Wednesday, March 19, 2008

Post# 4 - Arbitrage..."The Arb"

Arbitrage..."The Arb"
ar·bi·trage play_w("A0398900")(ärb-träzh)n.The purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy.intr.v. ar·bi·traged, ar·bi·trag·ing, ar·bi·trag·esTo be involved in arbitrage.[Middle English, arbitration, from Old French, from arbitrer, to judge, from Latin arbitrr, to give judgment; see arbitrate.]Noun1.arbitrage - a kind of hedged investment meant to capture slight differences in price; when there is a difference in the price of something on two different markets the arbitrageur simultaneously buys at the lower price and sells at the higher pricerisk arbitrage, takeover arbitrage - arbitrage involving risk; as in the simultaneous purchase of stock in a target company and sale of stock in its potential acquirer; if the takeover fails the arbitrageur may lose a great deal of money investing, investment - the act of investing; laying out money or capital in an enterprise with the expectation of profitVerb1.arbitrage - practice arbitrage, as in the stock marketccommerce, commercialism, mercantilism - transactions (sales and purchases) having the objective of supplying commodities (goods and services)
These descriptions are accurate but they don't really capture the magic that was trading on 'The Arb"! When I was hired by Steve Curry, he informed me that I would be working for an arbitrage operation run by Greenshields out of Toronto and Montreal, my first employer on the floor, and Drexel-Burnham Lambert out of New York. The Toronto operation was run by Peter Mitchell in the office and Steve on the floor. The Montreal operation was run under the Toronto operation but the voice of Montreal was Frankie Breaker. The New York arb operation was run by Norman Reich and Bobby Lupo and his number one man, Chickie, a Puerto Rican that was both funny and ball breaking. An interresting factoid is that Michael Milken was employed by Drexel, at that time running their junk bond department. Of course we called it 'high yield bond trading', which was a much cuter name. We traded for him on many occasions, according to Bobby Lupo, but we didn't get rich from his dealings. We were strictly on the equities side of the ledger. The movie 'Wall Street" was based on his story and the 'Arb Trader' in his office in the movie was based on our New York Arb Trader, Freddie, or so the story goes. In 1989 Milken was the fall guy in the largest fraud investigation in Wall Street history at the time. He did time. Today he is worth about $2.8 Billion. Crime pays! If you have enough money, justice can be eased if not denied.
Chris Martin was the head Toronto arb clerk, whose job it was to turn me into a clone, if possible. Chris was as smooth as silk in that job. He always seemed to know just how to calm down the ever crazy New Yorkers. They never seemed to be very happy, even when things were great and we were making scads of dough. It wasn't that they couldn't be pleased, it was more like they 'wouldn't be pleased! Even though they were very high maintenance you had to admire their drive and skill in this very competative arbitrage game.
When you traded the 'arb' you were required to be aware of every change in the exchange rate of the american/canadian dollar, the price of gold, the amount of shares bid and offered on a huge number of stocks, who had the big orders and how much and always, ALWAYS, everything that your competition was doing. Every time you didn't report a change in the status of any stock we were trading, the New Yorkers would blow your ears off with seemingly senseless screaming so you would never ever let it happen again. This happened about 100 times a day. That Chris Martin was able to handle this job as smoothly as he did was a tribute to him and his skilfull interpersonal tactics.
The job was unbelievably demanding. That was offset by the respect the job commanded and the amount of money you could make. People always stayed out of our way and for the most part, we traded the way we wanted. Always 'within' the rules but we knew the grey areas better than anybody else on the floor. The Pros' had to keep us in because if they didn't we could put a serious hurt on them. This just added to the hate but we really didn't care. We were there to make money and I was told every day that "you are only as good as your LAST trade" by Norman. He was right. Never has there been a more 'what have you done for me lately' attitude than on the arb.
At Greenshields we were a distant 'second' in the Arb world. Burns Fry was king. They were legendary. They had been Timmons, ultimate intimidating arb vetrans. In Toronto, Ricky, Marty Whittenbols, Scott Douglas, Gary Eamon, Frank 'Guido' Gradini, Paul 'the wop' Napolitano...they were a machine. The New York operation was second to none. Our guys were good...Steve Curry could trade with the best of them and Chris Martin was a great Arb Clerk, but these guys were unbelievable. In my career I was fortunate enough to work on the Burns Arb and it was as fearsome and professional as I always thought it was. Thanks Marty.
In 1980 the number three Arb operation was Midland-Doherty. They were as far behind us in the rankings as we were behind Burns. They had some great guys working for them, but they were more 'nice' than feared.
If you were an asshole, the Arb was where you wanted to be because being an asshole was a tremendous asset. Steve Curry told me that was why he hired me and I couldn't question that logic.
It took me awhile and cost Chris tons of patience, but I became, at the risk of ringing my own bell, a pretty decent Arb trader and loved every minute of it. All this despite Peter Mitchell's efforts to have me fired on at least three occasions in my first year or so. I just didn't drink enough for him, or something! Thanks to Steve and Chris, I was good enough to trade Arb for Greenshields, Burns, R.A Daly, Gordon Capital, good enough to trade pro for Nesbitt and good enough to start and run an independant Arb operation for McNeil Mantha, although they were responsible for the worst hatchet job I ever had to endure as a trader. Thanks Larry Hoes. McNeil-Mantha was a Montreal operation...So... Enough said!
Everyone in Toronto knows EXACTLY what that means.

Stay Tuned For..."I Can't Believe It's A Job!"

Post# 3 - The Cork Room

The Cork Room. Just the sound of those words brings me back to so many of my wettest memories as a trader on old floor. Just down the street from the TSE it was the most conveniently located drinking establishment ever. What better clientele than the 'work hard, party harder' crew from the floor. It didn't take me very long to realize what an intrical part of this job involved hanging out with the boys and comming in with the men.
At the end of my first day on the job at the TSE I met with my boss Steve and my teacher Chris. As I walked into the Cork Room it seemed like almost everyone I had seen on the floor all day was now here. The noise level was almost as bad as it was on the floor for the opening and closing bells, when everyone is screaming loudest. It was like a party. No, it WAS a party. The place was absolutely thick with cigarette smoke and reminded me of a 1940's black and white movie. The only thing missing was the piano player in the corner. This place didn't really need the piano player character...it was wall to wall characters. The decor was not exactly what you would expect when you think about where stock broker types might hang out for a few after work. The bar was classic, the lighting was dim at best, and the best part of its design was the large number of darkened areas where one could duck away for a quick whatever you wanted. Basically fill in the blank and that's what was available. There were lots of girls from the floor there and there were also alot of other single girls, office workers and secretary types that knew this was where the 'brokers' played. So, if you were interrested and after a few drinks who wasn't, you could meet and greet and hook-up without too much effort. This was equally true for all consenting adults. I don't think it was any kind of great pick-up bar, it was just where people in our business congregated and people do what people do. On a friday night you could get just about anything you wanted. Lots of the younger guys were into everything that you have ever heard people in the business might be into. Sex, drugs and rock & roll baby!
I could barely hear him but Steve was explaining to me that we were arbitrage traders and that everybody hated us. Everybody. He went on to explain that we were basically the pirates of the industry. We were the guys that tried to take advantage of every gap that might exist in the markets and information, real information was everything. That was why it was so important to develop relationships with as many other traders as possible and what better place to do it than here, at the Cork Room.
Chris was just up the bar in the middle of a small crowd, holding a Carlsberg and talking to a cute blond and an equally cute brunette. He didn't seem overly concerned with much of anything I might want to say to him, so I just kind of sat back and watched. After a little while he asked me if I wanted to come down to the can for a minute. I wasn't sure what for, but I was excited at the mere thought of what it might be. There was a small group of us crowding into a tiny area in the pisser and a couple of joints flared to life and I was well on my way to earning my first 'come in with the men' hangover. The 12 or so drinks I consumed that night didn't allow me the luxury of remembering too much after that and perhaps that is for the best.
Many generations of traders consumed way to many cocktails at the Cork Room. The place reeked of history, beer and piss. It was an unbelievable, unpredictable ride. Every night brought something new. Lots of black eyes that walked onto the floor in the morning after had received their lumps courtesy of an evening at the Cork Room the night before. More importantly, many many deals were put together over too many beers at the Cork Room. Steve was right, this is where the after hours action started but rarely ended for most of the crazies on the old floor. Most of the people on the old floor qualified for that designation...crazy!
Freddy was the favoured bartender because he was simply the best. This guy had heard and seen more bullshit in his job than any beef farmer ever shovelled. It would be hard to even imagine the Cork Room without Freddy. Then there was Nat. I bought more wierd crap from that guy than you could ever imagine. Upstairs in his barely lit office, you could buy almost anything. Almost nothing that you would ever use. He as kind of like a one man dollar store. If the TSE had trade relations when Nat was dealing, he would have owned the Exchange! He regularily sold snow to eskimos (pre political correctness remember) and everything else to the traders. He was a very cool guy and you just couldn't say no. When the Toronto Stock Exchange closed the old floor, 234 Bay St. wasn't the only piece of historic real estate to die. It took a little while, but the Cork Room died of progress as well.
The last thing I remember that first night at the Cork Room was Steve asking me if I wanted to come with him and some of his friends for Kentucky Fried Chicken. I don't know if I went or not, but I smelled pretty greasy when I woke up in my clothes the next morning.

Stay Tuned For "ARBITRAGE"...is that french?