a mere minute from a very different scenario.

LESSON #6:

Someone will always know more than you. If you sense you’re on an island, GTFO and reassess your situation. Locals are the last to know and if you think you’re the smartest trader in the pit or on the screen… You’re set to get smushed. 

I took the lessons and profits and opened my own desk. Left Hash Capital was truly born. I auto spread Fed Funds and then I started building out a copper arbitrage between NYC and London. I hired a night guy and we were in business 20+ hours a day. The first 9 months were great. Profits were high, moral was high, I eventually found out that my trader was high too… It wasn’t a hard decision to let him go as the words of my very first boss came flooding back to me

LESSON #7:

“You’re free to get as drunk as you wish, do as many drugs as you want, bang unlimited hookers, honestly I don’t care. But if you’re ever on the desk under the influence of anything, you’re immediately fired. There’s too much money at play for you to be dicking around.”

The markets continued to evolve, my hires got progressively better. Jack and Nick were two of the finest. We grew the bottom line, we made some really tasty coin. I was preparing to head out to our family vacation in the OBX of NC. It was late June, 2016 and the polls had just closed in London… word was slowly trickling out that the Brexit vote no one had priced in, was about to pass. 

The 5p market open was chaos, by 630 I was back in my office, manning 3 books and struggling to stay liquid. I traded the entire night, sleeping maybe 30 minutes until the sounds of my fill log jolted me awake. I did the best I could and as the market raced to a close on that Friday afternoon. By the close, I had covered half of my risk and made a decision to let the rest ride while I went on vacation. I had locked in about $65K worth of losers and I realized that it would either all come back or this was blowout #2. 

I didn’t touch a thing for a full week and when I finally got back on the desk…the account was down a total of $8K, the markets had come back and I was once again in the clear. Had I done nothing, I’d have been up well over 6 figures and probably fully gray head of hair too. 

LESSON #8:
It’s never as bad as it seems. It’s never as good as it seems. Like virtually every thing in life, it is NOT binary. There’s always an exit, there’s always a third way. Creativity isn’t just for artists, it has its place in the trading world too.

I began to develop this theory that there are really only two types of trades left in this world. Trend following and mean regression. Either you follow the trend or you fade the trend and assume that the price action will return to the historical mean. I still find value in this idea, though I’m not as adamant about its life cycle as I used to be. The interesting part is… given a long enough timeline, the trend becomes the mean.

My copper arbitrage was built on this premises. I created a mean reversion trading strategy that would sell high, buy low, and scalp in between the extremes because it was going to return to my ‘normal price’ eventually. If I was forced to inventory a few here or there, it was no big deal and I became adept at moving in and out of my arbitrage. However, in late 2018, this model was tested to the extremes.

At this time, I was trading almost exclusively at home through mirrored servers and some high speed cables. I had met a friend to grab a coffee and noticed my phone had 18 new emails. Each one turned out to be 3-4 emails letting me know that I was filled… I almost threw up on the walk back to my desk. Normally I carried 10-20 units depending on market conditions. Suddenly I found myself net long 150, trading 200 ‘points’ lower than settle and my daily P&L was -$615K.

The phone rang, it was risk. I had 15 minutes to exit as best I could or they would be doing it for me. I begged. They didn’t listen. I mentioned our deal. They didn’t care. I asked for 24 hours. They said no. 

I set the algo to suicide and vomited the entire book. I locked over $700K of losses in about 12 minutes.

I sat on the couch, watched a movie, cried on my office floor, screamed at God, yelled every obscenity at my now dark screens. In disgust I turned the monitors back on to see the close. 

Only one thing could rub salt in that loss and it happened. The copper market completely reversed and was now printing 300 ‘points’ higher than the low of the day. My algo would have made $325K give or take… instead I was now bankrupt. Blowout #2 was complete

LESSON #9:

You can be right, early and broke. The markets are more irrational than ever and you’re on the wrong side of the information equation. You must remain liquid.

It took a year or two to want to trade again. The mind was grinding on new ideas but the heart didn’t want to sting of failure again. Eventually, I got back on the horse. I crafted a new play that was trend following. I tested it, SIM traded, worked on the math, got it close enough to fund. It worked. It was small, the profits were tiny, but it was in the black. 

That work got me into other conversations. I revived some old trade ideas, overlaid some of my current work. Found some great symmetry and created yet another basket of trades. This time we were not just trend following, we added in options to help with the mean reversion. It was finally time, it was go time all over again. Time to shop this trade to prop desks and hedgies and get it funded. This was my golden goose.

In 2022 we took it live. It worked. Really well. It was seriously a brilliant little trade. In hindsight, I can say that it wasn’t the type of trade that would make you millions, but with a nice set of tight risk controls, this little guy would print $8K a week and that’s pretty tasty.

But golden geese get slaughtered and we lost our way. We over traded, we moved from 1 unit to 5 units way too quickly. We saw $8K and figured why not go for $30-40K? So we upped our size. We upped our execution. We bumped our risk exponentially. We killed the goose. The one way train in equities coming out of late July was one death nail after another. Blowout #3.

We’re older now. So even though the loss was significant, it didn’t bankrupt anyone. However, it drove a wedge between my partner and myself. The accumulated stress cost more than the profits returned. In order to make it to tomorrow, I had to exit. As I sat pondering what trade would be next, it dawned on me. It was time to leave the industry.

LESSON #10:

All great traders have 2 common qualities. They can evaluate risk, they know when to load up and when to lay off all while refusing to violate their risk rule paradigm. They know how to exit a loser and step aside.

 

My wife and I went for a walk that evening. I told her that it was time for a full-bodied reboot of my work, my career, my pay, my life… I realized that for 20+ years I have had the privilege of chasing down the thing I loved most. Trading. It had its low moments but it came with so many great ones too. Now, as the circle of life marches on, it was time to let that chapter close and die. I don’t want to wake up 230a to check my gamma scalps. I don’t want to sit on pins and needles waiting for JPow to release the minutes. I don’t want to be behind the informational eight ball getting picked off and smashed. I don’t want to grind my teeth at night. I don’t want to do it any more. I’m done.

So I find myself at a crossroads. Stuck in mindsets that I frequently counsel and preach about. Part of me believes I’m unemployable because I’ve spent two decades in a niche market doing things that truthfully only benefitted me. My other mindset is that of a recovered pessimist. I have found hope in the resurrection cycle of life, knowing that all great things come, die, and are reborn. I just need to find that next page for the chapter that is yet unwritten. 

~LH

*If you made it this far, thank you for reading my story. My DM’s are open if you have a lead on what’s next. I still lead a faith community on the weekends and you’re always welcome to join in person or online at Greater Chicago Church. I have a few old podcasts under the title “Cardinal Truth” though most won’t interest this audience.