Transcription
Yo, what's up guys? So, today I want to tell you guys a story about how I betrayed the head portfolio manager of my trade desk and it cost us millions of dollars, and I got away with it, and why I did that.
I'll start out with a quote that I'll circle back to at the end of this video, which is my favorite quote. It's, "You don't know what you don't know." Commonly attributed to Donald Rumsfeld. And it sounds stupid on the surface, like something a child would say, but it's actually a pretty profound quote because we often don't think about that because we only make judgments based on the things we see in front of us. And so I'll circle back to that later.
But anyways, it's circa 2010, and I am a new assistant trader in my first trading firm on Wall Street. And I get assigned to the grains desk, which trades options on corn, wheat, and soybeans. And the way this trade desk is set up is that there's an upstairs portfolio manager that has all of the screens in front of them with all the charts, and I'm sure you've seen that on TV. And our head portfolio manager, let's say her name is Kathy. She's this pretty blonde girl. And then, uh, she has a pit trader assigned to her. Let's say his name is Rob. He's this like Italian dude that looks like Joe Peshy. And he's very like frenetic and energetic, and you know, he's like Joe Peshy. He's kind of short-tempered and stuff. And, uh, he trades in the corn pit.
And so the business model is that sometimes there's really big trades that flow through the pit and they have a ton of edge in them. So Rob in the pit would make these trades against with the broker, and then he would use his headset. He's got a headset on, and Kathy has a headset on upstairs, and he would report it to her immediately, and then she would say, "Oh, nice trade." And then she would scalp out of it using the screens upstairs, cuz there's like the electronic screens and then there's the pit, and there's opportunities to arbitrage between them.
I get assigned to shadow Rob, and so I'm basically just following him around all day and doing his [ __ ] work. You know, he's actually a pretty cool guy, you know, like when he has breaks, he'll teach me stuff. And Jaffy, on the other hand, was like, you know, kind of a [ __ ] if I'm being honest with you. She just kind of like ruled her kingdom with an iron fist and was just like mean to everyone. And, um, yeah, I really wasn't feeling that.
So, a couple weeks in, I realized that Rob is basically a drug addict. Like, he's going into the pits like coked up and just making all these crazy trades. And and just gambling and lying to Kathy upstairs. And, uh, it's actually really interesting. There's a system where there's like drug dealers in the pits, and they hand you this like rolled up Wall Street Journal newspaper, and you know, you pay them as if you're paying for the Wall Street Journal, but then in the rolled up paper is like drugs. And so I learned this system early on. I'm like, damn, there's a whole ecosystem down here in the pits. This guy Rob, like, he's not particularly talented. Um, but he got the job because he was in the same fraternity as the founder and CEO of the firm.
He starts to figure out that I that I know what he's doing. And so, you know, he warms up to me and he's like, "Hey, man. Sometimes I make independent decisions down here, but it's for the good of the trade desk, right? You can understand that, right?" And I'm like, "Yeah, yeah, for sure, man. For sure." You know, because like these guys have the authority to fire you at any time. That's just the business model. And and so he can fire me at any time, or Kathy can fire me at any time. So, it's like I'm just going to nod my head and just go with the flow, right? And he's like, "Yeah." So, you know what I mean? I'm just doing what I got to do. Piston. Hopefully, you understand. You know, they called me Piston, I guess, for Piston Honda. And I'm like, "Yeah, no, totally, man. I get that. You know, do what you got to do." And he's like, "Yeah, my man." You know, he would he would do that and then he would do the exploding fist bump, like, you know, and I'd be like, "Oh, yeah. Yeah." And then, uh, anyways, besides that, he was pretty cool.
So, you know, I had a decision to make. Do I do I snitch on this guy Rob, or do I, you know, or do I stay loyal to him? And you guys can let me know in the comments what you would do. But for me, it's like I I I I don't really see what I would get by snitching on him. Even though like it probably makes sense in terms of corporate hierarchies. Like I didn't think Kathy would protect me. So it's like I'm not really in a good situation. Like if she if I tell her and then she just tells the founder and CEO, like I'm just going to get like I don't know what he's going to do to me. Is he going to fire me too? You know?
So anyways, he would say sometimes like, "Man, Kathy doesn't know what she's doing on this desk. Man, you know, if things don't work out here, man, I might just go trade on my own and find a backer to to or back me financially. Would you want to join me if I do that?" And, you know, I'm like, "Uh, sure." You know, I'm like, "Well, let me think about it, but yeah, probably." And he's like, "Yeah, my man." You know, like, you know, and he's just like fist bumps me. I'm like, "Okay, cool."
So anyways, this guy Rob, he's just making these degenerate trades. Like he's basically gambling. Like he'll make a trade and then instead of reporting it directly to Kathy upstairs, he'll like watch the market and see if the market goes up or down. And then if it goes up, he'll he'll be like, "Oh yeah, your boy Rob killing it. Yo, I got 10 ticks of edge in this trade, baby." And then, you know, Kathy will be like, "No way. That's a sick trade, Rob. Congratulations." Well, that's sick. And then when he makes a trade, but he's gambling and speculating on it and it goes against him, he'll be like, "Oh my god, Kathy. Oh no. Oh, this broker stuffed me with this bad trade. I don't know how he did it. I I don't know what to do." And then Kathy would be like, "H how's he allowed to do that? Are you allowed to like challenge that after the market closed? That's crazy." You like, "I don't have the power to do that. I'm just a trader down here. Oh god."
So, you know, I would watch him doing this and I'd be like, "Oh man, should I report this?" But then again, like I just don't have the incentive to, you know, like I don't like Kathy doesn't have any loyalty to me, you know?
So eventually they figure out what he's doing and the CEO comes down there and sees him doing it and just tears him out of the pit and yells at him and then fires him on the spot. And I'm thinking, "Oh [ __ ] am I going to get fired too?" But then they just figure, "Oh, he's just the assistant trader. He doesn't even know what's going on." So, they just like shuffle me to a different part of the of the firm. And, you know, eventually I get promoted to trader and it all blows over. But him doing that, it cost the firm millions of dollars cuz he was just gambling like a degenerate. And so, um, Kathy's just wondering like why is the why is the pit order flow so bad? Like why are the brokers down there so bad?
And just recapping on this whole incident and what happened, I'll explain to you why Kathy like what Kathy did wrong in this situation. You see, when you manage other people, you you usually manage with some combination of the carrot and the stick. And I'm sure you guys have seen like a drawing of that, you know, where you try to incentivize the donkey to move forward and you either use a carrot or the stick. So, it's like most people you're using, I would say the default if you're a good manager is like 90% carrot, 10% stick. And and the ratio of carrot to stick, it it changes per person, right? It's specific to the person. So if you have a really good worker, you want to give them mostly carrot. You want to manage them with mostly carrot because, uh, you want them to be aligned with you and interest, and you know they're going to grow in their career and they're going to become more powerful, and they're and they're absorbing knowledge, and you generally want them on your side, and you want them to be loyal to you. And with the with bad workers who are have one foot out the door anyways and are just kind of like dumb asses, you would manage them with the stick because you don't care about whether they can come up with like creative innovative solutions to your problems because you know that they can't anyways. And so you just want them to do the bare minimum, right? The stick never gets people to go above and beyond. It just gets them to do the bare minimum. But it but it but it threatens them to do at least that.
It's kind of a microcosm for forms of governance. You know, the way you govern your your trade desk or your little group at work is like the way you can govern a whole country. And you know, the carrot is like capitalism, and the stick is like communism. Because with the carrot, you get the Elon Musks of the world to come to your country and try to come up with, uh, innovative creative ways to solve problems and extract new profits out of the country. But then, you know, you get communism, you just get people doing the bare minimum, right?
So what did Kathy do wrong? Kathy chose to rule her trade desk with an iron fist, with a stick. And the problem with going with the stick over the carrot is that you don't know what you don't know. You need your underlings to be eyes and ears for you, right? You need your underlings to tell you, oh, you know, I've been talking to these guys at the at your competing trade desk. Like, they're going to try to use your code to, you know, enter these markets. So, you know, just giving you a heads up, man. And then you'll be like, yo, thanks for telling me that. I got a meeting with the head of that desk in 2 hours. So, I'm definitely not going to share our code with him. Now, there's things you don't know that you don't know. And by having loyal underlings beneath you, they're going to they're going to fill in some of that gap of knowledge, and they're going to take actions that are beneficial to you. And that's what you want, right? And so this is a situation where there were stuff happening in the pits outside of her knowledge. And if she was more loyal to me, I could have I would have reported that to her, but I didn't have any reason to believe that she would protect me if I did report that to her. And so I was loyal to him. Right?
So that's just that's just an example of like management, how to manage people. Don't ever rule your kingdom with 100% stick. Even though it's easier, right? Cuz when you ask her like, you know, if you ask people, why do you rule like that? It's often because it's just easier, right? If you're just busy and you're lazy, you don't want to be thoughtful about things. You don't want to bother to be nice to people, right? Being thoughtful and and considerate takes time and and takes energy. You just want to be a jerk and just and just dominate your team. It's pennywise, pound foolish to rule your your domain in that way. So, it's just a tip for people who end up managing people.
And even me, you know, years later, I ended up managing my own desk. And, you know, I'm taking my own advice. I was mostly nice to people. I was stern when I needed to be, but by default, I was 90% care, 10% stick. I I I gave people the benefit of the doubt, and I tried to align my interest with theirs, and it worked out pretty well. A lot of people, you know, looked out for me.
Anyways, let me know if you disagree in the comments.