Q&A: former BB market maker (trader) for US Treasuries - now a prop trader
I started out as a desk analyst, doing spreadsheet and programming things for all the traders on the government desk. I went to a non-target state school, and my entry job to the ibank was in the IT division as a VBA Excel and SQL database developer (back when that was special). After a few years, I got a shot as a UST bond trader, making markets to the customer base via the sales force and am now a prop trader. I am trading mostly the same product I used to be a market maker for (govt bonds). Ask me anything.
What do you believe your edge is?
this is a long story...and i'm not sure i can do it justice...but i'll try.
1st, i'll say that prop trading is a fulltime job...i check the markets when they open at 6pm on Sunday night...and pretty much never stop until 5pm Friday afternoon.
You just never know when some news event will cause markets to spike creating opportunity (for example, Trump tweet)...and if you are not sitting in front of your screens (or woken up by a price alert), then you'll miss these opportunities (some days you just have to accept that you will sleep thru these and miss them, but you try to minimize that).
I sleep next to my computer, and if certain price levels get hit overnight, then really loud alarms wake me up. Some weeknights i get to sleep without waking up....those are nice. Some nights i wake up at 2am and don't get to sleep much that day.
regarding "edge", its part my process, and part a model that i've built which is an evolution of models that i've learned from others.
1) i start follow and annotate a chart of bond futures with important economic events (this includes eco data like jobs, FOMC, inflation data, GDP, etc..). These are also seen on price chart with large volume and price movement spikes.
2) there are multiple technical analysis models/patterns that i've found to have predictive accuracy, and so i follow/trade them all...ideally taking larger positions where multiple models say to do the same thing. I suggest reading Raschke, Taylor, Steidlmayer, Mark Fischer, among others.
3) after over a decade of watching and trading these markets, i've learned to recognize certain patterns...and so part of my edge is my own "market memory" (this is a combo of more then just price/volume action...but also how markets react to economic events...and reactions to reactions, etc...).
studying data science and neural networks, we learn that each brain neuron cell has around 10k-20k data ...and 10k-20k data tentacles (axons and dendrites) that connect to other nerve cells, creating a massively complex neural network...your brain has around 86 billion nerve cells...and they interconnect.
When we create a neural net with computers, each "artificial nerve cell" stores 1-2 data bits, and has 2 data tentacles (input, output). The human brain is capable of orders of magnitude more calculations and memory than all the computers ever manufactured combined. So, use this complex memory ability to your advantage (you just need years of experience to absorb all the data, which is generally the largest constraint...most people are impatient and not willing to study/trade small for a decade before risking real money).
4) ok, so whats the model? where is the edge? I modified the hurst exponent model from parralax (they have a youtube video), combined with Taylor and some concepts from Mark Fischer....and that enable me to catch a number of large moves with very little time/price spent in drawdown. Its taken me a number of years to refine this model to its current form...and even still, there is a human element where my personal decision skills developed over years of market experience are added as another filter on whether to take/exit trades.
All the technical stuff is used as another filter (don't enter trade unless these xyz filters all say "yes")
I can't give you the exact model here. 1) not enough time/space 2) i'm hoping to eventually manage a large chunk of $$ and want to keep the secret sauce a secret.
So far i've been having a great year...i'm up over 50%
When I was trading at my last hedge fund... my boss, who was the biggest dick I’ve ever met in my life, threw a book at me to read mark Fischer ABCD system. As I’ve read it, there are pro and cons within his strategy and the reason why he exposes his strategy is because the more people uses it, the likely it will work but I hate those kind of systems. I do like patterns but it can’t be a bias pattern like something I personally draw on a chart because the market can give two shit about my lines.
i've tried replying to this message, but the system deletes my reply. i'm not sure why.
maybe WallStreetOasis.com can explain to me why my response won't post. i don't think i used profanity or bad links?
i get this error message
Content Would be Blocked by WSO spam control because of word @bloked_word Blocked by WSO spam control.
Does it work if you reply to this reply?
I would get errors.
Temp fix - 1. Copy message 2. Refresh the page upon error 3. Paste it again. 4. Hit "Add Comment"
This will allow it.
If you were a retail trader with a $25,000 account, what kind of approach to trading would you take?
i would do exactly what i'm doing now. i've tried posting a more detailed reply, but the system deletes it...i'm not sure why.
in essence, you must find some pattern that repeats often enough so that you can risk 1 to make 2 (or more). if you find a pattern like that, but it only appears a few times a year, that's not enough...because you must also be willing to be wrong 4-5 times out of 10...and make more than you lose to cover your losses, and make a profit. An adequate frequency is once a week. More would be great...but once a week is enough to make a career where you risk 1 to make 2...and win 50% of the time.
Do this 50 times (lose 1% 25 times...make 2% 25 times) and you will be net up 25% at the end of the year (assuming no position size change).
With a 25k account, 1% = $250 If you risk $250 to make $500
50 times a year at a 50% hit rate, then you should net make $6250 = 25% annual return. you could take more risk (risk 2% to make 4%, or risk 1% to make 4% on certain patterns) on your best setups to juice your returns.
now, if some of those wins are not 2:1 but 3:1 or 4:1, then you can really juice your returns, and enable you to increase size on your best trades via compounding. You increase size when you win...decrease size when you lose...and if you find some good patterns (this is the hard part) then you can make a lot.
If you just use Taylor with bond futures....that will get you enough to start.
What was your biggest challenge coming off a BB desk and moving to a smaller (assuming this is the case) prop shop desk? In your new role, how conscience do you have to be of your budget for software, data feeds, etc?
losses...must avoid losses..more important than making gains
What's your average time horizon for a trade? Std dev?
couple hours...1-2 st devs but thats not set in stone..i took a trade on friday morning, and i'm still in it monday afternoon.
How's the drop in volatility over short term horizons affected your P&L?
Regarding the programming skills you learned and used during the past few years at work, do you think one would be able to learn and reach your level within half a year from scratch? Assuming an ordinary finance background analyst at fixed income desk
Just start learning because it ain’t going away and the curve at which you learn is steepest after the first few months once you got your head around things, but knowledge and the way of thinking over time really becomes ingrained. That said some are natural and others will struggle. Same as everything else
probably....i'm not a top expert....but i generally am able to build whatever i want/need for myself. VBA was a great learning platform...easiest i think to start...but as anyone will tell you, not a great infrastructure to run a business (tho i've seen that happen...its always a bad idea not to build in a more stable platform like python or whatever...but Excel VBA is juts faster to learn/implement lots of stuff)
How big is the gap between market making to prop?
its huge...because its all you...most marker makers over estimate their ability to take money out of the market as a prop trader...MOST
thanks, this is what I thought. I think also that what you are doing is real trading. Congrats for that and keep pushing!
How do you think about the main drivers of your alpha? Would you say that all of your alpha comes from providing liquidity? Or is there more to it than that.
You could make money solely making market OTC but if you have to quote on screen, chances are you'll get run over and get fucked... From my own personal experience. Hence why we are compensated by the exchange.
it really depends on the product...being a market maker for 30yr bonds is different from 2yr notes...is different from nat gas futures, etc..
the most money is made from taking directional positions....not being a market maker (20 years ago was a different story)....but its also incredibly hard...and some people just don't have the innate natural ability to succeed (in addition, you must be trained by a good teacher...also hard to find). This is why 90% fail...if you don't have some natural ability (a certain kind of intelligence, combined with emotional control), then you have a 99% chance of failure.
i'm not a liquidity provider (i was in a prior job). I'm now a liquidity taker...and i operate in a market with very deep liquidity...the deepest in the world or so they say.
the main driver of my alpha is my ability to recognize patterns....not just chart patterns (tho, thats part of it) but also reaction to news patterns...seeing how the market reacts to economic data releases. Good news w/ bad action is an example that Mark Fisher talks about. I can listen to a Fed speaker, and in realtime i can feel what the market should do in reaction (generally i'm right...but it happens instantly). However, there are times where the market makes a mistake (the machines mis-understand the meaning of a statement sometimes, and i can see it on the tape) and those are golden opportunities...but you must be plugged in, trading in realtime to take advantage.
For you to make money, don't you need to be better than the market at anticipating news? Interpreting it as it comes out seems like a more risky strategy than assessing situations' fundamentals and putting on positions in advance.
Are you prop market making or pure prop trading? From being on the trading desk, what I've learned was just because you're a good market maker doesn't make you a good trader. Two very different qualities and personalities. There are only two ways to make money in this market and people can use numerous terminology, directional and mean reversion and this could be arbitrage as well. Which side do you lean towards more? Personally for me, I was never a good directional trader as opposed to mean reversion because my risk tolerance isn't so high and I get too emotional.
while i started my trading career as an institutional market maker...i'm now pure prop...taking market direction trading risk...and it took me a long time to become profitable. I wasn't a great market maker...i actually made most of my money when i was a market maker from my prop trading (sortof on the sly), which is why i went this route.
I tried mean relative value reversion at first, because that's how i was trained...but after 2008, this has not been profitable for me. So, i had to reinvent myself. I learned a market profile based strategy from a guy who used to work with Steidlmayer...and i've learned other things from other people that i've used to combine into a strategy that finds different types of directional opportunities.
So, i'm now purely directional. Sometimes that means mean reversion (from a market profile perspective)....but its not "arbitrage".
The key is position sizing...since outright markets can move a lot...small positions can still create large enough PnL swings.
After readon Dalton and Steidlmayer on market profile, i suggest reading this post about Taylor (and also reading Taylor's book).
You should sign up as a DMM with NYMEX and I'll work for you making strategies to quote and we can live off our stripend and we can get broker relationship too but i have connections
Thanks for all the info. I'm a recent college grad and have a few questions on prop trading while market making (not that you necessarily did or didn't...). How difficult is it to take a position without taking into account where you think the underlying is headed? Is it expected of you under Volcker? You're in super liquid territory, but any idea how the thought process changes if you're stuck holding something for a while like in credit? I'm assuming: more liquidity --> less care about direction since you can/will unload shortly, less liquidity--> speculate in addition to whatever spreads are quoted
How does buyside pay compare with the sellside so far?
sellside pay is more stable (until you get fired because of a reorg)....but sellside work for me was too much non-prop-trading stuff...was a distraction from where i was making real money. i would make money prop trading, and then lose it to customers because i had to make tight markets to win market share...was a losing business for me. i want to be judged solely based on my performance...and that is prop trading...i eat what i kill
Do you think it's worth the risk making the jump so far? To leave a stable well paying job to something like prop trading, I would only personally do it if I can get at least 3x-5x the expected comp
Hey question... So this is totally random and just last night, I was bored and I was playing around with my old firms excel that calculates our spreads from outrights...
So if you list all of the futures letter in vertical and lets say you bought 5 Jan, Sold 3 Sep and bought 10 dec... Do you know how to calculate it into spreads? I totally fucking forgot and I'm so fucking pissed. I know you line it in vertical FG GH HJ JK and so on and change positions to neg to pos or pos to neg to try to get it to zero either by adding or subtracing as you go down the curve... Do you know anything about this? I fucking forgot. I can't believe it. I can't believe I friggin forgot how calculate it and I called myself a trader? Smh...
This is how the pit traders did it back in the days.
i have no idea what ur talking about...i'm assuming nat gas is a different beast from USTs
Haha nvm, but no, it's actually all the same for futures but I'm trying to figure it out and I'll show you. I think you'll be impressed.
Hey I figured it out... Do you still want to learn? It pretty much teaches you how to translate your positions... So let's say you have multiple outrights... what is your new spread positions? Or from your current positions, let's say you trade a strip or combo spreads, what are you new positions and you can do it by hand or like what we did, automate it using excel as it feeds from RTD.
Not sure if you are trolling or not, but this is trading 101 stuff. Hard to take you seriously as a trader when you have trouble figuring out implied spreads from outrights...
this morning, there was strong eco data (housing and consumer confidence, which leads inflation). This data normally should skew the fed to hike rates...which means sell the belly (5yr notes). Indeed, the initial market reaction was to selloff with large volume...but then something interesting happened...5yr notes bounced off the lows made on the open last night which is also the lower 30 min 3 st.dev volatility band...the aggressive shorts off the data now appear to be trapped. This is the kind of trade i look for, so I bought 5yr notes after they bounced at 117-19+ ...using the low as my stop 117-18+...i'm now 1 tick in the money, and waiting for this to play out targeting 117-22. Either i'm wrong and i get stopped...or the new shorts get squeezed. Its a risk 1 to make 2+ type of trade...and this is my bread and butter.
you must understand economics, technical analysis, and price action to make this kind of trade in realtime...but that's my expertise..
So pretty much everything lines up in hopes for a reversion play? When you say volatility bands, which bands are you looking at because there are quite a few or is this something you've created on CQG or something?
for anybody following...recall i bought 5yr contracts (ZF) at: 117-19+ 117-18+ (more) ...and i sold all these 5yr contracts at 117-23
My risk was around 1.5 ticks...and i made, on avg, 4 ticks....and i'm now flat going into FOMC
Personally for me, market making was much tougher, imo. For you, what was the hardest? Algo design? Pricing? Hedging? Not losing money? Prop risk? Managing inventory?
For me, it definitely was the pricing and algo design. Hedging, there isn't really much you can do, especially in natural gas market making, especially when I was ONLY trading delta 1 products.
as a market maker...the hard part was taking on customer positions that i didn't want...and could not exit without instantly losing money (because i had a mandate to increase market share...that was the only way..but i had no PnL cushion for doing it)
Ah yes, that was my biggest pain too especially when the market was moving. But I at least got paid to make market but obviously I was forced due to time in market.
Curious, when you're pricing something... and let's say in this case I'm trying to find different paths to tighten the J outright bid... I can either do H bid outright minus HJ offer and get the J bid OR do use combo spread instead like GJ offer over the HJ... Which would more appropriate? I'm looking at an algo that we used when I was working for the market making firm. Is it more appropriate to use the combo spread bid/offer is tighter? Like let's say there it's more liquid?
Hey, out of curiosity, do you use TT at all for you trades? I recall that you do from the past.
I'm pretty sure the CME doesn't need anymore DMM for treasuries... I was on the phone with them a couple months back and they do need them on NYMEX and I just wanted to know if you wanted to start something with me... We can do the pricing methods, we can talk about getting a clearing firm, broker relations and etc... Just need someone to work with, not some joe schmo.
as i've said...i'm out of the market maker business...i prefer to watch the outright market, do my analysis, and only enter a position when i feel i have an advantage....that to me is pure prop trading...and that in itself is a full time job. anything that distracts me from that is "expensive" and something i can't do.
its true that i have lots of "knowledge" about spreads and stuff...but as it turns out, that was all pretty much worthless to me...as i've migrated to be an outright pattern recognition trader. its a different beast, but seems to be a better fit for me. who would've guessed?
while DMM payment sounds interesting, its out of my wheelhouse
i've executed on a variety of platforms...TT was the original ladder...but now everybody has it. it doesn't really matter to me anymore.
i'm currently using another platform because i got a better deal (i pay all expenses out of my own pocket, and for trading outright, my execution needs are minimal)
The reason why I asked is because we got paid to make market... and obviously we prop traded on the side... so I don't know. Just a train of thought. It be equivalent to like firms like eagle seven but obviously in a smaller capacity.
Hey sorry to bombard you with pricing questions... like yesterday, I'm looking at a price methodology that we (my old firm) used to price one of the outright... So, in the logic, it's saying.
(Jan 20 futures net change from last settlement + Mar 20 futures net change from last settlement) / 2 = Average (The Mean, obviously)
Average + Feb 20 settlement price = Feb 20 value?
What the fuck? I'm so stuck on this part. Why use Jan and Mar net change from settlement plus Feb last settlement price equal the Feb 20 value.
this seems like a simple linear interpolation of "change on day".
you take the average of the price changes from prior days close of A and C (which you did) and then add that to the prior day's close price of B, to get the current price of B (given a linear model).
so for example prior day settle prices A = 100 B = 101 C = 102
Current prices A = 100.50 C = 103
change on day A = 0.50 C = 1.00 B = ?
Avg of (A + C)/2= 0.75
B live price = 101 + 0.75 = 101.75 (if the "correct" mode is linear interpolation). In this example we are assuming that the distance from A --> B and B --> C are all equal. In the event where this is not the case, you need to adjust by the distance of the unknown to the driver points.
However, there are occasions where a linear model is not the right way to price things...especially when the underlying has more of a step function...so it really depends on the underlying fundamentals to determine if a linear interpolation model is the right thing to use.
That makes sense. Appreciate the help. Sounds like a dumb way to price something. I'm literally going through the entire pricing logic one by one.
What was your major in college? did you go to grad school?
i was an econ major in college (state school, non-target)...also took some computer science classes (programming, database design, design patterns). i interned at a tech startup sophomore summer, and that was really good practical programming experience...then interned in IT at an ibank..and had a FT offer at the end of that internship, which i accepted.
i have not gone to grad school.
1st job was hired into IT division of an ibank (where i interned), but got to sit on a trading desk as the "excel VBA guy"....and then after a few years was given a chance as a junior trader, and then after gaining a few years experience and making money, was hired laterally as a VP trading at another bank.
both. i'm trading levered, so every tick counts...so anything that might affect my market, is something that i care about. this is not an easy job...far from it.
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