4. Let the Games Begin!
I remember my first day on the derivative desk at Morgan Stanley’s New York office as if it were yesterday. There I was—6’1”, 215 pounds of muscle, straight A’s in my back pocket, and so scared that I could barely move. It was precisely where I wanted to be, rubbing elbows with the big hitters who wore Armani suits and had fat wallets. I remember thinking that one day, that would be me; at whatever the cost and no matter the price, that was my professional nirvana. There was one problem with my master plan—I was completely and utterly clueless.
They placed me at a turret in the middle of the trading desk, gave me a computer, plugged in two phones, handed me a few pages with trading positions, and told me to pick up the blinking lights and relay messages. It sounded simple enough until a red light—one of hundreds of lines that connected Morgan Stanley to various exchanges, brokers, and offices around the world—began to blink. I raised the phone to my ear.
“Two-and-three-eighths, three-quarters-five-hundred-up!”
Huh?
I stared blankly at the phone grid and tried to comprehend what I was supposed to communicate to the rest of the team. I looked around to see if someone could help me translate the message, but everyone already had phones pressed against their ears.
“Who the fuck took a market from the Amex?”
The words sliced through the room in a high-pitched voice and everyone—I mean everyone—stopped what they were doing. I swallowed hard and slid down in my chair as Chuck screamed at the clerk on the Amex, calling him a liar and threatening to fire everyone in his family.
Thank God I never said a word when I picked up the phone.
Thank God nobody knew it was the kid in the cheap suit who was too afraid to speak.
The Boston Bruin
The Morgan Stanley trading room was a massive labyrinth that occupied the entire floor of 1251 Avenue of the Americas. The equity derivative desk was nestled against the far center window with the listed stock desk, over-the-counter trading, convertible arbitrage desk, and international department strategically situated around it. If trading was the bloodline of Morgan Stanley, options were the heartbeat, and the fervor of each day’s flow revolved around our desk.
I noticed that one of the traders on the over-the-counter desk made more noise than the rest. He was the alpha trader—when he laughed, the mood lightened and when he yelled, everyone froze. His name was David Slaine, and he ran OTC trading for Morgan Stanley. When one of his customers had a trade to make that tied into the order flow on the derivative desk, he negotiated with the options department to set the price. During one of my first days, David was standing behind my chair as he worked an order, and when I turned my head to catch a glance, he looked down and introduced himself.
“You look like you work out,” he said in a thick Boston accent. “You should come to the gym with us after the close.”
I couldn’t relay an order to save my life, I didn’t understand most of what was happening in the markets, and I was unaware of the politics that consumed those around me. I did, however, know how to lift weights.
That afternoon, I joined David and Tommy Carden, a senior trader on the options desk, for a workout near our midtown office. There was camaraderie between them, a bond that was forged through long days in the trenches. They waged a vicious battle every session, but at the end of the day, they were regular guys who spotted each other on the bench and grabbed dinner afterward. It reminded me of my pledge class in Syracuse after a semester of hell, and it was a feeling that few would understand from the outside looking in.
It was very much a fraternity I wanted to join.
Engine Room, More Steam!
It all happened so fast—one moment was I flipping bottles in Syracuse and the next I was on the derivative desk at one of the world’s most prestigious financial institutions. I lived in my grandparents’ apartment, awoke each morning at the crack of dawn, and was so intimidated when I got to work that I wouldn’t even get up to go to the bathroom. I had to earn my stripes all over again in a strange, new world.
I was determined to make up for what I lacked in experience with effort and energy. Unfortunately, despite four years of schooling and the debt to prove it, I didn’t have a practical working knowledge of the business. When I had been in school, I asked one of my professors how to better prepare for life as an options trader and he told me to read The Wall Street Journal and study a Black-Scholes model, neither of which did much good.
I was overwhelmed by the speed and intensity on the trading floor and attempted to mask my ignorance by keeping my head down and not speaking unless spoken to. I later learned that other traders, many of whom took a more traditional path to get there, thought I was cocky. Some of them worked in the back office or toiled in operations and waited years for their shot to sit where I was. I was oblivious to the competition, animosity, and resentment. I didn’t know any better, and I suppose, it was just as well.
Wall Street was an exclusive fraternity, and it was up to me to gain their respect and earn the right to represent Morgan Stanley in the global battle for financial dominance. I pushed myself, picked up more phones, and relayed bigger orders, but the harder I tried, the more mistakes I made, and my self-doubt morphed into a complete lack of confidence. I couldn’t seem to grasp the business, but I committed myself to doing whatever it took to lend value to the operation. I was going to do whatever anyone else didn’t have the time to do.
During one particularly hectic morning with wild market swings, I offered to grab lunch for Jack Skiba, the second-in-command behind Chuck Feldman. I told him that I made a mean salad and watched closely for a response. He grumbled something and reached for his wallet.
“I got it,” I said, slowly reaching toward my empty pocket. “Stop!” he responded, seeing through my obvious gesture.
I must have spent 20 minutes making that salad. The tomatoes and onions were perfectly aligned. Grilled chicken danced across the center. A drizzle of dressing tied a bow around the top. It was a masterpiece, and I was ready to present it.
I dropped the salad on Jack’s desk, took my seat next to him, and pretended to focus as he glanced at my work of art. A few hours later, long after he finished eating, he turned to me and said, “Nice salad, kid.”
Try not to laugh, but that was my first victory at Morgan Stanley; it was a ray of sunlight during an otherwise trying time. I realized at that moment that Wall Street was a relationship business, and I had suddenly gained sponsorship. All I needed to do was perform.
A Simple Twist of Fate
While I was the second or third person on the trading floor each morning, I was the first person on the derivative desk. It was my responsibility to “write up” Chuck’s trading positions and “pare them off” so he could monitor the risk.
Slowly, I began to learn. Long common stock and short call options were a “buy-write.” Long calls and short stock were each a “synthetic put.” Long put and long stock combined was a “married put.” These phrases probably don’t mean all that much to you, and, at the time, they didn’t mean much to me.
It seemed silly that the world’s largest derivative desk had a clueless kid writing up the head trader’s risk profile in T-accounts each morning. It’s all the more ironic that despite fancy modern-day risk management, that very same derivative machination would eventually implode under its own weight and almost collapse the global capital market construct.
One morning, as I labored through my daily ritual, a blinking light sprung to life. I wasn’t supposed to pick up “the Cramer wire” since it was a direct line to a customer. I looked at the clock; it was barely 6:00 a.m. The blinking stopped—I was off the hook…and then it began again, and it didn’t stop; I picked up the phone.
“Hello?”
A frenetic voice on the other end of the line didn’t seem to notice that it was still dark outside.
“Heeeeeeey, what’s going on?”
“This is Todd,” I said. “Nobody’s here yet.”
“You new?” he asked, friendly enough but in a quickened pace. “We haven’t met yet. I’m Cramer. Whadaya think here? What’s going on overseas? Do you like ’em? So… Whadaya think?”
I looked toward the elevator banks but there weren’t any traders around. I swallowed hard and offered an honest take. “I saw better buyers on the desk yesterday. The smarter accounts were buying stocks for a trade.”
“So, do you like ’em?” he again asked, this time in a slightly less friendly tone. I didn’t miss a beat, “Yeah, I like ’em.”
“I like ’em too!” he shot back. Evidently, I had given him the answer he wanted to hear. “I gotta hop—they’re gonna rip ’em today. Rip ’em!”
The line went dead while the receiver was still nestled against my ear, and I’ll never forget the tension that I felt as the markets opened. I had skin in the game—not money, but my reputation.
One of the first things my grandfather taught me was that all a man has is his name and his word. Both were on the line, and, after the market meandered on both sides of the flat line for the better part of the session, stocks rallied hard into the close and finished near their highs. I was hooked.
Bonus, Baby
Holiday season arrived after I had been there seven months, and it was bonus time at Morgan Stanley. As other traders received word on their multiple six- or seven-figure bonuses, I anxiously awaited my turn. When nobody was left on the desk, Jack called me into the back offices.
When I had started, I was given a base salary of $28,000. I knew Wall Street professionals earned the bulk of their compensation through bonuses, so I wasn’t all that concerned. I sat down and smiled; Jack didn’t smile back.
“You need to step it up,” he told me as the color drained from my face. “If you want to be around next year, you have to find a way to contribute to the bottom line.”
I nodded my head in agreement. I knew he was right, but somewhere deep within me, I secretly hoped they would throw me a bone. I quickly discovered nothing came for free, and, as much as I thought that Wall Street was a relationship business, I quickly learned that it was a results-oriented machine.
I committed myself to earn my keep the next 12 months—I wanted to be in that room again and walk out with the big bucks. I continued to be the first person to arrive each day and the last one to leave. I studied books on options pricing and read The Wall Street Journal religiously, even if I didn’t understand it all. I established a rapport with the floor traders and others on the desk, waiting for lulls in their day to lob an occasional question. In time, I became comfortable with my ability to relay markets to the sales force and take reports on completed transactions.
“General Motors, symbol GM, October 40 calls. 11/4-1/2, 500 up!”
“International Business Machines, symbol IBM, January 20 puts, 2 1/2- 3/4, 250 up!”
“Citigroup, you bought 1000 calls at 2 even. 3/4- 1/4 250 on either side coming out!”
I hadn’t made the team, but I was clearly on the field. I knew, however, that spring training would soon come to an end. I needed to break the pattern; I needed to evolve from being that kid who knew the vernacular to the trader who made markets.
When Chuck tossed an odd-lot 1000 share order of Pet Industries on the desk of Harry Silver, the trader to my left, he passed it to me. “Go sell this,” he said, quietly so that nobody could hear. It was my first order on Wall Street, and I wasn’t going to sell it at market prices. I offered the shares above the market with hopes that someone would pay up.
I picked up the phone and cleared my voice. “Pet Industries, ticker P-E-T. Offer 500 shares at 3/4.”
The stock immediately traded lower; not by a lot—perhaps a half point—but it didn’t matter. The entire world stopped except for that one order as what would become an all too familiar knot began to tie in my stomach. I never sold a share, and the stock was down a buck and change. A few hours later, Chuck screamed to Harry, “Did I sell my PET?”
Harry knew I hadn’t as soon as he saw the look of pure horror on my face. “Just tell him you sold it—I’ll take care of it.”
The Morgan Stanley derivative desk had hundreds of millions of dollars in exposure at any given time. One thousand shares of Pet was a pimple on an elephant’s ass; it didn’t matter, and nobody would have known if I “cuffed” the report. For me, however, it was the single biggest moment of my professional life.
My grandfather’s advice rang loudly in my ear. All you have is your name and your word. I dropped the ball, but I wasn’t about to compromise my integrity. “No,” I said carefully. “I didn’t sell it.”
Harry closed his eyes.
“What the fuck! Jack, fire the fucking kid!” He threw down his pen, kicked his chair from under him, and stormed off the desk, shaking his head in disbelief.
After the close, Tommy asked me what happened. “I didn’t execute the order; Harry told me to tell Chuck that I did, but I don’t lie.”
It would be two years before Harry said another word to me.
The Great Lawn
While spending a day in Central Park that summer with my golden retriever Jackson, I ran into a friend who was sitting with a group of people, most of whom I didn’t know. She asked me to join them, so I sat on the grass and introduced myself to her friends.
One of them was Jeff Berkowitz, who was an analyst at Jim Cramer’s hedge fund. Jeff and I immediately connected, not because of where he worked but because of who he was. We related to each other on a variety of levels, from the markets to sports to women. We were both diehard Yankee fans and ardent stock enthusiasts.
After that meeting, we spoke often, shared ideas, and swapped insights. He was a sharp guy, and I was eager to learn as much as I could from him. His fundamental analysis differed from the technical approach that we employed on the Morgan Stanley derivative desk. I would eventually learn that four primary metrics defined the price action of a stock, or a market of stocks: fundamental analysis, technical analysis, structural influences, and market psychology.
I began to assimilate those four metrics as legs under the trading table, and when they were sturdy in alignment, the odds of profitability skewed heavily in my favor. It was an approach that I utilized for the rest of my career, and it was one that worked incredibly well— most of the time.