Transcription
**Algorithm Insights**
Algorithms are written by programmers to execute specific tasks in the market. These technical areas where we deploy algorithms are designed to shake out the longs and encourage shorts. The smart players at the bottom of these algorithms are the ones scooping up the opportunities. That's how algorithms function; they create volatility and liquidity, allowing us to take advantage of the market movements.
Every day, we engage in this process, executing trades hundreds of times as market makers and hunting stops. There's a common phenomenon in the retail space where price hits a stop loss and then reverses direction, leaving traders feeling targeted. Yes, this is a real occurrence. I began focusing on algorithms a long time ago, even though it wasn't initially my world.
Algorithms are designed to create volatility and liquidity. One of the trades that often loses money—85% to 90% of the time—is selling a failed breakdown. Algorithms are aware of this, and they are programmed to target these strike prices. Many retail traders make the same mistakes repeatedly.
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**Welcome to the Words of Rydom Podcast**
This is the number one podcast in the trading space, and it's growing rapidly thanks to all of you. Today, we have a true veteran with us. Richie Nesso first set foot on the New York Stock Exchange in 1965, and in one year's time, that will mark 60 years in the industry.
At one point, he was responsible for 90% of the volume traded in IBM, which accounted for almost 20% of the S&P. I am proud and honored to announce that we have Richie Nesso with us today.
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**Richie's Journey into Trading**
Thank you so much for that introduction. I'm trying to work on my intros, but it's an absolute honor to be here. To start off, I'd like to share how I got into trading. My mindset going into trading, especially at that time on the New York Stock Exchange, was shaped by my upbringing.
I grew up in a typical Italian family in a tough neighborhood in Queens, New York. I was a big sports fanatic and played at high levels, even earning a scholarship for basketball in high school. My family had bingo games at Sunday dinners, and we often played for real money. I grew up pitching quarters against the wall, trading picture cards, and playing poker for money.
At 15, I spent hours flipping cards against the wall, counting suits without knowing what I was flipping. I noticed that clubs always came out on top, which gave me an edge in poker. I had no real idea of what my future would be, but I was preparing myself for it through these experiences.
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**The Path to the Stock Exchange**
When I graduated high school, my classmates wrote in their yearbooks about their future careers. I simply wrote "business." I had various jobs, from selling encyclopedias to managing a bargain store. Nothing was an accident; everything was predetermined.
I never traded a stock in my life until I saw an ad in the New York Times for a job at the New York Stock Exchange. I put on my only suit and applied. Interestingly, my first job interview was for an assistant accountant position, which I didn't get. However, the HR person recognized my potential and later helped me secure a job as a runner on the trading floor.
Walking into that trading room was like being hit by a boulder. The energy was overwhelming, and I was hooked. I studied hard, passed my exams, and worked my way up from a runner to a clerk.
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**The Importance of Earning Your Place**
Nothing was handed to me, and I didn't want anything handed to me. I always wanted to earn my place. Competing against others brought out the best in me. I learned that confidence comes from putting in the time and effort.
In the trading environment, there were always entitled individuals who thought they deserved success without putting in the work. Competing against them was easy because I was driven to succeed.
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**Trading Mindset and Experience**
When I entered the New York Stock Exchange, I didn't recognize the connection between my past experiences and trading. It took a couple of years for me to realize that my background had prepared me for this environment. The energy of the trading floor felt like home, and I was determined to succeed.
I remember my first job paid $60 a week, and my goal was to make $40,000 a year, which felt like a lot at the time. The chaos of the trading floor was organized chaos, and I thrived in that environment.
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**The Evolution of Trading**
Today, I trade futures, which offer liquidity and volatility. The stock market is often based on hope, while futures allow for more strategic trading. I can make quick trades and capitalize on market movements without needing large capital investments.
Algorithms play a significant role in today's trading landscape. They create volatility and liquidity, and understanding their behavior is crucial for success.
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**Common Pitfalls for Retail Traders**
Retail traders often struggle with protecting their capital. It's essential to know how much you're willing to risk on a trade. If you're fortunate enough to be in the green, you don't want to give it back. Setting stop-loss orders relative to your account size is vital.
Many traders make the mistake of chasing trades instead of waiting for the right entry point. This can significantly impact their profitability.
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**The Importance of Trading Plans**
Every trader is different, and what works for one may not work for another. Simplicity is key; don't overcomplicate your trading strategy. Focus on what you know and manage your trades effectively.
Journaling trades is crucial for learning and growth. It's not just about profits and losses; it's about understanding the decisions that led to those outcomes.
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**Market Cycles and Emotional Recognition**
Throughout my career, I've witnessed various market cycles. The emotions during these times can lead to significant mistakes, especially for retail traders. Recognizing the signs of emotional trading is essential for success.
Smart investors, like Warren Buffett, often liquidate positions during uncertain times, sitting on cash to prepare for future opportunities.
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**Final Thoughts**
Trading is a journey, and with the right mindset and preparation, anyone can succeed. It's about understanding your personality, managing your emotions, and learning from your experiences.
If you're interested in trading, find a mentor who can guide you. The right support can make all the difference in your trading journey.
One of the smartest investors on the planet is Stanley Druckenmiller, who sold all his high-tech names and bought the IWM. Lesser names, less growth names, potentially more growth names actually—that's why he bought it. You know the IWM lists companies that are 30%—7% of them do not make money. But what they do have is research and development. If you buy a basket of those stocks in an ETF like that, one or two of them can hit. And that's what he did. Very smart dude.
But as far as the concept on Wall Street, it will never change. We talked about a number of times during this conversation about selling bottoms, selling bottoms, selling bottoms. Well, in essence, or buying tops, buying tops. The smart people in the world, that deep pocket, they know this.
So when people are puking and the market is puking, they have to place their bets and they have to stay in power just to hang on until it turns around. And when it's selling up here, he's printing money. This goes on over and over; it'll never change.
Do you feel like once everyone is talking about recession, that's obviously not when it's going to take place? It's normally when it catches everyone off guard, when peak euphoria essentially. So like every time we make a new all-time high, everyone expects us to then suddenly crash. It keeps doing it over and over again, correct? Until the point where no one questions it anymore, correct? This is going to keep happening.
Perfect. I stood up and watched the dot-com era the same way. You shook your head; none of those companies ever made money. They didn't make money at the time; it didn't matter. And every day I shook my head and said, "You got to stop this." My customers shook their heads; they couldn't believe it. They were getting run all over the place.
What's this? What the impetus on the money are capable of this until, as you just eloquently said, until it's not okay. And then it gets ugly.
I firmly believe in the last three weeks, okay, what were they talking about? What word did you hear? Bubble. It's a bubble. It's a bubble. Want to know why the market made new highs, all-time highs, two weeks ago? Because everybody was talking about a bubble. Exactly what you said; that's the way it goes. Simple common sense, man.
What are your thoughts in terms of—I know that you were part of history with the New York Stock Exchange. You placed the first trade, if I'm not mistaken. Was it executed via—I don't know if it was electronically—something you buy back the program trade orders?
That's right, yeah. First ever on the New York Stock Exchange. First ever. I had six million shares, give or take, of 60 S&P names to buy market on close when there was no supply. No supply! Stack of orders like this: buy 100,000 mobile market on, buy 20,000 IBM market on, 20,000, 500 shares of IBM. In those days, the buy market on close could take the stock up a buck and a half or two bucks.
Twenty thousand, 60 S&P names. I had 25 brokers, seven of which worked for me, 25 of which were just my friends that were representing. And I'm staying in a separate location handling every freaking order.
Okay? And I said, "Wait a minute, this is not going to work. It's not working. There’s no supply." The place was in a panic. The chairman of the stock exchange, the directors, the board coming down, "Are these real orders? Are these real?" I said, "Fellas, what do you mean are these real orders? Yes, they're real orders."
"Oh yes, they are! Oh my God, what are we going to do?"
"What are we going to do? Nothing! Get away from me! I'll take care of this."
Twenty-five brokers running all over the place. Finally, I realized that the traditional way to do this is not the way to do it. So what did I do? I called the largest, the biggest firm on Wall Street, who was a client of mine and paid me to trade IBM for them $115,000 a month in 1980-1981. A lot of money, just as a retainer.
But they had the most successful person that headed a trading desk and the most powerful person on Wall Street, excuse me, named Stanley Chervin. Stanley Chervin was the head trader of Solomon Brothers. Solomon Brothers was noted as a bond house, but they had a huge equity desk. Every piece of merchandise that came down the pike to get placed called Stanley, called Solomon Brothers.
I said, "I need somebody with strength here." I go to the phone and say, "Give me Stanley."
"Stanley, Richie, what's happening?"
"Stanley, listen to me. I have done—I have B to buy."
Okay? So you know, call me back. This is what he said. He says, "So call me back and we'll white somebody."
I said, "No, no, no. There's no way I cannot do that. There's none of that."
He says, "Give me my clerk." He gets his clerk and he says, "Give Richie sell orders up to the amount of shares that he has to buy at his discretion to fill every one of those buy orders."
And that was an incredible day. We just went up, talked about the specialist book, found out where supply was, you know, and then we filled it in with Solomon Brothers' proprietary sell paper and priced every damn one of them. Wow, crazy!
So like being part of that history, like you being part of the history of being one of the first people to instigate a sell program, a trade—how does that make you feel, though, knowing that you're part of that history?
It was just incredible. I wish I had those original papers. I wish I really did; they'd be worth millions of dollars, but I don't. But how did it feel? It feels very satisfying.
Here's a kid growing up in Queens with nothing. I didn't grow up with a poor family; middle-income people worked hard all their lives. You know, lived in a $10,000-$12,000 house. I had everything that I wanted, which was really not much. And here I am dictating flow to the top firm on Wall Street and the top trader on Wall Street.
Basically—not basically, you go look him up—the top guy. I mean, he controlled everything. And here I am, you know, one-on-one with this person, and he's giving me discretion over millions of shares.
So how does it make me feel? It makes me feel great, man. It really does.
As it should! As it should! And you know, as part of this whole interview, there are so many gems that we've taken away, that's for sure. And to speak from the experience and wealth of knowledge that you've had, you know it's going to have a huge impact on traders out there.
As we discussed, like people—this audience, the retail audience of today—you know, we've talked about the issues being more so of rushing, their greed, their lack of focus.
But when it comes to—we talked about sizing trades, right? We talked about handling size for yourself. But what would you advise to traders out there who are going through that scaling process themselves? You know, they're going from, I would say, trading a few thousand dollars into the tens of thousands, the six figures, the seven figures.
A lot of them have these barriers when it comes to that psychology of being able to handle, you know, new size, whether it's new stop-loss amounts, new take profit amounts, or new contract sizes. Is there anything that you can sort of advise them to help them overcome those barriers?
I would say something in a very profound manner here: if you find yourself in that position, stop and manage what you can manage because it's not for you. You will make mistakes, and it's going to cost you money. If you think you can fight through it, it's your prerogative to try it. But if you have a roadblock and you sense a roadblock because the chips on the table have changed, you know, you may have to look in the mirror and say, "Maybe this is not for me."
Or you may have to just stand in one place. You know, I think it's very fair. I think it's very, very fair.
And it's interesting you mentioned about chips on the table. How close is the relationship between, say, poker and trading?
As you mentioned earlier, actually a similar thing where you need to know the personalities. Obviously, that was more so for the pits. But do you treat the markets even now in a similar fashion of trying to recognize the emotion within the charts, if that makes sense?
Like if you're seeing a lot of down movement, a lot of emotion just within the chart itself—like when you're looking at the charts, you're seeing these huge red candles. Is that how you're operating? Are you looking at, "Okay, this is how the average trader is probably feeling right now," or the traders out there?
"This is what the flow may be telling me," and therefore acting accordingly?
Yeah, I mean, listen, I made my living and, as of today, have learned under very stringent conditions how to control emotions and how to manage emotions.
Again, the size doesn't really matter to me; it doesn't mean anything. I can, you know, it doesn't mean anything trading that kind of volume under those circumstances with what the stock meant in the overall picture of the market.
Every trade—most of the trades during the day—I can recount and look at the percentages of every one of those trades and the decision process that takes place to pull the trigger on a specific trade. Yes, it does.
So, you know, and I believe that those decisions really are the decisions that control the decisions we make in our everyday life. Whether it's to stand on a curve, whether it's to take a step this way, whether it's to yell at someone—whatever it is, there's a percentage in everything.
So you talk about a poker game; there's a percentage in a poker game. It plays: do I want to play? Do I want to go all in? Do I want to fold? Am I going to make a bet? Am I going to make a raise? Blah, blah, blah.
But the stock market boils all that down, and the difference is there is no time. You have to make a split decision, and you make a split decision based on the time you put in and being a student of the game.
As I say that word again, you need to get to a point where your gut spits this out, and you are capable of doing that, providing you have the right mentor. I'll tell you, providing you have the right mentor, you're all capable of doing it.
But the decisions that I make to this day are based on that gut feeling. I tell everybody, "Look at the rhythm of the numbers." What do you mean? I said, "Watch the quote and watch the size that trades. Watch it! That'll spit out scalp trades to you without looking at another thing."
Yes, it will! You'll see the momentum go; you'll see it. So, you know, those decisions are based wholly on mathematics.
And I say if you're a student of the game, your gut will start spitting out these moves. You will see it. And learning from the way I learned it and lived it to this day, it holds up. It just does.
So it's all about mathematics, man.
To finish up on the algorithm side of things, you know, what would be your advice for people to start trying to observe these algorithmic plays within the markets?
I know you've described really well previously in terms of having sort of your range, knowing where your premium and your discount is, understanding your buy and sell stops within those ranges, and acting accordingly. Is there anything that we can elaborate on that at all?
You need to remember that algorithms are there to create liquidity and volatility. They have no mind; they have to go to an area. They don't just go to an area; they're programmed.
No matter what you say, it comes down to a programmer programming them, programming whatever technicals they put in, whatever the mathematics is that make up this algorithm.
So it's not only the premium and discount areas, but when you see the NASDAQ going to a full number, coming up 20 or 30 handles—19,200, all right? 200, 230, 240, 250, 270, 275, 280. The market's rallying 275, 280; you know it's printing at the main number. You just know it.
And I know that those algorithms are going to make that print. But it's the same example could be made by any major firm, even number. Okay? Okay, where is that? 10, 20, 30, 40, 50, 60, 70, 80, especially 50.
You know, they sit and they sit; they want to go to those numbers. Why? We should spend a little time talking about algorithms going to option strike price areas. You know, we specialize in that as well because this market and its enormity—we gave the example of the positions in this market.
This day and age, positions are multi-million share positions. It's not easy to put that kind of money to work, and they have to put it to work. It's their mandate to put it to work.
Why am I giving you my money if you're not putting it to work? So they have to. So their positions are huge. Does anybody out there think that they just sit back and they buy and hold and smile and go home and have dinner with their wives? No, that's not the way this works.
They hedge their positions as well. Where do they hedge their positions for the most part? All right, options. So these strike prices become huge, and the amount of puts and calls that sit at these strike prices—the algorithms know where they're sitting, and they're programmed in to go to those strike prices.
Why? To create liquidity and volatility. That's all their mandate is. They're not human; they don't care about P&L. Understand that?
Interesting.
To finish up on, because I know it's a topic discussed previously on the podcast, but I haven't for some time—in terms of market makers and hunting stops, there's a big thing in the retail space of like the market makers, like you, you know, price hitting your stop loss, then going completely the other way, and people feeling very targeted, correct?
And I've heard you say that that is a case; that is something that does take place.
Oh, 100%! One of the lock trades as a member of the New York Stock Exchange that a specialist made, or if you were an agent and had order size flow, is to be on the other side of stop orders.
Okay? So conversely speaking, here's another little gimme for you folks out there, retail traders. Especially if you're going down to a number and the market is coming down and down and down, and it's—you know, the algorithms are going to print a number.
Put an order in two ticks underneath the number because why? Because you'll wind up being on the assumption that there are stop orders at those prices. And the assumption is that you will be on the other side of a bad sale.
The market is a buy and sell; there's a buyer and seller on every transaction. Somebody's going to be right, and somebody's going to be wrong. You want to be on the other side of stop orders. Yes, you're 100% right; you want to be on the other side of stop orders.
But it's not easy to identify where those stop orders lie. If you're going to put a stop order to protect yourself, again, don't put it at 50 because they're going to get hit. You know, put it at 40. Give yourself a chance. Give yourself a chance to breathe and for the position to be right.
Don't put it at 50; you're going to get swept away by some intelligent buy like myself who wants to get long.
Or if you're a mistake, Richie!
I love that! I love that! And I'm sure we could keep going, but thank you for being with us today and sharing so much with us.
Please, everyone at home, drop a comment with your biggest takeaway from this episode. There was so much, as always. The links for Richie will be in the description below, so make sure you check those out as well.
There'll be other episodes on screen, so check those out, hit subscribe, and until next time, take care!