CHAPTER SIX

THE TRADING GAME …

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I ACED THE SERIES 7 AND jumped headfirst into a brave new world. Randy and everyone else at Datek urged caution and patience, telling me that it would take anywhere from nine months to a year to learn the business, and that I should expect to see no paycheck above the de minimis $500 a week draw they paid traders in the training program. While $500 a week might work in some cities, in NYC you’d be lucky to cover a room in a flea-ridden hostel. At Sullivan & Cromwell, I’d been pulling several times that.

But after two weeks of intensive training and paper trading, under the guidance of a guy named Dan Balber, I was ready to go live. Within six months, I knew that I’d made the right decision. I was positive three out of five days and learning quickly to eliminate my mistakes and see the tape. Nine months in, I was making real money and taking home my first substantial paychecks. They weren’t jaw-dropping, but they were consistent: anywhere between $25,000 and $75,000 for the firm each month, and approximately 40 percent in my end. My confidence was growing, steady and solid.

It had happened. I was hooked.

At Datek, the bosses who reaped the jaw-dropping bonuses were personal degenerates, but they knew how to get results from us. The key was competition. The first time someone made $10,000 in a day, it was only a matter of weeks before several other traders had pulled that in. Then the bar was raised to $50,000, then came $100,000—all in a day—and soon enough others matched those figures. With each new impossible milestone reached—$1,000,000 in a month!—the roar of greed, speculation, and success boomed louder and louder. Erik Maschler and his cronies were the Roman Emperors, holding their thumbs up or down to whip a coliseum of financial gladiators into a frenzy of money-lust and one-upmanship.

Our emperors’ weapon of choice for fomenting maximum competition was something called the Watcher trading software. At most firms back then, traders only saw their own P&Ls. The Watcher allowed any trader to pull up a list of the entire firm’s daily P&Ls, laid out from top to bottom. You can imagine how it went.

Who’s up $25K? Bastard. Who’s gonna get ripped a new asshole for being $30K in the red? Ha, love it.

You could click “Top Losers” with your mouse and the Watcher would give your P&L in reverse order from worst to first. There were no secrets at Datek; and thus no bullshit lies after hours; and certainly no tenure. Poor performers could be fired at any time and there was no honeymoon period, no “take your time to settle in.” Competitive pride was juiced even further by managers launching contests, handing out a few thousand in cold, crisp, impromptu cash for Best Week or Best Day.

Look at those jealous glares.

Those new Ben Franklins were often topped off with all-you-can-drink alcohol-infused parties at nearby bars. Movados, Tag Heuers, and Rolexes (bottom-of-the-line Rolexes, but still Rolexes) were handed out like party favors. Erik loved rewarding and praising his best, and vocally shaming his worst. Managers were given fat expense accounts to entertain traders at steak dinners across Manhattan. These meals were often followed by hours in strip clubs, and the jaunts occasionally concluded with trips to Asian massage parlors for a “happy ending” to the evening. These excesses infused loyalty into the trader ranks and ingrained that cash-money lifestyle into their blood. It didn’t take much to get hooked. To fucking need it. The raw meat of cash gifts, of steak dinners followed by female flesh, and expensive watches tossed in for the fuck of it … it made the boys more loyal than they ever ought to have been.

The rewards were legendary, but so was the abuse. Erik was a plump Napoleon, prone to spittle-spraying verbal attacks. This was a jarring change for me. At Sullivan & Cromwell, the hallways were rarely louder than a whisper. If a partner or senior associate wanted to yell at you, he pulled you into his office, shut the door, and went for the jugular with soft-voiced sarcasm. (“Here’s a quarter, Mr. Kimelman. Go call your mother and tell her you’ll never be a lawyer …”) Datek was the opposite. Erik stalked the floor like a male lion before the morning’s opening bell, waiting to pounce. There was palpable tension in the room—a real feeling that violence was a possibility—and God help the trader who dared to make eye contact.

Take the tale of Alex Perez. A quick-on-the-uptake trader, and one of the few guys who, like me, was over twenty-five. Alex had been a trader for Cantor Fitzgerald and Prudential before deciding, again like me, to join Datek because one of his boyhood buddies was printing money on an everyday basis. One day in late ’98, with the futures way down, I glanced out from my protected corner (always have your back to the wall in such an environment) and saw Erik, hands clasped behind his back, high stepping through the aisles to inspect traders’ pre-open rituals. Alex was at his desk, munching on a bagel smeared with cream cheese and punching up the charts of different stocks that piqued his curiosity. Erik walked right up beside him, hovering, and the next time Alex put the bagel in his mouth, Erik wound up and swiped an open hand as hard as he could into Alex’s fingers, sending the bagel flying out of his mouth and across the room with a loud “thwack.” (You wouldn’t think bagels would be loud, but there you go.) Alex was in total shock. His mouth hung open. Before he could respond, Erik screamed, “You motherfucker, don’t let me EVER catch you eating right before the open. This is game time! You want to stuff your fat face, go do it before 8:30, when the real traders do. Well, what do you have to say for yourself!?”

It wasn’t even remotely a question.

“I’m … sorry?” Alex sputtered.

But Erik had moved on. Another trader, after four straight down days, was told that today would be a “big day” for him. The trader asked how.

“How big?” Erik growled. “Here’s how big. If you’re negative again today, you can either choose to be fired, or shave your head.”

This wasn’t a buzz-cut kid either. With blonde, wavy, enviable surfer hair, you could see his heart just sink. The kid did his best but still ended up losing a token amount that day. He chose to shave his head, and two other traders whipped out the clippers and took him to the bathroom to complete the sacrificial offering. When the shiny-scalped kid was negative the following day, Erik fired him anyway.

Pride? Why wouldn’t you quit? Because you wanted, you needed to ride that gravy train. And where else were you going to make that kind of money, at that age?

That was life at Datek. Those who didn’t earn were harassed until they either started making money or were weeded out and let go. Datek was like a trellis full of roses, and Erik the gardener with the sharp pruning shears—carefully cultivating his favorites and mercilessly removing everything else.

It was hard to convey to other people how absurd it was to work there. These were the true barbarians, the savage hordes plundering. For fifty years, the big banks had operated as a virtual oligopoly, with an iron-clad lock on the markets. Goldman, Merrill, Morgan, Lehman—functionally, they were little different than the Gambinos, the Genovese, and the Bonnanos, comprising and operating a ruthless cartel colluding toward a single end—fleecing the common man.

It wasn’t until the mid-90s that technology allowed the day-trading firms like Datek to challenge these established powers. As a securities lawyer, I was intimately familiar with the SEC. Or thought I was. To the outside world, and according to its own press team, the SEC was the regulator of the markets—enforcing the rules and ensuring fairness. But at Datek, I received an eye-popping crash-course in the real role of the SEC.

It quickly became bracingly clear that they were the defenders of the established cartel—nothing more, nothing less. They were running a protection racket that smashed any upstart firms that in any way challenged the old banks’ dominance. On occasion, an established banker or broker would fleece a retail client so egregiously, so sloppily, that the SEC would be forced to come in and slap a wrist, just to maintain the appearance that they were there to protect the public. But those cases were few and far between. The SEC existed, first and foremost, to protect the traditional Wall Street powerhouse banks from the public, and not the other way around. The overwhelming majority of the agency was staffed by mediocre, bottom-of-their-class bureaucrats who hadn’t been able to cut it in the private sector. And for those few at the SEC who were competent, their allegiance was co-opted through the portal of corruption known as the Revolving Door, which ensured a future payoff in the form of a lucrative gig with the very banks they were supposed to be regulating. Perfect Capture.

In 1997, some of my buddies at Sullivan & Cromwell worked on a big class action settlement from a suit against the banks filed by the National Association of Securities Dealers, or NASD, and the SEC. Banker’s Trust was our client, and their numerous derivatives blowups were keeping the firm’s billables high. The talk of the firm was a $4 billion NASD settlement, the largest by the banks in history for artificially keeping spreads wide (in our parlance, “raping retail”). Here’s how it worked. Traders would quote a stock, for instance, Microsoft (MSFT) at $25 by $25 1/2. If one of the banks on the offer decided to narrow the quote and make it $25 by $25 1/4, the rest of the banks would call that trader and raise bloody hell. Why did this matter? Simple: Because banks make markets, and by keeping the spread at 1/2, that meant that a retail client would pay a spread of fifty cents every time they wanted to buy or sell that stock. So 1,000 shares would mean an extra $500 profit for the banks right out of the retail client’s pocket. Not bad, right? That’s what happens when competition is artificially suppressed with the implicit blessing of the SEC. If there had been a real market, Microsoft might really have been trading at $25 by $25 1/16. That’s a $62 profit, instead of $500—a savings of $438 to the retail client. When the original day-trading firms began impacting the artificially wide spreads maintained by the boys at the top of food chain, what do you think happened? I think you already know the answer. Rather than going after the big banks for illegally colluding to keep the spreads artificially high, the SEC targeted the day-trading firms any way they could.

Once we learned that the SEC were not, in fact, the good guys—but crooked cops protecting bankers—it was hard not to lose respect for them altogether. When the SEC gave the big banks a free pass on something like spread fixing, but then came after Datek for canceling orders,* it was hard to feel like you were working for a firm doing anything fundamentally wrong.

This all might sound like the Wild West, but it’s important to understand day-trading firms like Datek were also a far cry from the seedier, mafia-infused boiler rooms that were operating at that time on Staten Island, Long Island, and even Manhattan, under the leadership of such “wolves” as Jordan Belfort. These firms—Belfort’s babies, as we called them—weren’t trading. They were stealing. How? They were selling stock that didn’t exist. (Or if the stock did exist, it was manipulated penny stock garbage, artificially inflated.) Datek wasn’t that kind of boiler room. We were a bare-bones trading floor, stacked with bright aggressive kids fresh out of the top colleges and universities—a generation of video gamers that had found the ultimate video game. Sure the people running the firms might have had some questionable backgrounds, but they were still light years from the boiler-room grifters.

Having said that, Datek was still the closest thing to an insane asylum I’ve ever been a part of. There was an “anything and everything goes” mentality that was hard to grasp until you saw it firsthand. But why not? It was the late ’90s, Internet millionaires cropped up overnight, bank analysts were peddling profitless Internet stocks, IPOs were through the roof, and the president was too busy with his cigar and intern to care. All looked right with America.

On a weekly basis, we ran wild, taking our cue from the stellar moral leadership. When the original group of senior trading management departed to start a firm called Tradescape*, the management duties fell to the two managers, Scrappy and Anthony … and that’s where the real frat boy degeneracy began. They’d host contests revolving around downing a whole gallon of milk, or eating two dozen saltine crackers in under five minutes, all for ridiculous stakes that would make jaws drop in flyover country.

My second week there, in the spring of ’98, one of the traders sent me a link on AOL IM. (I’d quickly learned that email and phone were secondary, petty methods of communications—IM, instant message, was our go-to principal.) I clicked it and up opened a picture of a naked young woman on all fours, winking, which I quickly clicked off and looked around, hoping no one had noticed. The trader next to me had a huge shit-eating grin and offered a loud.

“Noiiiice! Bring that back up.”

I gave him a rushed finger against my lips and shush.

“What?” he barked, laughing loudly.

I started to panic. At Sullivan & Cromwell, there were strict rules on Internet use. The Internet was still in its infancy, and in a law firm as stodgy as that, even a trip to harmless sites like ESPN or CNN was strictly verboten. Viewing dainty, Bob Guccione porn back then was the present-day equivalent of child porn: an immediate, no questions asked/no explanations accepted, 100 percent terminable offense, never encountered or discussed. Even a snapshot of Maria Bartiromo showing a little too much cleavage could get you a nasty drumming down from the folks at HR. I didn’t know what the rule was at Datek, but I figured discretion was the better part of valor.

Shows how much I knew.

Suddenly another trader, Kwan Soo, piped in: “Come on, let’s see that, or send it my way if you’re gay.”

“What’s the deal here with … with this … stuff?” I asked with genuine innocence.

Kwan answered, “As long as it’s not hardcore, it’s fine. Just no hardcore.”

“As long as it’s not … hardcore? That’s a real rule?”

It was.

Kwan pursed his lips and arched his eyebrows, as if this was the first time anyone had presented this question. “You know … fisting, anal, money shots, gang bangs … I guess anything with penetration. Or cocks. Definitely no cocks.”

“No cocks is an actual rule?” I marveled.

“I mean, it’s not like it’s in the employee handbook, but ask Scrappy. He told me when I first started working here. Playboy, Maxim, that stuff is always safe.”

There was a lot of nonsense working at Datek, and a lot of details that seemed unbelievable to outsiders, but the real unbelievable action was always in the work. The last three months of 1999 were just about the sickest thing I’d ever seen. It was an orgy, but I simply couldn’t bring myself to buy a stock that was up $10, hoping it would go up $15, even though it was overvalued by $100. But by choosing to sit out most of the ramp, determined to wait for the inevitable implosion, I was the Greatest Fool of All, as those around me made mind-numbing profits, day after day. YHOO, AMZN and CMGI would gap $10 a day, immune to gravity as the Nazz, aka NASDAQ, ripped right past 3000 and didn’t even blink rocketing past 4000. At the end of the year, the Nazz was up 83 percent, a far cry from the 5–7 percent stocks had returned historically. People were too busy celebrating and shouting “It’s different this time” to realize such an adjustment was unsustainable. It’s like a guy who averages five home runs a year suddenly hitting fifty. Something is not right in Mudville.

The end of the year at Datek meant big paychecks, fat bonuses, and off-the-charts celebrations, all capped off by the granddaddy of them all, the savage Christmas party, aka the Full Employment Act for Sex Workers and Unlicensed Pharmaceutical Dealers. That year’s party was like nothing I’d ever seen in a corporate environment. Erik had rented out the main room in the Waldorf-Astoria Hotel and invited traders and their significant others to come and indulge. In keeping with our barbarians at the gate reputation, we ransacked the Waldorf like the Huns under Attila. Erik had negotiated a per person all you can drink/eat rate from the hotel, and whatever the Waldorf people may have budgeted for alcohol, you can be damn sure they underestimated. This was a crew where each of us could polish off a dozen shots, almost as many cocktails, and a twelve-pack of beer over the course of a night and still be emotionally devastated by those two loneliest words in the English language, “Last call.” Additionally, many of the wives or significant others were good for a bottle of wine and a line or two each. The year before, Lisa and I had been at the Pierre for the Sullivan & Cromwell snoozefest. In 1999, we were present for a true balls-out blast.

The Monday morning post-Xmas party was always good for a laugh. There was a decadent roll-call, as Erik read a list of the party’s highlights and passed out the gifts to the workers in the firm. He didn’t even have to prepare a sheet, the Waldorf having done it for him.

“’We regret to inform that due to the following list of documented damages, management will be unable to return your security deposit from the night of December 15, 1999,’” he said to smiles and budding laughter.

“Seventeen broken glasses,” he began, just warming up. “A cracked mirror in the Northwest powder room. A broken bathroom stall door in the men’s room opposite the ballroom. Numerous complaints registered from the staff and other guests including rampant drug use, and several lewd and public acts performed in the balcony and throughout other public places in the hotel. If you have any questions, you may contact Donald Fortunato at the number above.”

“I’ve got a question for you, Donald,” Erik shouted as the crowd of traders roared with laughter and applause, “haven’t you ever heard of a par-tay? And what does some chick showing her ass out on the balcony have to do with my security deposit? Care to put a number on that?”

“Put a number on, Donald!” someone yelled out, and Erik responded in kind. “Donald? Let’s say $65K a year, if he’s lucky! WITH BENEFITS TOO!” he shouted maliciously, the rest of the room erupting in laughter like drunken hyenas, even the ones still hungover from Saturday night.

Erik and his managers/minions would then soften the two-day hangovers by passing out our Christmas gifts. My first year, it was a high-end wood-grain humidor and a bottle of Johnnie Walker Blue Label scotch. The gifts, like the party the weekend before, seemed like a very big deal. But for Erik, who had probably made $250 million that past year, spending $500,000 for a party was certainly no big deal. The same was true for our gifts. He might have spent $1,000 total on each of us. With about seventy traders at the firm, he’d spent less than $100,000. To the traders, it was probably the nicest gift they’d ever been given and engendered tremendous loyalty. Meanwhile, Erik was raping us on tickets at $15 a trade (which eventually went up to $25, until the Tradescape rebellion—and to prevent much of the firm from walking out en masse, Erik had offered “deals” on tickets and payouts). I was spending $1,500 every day in commissions, or more than the cost of my “generous” holiday gift. But give me a beautiful wooden humidor stocked with a few contraband Cuban cigars and a bottle of Blue Label, and I was ready to give him a hug and apologize for calling him a “greedy troll” on at least a dozen distinct occasions.

It shouldn’t have worked, but it did. Boy, did it ever.

* Traders could put in a large buy order in order to fool the robots or other traders into trying to front run the order and get them to pay the offer (where the trader might have stock for sale), and then cancel the same buy order before it was executed.

* Tradescape was eventually sold to ETrade for $200 million, in a deal that made AOL’s $182 billion purchase of Time Warner look savvy.