Thursday, October 30, 2014

Late night musings on baseball, wanting things too much, and a little bit about myself

Things are going pretty well for me right now, personally and professionally. I made $16,000 today, which has pushed me over $100k for October. I just attended my sister's wedding last weekend and had a wonderful time. I couldn't be any happier for her. Tonight, I met some cool dudes at my work building (the best workspace, ever) for a poker game and some drinks and won 1st in the tournament. Good things are happening in my life and I am grateful for that.

And yet I feel really sad right now... catatonic, even.

Baseball... stupid baseball.
Because the nuclear scenario lurking in my deepest, darkest fears for the last 4 weeks has finally come true.

The Giants just won the World Series. Again.

As it approached closer and closer to becoming reality, I felt all this coiled-up anger and hate.

They get to win it three times and we (the Los Angeles Dodgers) have to flame out again?
They get to win it three times with such marginal talent that they finished well out of the playoffs in the two odd years with nearly the same roster?
They get to have all the variance, luck, timing on their side?
Their ace outperforms in the playoffs while our Cy-Young and perhaps MVP winner gives up home runs to stupid Matt  Carpenter?
They get to be happy for a third time and I have to endure this bullshit again?

The very thought of it happening made me shudder in an ugly fit of rage and jealousy. I just want to see my team to win it all so badly (1988 one year before I was born) but instead I get to see these assholes win it three fucking times. I wanted to curse the sports gods forever and ever. I felt indignant. I felt wronged. 

Now that the day has finally arrived, I am no longer angry. Now I just accept it... because I don't know what else to do to get on with my life.

(deep breaths....)

I know, it's so irrational and stupid. If you just read all that and you aren't a hardcore sports fan, this is probably the along the lines of what you think about me.

"You're being silly, it's just a game." 

And that brings me to...

I'm incredibly passionate about my sports teams. That means my emotions will go through volatile fits and spurts over an outcome that's entirely out of my control. For anything I feel passionate about, there must be equal amounts pleasure and pain. I'm not one of those fans who can just stay positive and write off a big loss thinking "oh well, they'll get them next time". You know that guy at the bar glued to the TV who makes that loud thumping noise right after a crucial turnover and then you turn your head to stare at him thinking "Christ, that guy takes this shit a tad too seriously"? I'm that guy. I once stopped talking to a college buddy (who I'd later call my best friend) because he was rooting for the Celtics over the Lakers in the 2008 Finals (and he's not from the Boston area nor any had ties there, which made it all the more infuriating, as if it were his choice to betray me).

It's so deeply ingrained that even as I want to deescalate my attachment just for the sake of my own personal enjoyment of watching the game, I can't help but just react in the most base and primal way possible. Like they are the enemy and they *can't win*. They're not allowed to, damn it! (this is what I yelp out in vain to nobody in particular)

If you asked me what's so unlikable about the Giants to warrant such heated repulsion, the answer is because they are the Dodgers' rivals, so fuck them. That is it. I don't dislike any player in particular, nor the Bay Area in general. It's the idea of them getting to have something I want while I (my team) cannot. It's that sense of wanting I'm trying to describe here that's underlying to all the pent up rage. Wanting so much and caring too much.

I've reflected a few times to ask myself why I am like this.

This is about to get a bit personal but it starts with my childhood. Sports was the first thing I was most passionate about. My first experience watching sports was NBA basketball in the mid 90s. My dad had the Lakers on TV all the time. Later I would come to realize that he was more of a casual, low-key sports follower, not a guy who would know every little fact about the league/team and go crazy over each win and loss  -- this is unusual in the sense that most diehard fans usually become that way because they grow up around just-as-diehard family/friends/community members. My path there was a bit more isolated. I just got so hooked after watching Jordan and Bulls compete in the finals. My interest quickly spread to different sports -- baseball, football, basketball being the primary ones. I read everything, knew everything, watched everything and cared way too much.

I didn't even play any sports as a kid -- not a single one. The reason for this was because I had histiocytosis as a kid, which, in simplified terms, made my bone structure weaker. I was held out of P.E. at school often and rarely participated in physical activities. I would just watch other kids play from the sidelines. By the time this went away around 6th grade or so, I didn't feel a lot of confidence in myself as far as physical activity. I wanted to be good at things, not suck and be made fun of by all the other kids who had a head start. So I ended up channeling all my unused competitive rage into the teams I rooted for. I can't count how many times my parents told me to calm down over a Lakers game.

Nowadays, you take something like golf or pool, two things I do for recreation. I pour my heart and soul into it emotionally, for better or worse.

The passion to be a trader
So back to that "sense of wanting". It should go without saying I am every bit as passionate about trading and market as anything in the world. I want to be really good at it. I can't imagine how I'd look at myself in the mirror, if, after so much painstaking time and effort and commitment, I still wasn't very good at it. I don't think I could do any other job. That's how much it means to me. I foolishly positioned my self-esteem to be highly correlated with my trading success and I wish there was an easy way to change that. I wanted it way too much.

2012 was a year with a lot of worry and depression. It was my 2nd year in New York at my prop trading group. I didn't lose money as a trader but I wasn't making nearly enough to cover living expenses. Factor in profit split with my firm and taxes, and I was basically making chump change. It was a humbling experience for me since I held myself to the highest possible standards.

Why can't I do what they do?
Let me tell you a story of one particularly not-so-good trading day back in 2012 when I was with my prop firm. I'll preface it by saying I lost around $300 on this day. A paltry sum, even back then as a nickel-and-diming piker trader. It's not the PnL that matters. Not every story has to be about some massive loss, although we'll come to that one in time.

After a solid morning making several hundred bucks, I made eight consecutive losing trades to go back to even for the day. Nothing big, just getting cut up over and over by overtrading. It became a game of chasing the last loss. I was determined to get back and close green. I just needed to find some kind of opportunity.

Enter Wal-Mart (WMT). Yeah, not a volatile stock, I know. But it had breaking news in the afternoon and tanked and other traders on the desk started scalping it for 10-30c moves. 

There was this really good scalper on my desk, let's call him Nick. Nick had the ideal temperament for trader (whereas I have the opposite). Lightning fast reflexes to boot. Just kept his cool and executed. Made it look so easy buying dips and selling within 30 seconds for profit. Even flipping short the opposite direction was working for him -- basically what I call "playing the violin" on the stock.

So fittingly, it runs through my mind "I can do that too, watch me" For the next 30 minutes, I tried to do the same thing. I just kept trading 200-500 share lots trying to make 10-30c 5-10 times. I kept losing, just about every single time. And in real time, I'd hear Nick's commentary on his entries and I'd be a step slow or I'd take the wrong side. It became this personal hell where I thought God was personally telling me I was an awful trader and I should just stop embarrassing myself. Combine this with the bigger picture context of all the self-doubt accumulating in my mind as I wasn't making any significant money and...

I snapped. 


A buddy of mine who sat next to me observed that I had this idiosyncratic frustration habit where, if my level of tilt reached a critical mass, I would pick up the keyboard from the edges, appearing as if I was contemplating perhaps obliterating it entirely, only to at the last second, show mercy and drop it lightly back onto the table surface. 

This time, I threw it down hard enough to jar half the keys loose and send them flying. The Pg-Up key flew into the next row and hit some poor guy's face.

One thought that kept running through my mind in the heat of frustration: "why does he get to be so good at this and I can't figure it out?! I try too fucking hard to not be able to do this!"

I stormed out of the room in full meltdown mode. Maybe in another post, I'll describe just how bad meltdown mode can really feel.

you're being silly, it 's just money...
Now I have to stop writing
Because I need to go to sleep.

Now you readers know how crazy I am. I'm still trying to figure myself out.

To the Giants fans...enjoy it while it lasts you lucky SOBs

Friday, October 17, 2014

Free Money Part II: The 8AM ARCA Low-Offer

These are my early trading days (2010-2011) while I was still in college. More than half of my trading volume was on the OTC/Pink-sheets -- home to all the best pump and dumps and empty shell companies. I mostly made money by finding pumps and shorting them on Interactive Brokers (IB). IB has a first-come/first-serve mechanism for locates -- the first traders to actually take a short position would use up those locates. Sometimes you had to wake up earlier to "lock up" the locates before the other short-sellers. By routinely waking up and watching the level II of an active otc stock at 8am (actually it was 5am pacific time but I'm going to refer to EST for all trading time purposes), I observed a strange little phenomenon that didn't quite make sense.

OTC Trading
If you know how the OTC market works, you can skip this.

When you start trading otc's, the first concept you must understand is that unlike stock quotes on the NYSE or NASDAQ, OTC market maker quotes do not adhere to Reg-NMS rules. That means you do not automatically fill at the quoted price when you route to a market maker. The market maker has to fill you. If something is trading 1.00x.1.01 and you are you placing an order to sell at 1.00 bid, you don't get filled immediately. 

That is a big difference. Liquidity is a lot more opaque. It can be very chaotic in liquidity rushes (squeezes or panics). If you're late to sell in a panic, you will see your order unfilled as the bid drops and drops and drops.

There is one major exception, and that's if you route your orders through ARCA, the only ECN on the otc markets. If you route a market order or marketable limit order to ARCA, you "get it right away", like in the normal market.

The ARCA Low Offer
8am is when ARCA opens up for trading on the OTC. Before that, you can't route ARCA.

Whenever I watched a highly traded mailer stock like LEXG, UTOG, JAMN, I noticed there was often a print at 8am that would mark the stock down. It could be down 5, 10, and even as much 20-25%. 

And what struck me as very unusual was that you would see ARCA crossing multiple market makers (not available for routing before the market open at 9:30) who were posting prices much closer to the prior closing price on the bid. So if NITE posts at best bid at 1.50, ARCA would low-offer somewhere stupid like 1.30. Keep in mind that otc's don't trade pre-market and news rarely matters, especially on these highly controlled mailer stocks.

                     Bid                                                                       Ask

Then the offer would get taken quickly, nothing or very little would happen for the next 80 minutes and the stock would open up normally, often within 2-3% of the prior close, or even move to gap up significantly.

What is the point of doing this? Seems like if you wanted to sell the stock, you could just wait for the open and fill at a much better price. Why trade when there is no volume? It made no sense. Why is ARCA just giving his money away?

My theories:
1) Amateur short sellers sending in market orders to short asap on ARCA through Interactive Brokers
2) Market makers who are net short the stock trying to mark down it down as an intimidation tactic
3) Market makers who are net long and trying to mark it up using this a meta-tactic to suck in early sellers and either shake out the stock or later create a short squeeze

Ultimately, it didn't matter to me what the real underlying answer was. I had no reason to believe I was the sucker for buying. The other guy was the sucker for selling!

The Flip
So I did what made most sense to me -- I paid ARCA for as much as I wanted at these discount prices and then at the 9:30 open, I'd sell it immediately to the market makers. Boom, free money! 

thanks for the prints... sucker!
This worked EVERY SINGLE TIME... (except one time*...)
Here are a few more samples.

A few random thoughts:
  • Is this truly risk-free? Not quite. There were risky situations and there were very low risk situations. I would try to snipe at the prices that I felt were the least riskiest given situational context (how steep the chart, how thin the stock, any hit pieces out, etc). But this never really felt like a trade as much as it felt like I was exploiting some glitch. No stress involved, no intermediate decision making, no trade management.
  • Risk mgmt rules had to be intuitive. There was no way to backtest it but I was pretty sure whatever losses I might occur would be offset by the amount of gains. Just never go all-in or have size that's too hard to get out of in a panic, to prevent a loser that would wipe out everything and more. I was probably not greedy enough on these trades, because I was too inexperienced and the idea of having a total position size in a pump and dump equal to or greater than my account equity was too crazy.
  • had the wherewithal to be cautious when the stock had a major extended chart (because there were occasions of pumps that had such vertical charts, they really did just collapse starting from an 8am gap down). The more risk there was, the more cushion I demanded. With LEXG's chart at $10, I wasn't going to buy it at -5%. I would bid at prices that i would consider near impossible to lose money on (but above the trade cancellation threshold). It was more like fishing than trading -- just waiting for a bite at prices that I deem as "free money". 
  • Unlike technical trades where others could participate, this was a true "limited opportunity" trade due to the volume. So I didn't want to talk about it, lest I risk losing my edge with others competing for my prints. I was amazed at how few traders mentioned this strange anomaly. Somebody had to buying and selling at those times.
  • This entire experience generated my curiosity and obsession with market microstructure. I think all traders should take a course or read a book about microstructure, even if they aren't neccesarily trying to build algos or make markets. You never know when your understanding of "how things work" can be used to spot opportunity.
  • Nowadays you have to deal with halt risk whenever you play sketchy otc pumps. Back then, every halt that I knew of was before 8am so it felt safe. If I were to make these trades today, I'd absolutely have to factor that in as a major risk factor.
  • I've had multiple busts. I learned not to post bids or take offers that would push the stock below 30% in one print. I naively thought that if I sold my position very quickly, I'd be more likely to go unnoticed and get away with it -- but alas, they actually gave me a short position for my sales while they busted my buy prints. Bastards.
The One Time*
UTOG on March 22nd, 2011. 
I lost about 8 grand in total. It is still the largest realized loss I've had on a single play or within a single day on my personal account.

I actually have it on video. 

I puked it. I did not have the experience to realize I was exiting in the most inefficient manner possible in a very illiquid panic. At the very least, I could have minimized losses by working the order a bit rather than just trying to dump it regardless of price and volume. I was not as sophisticated a trader as I thought I was... just a fool as prone to acting out of fear as any other rube.

I remember shutting down my platform after that and driving to Panera Bread to get some coffee and food. While sitting there in the booth trying to get some studying done, I drifted into a state of delirium where I honestly thought it was just a bad dream that I lost $8,000 in 10 minutes. Then I snapped out of it, realizing I was still living in reality -- "oh NO... that did actually just happen today... how am I going to go on with my life?!"

You know what's crazy? UTOG went green later on and traded to new highs. 

Present Day
If this trade still occurred regularly, I wouldn't post this. The strategy has effectively been in retirement. The mailer/pump landscape is on life support. The SEC has been hounding these plays for the past 12 months, even halting stocks after 8am and intraday. The best promoters are gone, and so is the order flow. It was a gift in the days where I didn't really know how to trade. Now it's just a memory of the days yonder when you could still make big money on pumps.

Saturday, October 11, 2014

Free Money Part I: Monday Night Freeroll

Free Money

If you've ever taken a high school level econ class, one of the first concepts you learn is that there is no such thing as a free lunch -- meaning, it is impossible to get something for nothing. There's always some kind of cost or risk. Graduate high school, take a few finance classes in college, and you'll learn about efficient market hypothesis -- an assertion that all information is priced into the asset. This has been debated ad-nauseam but most people, even successful traders, can agree that the market is fairly efficient and it at least takes work to make money. You can't just pick it up off the ground. And I mostly agree... EXCEPT... there are some rare opportunities... and nobody ever really talks about them. I'd like share some of my "free money" experiences. None of them were ever scalable enough for me to get rich but they all taught me something.

So what is "free money"? 
My loose definition is basically that it's an opportunity to make money that shouldn't exist. It can be arbitrage, or some kind of structural glitch or anomaly to be exploited, or perhaps it's money being given away by another party for reasons unknown (or maybe they don't even know they're giving it away). 

How does one find "free money"?
You can't google search it or find it in any book or manual. It's part luck and part observation. You just need to pay attention. Question everything. Have a nose for the unusual and try to understand why it exists. It helps to already have a systematic understanding of whatever you are engaged in, whether it be gambling, trading, real estate, business, retail arbitrage, whatever it is.

Is there risk to "free money"?

The real risk is being a sucker -- thinking it's a free money opportunity but not reading between the lines. If you are a more skeptical mind, like myself, you may have an initial reaction of excitement to opportunity, only to later question why it exists and what makes you so special to be able to take it. Luckily I have no stories of thinking something was free money and getting totally screwed. Do your research. See all the angles. Run it by someone wiser than you. For anyone who follows bitcoin, there was a reason why Mt. Gox traded at fractions of the price of all the other exchanges. That's an obvious situation where you should be able to smell a fish rather than think "omg free money".

It helps to have a mindset of not wanting to lose money rather than trying to make money. In my experience, the scam stories always start with a victim who could only see the dollar signs and thus failed to ask the critical questions.

Y'all probably thought this post would be about trading, right? Nah, it's about gambling on a football game.

Part I: Monday Night Freeroll

Sometimes the Gods just want to smile upon you with great fortune -- free money in plain sight! There is no lesson here about keen observation or seeing all the angles. I guess the only lesson here is sometimes 'too good to be true' is actually true (just make sure you can verify that). This is my little coming-of-age action junkie story.

It was September 2006. I just started my senior year in high school. I've been playing poker for about a year and a half at this point. I had money in Pokerstars and Party Poker, while using Neteller as a money merchant to transfer funds. By perusing the Sports Betting forum at TwoPlusTwo, I learned about a betting promotion from Mansion sports book. It seemed too good to be true. 

The bet
First Monday Night game of the year: Steelers -4.5 vs. the Dolphins. The defending champions against a newly-minted Dolphins team led by hot shot college coach Nick Saban and former Vikings Pro-Bowl QB Daunte Culpepper
You had to bet $1100 to win $1000.
Yes, you could only take the Steelers side of the bet (maybe the promotion was to hedge some whale who bet a boatload on the Phins, who knows?).

The promotion? If the Steelers failed to cover... you didn't lose! Mansion would refund losses within 1-3 days. You would either have $2100 in your account or $1100. It was a true freeroll!

You were not allowed to hedge by placing a bet on the Dolphins. Some bettors with multiple sports betting accounts did hedge to lock-in a profit. Not that I'd ever do that, as hedging is -EV.

The decision
This had to be a scam, right? Isn't there something in the fine print I was overlooking? A catch? Nope. The veteran sports betting junkies on the forum said this was totally legit. I didn't have much to go on other than faith in 2+2, which was the smartest gambling community online by far.  It was also a community that reported scammers, welchers, and other bad business practice -- I know, big surprise, could you imagine that the gambling world would be so seedy? These were guys who were too careful to be scammed. Mansion wasn't some fly-by-night operation incorporated on some tiny island, they were a reputable book that did serious volume so even $5.5 million (the point at which they capped the promo) was a drop in the bucket for them. So why the hell not? It was a no-brainer. I opened an account and made a deposit.

Mansion required a photo ID of someone older than 18 at the time so the account couldn't be under my name. So, naturally, I snagged my dad's driver's license and entered his information to get the account approved. (If you're reading this dad, I'm sorry, but it was free money and you would have said no to anything involving gambling.)

I even got my cousin Arthur, who would share my Stars account to play sit'n'go tournaments, to open a second account at Mansion so we could double down. I told him to use his dad's (my uncle's) ID but he took his sweet time and by the time the account was approved, Mansion closed the window for promotion bets. More on this at the end.

The injury
Steelers starting quarterback Ben Roethlisberger, who had sustained injuries in an off-season motorcycle crash, is rushed to the hospital for an emergency appendectomy 4 days before kickoff and is listed as OUT. The line moves to a PICK-EM (a line of 0, meaning no favorite or underdog). Career journeyman Charlie "Chaz" Batch is named starter. The promotion window had closed and early bettors were locked in at the opening line of -4.5. Basically, we were all bagged with an extra 4.5 points from the "fair line", which I'd estimate is a 35-42% chance to cover. Thankfully the handicappers had no idea just how washed up Daunte Culpepper really was...

The game
It was a sloppy undisciplined game and I don't remember much about it except the 4th quarter. It wasn't looking great with the Dolphins leading 17-14 halfway into the 4th. I needed at least a Steelers touchdown and another score, and no more Dolphins scores, to cover with only half a quarter to go. The Steelers offense has looked like garbage all day.

6:11 to go and Steelers deep in their own territory.

But I'm still short that tricky half point without a lot of time left. Too many scenarios where Dolphins answer and take up a lot of clock, or fail on a long possesion, leaving the Steelers to run out clock rather than increase their lead.

Next possession, Dolphins ball. CULPEPPER THROWS A PICK! Pitt quickly gets into FG range. Jeff Reed, all-time best kicker at the notoriously tough-for-kicker's Heinz Field... from 44 yards... I'm chewing my nails... he's got this, no sweat...

... and he MISSES the 44 yarder! 17-year old me is thinking "fuckfuckfuckfuck that was my cover goddamnit they blew it!"

Dolphins have the ball. I need some kind of miracle here because it's either Dolphins touchdown or Steelers run clock out. Culpeppers drops back to pass... fires one downfield...


ahhhhhhhhh SHOW ME THE $$$$$$!!!! i love sports betting!!! what a rush!

Writing it out can't even do this moment justice. I wish I could find video footage because I'd love to relive that all over again. $1000 was a lot of money to me when I was 17.

I was fist pumping and whisper-shouting the entire night. Not that it was unusual for me to show passion over a sports game, but a game where I didn't care about either team? I just felt like I had to keep it under wraps. I doubt my family would've known the difference anyway. I did some late night grocery shopping at Albertsons that night and while all alone in the chips and soda aisle, I just spontaneously started jumping for joy, hop stepping all the way to frozen foods. I felt like the luckiest kid in the world!

The following morning, I walk into class and I just don't give a shit about anything. Everyone else is talking about exams, girls, college applications, plans for the weekend, other silly high school stuff, and uh.. I just made a grand on a football game. I'm playing a different game than everyone else. It's become part of my identity. Am I the smartest? Most athletic? Most popular or handsome? No to all of them, not even close. I am just the kid who makes the free money while nobody is looking.

And I still am. I know I will always make money, whether it's through trading or just walking into it the most half-assed way imaginable.

Although I had withdrawn the winnings from my own account, I used Arthur's account to make actual bets on games. Yeah, they got me hooked, I'll admit. That was the point of the promo.

Fast forward one month later: UIGEA was signed into law and it became nearly impossible to move money to and from gambling/poker sites. Poof. Neteller was no longer a transfer option for U.S. customers and our funds under my uncle's name was stuck in Mansion. So net of (lost) deposits, we actually didn't make any money from the promotion at all.

To this day, our money is still on Mansion and I've always entertained getting it back if I decide to take a vacation to London -- although I think my uncle might have to get the money since it's under his name...

Tuesday, October 7, 2014

Post One

I'm not sure what I want this blog to be but I'd like it to be atypical for most trading blogs. Something beyond trade setups, trading reviews, or psychology, but yet interconnected with all of them at a level of unusually high detail, introspection, and "inside baseball". Maybe I can fill in the gaps for those are otherwise unknowing. 

For the longest time I felt I needed to be a better trader before blogging about it. I kept raising the goalposts. Well, it's funny how writing works... when you find your voice, it all comes at once and the excuses just fall by the wayside.

First few blog subjects as a teaser:
  1. Free money. Four distinct trades or events in my life where there was money that was as close to risk-free as possible that I just picked up off the ground, due to sheer luck or observation. 
  2. My journey as a trader. From poker player to independent retail trader to prop trader, then back to retail, with bitcoin tossed somewhere in between. 
  3. Overtrading. My one and eternal struggle. Bulls fall prey to greed and hope, bears to stubbornness. I am relatively unaffected by either. My problem is trading with ADHD. My problem is committing to the f---ing trade.
  4. Trading bitcoin. I had no idea what it was or how it worked, but I saw the chart at $30 and said "I have to trade that". My emotions were at rock bottom at this point in my life but the 18-month heater of my life started with this bizarre cryptocurrency.
  5. Fannie Mae (FNMA). The stock that has made me more profits than any other in the entire universe. It's also the stock where I took my largest loss ever to date (a number north of 6 figures and 25x greater than my 2nd biggest loss) and effectively ended up my prop trading career
I think street cred and skin in the game is important when trying to write as a voice of authority on any given subject, especially trading. Here's mineI don't ever want to be seen as someone who talks a good game but doesn't actually deliver on the bottom line. Trading is doing, not theorizing.