Ask the Wall Street Trader

[The Truculent Gentleman]

Greetings Dopers -

I'm a Proprietary Trader at a Wall Street firm. I've been with this firm for over 12 years and I live and work in Manhattan.

I am open to questions.


To pre-empt some questions:
Proprietary trading means you are trading for your own account - not customer accounts. We take risk in the markets in search of profit.
My firm has zero outside capital - we manage only our own internal capital.
We have had zero contact with the government or any bailout. We are not a bank.
The best way to describe my firm is a hedge fund that only manages its own money, with no outside investors.
I am compensated solely on the basis of my performance.

[Surly Chick]

Do you wear suspenders and your hair slicked back?

[dalej42]

I'll probably have quite a few questions. I work for a major online brokerage firm.

I'll start with a couple of simple ones. Which licenses do you hold?


What type of derivatives do you trade?

[LonghornDave]

1) How was your company initially capitalized?
2) What is the approximate capitalization of your company?
3) What do you specifically trade?

[The Truculent Gentleman]

Do you wear suspenders and your hair slicked back?

Nope. That stereotype is more of the investment-banking mold.

[teela brown]

What in tarnation is the stock market doing the last week or two? Trying to give me a heart attack?

[The Truculent Gentleman]

I'll probably have quite a few questions. I work for a major online brokerage firm.

I'll start with a couple of simple ones. Which licenses do you hold?


What type of derivatives do you trade?

I have my series 7 & 63.

When I trade derivatives, it's mostly vanilla equity options.

[The Truculent Gentleman]

1) How was your company initially capitalized?
2) What is the approximate capitalization of your company?
3) What do you specifically trade?

1) The founding partners put up the initial capital.
2) I'm hesitant to give this information. Let's say in the 9 figure range.
3) Equities and Commodities. Within those groupings, I focus on special situations, risk arbitrage, and gold.

[The Truculent Gentleman]

What in tarnation is the stock market doing the last week or two? Trying to give me a heart attack?

Not my place to give investment advice. But I'm personally pretty negative about global economies - I think the global debt situation is even more serious than the press gives it credit for.


Edit: Headed home. Will address later questions tomorrow.

[Meatros]

So, are we headed for more deflation or some serious inflation? By 'we' I mean the US and the dollar...

[Trom]

I am a trader at a firm in Chicago that matches the OP's description exactly. If The Truculent Gentleman doesn't mind, I can give some answers, as well.

[threemae]

What's the actual breakout of your workday? What percentage of time do you spend:

sitting in front of a computer monitoring a market
researching how you would trade in given hypothetical situation
other categories of stuff I don't even know that you do


Are you concerned that computer programs could be trained to replace what you do, or is programming a computer to trade for you just a tool to leverage your own creativity or decision making?

What's the order of magnitude of your own compensation? Over or under $1 M/year? I assume it's over six figures.

What is the career path for most traders in your firm to get where they are now?

[Rand Rover]

Do you use a purely mechanical rules-based strategy or a discretionary strategy?

If discretionary, do you take a more fundamental or technical approach?

[Happy Poster]

What letter does your firm begin with?

Which blogs do you keep up with?

Would I find you on Nuclear Phynance or Wilmott?

[Happy Poster]

Trom are you a local?

[ralph124c]

I am curious about how mutual funds trade stocks.
Suppose a huge fund (Like Fidelity Magellan) decides to buy a huge position (say 10 million shares of firm "X")-how do they spread out the trade? They don't want to alert others (it will drive thr price up).
Also, they don't want to allow brokers to profit by optioning the stock.
So how do they do it?

[Happy Poster]

FWIW I used to be a local @ cannon st, primarily short sterling and euromark...

[The Truculent Gentleman]

So, are we headed for more deflation or some serious inflation? By 'we' I mean the US and the dollar...

This is opinion only. Remember EVERYONE in the market has an opinion, and the majority will be wrong. That said:

I think we are in a near term deflationary period characterized by capacity underutilization (ie idle factories) and low velocity of money (ie most of excess cash isn't being lent/used).

However, in the medium/longer term, I believe this link: http://www.comstockfunds.com/files/NLPP00000/421.pdf
tells the real story. The only realistic way out of that mess is devalue the USD and print our way out.

Trom, I welcome any other comments or insights by professionals.

What's the actual breakout of your workday? What percentage of time do you spend:
sitting in front of a computer monitoring a market
researching how you would trade in given hypothetical situation
other categories of stuff I don't even know that you do

Are you concerned that computer programs could be trained to replace what you do, or is programming a computer to trade for you just a tool to leverage your own creativity or decision making?

What's the order of magnitude of your own compensation? Over or under $1 M/year? I assume it's over six figures.

What is the career path for most traders in your firm to get where they are now?

80% of my time in front of a computer monitoring markets.
Researching stuff is usually done at my desk while monitoring markets.
20% is spent talking to other traders, analysts, sourcing ideas.

Computer (quant) systems can't replace what I do. There is a profitable niche for mechanical systems, but they'll never be able to replace what I do.

Compensation varies by year according to my performance, and has been very wide over the years. I'd prefer not to get to deep into compensation discussions and am more interested in talking about the markets.

About 1/3 of the firm are people that started working here right out of college as junior/assistant traders. The rest are hedge fund managers/traders, sell side traders, etc that like our business model.

Do you use a purely mechanical rules-based strategy or a discretionary strategy?

If discretionary, do you take a more fundamental or technical approach?

Purely discretionary. I always have some fundamental view and use technicals as a timing tool.

What letter does your firm begin with?

Which blogs do you keep up with?

Would I find you on Nuclear Phynance or Wilmott?

Nope - no hints on my firm.

http://globaleconomicanalysis.blogspot.com/
http://pragcap.com/
http://www.cumber.com/commentary_archive.aspx

That's a sample of the kind of stuff I read.

I've never heard of Nuclear Phynance or Wilmott.

I am curious about how mutual funds trade stocks.
Suppose a huge fund (Like Fidelity Magellan) decides to buy a huge position (say 10 million shares of firm "X")-how do they spread out the trade? They don't want to alert others (it will drive thr price up).
Also, they don't want to allow brokers to profit by optioning the stock.
So how do they do it?

This is not what I do and is outside my area of expertise. But 'front running' big mutual fund orders has been and will probably continue to be a problem on Wall Street. Our firm doesn't take customer orders so front running is never an issue.

[Anaamika]

Are you rich?

[The Truculent Gentleman]

Are you rich?

Define rich. But to answer - no. I live in Manhattan, stress about living expenses and paying for my kids school. My wife drives a used car. I don't own a car. I ride the subway.

[Anaamika]

Define rich. But to answer - no. I live in Manhattan, stress about living expenses and paying for my kids school. My wife drives a used car. I don't own a car. I ride the subway.

'Twas just curious. :)

[Trom]

Trom are you a local?

No. I actually work for a Chicago firm that focuses on equities rather than futures. I've never even been down to the pits. Though, I do listen to an audio feed of the S&P pit sometimes when I'm bored.

I am curious about how mutual funds trade stocks.
Suppose a huge fund (Like Fidelity Magellan) decides to buy a huge position (say 10 million shares of firm "X")-how do they spread out the trade? They don't want to alert others (it will drive thr price up).
Also, they don't want to allow brokers to profit by optioning the stock.
So how do they do it?

As delicately as possible.

There is a huge amount of effort that goes into minimizing market impact by large traders. There are firms that specialize in finding liquidity through a variety of sources. As a random example - Jones Trading. (http://jonestrading.com/Home.php)They might utilize sophisticaed algorithms that react to the public markets and makes thousands of different 100 to 1000 share buys as opportunities present themselves. Dark pools (http://en.wikipedia.org/wiki/Dark_pool) were also created with the goal of providing a way to move large amounts of stock anonymously without moving the market. This (http://www.quantprinciple.com/invest/index.php/docs/realworld/darkpools/) is a pretty good explanation.

[Telcontar]

Does your firm, overall, beat the market? Do you personally? By a lot?

[raindog]

This is opinion only. Remember EVERYONE in the market has an opinion, and the majority will be wrong. That said:

I think we are in a near term deflationary period characterized by capacity underutilization (ie idle factories) and low velocity of money (ie most of excess cash isn't being lent/used).

However, in the medium/longer term, I believe this link: http://www.comstockfunds.com/files/NLPP00000/421.pdf
tells the real story. The only realistic way out of that mess is devalue the USD and print our way out.

Trom, I welcome any other comments or insights by professionals.


What do you think will happen to our ability to finance our deficits if we devalue or "print money?"


I assume you're bullish on gold? Is this true?


Are you equally bullish on other commodities?


Your mid-term/ long-term view on residential real estate?


Who do you think inflation harms the most? Helps the most?

[raindog]

Do you short?

What industries would you be shorting now?

[Duke]

You've mentioned derivatives...what's your take on the claim that misuse of derivatives and related financial instruments were largely responsible for the current downturn in world financial markets? I realize that the world recession has a large and complex set of causes, but what part do you think derivatives played?

[Projammer]

Does your firm have any purpose beyond buying and selling to earn money for the capital holders?

The image I have right now is that a group of wealthy people have pooled their resources and hired you and your coworkers to make more money for them. Day trading on a large scale as it were.

I have no problem with this scenario, I just want to make sure I've got the right picture.

And on the day trading line, how long do you normally hold a stock? Do you have a targeted flip time when you're trading?

And an open question to all the traders. How accessable is information for insider trading? Is it somthing you have to actively avoid? Or would you have to make an effort to be in violation?

[Trom]

...

And an open question to all the traders. How accessable is information for insider trading? Is it somthing you have to actively avoid? Or would you have to make an effort to be in violation?

It would be quite hard for me to come by legitimate insider info.

[NurseCarmen]

What is your opinion of investment bankers?

[The Truculent Gentleman]

Does your firm, overall, beat the market? Do you personally? By a lot?

Yes. We were up in 2007/2008/2009 nicely. The environment where we usually lag the market is when it is up huge (20+% in a year). In that environment we usually lag a bit. But it's more than made up for the fact that we haven't had a down year (down quarters, certainly) since I have been here.

[The Truculent Gentleman]

What do you think will happen to our ability to finance our deficits if we devalue or "print money?"

I assume you're bullish on gold? Is this true?

Are you equally bullish on other commodities?

Your mid-term/ long-term view on residential real estate?

Who do you think inflation harms the most? Helps the most?

Yes, I am extremely bullish on gold. Extremely. Extremely.

I think the currency devaulation argument is good for all commodities - however, most other commodities have separate supply/demand issues that could impact their prices. For example, if we enter into another recession, the decline in demand for oil could put downward pressure on prices. Gold is unique that it has no real industrial applications and is really best analyzed as a currency that has a finite supply.

Mid term, residential real estate is plagued by massive supply (unsold homes, homes in forclosure, etc). Until that supply is absorbed, you won't see significant price gains. Long term, I think housing prices should keep up with inflation, but not more. The increase in housing prices we all lived through in the last decade was a result of excess credit in the economy. It's unlikely we will see action like that again.

This is an easy one - inflation helps debtors and owners of real assets but hurts savers. If you owe a ton of money at a low fixed rate, inflation is your friend. If you have cash sitting in a bank account, inflation is the enemy. If you own real assets (gold, land, etc) you are hedged in that your real asset should hold its value, regardless of inflation.

Do you short?
What industries would you be shorting now?

Yes, I short alot. I typically don't make industry calls, but if I had to be short anything I would be short US treasuries.

You've mentioned derivatives...what's your take on the claim that misuse of derivatives and related financial instruments were largely responsible for the current downturn in world financial markets? I realize that the world recession has a large and complex set of causes, but what part do you think derivatives played?

Oof - this is a big question, probably outside the scope of this thread. Yes, derivatives played a part in the meltdown, but were not the cause. The cause of the crisis was excessive leverage (ie debt). This problem still exists, except now the risk has been transfered away from the private sector and it is now the balance sheet of sovereign nations.

Derivatives played a part in that unregulated derivatives (like those at AIG) effectively allowed institutions to increase their leverage without posting adequate capital to protect against their bets not working out.

As a simple summation, I would say derivatives exacerbated the problem, especially at certain firms (LEH, AIG) but the problem existed regardless.

Does your firm have any purpose beyond buying and selling to earn money for the capital holders?

The image I have right now is that a group of wealthy people have pooled their resources and hired you and your coworkers to make more money for them. Day trading on a large scale as it were.

I have no problem with this scenario, I just want to make sure I've got the right picture.

And on the day trading line, how long do you normally hold a stock? Do you have a targeted flip time when you're trading?

And an open question to all the traders. How accessable is information for insider trading? Is it somthing you have to actively avoid? Or would you have to make an effort to be in violation?

No - as my boss told me when I first started working here, "We're not here to save the whales." The sole purpose of this firm is capital appreciation for the capital partners (of which I am one).

Your rough picture is correct - except for the term 'day trading'. Some people do trade daily, but our actions include other activities such as risk arb, adr arb, special situations, commodity trading, futures, rates, etc. We mirror the proprietary trading desks at the large banks, but without any conflict of interests.

Personally I will hold stocks anywhere from 10 minutes to 6 months. It all depends on the situation and what I'm trying to achieve.

As far as insider trading, it's not that common. Anytime I do get information I would consider potentially 'insider' I try to steer as far away from it as I can. There are plenty of ways to make money without risking my career.

[The Truculent Gentleman]

What is your opinion of investment bankers?

I think investment bankers work harder than almost anyone else I know. (At least in the first 10-15 years) Seriously - as much grief as these guys get in the press, those guys work their absolute tails off and sacrifice friends/family for work. Yes the rewards are there, but the personal costs are very very high.

I know I would never be willing to make those sacrifices, regardless of the payoff.

[Richard Parker]

An apparently common problem at hedge funds before the Great Recession was people employing so-called "quant" techniques created by people like this guy (http://en.wikipedia.org/wiki/Edward_O._Thorp), but without really understanding how to properly use them.

Have you observed this problem?

[The Truculent Gentleman]

An apparently common problem at hedge funds before the Great Recession was people employing so-called "quant" techniques created by people like this guy (http://en.wikipedia.org/wiki/Edward_O._Thorp), but without really understanding how to properly use them.

Have you observed this problem?

We don't use quant techniques so I'm not personally familiar with them outside of knowing when they blow up.

[friedo]

No - as my boss told me when I first started working here, "We're not here to save the whales." The sole purpose of this firm is capital appreciation for the capital partners (of which I am one).


How long did it take for you to make partner? What proportion of the staff has equity in the firm? Also, are the founding partners involved in day-to-day strategy/trading decisions, or are they basically passive clients?

[Oredigger77]

[QUOTE=The Truculent Gentleman;12104884]About 1/3 of the firm are people that started working here right out of college as junior/assistant traders./QUOTE]

What degree do the junior traders typically have?