This is a follow-up interview with the young lady whose first discussion Naz had posted. I have anonymised names of people and firms since I do not represent them.
Mr. Interviewer: By way of background, you're currently an active proprietary trader at XXX Trading in New York. Could you tell us how you got into trading, and who taught you?
Ms. Trader: Well, I studied computer science at Cornell University. And the seven years of computer science made me know that I didn’t want to do programming. I wanted to try something else with a little bit more excitement. My brother ABC is a partner at XXX. I went in to visit him at the office one day, and it was a great environment -- very interesting and exciting and guys who were very excited about trading. It seemed like something that I wanted to do. So I tried it.
Interviewer: Do you think your degree helps you in your trading?
Trader: Not at all. The only thing it helps is I’m very familiar with the keyboard. So that’s probably the only thing. I’m a very good typist now. And I think that’s important in trading.
Interviewer: Can you tell us what the training program is like at XXX Trading?
Trader: Well, the first three weeks you’re learning about the general market, what a Level II screen looks like, what all the indicators are, as well as going over what stocks are within your realm of trading. And basically you get an overview of what momentum-based trading is in every aspect, from getting comfortable with the keyboard and all of the indicators on the screen to some basic principles about momentum. After those three weeks, you start live on the computer, and you have a manager who sits next to you. Mine – his name was XYZ. He was my manager. They sit next to you for a few months and you start trading 100-share lots and watching and learning about the market.
And as you go on and you’re learning in trading, you will get bumped up in share size as well as in where you are going to sit. So after a few months, you don’t have to sit next to your manager anymore. You’re put in a group of people all about the same skill level. But even after the training program is over, meetings held every day after work starting at 4:30 and end about 5:30. And all the trainees have to come in at 8:30 in the morning so that they can sit and look up a few things on Briefing or discuss what happened at the end of the day. It’s very hands on; you’re talking constantly throughout the day with other traders about trading about different things you see, different stocks you’re playing. It’s a very team effort, so it’s very nice trading at XXX.
Interviewer: And you quickly ramped up to trading as many as how many shares when you were trading at your largest size?
Trader: Oh, I got up to 6,000-7,000 shares of stock if I wanted.
Interviewer: At a time?
Trader: If I wanted to.
Interviewer: And the gross number of shares traded per day was in the realm of how many shares per day?
Trader: At my max?
Trader: Over 500,000 shares a day.
Interviewer: How was you performance at your peak, or max, trading size?
Trader: Well, at my peak I was – it was in the midst of the bull market the end of last year, last March.
Interviewer: March of 2000?
Trader: March and April of 2000. I was just very aggressive. I was very confident in what I was watching. I was playing the momentum game. I wasn’t watching just three, four or five stocks. I was playing whatever was moving at that particular moment, buying and selling into the run based on a snapshot of the stock that I took in the 30 seconds when I typed it up. So that was a very exciting way of trading because it was getting into the real momentum of buying well and selling higher because the runs would last longer and the runs were just more frequent and much stronger than they are now.
Interviewer: Some of those runs had massive momentum. How was your performance catching it on top of that momentum crest?
Trader: I was always net positive, gross positive, and I was at a $50 ticket average. That’s good to say.
Interviewer: What’s that mean – a $50 ticket average?
Trader: Ticket average is the average profit (or loss) per ticket of 1,000 shares. So if I was writing 500,000 shares a day, a $50 ticket average would be $25,000.
Interviewer: $25,000 a day is what you made at your peak?
Trader: That is if I was trading 500,000. I mean that was at the max. Trading between 250,000 and 400,000 shares is probably my average.
Interviewer: Somewhere in the realm of $10,000 to $15,000 a day.
Trader: It was just a great trading environment. Everyone was very pumped, and you weren’t as cautious as you have to be now.
Interviewer: You’ve seen the biggest bull market in the history of the Nasdaq from March 2000 to April 2001, the period you’re talking about, to the biggest bear market in the history of the Nasdaq from then through now (April 2001). Has seeing these extremes made you a more flexible trader, better able to trade both from the long and the short side?
Trader: Well, actually I’m still not very comfortable with shorting stock. And even though it was obviously a bear market, I wasn’t playing it as a bear market. I was still playing the long side. So that is probably something that I should have been working on, my shorting game during that time instead of constantly just trying to play long. So I didn’t actually adapt as well as I would have liked to the different markets. I’m only just in the last two months really getting back up to speed in this type of market.
Interviewer: In shorting stocks?
Trader: Well, no. I’m still not shorting stocks very often. I’m just more versatile and more careful.
Interviewer: You mentioned you trade based on momentum principles. How do you define and identify momentum?
Trader: Major market makers, such as the big banks like Morgan Stanley and Merrill Lynch, aggressively buying stock. A run up would be the market maker or even an ECN buying enough stocks at all the levels, on the offer, lifting and stock prices going up. And the people who are going high bid and putting up offers, they keep increasing their bid.
Interviewer: Something you said to me in an earlier conversations still resonates because it’s so different from the approach that most of us at YYY use. You said this: “I don’t believe in technical analysis.” Why not?
Trader: I wouldn’t say I don’t believe in technical analysis. I just wouldn’t put my money on it, because I think that the stock market can’t be analyzed into any little formula. I think that what the stock market is really doing is analyzing buyers and sellers of certain stocks at a particular moment. So despite all the technical analysis in the world -- someone may have an opinion that a stock is going to go down -- if someone comes in and wants to buy 100,000 shares, it’s going to go up. So that is where I’m putting my doubt on technical analysis -- I don’t think the stock market is that easy to define.
Interviewer: As easy to define as in chart analysis?
Interviewer: Interesting. Well, you define momentum differently than momentum-based traders like John Smith who defines momentum through recent price persistency in charts and in other ways. Your method, as you were starting to say, appears to be forecasting where buying or selling is going to occur based on an accurate reading of the ax, or the most active player, or the market makers in the stocks. How do you define who that major player is?
Trader: I like to call it the major market maker, not the player. The one who is either buying or selling enough stock to actually make a difference. And the way I determine who is the player at that particular moment is who is actually selling stock. If I preference them, are they going to sell me stock? If I preference them are they going to buy stock from me? So if I see a market maker who has sold me stock before and now is no longer selling and maybe he’s buying, that might be a little sign for me. Or if he’s selling and actually now takes a lot of stock and then goes lower and is not lifting off the offer, just selling stock, that would be a sign for me that he is going down.
But really, you can’t necessarily say that this is the real player, that this is the market maker who is really buying because a market maker can be as fickle as a teenage girl. He could stop wanting to buy just because he has to go to the bathroom. I mean there’s any number of reasons that a market maker might not give you a print. You always have to take that as a possibility. But you try to look for trends and who has been buying more, who’s been on the offer, who’s been actually selling, who’s actually giving prints and where they are giving prints. Each trader has to figure that out on their own.
Interviewer: Well, of all of the stocks that you could choose to trade in any given day, what makes you select one particular stock over another? Do you have software that scans the entire market to meet your momentum criteria? How do you locate them?
Trader: Well, in the good old days -- if I can say the good old days last year – in the good old days, the market sorter, which is a Thermograph, would analyze the number of ticks, positive and negative, the positive being high bid, drop offer, yada, yada, yada.
Interviewer: What is the Thermograph? I’m sorry. I’m not aware of that.
Trader: It’s a tool that XXX has that is called the market sorter, and it will analyze the number of ticks in a stock as the market maker is ticking around and the number of positive ticks versus the number of negative ticks. It displays in a green-and-red visual aid; green being positive ticks, red being negative ticks. If something is moving up, there is going to be a lot of positive ticks, people going high bid, people leaving the offer, stocks going up. So, it will pop up on the Thermograph as being green and you’ll see that the stock has been going up. In the good old days when a stock started to go up, it would continue to go up, and you could get into the run that way. But nowadays since stocks aren't running two to three points anymore -- it’s not running the same way it used to -- you can’t necessarily pull it from the market sorter. If it’s already full of green ticks, how many more green ticks do you think there are really going to be? So nowadays you have to more have an idea of which stocks you like to play and I’m a lot more specific about which stocks I follow and a lot more refined in my trading.
Interviewer: So does XXX's software scan the entire market?
Interviewer: And do other trading houses near you have similar market-sorting software?
Trader: I’ve gone to the different online expos and I know for a fact that a lot of them have similar Thermographs or market sorters.
Interviewer: And does your Thermograph or market sorter scan the entire market or does it just do it stock by stock, whichever stock you happen to click on?
Trader: Well, the program that I am using, which is the professional product, it scans all the stocks in the Nasdaq. But there is an online product which will be stock specific.
Interviewer: So it will look at all of the stocks in the market and will indicate that one stock will have the most momentum based on the number of upticks vs. downticks?
Interviewer: What kind of trading goals do you set for yourself on a daily or a weekly basis, if any?
Trader: I used to set goals for myself. And that was great when it was a great market and I was hitting those goals every day. But then when the market changed, I didn’t refine my goals as I should have refined my trading as well. So I wasn’t meeting my goals last summer. I was getting very down and I was getting into a slump and my mindset was just off because of these goals that I set for myself. So nowadays I don’t have a goal. My goal is to enjoy the day and to trade as best I can and not miss any opportunities. I mean, a day can be great if I make five grand on 100 tickets or it could be great if I make one grand on 300 tickets, depending on the way I was trading and my mental attitude and what actually happened. So I don’t like to have goals anymore.
Interviewer: Do you mostly trade the same stocks every day?
Trader: I do now. Lately, I have been trading the same stocks every day. I have gotten into a groove with two or three different stocks, so I’m very comfortable trading them. But it doesn’t mean that I’m definitely going to trade those two or three stocks every day. I’ll look at them in the morning and if I don’t feel the same thing about them, I’ll quickly switch to a different stock.
Interviewer: Have you developed some basic rules that you look for time and again to base your trading decisions on in these stocks?
Trader: Well, lately I’ve just been trying to take on a no-risk situation, looking at the market, trying to buy a lot on the bid, trying to refine – I’ve just gotten it a lot sharper. So, I’m trading less. But I guess I really don’t know how to answer that question very clearly.
Interviewer: Maybe you could answer it this way: How do you take on no risk?
Trader: Well, buying on the bid when I know someone who will buy stock form me is there. Say if I know that Merrill Lynch has been there. Every time I preference him, he’s sold me stock. Say I see him go high bid, I might go a teeny above him or join the bid with him. If I get hit and get the print, then it’s no risk since I know that Morgan Stanley will give me the print if I preference him. However, again, a market maker can change his mind on the flip of a coin. So it’s not necessarily no risk. It’s just less risk than preferencing the offer or picking random stocks.
Interviewer: And it’s very much like trading the inside bid and ask, isn’t it?
Trader: No. I don’t try to trade the inside ask. I like getting hit. My favorite play is a stock just came off, it’s gathering some sort of strength, a tiny bit on the bid. I put up a bid, get taken, other things go on and then it will go up. But it’s not as much of a momentum game anymore. Well, it is still a momentum game because the momentum of the market has to be changing as well.
Interviewer: And you’ll gauge whether the market is changing with the Spooz, the S&Ps or the Nasdaq futures?
Trader: Well, a lot of tools. The Thermograph is a great tool to use for what’s going on in the market. If I see all red, I know the market is going down. If I see all green, I know the market is going up. But I always have a graph of the Nasdaq futures and the Nasdaq itself as well as hearing people around the room. I mean everyone is yelling “going down,” “going up.” It’s a very vocal room.
Interviewer: How many traders are you in the room with?
Trader: Well, I think the room upstairs now has over 70.
Interviewer: Seventy traders. And are they all or mostly proprietary traders like you?
Trader: No. It’s about half and half.
Interviewer: And the other ones, what are they if not proprietary?
Trader: Customer traders. They trade their own money.
Interviewer: You said before that you like to trade stocks with a quarter and at most a half-point spread. Is that still the case? And if so, why?
Trader: I don’t think I ever said that.
Interviewer: It was in your interview with ZZZ Magazine.
Trader: Really? The stocks I’m trading now have a little bit more of a spread than that. But I mean, there are two different games that you could play. You could play one with the wider spread and less size or you can play more size and a smaller spread. Each way you have the same amount of profit-to-risk ratio. So I’ve taken on the first of the two which is wider spread, less volume. So, the spreads I trade now, they’re probably between the quarter-, half-point range, but can get up to three-quarter-of-a-point, even a point. But that’s not very often.
Interviewer: I guess I think I know the answer to this question now. But I’ll let you answer it. If you don’t use or believe in charts or technical analysis, how do you identify support and resistance?
Trader: By where I’m actually physically seeing the market makers buying and selling on the Level II. So, let's say I see a stock that gets down to 30, an even number, and market makers start coming in and there’s Instinet and support underneath and the market maker that I know was buying earlier is not budging, that’s a sign of a support level. I mean, they’ll actually come out and you’ll see the level on the Level II screen become very thick. That’s how you can tell whether or not it’s a support or resistance level.
Interviewer: Do you want to mention the three stocks that you trade and say why you’ve chosen those three?
Trader: Not especially, but I change them all the time. So the stocks I’m trading right now are not the same three stocks I traded last week. One of the stocks I like to trade now is NVIDIA (NVDA). It just moves with nice volume, but not overly. It also has full runs but not as many ECNs play a stock like Ciena (CIEN) or Veritas (VRTS).
Interviewer: And having fewer ECN players makes the stock easier to "read" because there are fewer hidden orders in the routing, is that right?
Interviewer: Could you talk about your routing strategies, how you route your orders?
Trader: Well, most of the time the ideal momentum trade is you buy on the offer, sell on the offer. So I would preference market makers in the momentum, hopefully. Let’s say the stock was 30 by 30 1/4, and I see InstiNet and Merrill Lynch and a few other market makers going in at 30 1/8, so now the spread is 30 1/8 by 30 1/4. I’ll preference the 30 1/4 and hopefully get my sell at 30 1/2. Since the different stocks have different players, I can’t really say which way I would sell it. XXX does have access to all of the ECNs. So I would put it up on the ECN that I found to be most liquid of the day such as today in NVDA. I found Redi to get my prints off much faster than on Island. So I was using Redi to sell it at the half.
Interviewer: And you just found that out by having an order print?
Interviewer: Are there any other recent stories about how you approach routing an order, the difficulties, and how that can improve your trading?
Trader: Well, I find the XXX software to be faster than a speeding bullet. I wind up not having any problem getting in and out of stock because I guess I say I’m an expert in (determining) which of the market makers are going to give out prints in specific stocks. So I couldn’t give a very clear example in certain cases. Say JP Morgan was selling stock all day and I get short with him. I’ll preference him over Morgan Stanley or Merrill Lynch since I knew he was giving prints. It’s very specific to the situation because I do have the ability to put up an offer on any of the different ECNs as well as preferencing or SOESing. So I’ll try to get stock any way I can. I’ll put up bids, clear offers. I’ll be able to get stock.
Interviewer: And what does XXX call their proprietary-trading direct-access platform?
Interviewer: Have you compared it to any others?
Trader: I actually do have friends in other trading facilities. And I have found that XXX's gets your fills much faster. So I’ll know whether or not I have my stock in a second, whereas other people might have wait three seconds. Although it’s only a two-second wait, it’s that important, if I want to get that right print, the good print.
Interviewer: I didn’t quite understand a term that was used in the Active Trader interview about "first-level buying opportunity." Can you describe what that is and how you find momentum stocks before they exceed their first-level buy opportunity?
Trader: When you’re watching a stock and you see a stock coming off and market makers as well as ECNs are filling in the offer because the stock is going down, but you see on the bid that Merrill Lynch is now absorbing stock so he is buying a lot. Say Merrill Lynch is at 30 1/8 and 30 is a very thick level. And the market makers and ECNs have gone down to 30 3/8, then 30 1/4, 30 and 3/16, and you start to see support on the bid growing and you see Merrill Lynch buying an enormous amount of stock and not budging. Then you’ll see someone join him on the bid, if not, going high bid. If not, then someone paying the offer. So you’ll start to see prints going off at the price at the offer. That would be the first level. You’d buy that -- the quarter level -- and that would be the first level in that situation because that’s the first-level buying opportunity after the stocks have been going down.
Interviewer: The first-level buying opportunity then is when you see Merrill holding and prints going off at the offer where a Merrill is holding.
Trader: Or in another case, the first level would be if the stock is going up and you miss the original buy -- the first level there. And it goes up and then it pauses and pulls off maybe a little. It could pull off an 1/8 or a 1/4, but it’s not pulling off all the way; it’s not pulling off as much as it went up. So then it’s collecting a little more strength and not going down, then you preference the offer at that level, and that would be considered the new first level.
Interviewer: Very interesting. How do you deal with the stress of trading?
Trader: Well, nowadays I try not to think of it as money. I don’t put a dollar sign to it. I think of it as points -- how many points am I making in the stock. That’s helped get the stress down a lot. And just taking it day by day and not trying to force the market to be like it was. That was a horrible thing when the market changed and I didn’t change with it, that was very stressful. But now that I’ve changed along with it, things are going well again.
Interviewer: So what types of activities do you do outside of trading hours?
Trader: For trading or for my personal life?
Interviewer: How about trading and then personal life.
Trader: Trading – actually I’m writing an article right now for ZZZ magazine and I am thinking about writing a book on trading, but I’m not sure. I talk with traders very often. That’s probably the extent of what I do outside of work.
Interviewer: No chart scanning, obviously.
Trader: No. I have an identical twin sister. She is who I hang out with and we do things like classes and different activities together. She is a teacher, not a trader.
Interviewer: What kind of activities?
Trader: Well, we have been taking sculpting and a cooking class since I don’t cook. Actually since she’s a teacher, we’re going to go to space camp.
Interviewer: Space camp. Like NASA space camp?
Trader: (Laughing) NASA space camp for teachers. So that’s basically it. And I love to travel. I go to Europe all the time. Traveling is my favorite.
Interviewer: Where’s your next trip to?
Trader: It’s to Greece and the Netherlands.
Interviewer: Beautiful. I've sailed through Greece. Is there anything you’d like to say in concluding?
Trader: Trading is a great job if you can deal with it, if you can handle the stress. It’s a true meritocracy. So any of my successes are my own. That’s a great feeling when I know at the end of the day that I did well, and it’s solely based on my own work.