Notes for Chat with Traders, Episode 108

Episode 108 ... John Netto (55:25)

• Placed first sports bet at age 8
• He lost the first bets he placed but didn't discourage him
• Doesn't bet on sports anymore
• Father conservative, imparted importance of saving and investing
• Remembers the 1987 crash, he was 13 then, age 42 now
• Oliver Stone's movie Wall Street made strong impression on him
• Stone didn't realize he was turning kids onto the market instead of off
• He wasn't a bookie, he was a liquidity provider (in high school) [has a sense of humor]
• "The Netto Number" -- redefining alpha [they didn't explore this idea]
• Claims creating "Progressive Points Spread," not a binary outcome on sports betting
• Poor grades in school but worked hard on his bookie business
• Grew up in East Bay Area, Interstate 80
• Recorded Stardust casino opening odds delivered via radio
• Dec 1992 graduated high school and joined the Marines, 18 yo 
• Classic underachiever, poor grades, low self esteem in high school, so Marines transformed him
• First assignment in Japan, in two years
• Learned Japanese language, passionate about it, 1994 (no Google translate)
• Assigned to Tokyo (embassy detail?), continued to study Japanese, two more years 
• Came back to US in 1998
• Opened eTrade account
• Studied Chinese at Univ. of Washington
• Wouldn't say he's "fluent" in Japanese (smart to say that), it was just "effortless"
• 2200 hours to become "professionally competent" in Level 4 language (like Arabic, Chinese, Japanese)
• Had horrific sense of timing in the markets at first
• He had no process then, just impulsive
• Thought he should just do the opposite of what he naturally did 
• Truth is that throwing darts at the wall with good money management, you'll do ok
• But held his losers, cut his profits short
• Left Marines in 2002, joined prop trading group
• Joe DiNapoli's book really helped him
• Still uses DiNapoli's Fibonacci ideas
• Managing risk not a problem for someone with Marine-like discipline once he had a process
• Trades futures markets and options
• Uses eight monitors
• "Protean" trader ... highly adaptable
• Developed multiple strategies: mean reversion, relative value, momentum, trend following, breakout systems -- uses all of these
• Key is knowing which strategies to apply to current market environment
• "Global Macro Edge" -- name of his book
• He's a fast talker
• Three keys to be successful trader: operations, analytics, execution
• (He has a lot of set-phrases memorized, clear military training)
• Hired programmers to automate things, on a contract basis
• His wife helps him organize things [she must be an angel]
• Hires people based on word of mouth
• Wants people certified on certain APIs
• "Prow-ess"
• When to lever things up and lever things down -- that's what it's all about
• "Market Regimes" -- technical, fundamental, sentiment
• Spends a lot of money on bespoke research (~$80K a year)
• Makes $500-600K a year trading [on how much capital? Netto says $1MM in capital]
• Spends $26,000 a year on his Bloomberg Terminal
• Uses CQG as well
• Great asymmetrical trades (paying 5 to 1) come with a great deal of discomfort
• Wrote a 580 page book, self-published? (yes, self-published) 
• Low volatility for years now ... have to adapt to that
• Make your lack of capital your biggest strength, small positions can be an advantage
• Trades from home in Las Vegas
• Has patents on his process, but won't talk about it
• Global Macro guys can be brilliant but don't know how to manage risk
• Importance of getting out of your comfort zone
• Want to be a little bit afraid in a trade
• Be aware of your emotions, feelings, instincts
• Does daily "Qualitative Self-Assessment" -- preparation, focus, routine
• Journal everything constantly
• Be in tune with yourself
• You need to be uncomfortable to hold your winners
• You need to feel the nnnngggggg, but power through it [I know what he means]
• Overconfidence > complacency > mistakes > losses
• Respect the market
• Embrace your losses
• If you're not losing money, you're not taking the risk necessary to succeed
• Separate discomfort from fear, confidence from complacency
• Boy he talks fast, sort of an interesting rapid-fire military cadence throughout  
• Twitter: @JohnNetto

Notes for Chat with Traders, Episode 109

Episode 110 ... Edward Thorp (65:15)

• Ham radio license at age 13
• Fascinated with all things science at age 10, 11
• Born in 1932
• Sold Kool-aid to WPA workers, turned 5 cents into 6 cents
• Early reader, loved books
• Started talking in full sentences
• Precocious youth
• Learned how to make gunpowder from encyclopedia
• Parents worked in War Industry, kids weren't supervised, family very poor
• Delivered newspapers, bought chemicals from corner druggist
• Won scholarships to fund education
• Studied chemistry at UCLA
• Switched to physics, working on PhD
• Switched to math, got his PhD in two years instead
• Got job at MIT teaching, spent two years there
• Wife hated Boston winters, moved to New Mexico, then UC Irvine
• Independent thinker
• Interested in whether roulette wheels could be gamed
• Found out people playing blackjack and running games didn't understand what they were doing
• MIT had an IBM 704 computer
• Taught himself Fortran 2, early 1960, test his card counting ideas
• Saw how to beat blackjack in multiple ways from computer results
• Saw blackjack as a math problem
• Bet big when you have an edge, bet small when you don't
• Everyone thought he was a crank
• Casinos said they'd send a cab for him
• Manny Kimmel wanted to bankroll Thorp
• Kimmel owned parking lots in NYC
• Didn't know Kimmel was mob-connected
• Kimmel an experienced gambler
• Doubled $10,000 bankroll on their first trip to Vegas
• Thorp more interested in academics than gambling
• Casinos continued to scoff, so he decided to write a book about it
• April Fool's Day 1964, changing the rules of blackjack, no doubling down , no pair splitting
• Eventually rescinded those rules
• Still are people who make a living counting cards
• Thorp never interested in money, liked to be around smart people who knew a lot
• Thorp not a conventional guy, unique thinker, Depression-era type of man [vanishing bunch, alas]
• People steal your ideas so he published quickly
• Claude Shannon sponsored his paper for National Academy
• Claude Shannon was a gadgeteer ... wanted to help build wearable computer to beat roulette
• 1950s terrible in casinos, 1960s awful, same in 1970s -- mafia violence
• Casinos improved in 1980s when they went corporate
• Played baccarat, won regularly, they drugged his drinks
• Also tampered with his car so accelerator stuck -- apparently tried to kill him off
• Casino owners hated Thorp and card counters in general, wanted to kneecap him
• Money made from gambling and book sales, tried to invest it, but didn't do well
• Studied investing all summer 1964
• Discovered warrants in 1965 
• Figured out how to price warrants, buy warrant and short stock, or buy stock and sell warrant
• Wrote a book about his warrant findings called Beat the Market
• Beat the Market inspired Black and Scholes, pricing uncertain payoffs
• 1973 Black Scholes paper on options pricing, Thorp says he had exact formula years earlier
• CBOE opened in early 1970s, options finally tradeable on an exchange
• Playing poker or blackjack great training for investors or traders
• "An edge" -- winning money at a fairly predictable rate
• "Mathematical Expectation"
• Managing your bankroll -- gambling is the master teacher
• Kelly Criterion -- maximizing expected growth
• Play 100 hands an hour, for 100 hours, that's 10,000 hands -- a lot of bets
• "Maximum Expected Return"
• KC a compromise between timid betting and overly aggressive betting
• Find a situation where you have an edge, use Kelly Criterion to manage your bet size
• Warren Buffett on one end of having an edge, HFT on the other end
• Don't pursue money or success ... do what you love and enjoy, then money and success will follow
• A Man for All Markets -- a memoir ... what's important in life
• Don't just pile up money, enjoy the people you love

Techies and Medics

Glassdoor released yet another list of jobs that pay over $100K; they are:

1. Finance
2. Medic
3. Tech
4. Tech
5. Medic
6. Medic
7. Medic 
8. Medic
9. Tech
10. Tech
11. Tech
12. Medic
13. Tech
14. Medic
15. Medic
16. Tech 
17. Medic
18. Tech
19. Tech
20. No idea?

See why there's no Single Payer healthcare system in America? 

Best and Brightest

Earlier this year my son got into the Center for Talented Youth program at Johns Hopkins, and we recently attended an award ceremony for the kids who got the highest scores on the entrance exam. 22 children from western New York state chose to attend the event and I was interested in the distribution of their backgrounds, which I've detailed below.

6 Chinese: (Chen, Fang, Feng, Hu, Lin, Ren) -- 27%

3 Jewish: (Arias, Raskin, Rutberg) -- 14%

3 WASP: (Harrow, Smith, Wells) -- 14%

2 Indian: (Bhatt, Pendri) -- 9%

2 Korean: (Lee, Lee) -- 9%

1 African-American (Amos) -- 5%

1 Nigerian: (Shoyinka) -- 5%

1 German (Heinzelman) -- 5%

1 Greek (Levedakis) -- 5%

1 Portuguese (Antunes) -- 5%

1 Ukrainian (Homik) -- 5%

Immigrants are still making America great.

Honda CR-V Generations

These are the five generations of the Honda CR-V ... still see plenty of First Generation CR-Vs on the road here in Appalachia. The front grille and cargo area side windows are the things I look at to tell them apart:

First Generation (1995-2001)

Second Generation (2002-2006)

Third Generation (2007-2011)

Fourth Generation (2012-2016)

Fifth Generation (2017- )

Notes for Chat with Traders, Episode 110

Episode 110 ... @RollyTrader (69:09)

• "George"
• Native New Zealander
• Now living in Australia
• Brother 11 months older
• Dad gave them a thousand dollars, brothers would compete buying stocks
• 2001 in University
• Rugby friend said markets were the ultimate game
• Read the Market Wizard books
• You won't get rich quick
• Without a trading plan, it's just gambling
• Pick an asset class and stick to it
• Narrow your focus, and master those set-ups
• Read William O'Neil, learned CANSLIM
• Copied Mark Minervini style
• Worked in corporate finance, but hung out with traders all day
• At old Australian brokerage firm, no one talked about charts
• Started trading on his own
• Moved to Argentina
• Visited Mark Cook in Ohio ... watched his daily ritual, George was 26, 27 yo then
• Paid Mark Cook $5-$10K to do this for a week
• Mark Cook had super simple style, but day trading didn't suit George
• Read Mark Minervini books, met him, Minervini gave him direction
• Paid Mark Minervini for his courses
• Learned a ton from the two Marks
• Find someone with an audited performance record
• Mimic their style, then adapt
• Mark Cook traded bonds and emini only
• Day trading will never work for him because he likes to make a cup of tea (not watch screen)
• Two Marks are super calm traders, they do same thing over and over
• Minervini scales in and scales out
• Record every trade, study them carefully
• Minervini discipline rock-solid, never takes a trade outside his system
• Same is true of Mark Cook
• Most mistakes new traders make are avoidable
• Most new traders don't give trades room to work
• Trade one asset class
• Stick to your set-ups
• Don't add to losers
• Don't trade against trend
• Everything comes down to risk management 
• Doesn't care about the index, just the stocks he's watching
• Looks for strong sectors, strong companies
• Always uses the chart to enter
• Uses volatility contraction pattern from Minervini
• Uses "Pocket Pivot" from Gil Morales (another guy he subscribes to)
• He's a swing trader, not a day trader
• Trades Australian stocks mainly (90%)
• Has 15 scans, uses four religiously
• Looking for volume and price contraction
• End of day: runs scans, builds watch list
• Puts on a documentary then waits for his alerts to ding
• Mentions MarketSmith 
• Uses TradeStation and CQG
• Just looks at price and volume, some moving averages, no other indicators
• Looks for "bases" ... price and volume contraction through the range
• Only buys uptrending stocks
• Volume dries up, price contracts, he'll set his alert above
• Without trading rules, you won't survive
• "Optimal F" formula gives you optimal position size
• Usually doesn't put more than 8% in any one position
• But might put 20% in one stock
• Adapt trading rules to the market since it's dynamic
• Average stop is 6.5% away
• Controlling risk is what all successful traders are good at
• Spread on Australian microcaps is 10% alone
• New traders need to trade leading names, not microcaps
• Gamblers love to buy one cent stocks that go to two cents ("think they've done something right")
• His exits very discretionary, watches for breaks of 20 day MA 
• Rarely trades short side
• Best names to short are the former leaders, "most froth"
• Puts trading profits into venture capital
• Trading nice because you can just go to cash and relax
• Running a real business, you can never relax
• Twitter: @RollyTrader

Notes for Chat with Traders, Episode 111

Episode 111 ... David Bush (79:46)

• Started in TradeStation's EasyLanguage
• Previous guest on CwT podcast, episode 023
• Has won quant trading competitions, "Battlefin"?
• His model has traded with real money for six years [how much money?]
• Going from discretionary to systematic trading
• Good results, crummy Sharpe ratios
• Don't look at average drawdowns, look at max drawdowns
• Code your cherished notions to find that they're ridiculous and you'll abandon them
• Simple things are more robust
• Mandelbrot saying about simplicity??
• Avoid complex travel routes, being overly specific
• You need to be able to generalize well
• Decimalization, new regulations changed everything
• Market microstructure has changed dramatically
• 2000 share average trade size to 200 shares over last decade
• Strategy should be so simple you can write it down on a napkin
• "Poetry is moving easy in harness" -- strategies need a degree of freedom
• Backtesting poorly is easy to do: poor data, frequency of data, missing intraday lows and highs, sample sizes too small
• Must be able to articulate why model is working
• Does same logic for one market's strategy work for other markets? It should (at least have a positive expectation)
• Avoiding curve fitting: minimize rules and complexity, include out of sample data
• He's not a gunslinger, wades into the water
• Paralyzed by fear that your model is ineffective, you'll find reasons to delay launch
• Have super conservative assumptions -- slippage estimates should be large
• Fills and commissions estimates need to be large (realistic)
• Modeling market impact is huge ... trade size, illiquid markets need to be realistically accounted for
• Some rarely tweak their models, others constantly alter them
• After 1987 crash, reversion worked better
• "I've never seen a bad backtest" -- all survivorship bias
• How do you know when your model isn't working anymore?
• You have to be fascinated with markets to succeed in them
• Need more tools to manipulate data ... better than "word clouds"
• Need time and space and silence to have uninterrupted thoughts when coding
• View your own life as theta, "time decacy" ... don't waste time
• Use an egg timer, set it, and focus the entire time -- stay on task
• (Aaron mentions the Life Calendar)
• Practices zen meditation
• "Sit like your head's on fire" -- carpe diem
• You need to be mentally resilient as a trader, lot of stress, setbacks, uncertainty
• You need to be physically fit to trade
• Sunday is his zone-out time, no screens, chills out completely
• Need a healthy mind to trade
• www.alphatative.com
• Twitter: @alphatative

Notes for Chat with Traders, Episode 112

Episode 112 ... Jorge Soltero (73:09)

• Lives in Puerto Rico
• Native Puerto Rican
• Not all flip-flops and shorts in Puerto Rico
• Best of both worlds (commerce & leisure) in Puerto Rico
• US regulations
• Studied in the US
• Philosophy major, University of Chicago
• Lived in Chicago 25 years ago (aware of exchanges: Board, Merc, CBOE)
• Had friends who worked on the floor
• Worked for Archdiocese of Chicago, board member was bond trader
• Admin job at Archdiocese, wasn't leaving a big salary job to try to trade
• Asked quick-thinking math questions in interviews
• Pacific Coast (San Francisco) used to have exclusive options listings for tech stocks
• First job at Apollo Trading (small market making firm)
• Clerk in currency pit on Merc floor, D-mark was huge, Yen big (1994?)
• Always worked on options side
• "Controlled chaos" on the floor
• Eurodollar floor huge, you needed to be tall and strong and loud and aggressive
• "You never want to be the biggest trader in the pit" (you need liquidity, avoid getting stuck)
• Occasional scuffles and shoving matches, have to pay a fine for "non-business-like language"
• Spend all day next to competition, not co-workers -- unique environment
• Lots of settling of slights, real and perceived, off the floor
• He'd be waiting off the floor at 4AM in San Francisco, floor opened at 4:30 AM, needed to claim spot in pit before 6:30 AM open
• Left Apollo, got job at Hull Trading
• Hull was well known, big user of trading technology, no third-party options pricing software
• Timber Hill had its own options pricing software
• Interview question: Stack of pennies as high as Sears Tower, would they fit in this room?
• Hull Trading style -- never boredom traded, not cowboys ... very methodical, more confident
• You have to trust your model if you trade options
• Went from Ten Year Note pit to Equities (OEX) ... used to be super big deal, the OEX
• Just trying to capture bid offer all day long
• "Pit awareness" way ahead of the machines in the past, not true anymore
• Blair Hull, blackjack "wizard" 
• Have an edge, exploit it when you have one, back off when you don't
• Hard to find a copy of Thorp's original book
• NCAA tournament a big recreational gambling thing
• Hull guys would try to model everything, horse racing, NCAA, etc. 
• Hull bought by Goldman Sachs in 1999
• You needed to fit in at Hull, everyone got along, traders, developers, etc. Good teamwork important.
• Goldman Sachs a more competitive place than Hull
• QQQQ just listed in 1999
• Moved to London with Goldman Sachs, had no idea what he was walking into
• Hard to switch from floor to screen, point and click and pick up phone
• No energy, no noise from the crowd ... hard to judge market tone
• Silence of being off-floor very strange, he was told to "please calm down"
• Got into backdoor of institutional side through Goldman buyout
• Moved to UBS, back in US, and then moved to Merrill Lynch (back in London from 2009)
• Information edge that institutional trader has over retail trader is no longer large 
• Heavily regulated on institutional side, duty to find best price and structure for clients
• Playing field no longer as distorted as it used to be
• Position size matters and how you're going to use leverage
• Enjoyed his pit days the most from his trading life
• Now he's isolated, trading his own money
• Institutional traders just reacting to client order flow
• Go where the liquidity is
• Mixed bag results for him for the last six months on his own, but he's optimistic
• May have to hire a programmer to try out ideas, building models
• First saw ETFs in 1996, thought they were a great product
• ETFs liquid, cheap
• Lots of ETFs have options listed on them
• Twitter: @El_9uapo (Old joke from the Three Amigos movie)

You Fear That You're Living in Lebanon

I suffered through the entire Spotify Global Top 50 song list and only found one song I liked ... this one ... she was born in 1997. (The post title is my interpretation of the unintelligible lyrics ... ain't true, ain't true, ain't true, no.) 

"Crying in the Club" Available at: Spotify http://smarturl.it/CamilaCabello_Sptfy iTunes http://smarturl.it/CITC Apple Music http://smarturl.it/CITC_AM Find Camila Here: Twitter: @camila_cabello IG: @camila_cabello Facebook: @97camilacabello Website: www.camilacabello.com Video Director: Emil Nava Video Producer: Mary Ann Tanedo For Rojas Vision, Inc. (C) 2017 Simco Ltd.

Notes for Chat with Traders, Episode 113

Episode 113 ... Benjamin Small (60:02)

Interesting episode ... I know a bit more about Bitcoin now.

• Got Ph.D. in Electrical Engineering in 2006
• Wall street firms started hiring people like him to automate things
• At UBS in spring 2006
• "Junior Quantitative Researcher"
• Prop trading allowed before Volcker Rule
• UBS had huge retail market making operation
• Worked on whether to internalize retail order flow or send it to the Street
• Algorithm they design makes the decision
• UBS, Citadel, KCG biggest buyers of order flow
• They want exclusive access to retail order flow
• Most retail orders are market order or marketable orders
• Any order that's willing to cross the bid ask spread has value
• Non-marketable limit orders must be routed to an exchange
• Brokers pick an exchange where rebates highest
• Beginning 10-15 years ago, desks got more aggressive about maximizing profitability
• Equity options orders can't be internalized (illegal)
• Trading desks are profitable, so are retail investors getting screwed by them? Tricky question
• Off-exchange volume is ~30% of total volume
• Worked at Citadel, then Credit Suisse
• Built statistical models to improve prop trading desk algorithms for eight years in all
• Must constantly tweak, fine-tune models used by desk
• Monitoring the algorithms in real time to improve things
• Latency is a huge issue in US equity markets
• Have to optimize computer code so it's fastest, competitive edge
• Memory versus disk versus cache
• Worked at IEX, head of quantitative research for one year
• IEX had ambitions to become an exchange (now it is one)
• One of the inventors of the "Discretionary Peg" order
• Tries to predict on client's behalf to switch between inside peg and midpoint peg
• Works at Gemini currently, head of market structure
• Market structure an interesting combination of microeconomics, statistics, and computer science
• Most Bitcoin exchanges have central limit order book
• Winklevoss twins founded Gemini a few years ago
• Received licensing to trade Bitcoin from New York State Department of Financial Services ~15 months ago
• Gemini a fully regulated, licensed Bitcoin exchange
• Traditional financial services players could be comfortable with Bitcoin on Gemini
• Licensing important because US heavily regulates financial services
• Risk and compliance concerns put to rest
• Need to make an on-ramp for institutional money into Bitcoin
• Need to normalize Bitcoin, just another asset, not a crazy crypto-currency
• Evidence that people are seeing Bitcoin as a virtual store of value, not just a speculative thing
• More institutions are getting involved in Bitcoin
• Majority of Bitcoin trading is by professional Bitcoin market makers
• Only 20-25% of stock trading is retail
• Bitcoin not too tightly correlated with other asset classes, useful for portfolio managers
• Choice of exchange and wallet providers is all important ... your account could be hacked [or Mt. Gox'd]
• Many Bitcoin exchanges and wallet providers are not vigilant about security
• Can manage your own Bitcoin wallet but if you lose the key, it's lost
• Bitcoin trading primitive, only $15BB market cap
• Most sophisticated market makers don't want to deal with Bitcoin because it's too small
• Think of trading SPY by comparison -- tons of market makers, penny spread, hundreds of millions of notional at both bid and offer at any time
• Any aribtrage opportunities in Bitcoin?
• Arbitrage across exchanges worldwide ... liquidity, credit risk different by exchange
• Statistical arbitrage a profitable strategy by itself
• HFT haven't entered Bitcoin ecosystem ... yet
• Lots of scams and ponzi schemes in crypto-currencies, just like penny stocks
• Why is Bitcoin big in China? Avoiding capital controls and Chinese are natural speculators (gamblers)
• There are hundreds of other crypto-currencies, alt-coins
• Bitcoin is only five years old, but it's the "core concept"
• Ethereum network added a lot of new ideas, help ecosystem evolve, "Ether" is the token
• Ether has "smart contracts" -- like a derivative contract but enshrined in computer code, not law
• Ether faster than Bitcoin when it comes to settling transactions
• Founder of Ethereum is a young Russian kid from east Brooklyn
• Bitcoin has first-mover advantage
• 10 or 20 years from now, could be a much better idea than Bitcoin
• Gemini has anti-money-laundering controls
• Bitcoin is no scam
• Any alt-coin that doesn't have an adequate market cap should be avoided
• Look at the source code, all alt-coins are open source, do background research
• Lots of oddball alt-coins based on weird ideas
• Big laboratory for experimentation
• "Shitcoin"
• 4PM auction at Gemini, match buyers and sellers to get a solid price for the asset, one price
• Walrasian equilibrium is the algo they use
• Gemini exchange broadcasts forecasted auction price starting at 3:50 PM
• Bitcoin will eventually take its place among commodities like gold and oil (he predicts)
• Bitcoin has mathematically defined supply, so should become stable store of value [he says hopefully]
• Transactions take 30 minutes to clear on the blockchain -- slow!
• In future, with instant transfer of value, Bitcoin accepted at point of sale is a possibility
• We never touch paper currency anymore, all credit cards and (stored credit cards at) Amazon now
• Banks already have full control of your money, no need to be paranoid about it
• www.gemini.com
• Not on Twitter