The Day I Lost a Sh*t-ton of Money DVD Special Feature: The Narrowly Averted Crash on AAMRQ

Hey, welcome back! Read Part I if you haven't yet done so.

I completely forgot that the trade I'm about to write about on AAMRQ occurred in October and not November as I remembered. That changes everything.

My internal writing voice: Good job ruining the proper sequencing of your story. It would have made much more sense to end Part I with this trade.

Oh well. I wrote far more than I intended about this trade and now it's a standalone story. The thought process, trading concepts, mechanics on this trade is close to identical to the trade that will destroy me later. It foreshadows what to come. Part II will be out by Tuesday.

A Smooth Takeoff

So let's go back to October for a second. Things were going well. I was finally finding my groove as a trader.

There was just one blip on the radar.

If you like this PnL calendar, check out Tradervue!

Whoops. That's not the right day. Although I'm definitely annoyed I finished red on that day because all I had to do was scalp a measly $2 to achieve a perfect month. Two bucks! That's basically a bid-ask spread with 100 shares. Ugh.

The day in question was actually Friday the 25th, right next to that sweet $41k day.

Now, there's nothing wrong with making $3,237.98 obviously, but that final realized number masks the boatload of risk that I took on while on the way there, while trading AAMRQ, the ticker for bankrupt American Airlines.*

*If you want to know the fundamental story behind AAMRQ at the time, I wrote a short summary.

The day started off well as I scalped $4k in gains on FNMA. However, the middle of the day was quite boring as my PnL drifted sideways. Coming off an incredible Thursday and a solid open, I was not satisfied with $4k. I churned a few other stocks in an effort to keep grinding small profits, but not really making any headway. I was staring at AAMRQ, which was on my watchlist for a short since it had an over-extended daily chart. I stopped trying to short it after the open since the slow, consolidating price action was putting me to sleep. I mentally dozed off.

A Little Turbulence

Later in the afternoon, AAMRQ started to rollover from $7, quickly trading down to $6.50.

 My inner critic: "Ugh I'm so stupid. Why am I not short right now? I guess I'll wait to scalp it long."

The first real bid came in at 6.50 to soak in some orders (notice the volume jump). I tapped my buy keys on my personal account. I actually tapped it for more size than I wanted and got filled way too easily (first red flag) but I didn't care... probably just means I'll make more money. This wasn't yet a big panic move by any means, but I thought I could make a quick 10-15c out of it.

It upticked a tiny bit but the supply was so thick that I couldn't sell any on the offer. The best bounce plays confirm immediately. Remember what I wrote in part I about getting out?  Second red flag.

Seeing a poor reaction was my out signal. It could go down a lot more. The plan was to get out and re-evaluate. I sent in some orders:

Status	Symbol	Side	Qty	Open	Price	Route
Accepted	AAMRQ	Sell	8000	8000	6.45	NITE
Accepted	AAMRQ	Sell	8000	8000	6.45	CDEL

I thought I was timely because I sent my orders in before the downtick, but 45-60 seconds later, no fills and the 6.50 bid dropped. I had to cancel my orders and re-adjust the price since I didn't set a low enough limit like 6.20-6.30. Stupid rookie mistake! I had to wait for the market makers to stop holding my cancels, so I could enter new sell orders.

Status	Symbol	Side	Qty	Open	Price	Route
Canceling...	AAMRQ	Sell	8000	8000	6.45	NITE
Canceling...	AAMRQ	Sell	8000	8000	6.45	CDEL

Fucker. C'mon, fucking cancel it already, you stupid fucks!

A moment later, AAMRQ started printing 6.00. Um, what? It was just at 6.50! There are still market maker quotes at 6.30-6.40 bids on my level II!*
*later on, I would realize I misjudged AAMRQ's liquidity, thinking it would trade like FNMA. FNMA had a slow penny-by-penny tick on the way down. AAMRQ traded far thinner (it traded in the tens of millions vs. FNMA's potential hundreds of millions) thus skipped prices on the way down.

My orders finally cancelled but that wasn't all I had to worry about anymore... because I saw something very scary on my level II window.

The Hijacking 

Let me introduce you to your worst nightmare on the level II screen, if he's moving on the other side of your position: The ARCA Monster.

attention all passengers: you are being re-routed in another direction. DOWN!!! LOL. goodluck2u all!

The ARCA Monster doesn't give a flying shitfuck about those buy orders on NITE or CSTI that's 30-40c higher than its asking price.

It wants to sell stock at irrationally low prices.

It wants to screw with your mind (and your PnL).

It wants panic!!!

And it has a nifty lil' weapon to trap scalpers and make them feel incredible levels of intense, undying pain -- it can pull all of its own bids and cross all of the market makers bids with the lowest offer.*

*This post might give you insight on the difference between ARCA quotes and market maker quotes. In short, the OTC is this quirky, glitchy, no-holds-barred market with weird rules where stupid shit like this can happen. I, for one, would not change a thing about it.

Execution at reasonable prices without huge slippage? A liquid trading stock with a deep order book? An electronic trading auction process that 's actually efficient and makes sense? What does the ARCA Monster think about that?

hahaha FUCK YOU! im crashing this plane! buckle up!

Fight or Flight
My first thought was not "wow, I have never drawn down this much in my life". It should have been. All of my prior $10k, 20k, $30k days were pain free -- I didn't just recklessly add my way out of a hole. I'm not used to taking pain. This was a new pattern. It required time to step back and deliberate new tactics, even though... [heat-of-the-moment me]: NOW IS NOT THE TIME!

The first thought was instead... "this is WRONG. I have to buy more."

I checked all my 2nd-hand newsfeed sources if anything happened on AAMRQ -- twitter, chatrooms, Yahoo, Google -- nothing. Our desk had a live TradeTheNews audio feed -- whom we refer to as the squawk guy -- but only radio silence the past ten minutes. The last thing I wanted to do was capitulate.

At this point, I didn't have much BP left in my personal account so I had to use my firm's account. And unlike all the other times I made this play, I didn't wait for a clear bid to start buying. I actually thought maybe the ARCA Monster was just giving me free money by crossing at such an absurd price with no news. My reaction was to chew him up before others saw the same blatant mispricing that I spotted and took all the shares. I had no plan and no visualization of what the implied potential drawdown could be with my new position size (now at 40,000 shares combined on both accounts with an average price well above $6!). It was 100% primal instinct -- I chose to fight.

Let's lift this mother fucker.

click click click click click click click 

He wasn't lifting at $6. Instead, he stepped down another 10c.

LOL nice try! you can pick up your bags at terminal $0!

I tried in vain to route to some stale market maker quotes on the bid and maybe flip out some of my adds (a sort of order flow arbitrage maneuver that I pulled off before a couple times) out for small gain or scratch. Nope. No fills. Holy mackerel, what the fuck is going on?

Now I started to feel the early onset of panic. I'm used to having my hands sweat on these trades but now my heart was seriously pounding. That never happened before. My objective abruptly switched from "free money opportunity" to just "survive". I had to save bullets. I had to wait for the next clear bid with some kind of exhaustion volume. I didn't care about a profit anymore, now I just wanted a small loss or a break-even. 

I let the ARCA Monster step down while resisting the urge to spam the buy button. I had no idea how I was going to get out of this. 

The Nosedive

I felt overwhelming amounts of sheer pain but at the same time, my gut was telling me this move was all emotion -- maybe one of those"bear raids". If this happened earlier in my career, fear might have gotten the best of me -- what if it was in fact horrible news about the merger/antitrust lawsuit and insiders knew it before the market? But after 4 years of experience, at my screen nearly every goddamn day, I had seen too much. I had seen too many flash crashes, too many error-driven anomalies, too many biotechs that tanked massively for no reason only to go right back up. This was not an unexpected news scenario where my risk was a scenario of no recovery, it was just a max pain situation where a stock goes from extreme overbought to ultra-extreme oversold, just like FNMA, and would likely to correct again. I just started my position stupidly early, trying to scalp at best what would have been a 15c move. It will bounce. It always does.

At least that is what I hoped. When you're upside down more than you've ever been* in the heat of a 5+ standard-deviation intraday move, it's hard to distinguish between intuition and hope.

*my largest loss before this moment was $8000. I was then down 5x that much on both accounts combined.

At the very least, I was determined not to puke into extreme weakness. If I had to take a loss, it's going to be a loss scaling out on the way up -- that I could deal with.

Then, all of a sudden, I heard a voice from above.

I heard exactly what I needed to hear.

The Barrel Roll
The squawk guy: "American Airlines corporate headquarters says there is nothing new to report in response to the unusual activity in the trading stock."

And I saw what I needed to see: bids joining at 5.60 and absorbing massive volume. BOTTOM.

FWIW: the real bottom was 5.60, anything below was a through-print

And the ARCA Monster? He finally lifted.

little did I know, this would not be my last encounter with it...

I added another 15,000 shares 5.58-5.60. This needed to work! My eyes were inches away from the screen, hyper focused on the tape for signs of thick selling on the offer, ready to pull the trigger quickly in case that ARCA fucker came back.

But it reacted like all the best bounce plays did, by confirming immediately and moving explosively away from that first huge supporting price.

It bounced all the way back to my initial entry at 6.50. My exits were not great even though I was convinced it would rip back over $6, as fear and adrenaline turned me into a highly anxious seller into strength for my first few lots.* I didn't deserve a profit anyway.

*when executing on the otc, you have to sell into strength to fill, rather than selling into weakness with the herd and getting your orders held up

The end result (here and here)? Closed green. Survival. $3,237.98.

Post-Trauma 

The near disaster revealed an entirely new side of me that I didn't know existed -- this latent decision maker who acts without thinking while on a huge rush of adrenaline, coming alive to seize the controls only when I had entered uncharted territory in negative PnL. Until that moment, I had always been a huge wimp with a natural low pain threshold, which is why I had been so good at taking small losses. I had been the model risk manager. My managers regularly encouraged me to take more risk per trade. Not getting out where I expected to get out and seeing that (red number) jump so quickly became a threat to my soul and that hidden part of me responded accordingly. You don't know how you will react when the crazy and unexpected happens.

That weekend, I took some time to reflect on the what-if's while gazing into the pier.

My inner monologue:
Could you imagine where you'd be right now, mentally and emotionally, if the worst case scenario did happen? 
Would you even be here right now? Sitting and thinking peacefully after golfing at the range?
Or would you be a big char-coaled corpse with bits and pieces of ashes flying all around Manhattan -- y'know, after deciding to light yourself on fire? 

You're such an idiot, don't EVER do that again.

Part II