Back in 1984, I had a lawyer buddy ask me to put on a couple of trades for him. I opened an account for him with my clearing firm, I talked them into opening an account with just $1,000 in it. Guys who weren’t brokers did this kind of stuff for friends all the time, so my firm didn’t think it was a big deal. He got a good deal on comissions, paying $12 per round trip, which wasn’t bad in those days. I didn’t make a dime off the account and was just doing a friend a favor. I remember the first trade was for a couple of wheat options, where he made a few hundred dollars. I started trading 10,000 bushels(2 contracts) of wheat for him capturing several cents a week, net. We went for the base hits, and low risk trades. I ran his account for 3+ years and he ended up with $46,000 in the account(after taxes). He wanted to trade bigger size(at that time we were putting on 25,000 bushel(5 contracts), which I disagreed, but eventually went along with. One morning, he asked me what I thought the market was going to do. The cash market was very firm, and I thought that wheat was going to rally(the whole floor had been bullish for a couple of weeks). He told me that he wanted to buy 100,000 bushels(20 contracts) at the open. I objected, but he demanded that I get it down. Needless to say, the market opened 12 cents higher, and closed down a dime. I talked to him on the phone when the market was at the lowest, and he was pissed, telling me to sell. We sold the wheat at the very bottom tick of the day. His account lost over $20,000 in a day. Nevermind the fact that he started with $1000, he was really pissed at me for “Losing his money.”. I told him that I preferred not to trade any more for him, and had the clearing firm cut him a check for the balance. To the best of my memory, the check was for $24,000 and change. We didn’t speak after that. Several weeks later, the exchange started an investigation of me for acting as a broker(I was never a broker or dealer, just a local trader). Since most locals ”helped” our friends, I didn’t think that it would be a big deal, but the exchange was being prodded by the CFTC, with whom he also lodged a complaint. I ended up getting suspended by the exchange for 30 days, and fined $5,000 from them. I was OK with that, and took my lumps like a man. When my ex-friend dragged me into Civil court, my lawyer advised me to cover his “losses,” which I eventually did as a settlement. This expensive lesson made me realize that I should never, ever do anybody a favor when it comes to trading. I made the guy an enormous return on his money, and he sued the crap out of me when he lost half. He was still $23,000 richer than when we started. I did him a big favor, made him a whole lot of money, and still got fucked.
This is why I don’t trade other people’s money.
Jeff
I wouldn’t do it because I know it would change the way I trade, and I know I’d feel guilty without reason if I lost them money. I didn’t even think about this kind of thing happening, though. When I was reading this story, I thought ‘what kind of person reacts like this…it’s astounding’, but then I read the first line again, the bit where you mention he’s a lawyer, and it all made sense.
Comment by Caravaggio — July 24, 2008 @ 10:12 pm
Trading his money did affect my trading to a small degree, and I did feel intense guilt when I lost him money, but we never had a real huge drawdown. The biggest drawdown before that big hit was probably $0.06 on 20,000 bushels($1,200) The long, long trends in the grains in the early-mid 80’s made making money really easy compared to today. People can really screw you over big time, which I felt I was. However, what I did was completely illegal, against exchange rules, and wrong, as I never did take a Series 3 exam.
Still………..
Jeff
Comment by masteroftheuniverse — July 24, 2008 @ 10:33 pm
Hi Jeff,
Of course it is completely your business, but since it is on the “blog” i will comment:
“This expensive lesson made me realize that I should never, ever do anybody a favor when it comes to trading”
and the title of your post, “Why I don’t take investors”
Does not seem completely congruous to me.
For example: If someone was paying you 2 20 for running a serious allocation using strategies you had developed that scaled beyond what was prudent to execute with your own capital, at least it could be considered a valid business interest on your part.
Not that this would interest you either.
Comment by nathan — July 24, 2008 @ 11:14 pm
You didn’t need to take a Series 3 exam, your “sin” was not registering as a floor broker. They don’t require a Series 3 to be a floor broker…and thank goodness or there would have been a lot fewer of them! They make you register with the CFTC and they do an FBI fingerprint check.
This is perhaps the easiest of all violations to catch, as such trades clear as a CTI 4 (non-member customer), while all the trades you execute for yourself are CTI 1. If you’re not registered as a floor broker, you should never clear anything besides a CTI 1.
All this being said, what kind of mope wants to buy the opening in anything when it gaps sharply higher? Fading gap openings is something locals do for a living. As I once told my wife, “We don’t price these things to lose money.” I was talking about back months, but I could just as easily have been talking about gap openings.
Of course, such a stupid move on his part was inevitable. It could have been worse. You could have worked his account up to $200K and had to pay him back $100K in “losses” when he insisted on buying a hundred contracts on a gap up opening.
Comment by We Are...Penn State email list — July 24, 2008 @ 11:27 pm
Unbelievable. What an ingrate and asshole! I get really pissed with people that (a) won’t take responsibility for their own actions, and (b) actually blame their own stupidity on someone else.
I agree with you 100% Jeff. You shouldn’t trade for other people unless it’s your business model (e.g. mutual fund). The problem is that you have to explain everything that you do, and when things don’t go well, you have to put up with endless whining and complaining - or worse, what happened to you.
I was a stockbroker for almost two years, and I’ve seen the retail side. A lot of clients are great, but the rest - uuggh.
Thanks for popping by at my blog and commenting. I’m almost out of gas - as it were. I took profits going up (long ETF) and now profits going down (short ETF). This break has been so hard, that I may even get to take some profits on the long side in a couple of days if we get a snap-back (likely with gas). I’ve also seen some decent profits in the ags, and one on the oil short. I’d like to see that market come down a little more. When I get a second profit on the short oil ETF, I’m going to introduce the long side to the portfolio. I also want to get long gold in there, just not yet.
Cheers,
George
Comment by allocator — July 25, 2008 @ 12:05 am
Hey Jeff,
What do you think of Anatoly Veltman over at DS? Every time I mention Commitments of Traders, he’s all over me. I’m sure I’m not approaching it as scientifically or reverently as he is, but man, can’t a guy just make an observation once in a while without getting a bunch of data and technical mumbo-jumbo poured all over him?
Cheers,
George
Comment by allocator — July 25, 2008 @ 12:23 am
Nathan:
If I were going to trade somebody’s money, I wouldn’t charge 2 20, but would charge 5 25….and they’d be getting a bargain. But, seriously…..Trading for myself is hard enough, trading for others is murder…..having to sit on the phone all day explaining what’s going on would be enough to drive me nuts.
Penn State:
Minneapolis made it a bitch in the 80’s to register as a floor broker because of the arcane rules, and the easiest way everyone did it was to take the 3 then present it to the floor committee and get the rights. I never did fill any paper, nor would I have wanted to. Filling paper was purgatory, as far as I was concerned. My lawyer friend, when his account got big, thought it was his wisdom that got it up there. Needless to say, I remember that day, not fading the gap because my friend was long. So, I lost that money also….if you want to be technical about it. On a big gap up day, normally, I’d be selling like crazy and trying to hammer on the spread at the same time.
George:
I don’t know what to say about Anatoly, except that…..He’s Russian
Talk to Larry Williams, who shows up on DS once in awhile. He wrote the book, literally, on the COT report. By the way….Lon’s gone.
Jeff
Comment by masteroftheuniverse — July 25, 2008 @ 1:47 am
Its unreal how litigious the US has gotten. It continues to amaze me how things like this happen where someone ‘thinks’ they got screwed in one way or another and tries to get revenge in the legal system. The so-called revenge, in my opinion, is just a waste of time & money for all people, except those that get the windfall of course (which is generally the lawyers on either side). It seems to be the same thing with the CFTC going after the traders from Optiver for oil manipulation. The news article seems similar to the ones quoted in the jesse livermoore book from years ago.
The whole idea of an accident or so called bad luck seems to have been forgotten at some point in the past. Maybe its the area I live in, but it seems to be exceptionally bad in the metro detroit area with the UAW workers trying to blame away the problems of the Detroit automakers on something or someone.
In your case the stupid thing about the situation is that the guy that sued you could have opened up his own brokerage account and, most likely, blown it out and nobody would have had a problem with that. In the end you guidance put him ahead of the game even if his lawsuit was a loss but in the end the lawyers likely got the largest piece of the money. I
Regards,
Eric
Comment by Eric — July 25, 2008 @ 3:52 pm
Hi Jeff,
Your request over at my blog is completed.
Cheers,
George
Comment by allocator — July 25, 2008 @ 9:02 pm
I think the lesson here is not so much “don’t trade other people’s money”, but rather “cover your ass”. Most lone traders get used to having no obligations to anyone, so it’s easy to forget that the moment we take on a customer, or even just give advice, we’re now taking on a whole load of risks, expectations, obligations and potential liabilities. It is rather ironic that an experienced trader will go through all kinds of unlikely market eventualities, to cover his ass - but here you took on a boatload of risks with this “friend”, you allowed your social relationship to blind you to the potential risks (very understandable, I have done the same but was lucky to avoid things going quite so wrong). It’s like lending anything more than pocket money to a friend - not only will you probably lose the money, and teach them bad financial habits, you will also probably lose the friendship too. If there’s one lesson I’ve learned it’s that there are no friends in business.
If you look at this kind of thing as a trade, it’s a real sucker bet. Heads, things go well and you make someone a bit of cash - at best you get pocket change and a bit of goodwill. Tails, things go wrong - this can happen even if you made them a lot of money, even if you charged them nothing. No good deed goes unpunished! You are risking potentially getting criminal charges, losing a fortune, losing your reputation, your license to trade, your livelihood - for absolutely diddly squat. This is like selling deep out-the-money Fannie Mae puts for 1 cent. There is NO WAY any trader would take this on, if it were a trade. But because it involves a “friend” or a “nice guy”, this normal sound business & trader thinking seems to often fly out the window! Even in “Reminiscences of a Stock Operator” you see this happening - and as a consequence, Livermore stopped taking tips.
If one wants to manage other people’s money, it has to be done 100% professionally. No handshake deals, no unwritten understandings, just pure business. Everything signed in triplicate, boilerplate contracts from a top legal firm, be ruthlessly professional and expect each potential client to be a future lawsuit who will trash your name. Cover your ass!
Comment by Matt — July 26, 2008 @ 12:45 pm
Minneapolis made it a bitch in the 80’s to register as a floor broker because of the arcane rules, and the easiest way everyone did it was to take the 3 then present it to the floor committee and get the rights.
Whenever you talked about being a former Wheat local I’d assumed you meant at the Board. It never occurred to me that you were at the MGEX. (Sort of the same way people in Vegas can’t imagine there is gambling in other cities.)
Comment by We Are...Penn State email list — August 3, 2008 @ 4:43 am
Penn State:
I actually cut my teeth at the Mid-Am for a couple of years while I was in grad school. I ended up in Minneapolis due to my wife’s hatred of Chicago. Minneapolis provided good spread opportunities, and I liked the market because it was dominated by commercials, and I liked to trade against the big boys. That being said, my great grandfather bought his first seat at the CBOT for $25.00 before the turn of the century. He ended up with several more, and I inherited more than a few shares of stock which ultimately became part of the CME. My clearing firm at the MGEX also cleared at the CBOT, CME, and KCBOT, and I loved working those spreads. We had good floor brokers back in the day……….
Jeff
Comment by masteroftheuniverse — August 4, 2008 @ 12:20 am