Never Trade an Error

A long time ago, I was the floor manager for the Chicago Board of Trade operation of a firm called Timber Hill. I had a junior trader working for me along with three clerks. Our job was to quote the MMI Futures market and execute futures trades to hedge the stock index option arbitrage that was the firm's specialty. The MMI futures were a Dow Jones look-alike index with the ticker symbol MX and were usually referred to as "missile futures" (Reagan was still president). For a futures contract, the action was very fast. The clerks rotated around their three roles: working the desk for data input, quoting from the pit, and chasing tickets and paperwork. I traded off with Kenny, my junior trader, executing the trades in the pit and overseeing the market quotes. Kenny had served in the Marines during Vietnam, and his demeanor typically oscillated rapidly between hyper-vigilant and fearfully paranoid. He had grown up in Chicago and seemed to know everybody on the Board.

At that time, the MX contract traded twenty to thirty thousand contracts per day. Our floor operation would execute seven to eight hundred contracts, sometimes up to two thousand, but always in small batches. Our job was not to speculate in the contract; instead, we executed as precisely as possible and provided market insight for the option traders. Typically we "faded" the market. Buying as the market fell and selling as the market rallied.

Late one afternoon, probably in the summer of '87, we missed the input of a trade I had executed. Kenny was the first to become aware of it - we had bought 10 futures contracts about twenty minutes earlier and at much higher levels. Those 10 contracts had yet to be reported on our trading system. If we had entered the trade into the system at that point, we would have had to explain to the head of the firm in New York how our carelessness cost the firm six or seven thousand dollars. We could also sell the contracts back into the market and establish the loss.

Each of us went through our logs to try to figure out how we had messed up and to be sure that we actually had messed up. By the time we were sure, we were ten thousand dollars in the hole and losing fast. It was near closing, and the market continued to sell off. Kenny floated the idea that we just lose the ticket and come back in the morning. We would treat it like an "out trade." An "out trade" is a trading error found in the overnight clearing process and reconciled prior to opening the next day. There were almost always "out trades," and we could probably bury the mistake with the typical noise of the clearing process. Hey, maybe overnight, the market would rally.

And then I very clearly saw the problem. An honest mistake was quickly becoming a conspiracy to commit fraud. I entered the trade into the system, booked the trade to our position, and called the New York office. It cost us about seventeen thousand dollars.

Never trade an error. Close the trade, establish the cost, and get back to your business. If you profit from it, you'll be tempted to do it again. Most likely, you'll make a series of increasingly bad decisions, ultimately resulting in an enormous cost or even ending your career.

I'll bet that's what happened to Nick_Leeson.

The population distribution of ambition and intelligence 

(This post is hypothetical - I have no data)

My intuition is that career outcomes have some correlation with an individual's score on the attributes of ambition and intelligence.

The values of these scores have some sort of skewed distribution. The lower end of the distribution is truncated, and the upper end of the distribution is subject to large outliers; the bulk of the population (the center of the distribution) falls below the mean on both these attributes.

An individual, simply having an "average" score for both these attributes would have a relatively high likelihood of career success.  If an individual's score for either of these attributes falls into the upper end of the distribution, certain paths seem much more likely.  An individual with both these attributes in the far upper end of the distribution is, by definition, "deviant."

Financial Regulation

My Recommendations for Financial Market Reform:

Arrest Barney Frank and Chris Dodd

Repeal Dodd-Frank

Repeal Sarbanes-Oxley

Reinstitute  Glass–Steagall

Liquidate Fannie/Freddy

Investment Banks/Brokerages and Investment Management Companies may not be public corporations

The Federal Government, The US Treasury and the Federal Reserve Bank may not:

1. bail out Banks/Investment Banks Insurance Companies or Investment Funds
2. bail out Corporations
3. bail out Corporate Pension Funds on bankruptcy or liquidation
4. Reimburse or otherwise  Fund any State in excess of Federal Income taxes paid by citizens of the state

The role of the Federal Government should be to aggressively liquidate any public entity on insolvency while strictly enforcing legal creditor priority and contracts.

1. On bankruptcy or default no financial firm should be allowed to be reorganized in any form
1.  All C-level or Partner Level employees must leave the industry,
1. are banned from employment or other compensation by any Government entity
2. Corporate Board members must resign all Board Memberships (including non-profit)
1. are banned from employment or other compensation by any Government entity

Strictly Prohibit Federal Government from any form of Corporate Ownership, Investment holdings, Issuance of Insurance or Guarantee

1. Privatize PBGC and let it succeed or fail on its own

SEC role on corporate information

1. Incentivize Public Disclosure of all Corporate Information
1. All material information must be publicly disclosed within 24 hours

2. Crowd source credit ratings
3. Any security or investment transaction must be publicly disclosed including the identity of the buyer and seller and the price within 15 seconds of the transaction.

Why nobody saw the growing risk in the real estate market.

I entered business school in Chicago full-time in '91. As part of the MBA program, I was required to take part in the "Lead" program - the part of the business school's curriculum focused on developing leadership skills in future captains of industry.

The program divided the entering class into a number of cohorts, each comprised of 60 students. Cohorts held regular meetings with facilitators selected from second-year students to engage in exercises designed to develop specific aspects of leadership. At the first meeting of my cohort, the facilitators divided us into twelve teams of 5. They asked us to discuss and select an individual - historical or current - that we believed best-exhibited leadership qualities.

The group I was assigned to had a good mix of international students, including students from Chile, Canada, and Russia.  The team had two women and three men. Recall this was just after the first Gulf War under President George Bush Senior. General Schwarzkopf was mentioned, also Jack Welsh of GE, and even Margaret Thatcher.  But I had other ideas.

The facilitators asked the teams to stop and polled the room to see what 12 groups of high-achieving graduate business students could come up with.

Six teams of first-year MBAs somehow independently choose Mahatma Gandhi.

Five teams of highly educated future leaders managed to choose the Reverend Dr. Martin Luther King.

But my group choose Captain Jean-Luc Picard of the Star Ship Enterprise. Sighting him as a poet, an explorer, and a warrior. He was a proven leader and manager not just in a multicultural organization but a multi-species organization.

By the time most of these students arrive at business school, they are thoroughly indoctrinated politically correct sheep. The program is about credentialing the participants - and signaling to potential employers. Original thinkers had long since been weeded out.

The Democrats Downgrade

You argue that S&P's down grade of US Government Debt securities is politically motivated and inappropriate. You sight their mishandling of mortgage backed securities ratings preceding the real estate crash of 2007 - 2008.

But S&P is the boy who's pointing out the fact that the emperor is naked, and you are trying to hush him to hide your own embarrassment.  If S&P does not downgrade US debt they are playing the same game they played pre - 2007.

Calling them on their missed call admits what has been missing in the narrative.  The villains here were not just the greedy bankers of the narrative, but also the Rating Agencies, the US congress and the liberal press.

S&P's call forces you to adopt the new narrative.

Denying that makes you a fool. Admitting that, but claiming they are mistaken now makes you a hypocrite.

Infantile, Narcisistic Morons?

Government should not be involved in any activity that cannot be effected by citizens between the age of 18 and 30.  Any activity that cannot be effected by these citizens should be left to the private sector.

Government service should be required of all citizens for a period of at least 3 years. Service must commence prior to the age of 25 and end no later than the age of 35.  No individual may serve in government longer than 10 years.

Ethics

Your buddy has a great apartment on Park Avenue South.  He has invited you over to watch the NBA finals on his giant flat screen.  He says, "why don't you bring a six-pack of your favorite beer, and I'll buy a pizza?"

As you get off the elevator on his floor, a delivery guy gets on.  You walk down the hall to his apartment.  Just before you ring the doorbell, you notice a $100 bill on the ground outside his door.

What do you do?

1. Keep the $100 bill - if you weren't meant to have it, it wouldn't have been lying on the ground for you to find.
2. Tell your buddy that you found a $100 bill on his doorstep and offer it to with him - he must have dropped it when he was paying for the pizza.
3. Call the pizza parlor to have the delivery guy come back - obviously, as he was making change for the $100 your buddy just gave him and trying to juggle the delivery sacks, he dropped the $100 bill on the ground. Your buddy got his $80 change after paying for the pizza, and the delivery guy is out $100.

You are:

1. Qualified to be a trader
2. Qualified for sales
3. Better leave the business - there is no future for you here.