Early on in my career I was extremely fortunate to work on the best institutional equity desk in Canada. There were plenty of great traders at the firm, but the lessons I learned from the head trader still resonate with me today.
Many traders are often confused by the action in the markets. What they sometimes miss is how many moves their opponents are thinking ahead.
I learned this lesson one day that is forever etched into my memory. Our desk was excited by the fact that a big new issue was coming to market. I can’t remember the specific stock, but I think it might have been Manitoba Telecom. It doesn’t really matter what the stock was – the important part to know is that we were anticipating doing a lot of trading in the name.
Our head trader was more like a Grand Poobah that oversaw the desk, but often disappeared for hours at a time for syndication or other high level meetings. We had another senior trader that ran the desk on a day to day basis and was in charge of trading the new issue. When the stock finally opened, it was super liquid and trading gobs. These were the days when stocks traded in eighths, and the quote on the board was something like 8 even bid for half a million, offered at an 1/8th with 1.2 million showing out loud. Our senior trader started hollering out that we would buy a million at 8.00 and sell 2 million at 8 1/8. Our traders who dealt with our institutional clients received a few trades for 100k or 200k, but we were frustrated that some big prints were going up at other firms without us participating. The senior trader kept following the quote, trying to make it bigger and attract an order. But for half an hour we had no luck harpooning the whale order that was trading at other shops.
That is when our head trader took over. I distinctly remember him saying, “anyone can make a market on the quote – you aren’t going to get the order that way.” He then proceeded to call out to his stock entry clerk (the head trader had no terminal and did not actually put in any orders himself), “offer 1 million at an 8 1/8.”
The clerk put an order into the book to sell 1 million shares at 8 1/8th.
Then the head trader said, “sell half a million at the figure.”
So the clerk sold 500k at 8 even. The order was immediately filled. The bid on the board, which had been for 1.2 million, was now only showing 700k.
The head trader then watched the tape. A few big trades went through at 8 even, and within a few minutes there was only 400k wanted at that price. Sensing his opportunity the head trader pounced. “Sell 1.4 million at 8 even!”
The clerk quickly entered the order to sell 1.4MM at 8, and the quote moved to 7 7/8ths bid at 8 even offered.
At this point the head trader went to work making trades with our institutional clients. Instead of going out 7 7/8ths bid at 8 offered like most traders would have done, the head trader forced the sellers to deal with us by telling our traders to tell their clients that we would pay the offering the price for 2 million.
“8 even bid for 2 million!” he shouted out across the desk.
Our traders immediately called our clients and to no surprise, one of the traders found the big seller.
“Two million sold to you,” one of the agency traders barked. “Do you want to buy anymore?”
“Tell him I am 7 7/8ths bid another 2 million for now, but everyone let’s get to work finding some buyers,” the head trader responded.
And sure enough, we went on to find some buyers and dominate the tape for the rest of the day.
That day will stay with me forever. I will never forget the lesson of realizing that to make it in this business, you need to be one step ahead of the next guy.
This applies to any type of trading. You need to realize that anyone can buy on the good earnings report, or sell on the bad macro data – just like anyone could make a market that is exactly the same as what was showing on the board. The truly great traders are always thinking about the next move and realizing what is obvious is useless.
Things that I am watching
The Chinese Yuan continues to plummet
Overnight the Chinese Yuan selling hit a new level of desperation. The Yuan had the largest one day selloff in more than 6 years!
CNY – biggest one day sell off since 2007!</a> </div>
I don’t really have any insight into this move except to note that maybe their credit problems are bigger than anyone thinks.
Long a tiny position of puts on TSLA and FB. Just for shits and giggles. Conviction 1. Stop – none: when they go to zero the market will do it for me.
Short US 5 Year Treasury Futures. I expect the Fed to continue to withdraw stimulus aggressively. Conviction 3
Short US 2 Year Treasury Futures. I think the downside is a move from 31 bps to 25 while the upside is a move up to 50 bps. Conviction 4
Short Euro. Added to this trade into the recent rally. Conviction 5
Short Nasdaq 100 futures, short Eurostoxx futures, and short Nikkei futures. I entered the trade last Wednesday with idea that the Fed is going to taper until something breaks and that the bulls are pushing their luck. Conviction 4. No stops for now
Short European stocks via ESTX50 index vs Long S&P 500. I continue to believe that the ECB is too tight relative to the Fed and the BoJ, and that this will translate into relative weakness of European equities. Conviction 5
Short Yen. Establish short Yen last week. Now I will sit tight and wait. Conviction 4
Short JGB futures. I can’t call myself a macro trader without this widow maker on the sheets. Small position for now, but will add aggressively at the first sign it is working. Conviction level: 2. No stop.
Long Yen volatility. I believe we are entering a period of increased volatility for the FX pair. Conviction: 3
Long 30 year US treasury volatility. Swapping half of this position into Yen volatility. Conviction 2
Long various deferred crude oil futures contracts. I own a variety of different expiries in years from December 2014 all the way to December 2020. Conviction level: 5. No hard stop.
Long precious metals smorgasbord. Long gold, silver and platinum futures. I also believe that the closed end ETFs (CEF.A CN Equity or PHYS US Equity) which are now trading at discounts versus years of trading at a premium are a good way to play this idea. Conviction level: 5. Using the year end lows as a stop for half the position.
Long grains. Long deferred corn, wheat and soybean futures. Although this trade has not worked at all, I really like it long term. Conviction level:6. No stop period.
Long Ithaca Energy IAE CN Equity. See previous posts. Conviction level: 5
Long Input Capital INP CN Equity. I have not yet written this up, but I really like this story. More to come in coming days. Conviction level: 5