The New Market Wizards: Conversations with America's Top Traders (40 page)

There are so few full-time women traders. Do you believe there are any obstacles to women trying to get into the field?

I have sometimes felt that I had to work twice as hard to gain respect or to be taken seriously. But, quite honestly, that perception was probably based on my own beliefs rather than grounded in reality. In retrospect, I don’t think that being a woman has ever really hindered me. In fact, if anything, it sometimes seemed that people made an extra effort to be helpful to me, perhaps because there are so few women traders.

Of course, there may be pockets in the industry in which women do encounter barriers—for example, the large New York institutional firms and banks. I have known women who felt that sexism interfered with their ability to land a job on a trading desk. But, again, I have never personally encountered such difficulties.

I would strongly encourage women who have the confidence to become traders to make the effort. There is no reason for women to feel any fears of intimidation. Trading, more than any other field, is a bottom-line business. People look at your performance numbers. They don’t care if you’re a man or a woman. If you perform well, you’ll get financial backing. Conversely, if you’re incompetent as a trader, just being a man is certainly not going to help.

Women may also have intrinsic advantages over men as traders. For example, women are less likely to use trading as an ego trip. They aren’t prone to making the macho-type trades [putting on a large position with the intent of feeling a sense of power in moving the market], which I have seen lead to the financial ruin of a number of male traders. Even the largest women traders I know tend to be very low-key, almost reserved, as traders.

Any there any other differences between women and men as traders?

Women may be more intuitive. I certainly feel that I can see patterns that other people can’t, but I don’t know if that’s because I’m a female. I think it’s often more acceptable for a woman to rely on intuition than it is for a man to do so, and intuition certainly comes into play in trading. For example, when I’m watching the price quotes, I never say something like, “Oh, the market is down exactly 62 percent, I have to buy right here.” Rather, I might think, “Gee, it looks like we’ve corrected enough and the price has stopped going down, so I’d better buy.”

In our initial phone conversation, you mentioned that you’ve shared your trading methods with other traders. Aren’t you concerned that revealing your approach could destroy its effectiveness as other people start to use it?

I truly feel that I could give away all my secrets and it wouldn’t make any difference. Most people can’t control their emotions or follow a system. Also, most traders wouldn’t follow my system, even if I gave them step-by-step instructions, because my approach wouldn’t feel right to them. They wouldn’t have the same confidence or comfort in the trading method as I do. But for argument’s sake, let’s say that showing my methods to other traders did eventually cause some of the patterns that I follow to change. If these patterns changed, new ones would be created, and I’m confident that I would find them.

What advice would you give novice traders?

Understand that learning the markets can take years. Immerse yourself in the world of trading and give up everything else. Get as close to other successful traders as you can. Consider working for one for free.

Start by finding a niche and specializing. Pick one market or pattern and learn it inside out before expanding your focus. My favorite exercise for novice traders is pick one market only. Without looking at an intraday chart, jot down the price every five minutes from the opening to the close. Do this for an entire week. Be in tune to the patterns. Where are the support and resistance levels? How does price act when it hits these levels? What happens during the last half-hour? How long does each intraday price move last? You won’t believe how much you can learn from this exercise.

Never fear the markets. Never fear making a mistake. If you do make a mistake, don’t complicate the position by trying to hedge it—just get out.

Stay actively involved with the market. Don’t just sit passively in front of a monitor, or simply stare at charts. Notice how many old-timers who have been successful for years still construct their own point-and-figure charts by hand intraday. They keep the same routine day after day. Develop your own routine for taking periodic market readings.

Never be greedy. It’s OK to leave money on the table. If you can’t get in at a favorable price, let the trade go and start looking for the next trade.

Finally, remember that a trader is someone who does his own work, has his own game plan, and makes his own decisions. Only by acting and thinking independently can a trader hope to know when a trade isn’t working out. If you ever find yourself tempted to seek out someone else’s opinion on a trade, that’s usually a sure sign that you should get out of your position.

What are your goals?

There’s no better satisfaction than playing a piece well, whether the instrument is a piano or the markets. I measure my progress not in dollars but in my skill in predicting market patterns—that is, in how close I can come to pinpointing my entries and exits to the market turns. I believe that I can go into any market with just a quote machine and out-trade 98 percent of the other traders. Over the next ten years, I would like to significantly step up my trading size. I really believe that I can become one of the best traders around.

Certainly one of the primary common characteristics I have found among the great traders is an almost compelling sense of confidence in their ability to succeed. Linda Raschke personifies this type of confidence as well as any trader I have interviewed. There is not the slightest doubt in my mind that she could start over in any market with minimal funds and excel. She truly believes that she will become one of the best traders ever, and I for one certainly wouldn’t take the other side of that bet.

Are traders like Raschke confident because they succeed, or do they succeed because they are confident? Probably a little bit of both. However, the key point is that exuberant confidence appears to be one of the essential elements in exceptional achievement as a trader, and I assume in many other endeavors as well.

Occasionally, an interview provokes me to reassess my view of reality. I have long assumed that markets might be predictable over the long term but that short-term price movements are largely random. Raschke holds exactly the opposite point of view. She believes that in the markets, much as in weather forecasting, short-term predictions can be quite accurate but long-term forecasting is a virtual impossibility. With her ability to see patterns that others don’t, she has been able to trade short-term price swings with a consistency that would defy the laws of probability, if indeed there were no patterns in these movements. Raschke has made me a believer. Clearly, there are predictable movements in price even over periods as short as a few days or a single day.

Raschke reminds us that traders are people who do their own work, make their own decisions. One particularly insightful observation made by Raschke is that the temptation to seek out other peoples’ opinions on a trade is a sure sign that the trade should be liquidated.

Among the characteristics that Linda Bradford Raschke cites as essential to being a good trader are a passion for trading, self-reliance in developing trading ideas and making trading decisions, the willingness to take risk, the ability to correct mistakes immediately (because they are inevitable), and patience, patience, patience.

THE TRADING MACHINE

Y
ou guys make money every day,” said the floor broker to Mark Ritchie in a reference to CRT (Chicago Research and Trading). His voice was a mixture of envy, disgust, and admiration. He was holding a long position, and the market had moved locked limit-down against him, in one of the periodic painful setbacks that are a bane to even successful traders. The amazing thing is that the exasperated broker was exaggerating only slightly. CRT may not make money every day, but it is profitable virtually every month, if not every week. Think about that!

The story of CRT is one of the most incredible in the investment world. A mere fifteen years ago, Joe Ritchie (Mark’s brother), the firm’s founder and leading force, was so broke that he had to borrow his brother’s wholesale suit to visit the Chicago Board of Trade. Today, Joe is the helmsman of a trading company of eight hundred employees, including a primary dealer of government securities, that has been estimated to have garnered close to $1 billion in trading profits. To generate that profit, Joe Ritchie estimates that the firm has done over $10 trillion in transactions. (That’s trillion like the figures used to describe the total U.S. debt—we’re talking big numbers here.)

CRT doesn’t go for home runs. It is in the business of extracting the many modest profit opportunities that are continually created by the small inefficiencies in the marketplace. Are options on one exchange slightly higher priced than equivalent options on another exchange? If so, CRT uses its state-of-the-art information and execution capabilities to buy the option that is low and sell the one that is dear. Do options in a given market provide a better risk/reward profile than the underlying market? Or vice versa? If such a discrepancy exists, CRT trades one position against the other. There are literally hundreds, if not thousands, of variations on this theme.

CRT is constantly tracking approximately seventy-five different markets, traded on nineteen worldwide exchanges, with sophisticated trading models instantaneously signaling which financial instruments are relatively underpriced and which are overpriced. Other models continuously evaluate the net risk of all the firm’s positions, with the goal being to reduce net exposure as close to zero as possible. In taking advantage of these small profit opportunities and keeping net risk to a minimum, CRT has come as close as any firm to creating a successful trading machine.

How does CRT operate? Floor brokers have sheets generated by the firm’s proprietary computer models, telling them what price they can bid or offer for each option at any given market price level. The calculated figures take into account not only the matter of determining the option’s value but also how that option interrelates with the firm’s overall position. For example, if a given option position helps bring the firm’s net risk exposure closer to zero, the indicated bid price for that option might be skewed upward.

The floor traders are supported by teams of upstairs traders, who use the firm’s computer models to monitor the impact of fluctuating prices and the firm’s constantly changing portfolio on option values. The upstairs traders feed the floor traders a constant stream of updated information. On very volatile trading sessions, runners may bring the floor traders revised computer valuation sheets as often as twenty times in one day.

When the floor trader implements an option trade, he or she immediately offsets the positions with an equivalent opposite trade in the outright market. For example, if a trader sells T-bond 98 calls, he will buy the equivalent amount of T-bond futures to counterbalance the position. This hedge is implemented instantaneously. As soon as the floor trader posts the option trade, he hand signals an arbitrage clerk standing on the top step of the bond futures pit fifty feet away. Within a second or two, a futures trader has placed the offsetting order, and the transaction is complete.

The initial hedge placed in the outright market virtually eliminates any significant near-term risk on the position. However, as the market moves, the position will become unbalanced. Once the initial trade and offsetting hedge are booked, the responsibility for managing the position is transferred to an upstairs position manager. The job of this manager is to keep the risk exposure of the firm’s constantly changing portfolio as close to zero as possible. CRT is so rigid about risk control that it even has a backup risk control group. The backup group assures that the firm is always ready to handle even the most extraordinary trading events (e.g., the October 1987 stock market crash and huge price moves triggered by the outbreak of the Persian Gulf War).

The complexity of monitoring the positions placed by hundreds of traders, reevaluating thousands of interrelationships between different market instruments traded worldwide, and tracking the firm’s portfolio risk balance continuously, all while prices and positions are changing every second, requires enormous computer support. CRT has nearly an entire floor in its office building devoted to computers. There are departments for developing new proprietary software, and the firm even has its own on-site hardware repair unit.

CRT’s computer software programs are highly sophisticated. Every effort has been made to translate data into graphic displays, reflecting the belief that the human mind can draw information much more readily if it is in visual form. A new generation of CRT software, which was in an advanced stage of development when I visited the company, provides three-dimensional displays. These computer images will allow the traders to view the firm’s real-time position for an option market across both a range of strike prices and a range of expiration dates in one picture, with different colors used to represent different concentrations of positions.

All the high tech aside, ask anyone at CRT about the firm’s success, and they will tell you that teamwork is the key. It may sound corny, but it is obviously an absolutely essential element of CRT’s philosophy. You either buy into that philosophy or you are in the wrong place. Self-centered maverick traders, no matter how talented, need not apply.

Here is how one former CRT floor trader (who now handles a variety of other roles) describes the advantages of CRT’s teamwork approach versus the situation at most other firms:

The teamwork philosophy also extends to compensation. As one employee describes it: “Joe is absolutely committed to sharing the wealth. Instead of thinking about how little he can pay people and get away with it, he seems to be more concerned about how he can split up the profits fairly.”

Mark Ritchie gave me my first perfunctory tour of CRT, walking me through the main trading floor. The workspaces appeared very attractive and comfortable. However, something seemed out of place. I thought of those childhood puzzles with the caption “What’s wrong with this picture?” When we walked past the receptionist area, Mark was told that he had a phone call holding. While he was on the phone, the nature of the oddity finally struck me. The trading floor was quiet! I mean, you might have thought we had toured the offices of a university or law firm. The shouting, turmoil, activity, anxiety, stress, cheering, swearing, and other assorted noises and emotions that normally permeate a trading floor were all missing.

CRT is a laid-back firm in many ways that go beyond the extraordinary calm in which trades are planned, monitored, and executed. No suits and ties here, unless of course that’s your preference. Jeans and sport shirts are the common attire. There is a cafeteria in the center of the trading floor, which is available to all employees—and the food is home-cooked, not the typical cafeteria variety. There is even a lounge area on the floor. Again, not your typical trading operation.

The following two chapters contain interviews with two of CRT’s initial four founding members: Mark Ritchie and Joe Ritchie. Mark actually drifted away from CRT years ago, preferring to trade on his own, unencumbered by additional managerial obligations. Joe’s involvement with CRT, however, remains strong. He is still the firm’s primary visionary and guiding force, albeit the responsibilities for the day-to-day operation of the firm have been transferred to a senior management team. Although Mark is no longer actively involved with CRT, his interview is placed first, maintaining the order in which the conversations actually transpired.