A Tale of Three Traders (Part 2)

02/12/2008 12:00 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

I asked my manager what he wanted me to do about it. And when he answered, I wasn’t wild about the idea. He told me to walk out to the trading room, go over to where Karl was sitting smoking his cigarette and quietly tell Karl I had just gotten a call from home and needed to speak to him privately out in the hall. Then I was to do my best to find out his real position and what his current P&L was. And if he was in as deep a hole as the call from the broker had suggested, I was to find a way to get Karl to take a walk to clear his head and while Karl was out of the room, I was to call my manager back with what I had found out.

I hung up the phone and took my own deep breath and then slowly walked over to where Karl continued to hunch over the trading desk, chain smoking his cigarettes. As soon as Karl noticed I was standing along side him, he mumbled into the phone that he had to go and then gave me a weak smile and asked, "What’s up, Tim?"

Going along with my manager’s plan, I softly told Karl that I had just gotten a call from my home and I needed to ask his advice out in the hallway. Karl glanced at his quote screen, grabbed his packet of cigarettes and his lighter and said, "Sure, let’s go," and then he led the way out of the trading room into the hallway. Once the trading room door closed, he asked me if everything was alright at home. I paused for a second and then told him that I had just gotten a call from our manager and that he was concerned about the size of Karl’s position and the mounting losses.

I’ll give Karl credit: I feared he would become irrational and perhaps even get angry enough to become violent, since someone had obviously "ratted him out." Instead, I watched as all the energy drained out of his body. He closed his eyes and murmured, "I can’t lose this much money. It’s too damned much money! I know it will come back. I just need the market to come back." His eyes opened then and he asked what I was going to do about his position. I told him the truth. Our manager hadn’t told me to do anything about his position. I didn’t mention he had told me to call him as soon as I knew how large the position was and how bad the loss was. When Karl heard this, he repeated, "Tim, I can’t lose this much money. It’s too damned much money! I know it will come back. I just need the market to come back."

I felt bad for Karl. He was completely lost at this point. His sole focus was that the market was now trading at irrational levels and that if he was just patient, the market would return to rational levels and everything would be alright. He’d completely forgotten that his position greatly exceeded his limits and that his trading loss dwarfed what he was allowed to lose in several weeks, let alone a single day. How was I going to help him? What could I do to help my manager and the bank I traded for?

While Karl leaned back against the wall, an idea came to me. I told Karl to take a walk downstairs to get some more cigarettes. I told him I’d watch his position for him. I told him to quit worrying—the markets always go where they’re supposed to go, right? He apparently took that to mean that I agreed with him, that the markets would return to his entry price if he only just waited it out. He said, "That’s a good idea. I’m almost out of cigarettes anyway. You watch my position and I’ll be back in a few minutes. It’ll come back. Thanks, Tim," then he patted me on the shoulder and walked down the hallway to the elevators.

Once I saw him get in an elevator, I went to Karl’s desk, checked his position size and did a quick calculation to get an idea of the size of his current loss. Then I went back into my manager’s office and called him back. I told him the news was worse than he had feared—the position was more than twice what the broker had told him and the loss was nearly three times as large. In less than two hours of trading, Karl had lost more than all the traders in our trading room normally make in three months of trading!

Now my manager gave me explicit directions: go to Karl’s desk and close out his position. When Karl got back from buying cigarettes, I was to ask him to come into our manager’s office and call him at the home office. And while he was in the office talking with our manager, I was to double check that I had completely liquidated his positions and then check out all his trades with his brokers. Once that was done, I was to call each of them and tell them they were not to accept any further trades from Karl until they heard personally from my manager.

More tomorrow in part 3. Part 1 | Part 3 | Part 4  | Part 5

Timothy Morge
tmorge@sbcglobal.net
www.medianline.com
www.marketgeometry.com

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