The Blog

Folks, we continue Lucci’s story from where we left off starting at the Prop Firm and learning how to trade…

All prop firms make sure their hires are aware that they won’t be making money for AT LEAST 6 months. 6 months is the standard learning curve apparently but that number is totally arbitrary. Most people take much longer and many don’t ever make money inside of a year. High attrition, in Prop Trading firms, is a given.

This particular trading office was the epitome of ‘laid-back’. They took the simple approach that if you wanted to make money, your ass would be there on time and willing to soak in all the knowledge thrown at you. Training programs and study regiments were looked at as trivial means of learning what they had to teach.

The only way they wanted you to learn was to ‘get in that ass’, so to speak.

After two weeks on the demo account, plugging away hitting buttons and aimlessly watching ‘the matrix’, my boss wanted me to go live. I began my trading career with 4 other newbies who started around the same time. We basically stuck together, sat in the same section of the room, and spent hours after the market closed reading historical tape going over trades from the Top Dogs.

They started us all out at a 100 share lots. This meant for any given trade we could only buy a MAXIMUM of 100 shares per trade. It was basically done to cap our daily losses and make sure we couldn’t go buck-wild and lose all our starting capital ($5K). My cohorts and I were scared to use real money at first but you soon realize you can’t do real damage with a 100 shares anyway.

So on the days went…

During pre-market hours everyday, I was told to check all the newswires, Marketwatch for ‘stocks to watch’, Yahoo Finance for headline news, and Briefing for ‘upgrades and downgrades’. Having a good updated ‘basket list’ was important at this firm. This meant that half of one’s screen needed to be dedicated to watchlists FILLED to the brim with stocks to watch. This place was OBSESSED with finding big size on the ‘bid’ or on the ‘ask’.

Let me explain first in detail how the big traders in this firm made their money…

Shorting stocks was 95% of every one of the top dog’s daily trades.

Why though?

They had an edge, as most other prop firms had as well. Before they killed the ‘uptick rule’ in 2007, prop firms had the system to extract beaucoup dollaz out of the stock market with a special tool called ‘The Product’ or ‘Bullets’. This would allow us to circumvent the uptick rule and manually drive a stock down to artificially create quick profits hundreds of times a day.

So hold up, wtf was the uptick rule??

Alright, the uptick rule was put in place to disallow a short sell unless it was made on an ‘uptick’. You can read up on it here on wikipedia BUT let me give you Lucci’s definition. If you wanted to short a stock, you had to physically WAIT for someone to buy you out a penny above. So let’s say you were trading Bank of America (BAC) and the last trade was at $14.50. You couldn’t immediately short at $14.50 you had to put your offer out at $14.51 and wait for your offer to get hit, hence the term ‘on the uptick’. If the stock kept going down you had to move your short down to a cent ABOVE whatever the last trade was. So if BAC went down to $14.45 you had to move your short to $14.46 and WAIT for someone to buy you until you were ACTUALLY short. Nowadays, we can get short wherever the fuck we want to we ain’t gotta wait if BAC is trading at $14.50 we can get short AT $14.50 with no problems.

Ok so how did that give an advantage to the prop firms??

Stop being so damn impatient, shit!

Prop firms had these tools which allowed them to BYPASS the uptick rule and force sell on the bid, or the ‘last trade’. This is why big size on the offer was so important. So check it out guys, let’s say somebody had a big order to short sell a stock say 10,000 shares. They’d have to sit on the uptick. Now imagine this, you have a product that allows you to sell the bid.

So whatchu think you’re gonna do??

You’re gonna use that shit, hit the bid as many times as you can and that offer HAS to step down everytime and sit on the uptick. Now, you’re starting to get a picture of how this works but let me give you further details. Thin stocks were the best to do this on because there was minimal liquidity and you could manually push a stock down a point before the short got filled.

Let’s take a stock like Autozone (AZO).

AZO is trading at $150.50 with the bid size of 900 shares. A 10K short comes in at $150.51 and there’s small 100 share bids at $150.40, $150.35, $150.30, $150.29 and $150.10. The first thing that happens is that 10K offer pops up at the top of your basket because you have it filtered to throw the highest size offers at the top. You say to yourself “ooooooh shit lemme pull this thing up”. You pull it up and in fractions of a second you decide to get in that ass. You take the 900 shares on the bid at $150.50 with your product button. Now you’re short 900 shares, you have a 10K offer in front of you and you sell another 100 at $150.40. The offer now steps down to $150.41. You’re now up $.08 on 1000 shares which is little less than 90 bucks. You take a quick look at the book and again there’s only small 100 share lots all the way down to $150. You start banging that product button like you just took a Viagra pill and it’s been an hour already so your junk is ready to put in work. You sell another 600 shares and get the stock down to $150 and that offer is now down to $150.01. You’ve effectively gotten yourself .$50 on your short and you now BUY into that offer and cover your position. You just made like $400 in seconds.

Now repeat and rinse about a hundred more times a day. What you have here is firms all over the country doing the same shit and manually creating profits while the rest of the world has no clue you can even bypass the uptick rule. Sounds sweet huh??

Weeeelllll it wasn’t THAT easy!

Using the product was double the commissions sometimes even more because of the slippage (so many people would use it in the office we often got in each others way and couldn’t get out on that offer we were all watching. Many times we’d accumulate MORE than the offer and when it came time to cover there was not enough for all of us to get out on.)

If you churned with the ‘Product’ your ass would get destroyed in commissions.

This was how it went folks, day in and day out. Finding the big short stepper, by filtering hundreds of stocks, and then banging that bid with the ‘product’!

Stay tuned for the next part of ‘The Prop Firm’ where I outline my successes and failures!