Tuesday, July 6, 2010

My Morning on the Trading Desk

As CIO of the firm, I tend to think of investment strategy and tactics when explaining our investment process from the 30,000 feet up perspective. The day-to-day trading operations of the firm go by me in blissful ignorance. However, last Friday I found myself staring at the CyberTrader screen at 7:30 in the morning watching the market wake up for the trading day. It turns out that Pinnacle needed to buy 400,000 shares of a security to close out a trade, and while the gory details of the transaction are not important, what matters is that we needed the shares of exchange-trade fund XLK to fall during the trading day. Senior Analyst Carl Noble was explaining how little activity there was in pre-market trading in the shares, and we could literally see the few offers to buy or sell the security from around the world show up on the screen as the minutes passed.

Complicating matters for us was the fact that the monthly payrolls report was due out that morning at 8:30 a.m., a full half hour before trading opened. We consider the market to be oversold in the very short-term as we’ve seen a couple of weeks of relentless selling. On Friday morning we were thinking was that any decent payrolls report could ignite a sharp early morning rally – the absolute opposite of what we were hoping for. Further complicating matters was that Friday was the last trading day prior to the July Fourth holiday weekend, and traders would be jumpy about short positions they held through the weekend if the payroll news was good, or simply better than expected. If the number beat the “whisper number,” the unofficial expected payroll number, then we could be under water. The payrolls report was announced at 8:30 a.m., and the report was rather benign. The offers to buy and sell began to pick up momentum and you could see the bid–ask spread begin to narrow as volume picked up. Tick…up…tick…up….tick…down….the numbers rolled up the screen at an increasing pace as we got nearer to the market open.

I thought of my next door neighbor, Chris, who is an energy trader for Constellation Energy. Could this insane exercise be what he does for a living on a daily basis? Tick…tick….tick… The market drops down a few points and Carl, working with Scott on the Schwab trading desk, who is working with UBS, who actually makes a market in the ETFs, buys 150,000 shares. Now I’m thinking of Eddie Murphy’s famous scene in the movie Trading Places where he is trading commodities and explaining that investors were panicking because they needed to get home and buy their kids the GI Joe with the kung fu grip. (We decide to take another 150,000 shares.) It turns out the commodities traders in the movie were dealing with the Christmas holiday rather than July Fourth, but now I can feel their pain in a completely different way. Tick…tick…tick…. The market is open now and the spreads are collapsing. Millions of shares are being traded while I watch the screen. It’s 10:30 a.m. and we are out of the trade. To Sean Dillon and Tim Mascari, our portfolio traders at Pinnacle, I thank you for what you do for us every day. This is absolutely nuts!