Preface

What do you do for a living up there in Canada?” The United States border official began his questioning while he examined my Toronto-issued passport. He was devoid of the type of smiles and overall casual, easy-going personality I had (surprisingly to many) come to expect of others in his profession. It was 2007, well into the post-9/11 world of Homeland Security. And I had encountered quite a few of his colleagues at the Niagara Falls border, having frequently traveled to New York to visit my ex-girlfriend. I am and have always been a fan of that city and, unsurprisingly, it continues to play a significant role in both my personal and professional life.

“I'm a trader,” I answered.

“A traitor?” The bald man asked, having clearly enunciated the second “t” without showing so much as a hint of a smile if doing so was even in his repertoire.

“I trade stocks for a proprietary trading firm.”

“What kind of stocks are there to trade, up there in Canada?”

“I only trade NYSE listed stocks right now, actually—at a firm in Toronto.” I had nothing against the Toronto Stock Exchange, but it just happened that I specialized in a style of high-volume ECN rebate trading on New York listed equities that was mostly impossible to duplicate on the TSX at the time.

“Got any stock tips for me?” He looked up as he posed the question and watched my facial cues as if to test the legitimacy of my claim.

“Mostly just scalp AMD lately—you know, the Pepsi of PC processor chips to Intel's Coca-Cola.” Obviously, the references had gone well over the border official's head.

“That's it? You just trade one stock all day?” He raised an eyebrow.

In reality, I switched between a small basket of stocks at the time, but a simple yes sufficed. Needless to say, the usual “okay, go ahead” with a welcoming smile after two seconds of questioning, which in my experience was typically offered to Canadians who answered two or three questions at the U.S. border without much hesitation (yes, even in 2007), was not about to be offered this time. Instead, the man asked to see the contents of my wallet and spent the next 10 minutes going through every single item. Naturally, he closely examined a business card—the one from my floor manager at the Toronto-based proprietary trading firm (or “prop firm” for short) where I worked at the time—and analyzed it as if it were a piece of vital evidence in a crime scene investigation. Eventually, after meticulously inspecting each and every item in the wallet, he nonchalantly handed all of my credit and debit cards, ID cards, passport, and U.S. cash back to me in a mound. I was forced to reassemble the hill of plastic and paper into the wallet before proceeding into Buffalo, New York.

After the unfortunate events of September 11th, 2001, which had led to increased border security, Canadians were, for the first time, treated by American border officials as foreigners at the Niagara Falls border (prior to 2001, a verbal confirmation of citizenship was all that was typically required for a Canadian to pass; no passport, nothing). As of January 2007, it was also required to present a passport to enter the United States by air, with other forms of transportation to follow. Yet even then, it was typically a much more straightforward process than that one particular, unusually humorless, American border official had decided to make his job. In fact, his unusually unfriendly demeanor had reminded me that the typical American, in my experience, tends to be much friendlier and more personable than the overplayed stereotypical contrasts between residents of the two countries would suggest. He had also reminded me that misconceptions and general ignorance about prop firms, and markets in general, remain as widespread as ever in a time when politicians feel free to use “investor protection” as a public catchphrase to appeal to the lowest common denominator; and as an excuse to pass arbitrary laws and regulations based on unproven theories that do little more than protect securities lawyers from boredom.

Over the years, I had also found that there was an excellent variety of books available on all aspects of the finance industry—ranging from the entertaining tales of Michael Lewis's Liar's Poker to Nassim Taleb's philosophical treatise, Fooled by Randomness. Yet, I couldn't help but notice the rarity of published material that accurately conveyed the multifaceted subtleties of modern tape reading and destination selection often employed at today's proprietary trading firms and institutions. The basic and very practical skills of reading the tape, and selecting an optimal market center or dark pool algorithm for an order, should be learned and honed not only by high-volume scalpers and frequent day traders but by many other styles of traders and investors looking to optimize the cost of entry and exit.

In an industry that revolves around making money, and minimizing costs, it astounded me that articles continue to gloss over concepts like ECN pricing and rebates with choices of wording that make it abundantly clear that the authors have no concept of this aspect of the industry or its accepted standards.

While retail participants were traditionally excluded from the ability to interact directly with the equity exchanges, ECN systems, and dark pool algorithmic routes, a growing number of today's deep discount direct access brokerages enable individual traders to join this institutional poker table and participate directly on the playing field traditionally reserved for professional proprietary traders and HFT computer systems. These, and other vital elements of trading and strategy development, are often taught in the training programs conducted at proprietary trading firms that trade on the U.S. equity markets—whether the firm itself is operated from Toronto, New York, London, or anywhere else in the world where acceptable latency can be achieved via Internet connectivity to Wall Street. (More accurately, connections are actually made to the U.S. exchanges' computer systems located in an Equinix data center in New Jersey that currently houses the NASDAQ, Direct Edge, and CBOE exchanges.)

More importantly, politicians who deliberately cater to voters who they assume do not understand the first thing about basic concepts of the securities markets—let alone the practical function and benefits these concepts may provide to traders and investors of all kinds—will hopefully lose some of their support in passing superficial regulations. If the general trading and investing public is given an opportunity to gain a better understanding of the electronic markets, maybe the debates over the merits of many aspects of a free market could be better understood rather than used for shallow, emotionally targeted arguments. Ideally, a better educated public, particularly with more education on the real-world effect of actions such as short selling (and the subsequent buying that is required to take profits or cut losses in such a position), would be able to defend against the sorts of political agendas that rely entirely on knee-jerk short-term memory based reactions out of pure mass ignorance.

Whether you're an intermediate trader looking to learn more about the basics of proprietary trading firms or an individual investor looking to better understand the basics of today's electronic trading systems, I've attempted to weave important concepts and practical lessons into the stories and anecdotes into the story of the beginning of my career, and subsequent personal growth, as a trader. This book was not intended to be an instruction manual or a simple strategy guide, but rather a narrative of one trader's experiences in one corner of the much larger global securities trading industry.

Many individuals' names, and the names of a few legal entities, have been changed to protect the privacy of current and former colleagues and peers. Of much greater importance is that the core lessons and experiences, told from the perspective of one proprietary trader who participated in the equity markets through the years surrounding the biggest stock market crash in recent history, remain intact.

Ultimately, no matter what stage you presently find yourself in as a trader or long-term investor, I hope you will be able to add this book to your personal trader toolbox, to aid you in your future efforts in both bull and bear markets.

Francis James Chan