Living Ledged

 

S & P 500 ADD

 

 

In the early 2000s I had the privilege of working for a prop trading firm. This particular firm allowed traders to put up there own risk capital, use firm margin leverage and software. When hired on I was told how the firm would back each of us and put 1,000,000.00 cushion between each hired trader. So no one single rouge trader could take down the group.    

The firm was small, we boasted about 200 individual traders, but at that time we were about 5 percent of the daily volume on the NYSE, so we were small but relatively active,- we were all trading all the time. All manual entry orders not much algos.
 

Stories of people then setting up a second remote account (trading from home outside the office) became popular. People soon figured out that there was one master account in which everyone used as margin against sub accounts, and people would blow up their accounts, and then go home and take a second shot and blow up there again with money that wasn't theirs at all.

 

But more to the story-

 

Trader X (Names Removed to Protect the innocent) was trading his 50k account for about a year, and had drawn down to about 3500.00 and at that time (GS) Goldman was being added to the S & P 500.

 

and the trade when like this.. one hour before the close enter in a MARKET ON CLOSE (MOC) order to sell.

 

Done naked, and this order is in,.. at this time order imbalances are posted with one revision. Stating how many there was to either buy or sell and a revised number of buy and sells. Orders to go with this imbalance were no longer taken but you could *fade* a posted imbalance if going against the posted numbers.

 

The Arb went like this, funds that had to track the Standard and Poors 500 had to buy it on the close if it was to be added in just to track performance, and they will wait till the last possible second to do this, meaning they were forced buyers on close with a MOC order.

 

 

So back to trader X, he entered in a much larger then standard order knowing it wouldn't show up on the firm book because it was not filled, and the deltas were considered SOFT, seconds before the close he would then buy the equal amount of shares and pray for a mark up and instantly sell on the close instantly on and then off margin.

 

Trader X was considering new professions and how he had wasted not only the last few months of his life but also squandered all his savings away.

 

his GS MOC order was in and accepted, and seconds before the close he bot stock, and the sucker gapped up so much higher then he ever expected his account was made hole and then some almost instantly.

 

and this was the last day trader X traded for the firm ever again but we went from HOLE to WHOLE and then some.