September 16th, 2011
06:07 PM GMT
Editor’s note: Jim Josephson has spent 15 years in banking, working across Jardine Fleming, Credit Suisse, Morgan Stanley and Bear Stearns. He has worked in equity derivatives sales and trading, structured products and flow derivatives. These are his tales from the trading floors.
We ought to discriminate between traders and punters or gamblers, because the distinction is huge. Traders who are successful over time are level-headed people, they have a calmness and method, humility and discipline.
They have a work ethic closer to a religion than anything else. They will not drink in the evening because someone is likely to call at midnight from another time zone.
They get up early and get in front of the screen because the static data they checked over yesterday needs to be checked again today. They don’t embrace risk, they intimately understand their risks.
There is a great analogy, albeit a little cringe-worthy for the true professionals.
In Tom Wolfe’s descriptions in “The Right Stuff”, great traders are analogous with his test pilots. They are dour and almost unimaginative professionals, they don’t make mistakes.
The fighter pilot-esque flair is an embarrassment to them, and they leave well alone because they know these types don’t last. Those types always end up at the centre of the accident site, at the bottom of a smoldering pile of wreckage.
In reality, things do go wrong, and mistakes are made. But the difference between a great trader and a pretender is what happens next. Swearing and smashing things up are for the amateurs. You can tell the best by the fact that the worse it gets the calmer and quieter they are, the more slowly they speak.
They might lose it if their lunch is cold or there is no sugar in their coffee, but if they are down a couple of million on the day they are calm and methodical, stopping the bleeding and trying to make things better from here on in. The bluster and fluster is for those who don’t know what to do next because they hadn’t thought it could happen to them. I have seen fist fights, lying, shouting, even crying – those traders were all pretenders.
Every day, there is one truly entertaining moment - when traders turn their systems on and see the first revaluation for the day. Occasionally there is a Big Red Number staring back.
When it happens to you, the first response is to rub your eyes and look again. If it’s still there, your stomach drops and could throw up (some actually have), so you recalculate the system again. If you are good then it’s just a matter of tracking the problem down. Something from yesterday got booked the wrong way around, to the wrong book, or not at all. Some of the feeds are wrong, the links not working, the data corrupted. Good traders don’t get nasty surprises.
Very rarely you are faced with a situation that your counterparty is wrong, or you are wrong. In my most memorable incident I thought I knew where I was right and they were wrong. There was a desire to almost tell them where their mistake was, just to see if they agreed. In the end the difference on the one line trade was $15 million in my favor, but the initial reaction was relief not celebration. I did once witness someone who thought they were right and the market wrong lose around $300 million in 30 minutes. If the whole world is coming at you it is likely that you are wrong not them, and you best back off.
My survival method has always been this: Work out whether the issue at hand is something you can fix. If it is then you need to sort it as quickly as you can, if you can’t – and this can be difficult - but you can’t let it bother you. Amateurs have excuses and blame for everyone except themselves. A good trader will take responsibility when he is wrong.
If a bank is working correctly big accidents don’t happen. Banks lose money, but never too much. The first loss is the best loss, and it is resolved quickly and correctly. No one trades bigger than the liquidity of the market allows for, in the event you need to close out quickly and quietly. Positions are revealed every day, and there are no nasty surprises. Obviously a fraud can short circuit that, but then in hindsight you can point to issues and irregularities that someone ought to have picked up.
Hedge funds are invariably different. A lot don’t have the discipline and diligence of apprenticeship in the market and on the trading floor, they don't have product controllers and mathematical modelling people, they are hugely under resourced by comparison.
A lot think that something other than cumulative daily profits and loss can determine their future. It doesn’t. This explains why in my experience maybe 75% of hedge funds fail within their first five years. You can only be lucky for so long, there is no substitute for knowing what you are doing in trading. It is said sometimes that one would rather be lucky than good, but luck is transient and good is good.
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