(continued from Risk Limit Exceeded)

Let me tell you a story about a trader named Franklin Chase.

Franklin Chase started trading at Datek Securities some time in the mid 90s1which later became Heartland Securities, the same firm where Victor and Avery traded at and made enough to start MBC Securities. He established himself as one of their best traders and after making millions, he then left to trade his own money. Franklin had a good feel for how the dotcom stocks moved. He committed to his research and understood share structures and corporate financing at a time when most investors only concerned themselves with headlines and momentum. That is to say, he knew most of these dotcom companies were total shit.

One hectic trading morning in November of 1999, Franklin observed a bizarre move in one of the stocks he was intimately familiar with–a stock called China Prosperity International Holdings or “CPIH”, a foreign building and construction company. The stock shot up 1000% in a single day–jumping from $1 to $10 & 1/6th2they were still 2 years away from decimalization. This was attributed to a recent trade agreeement allowing China to join the World Trade Organization (WTO).

A month ago, CPIH had issued a press release that they would be joining in on a state-enterprise venture called Century Vision Network, which would bring Internet access and video-on-demand to Chinese households. Investors were skeptical and the initial price spike died off within a few days. They didn’t have any financing or operations, nothing but a non-binding LOI. Beyond all of that, CPIH had massive dilution potential–convertible notes alone could quadruple the share count. Franklin knew this because he had shorted that initial spike weeks ago and covered for a nice gain. It’s time to go back to the well, he figures. The next morning, the stock opened on a fat gap up at $14. What an amazing opportunity. Franklin got short.

One hour passes. His initial entry isn’t so good.

The stock trades to a high of $30, leaving Franklin down 100% on his short. But his initial position sizing had been conservative and he trusts his research. Surely, this must be the point where buyers have been exhausted. $1 to $30 on a stock with 104 million shares outstanding and tons of convertible dilution on top of it–that’s insanity.

Another hour goes by. $50. If $30 was insanity, then WTF is this?

Now Franklin’s getting mad. This is out of control. How can the NASDAQ allow this to happen? Okay ‘don’t lose your mind’, he reminds himself. You’re a pro and you have handled worse. You can’t be *that guy* and get scared at the very top. Just wait.

A half hour passes and the stock refuses to slow down. It prints $80. EIGHTY DOLLARS! Now worth over a billion dollars in market cap, fully diluted. It closed at $1 few days ago!

As Franklin deliberates whether to capitulate on his short position, the bid immediately yanks out on CPIH. The stock almost immediately plunges back to $50 within minutes. Franklin feels he’s spotted the turning point and he adds more to his position, bumping his short average price over $30. CPIH eventually closes at $32 1/16th.

Franklin tries to relax himself before going to bed. The tension can be overwhelming sometimes. He’s a trading veteran who’s been through a few nasty short squeezes. That may have been the worst he’s ever encountered but thankfully CPIH collapsed at the end of the day and the momentum is almost certainly broken. They always end up going lower, it’s never any different.

The next day arrives. Time to wake and check the price.


$200. Franklin doesn’t know what to do. He can’t move. It feels like his heart has stopped but somehow he’s still alive. How could this happen? An initial 5% position might blow up his entire multi-million dollar account. He traded his ass off for years at Datek–one of the best goddamn traders they ever had…one trade and none of that will even matter anymore, all the money will just disappear.

A phone call rings. He snaps out of the daze and picks up the phone.

“Hey Frankie… we’re going need you to post another million by the end of the day or we have to cover you out.”

Jesus Christ. How far am I going to take this, he thinks. My kid’s college fund? My wife’s 401k? He thinks but it doesn’t feel like thinking, it’s more like this desperate cloying for any morsel of rationality in his own mind. Then he notices his screen… CPIH has dropped back down to $120 while he wasn’t even looking. The spread is so wide, trading it feels suicidal. Cover and feel like you can’t live with yourself if it goes down more. Add more and feel like you’re tightening your own noose. The only natural course of action, given his state of mind, was to just do nothing. His fate was in the hands of the market gods.

CPIH trades sideways in the low 100’s for most of the day. Near the closing bell, it drops another 20% and closes at $80. Even with a large intraday correction, Franklin is still holding onto a 150% loss. The entire trading day unfolded in what felt like slow motion–each minute watching the ticks felt like ten in real time. He hadn’t even noticed he never got another phone call despite never having posted any additional capital. Fear has consumed Franklin like never before. What if it opens at $300? Seems farfetched until you remember it closed “weak” at $32 1/6th other day and still found a way to squeeze again to $200. That also seemed implausible at the time. Maybe he woke up in a universe where probabilities do not exist anymore.

The next day arrives and Franklin doesn’t do any of his usual prep work. He’s leaning over his desk with both hands outstretched, praying this will be over soon.

CPIH opens much lower. The company has issued a comment about not commenting on unusual market activity. CPIH trades back down to $30. The day after that, CPIH trades back near $10. Franklin covers into a blended average somewhere in the teens. From the brink of margin call to survival.

Me: And then what happened?

Hanzo3reminder, he’s a long time colleague of Avery and Victor from Heartland Securities and “The Contrarian” from The 10 Traders You Encounter in Prop: Well he lingered for a bit… took a long break. He came back, tried to trade a little bit, and struggled… he would say things like ‘I just don’t feel like I’m in control anymore’. Eventually, he quit trading.

That’s the story of Franklin Chase, as told by one of his colleagues from back in the day. A good trader who got caught on the wrong side of a wild move, got lucky enough to recover from it, but could never trade again after that. His mind was never the same.

Hanzo starts to point at me while sipping from his beer, like he’s signaling for me to listen carefully.

“Pete. You’re like a jet fighter who crashed. You gotta get back in the pilot seat and fly again. Don’t let it linger.”

Should I Stay or Should I Go?

In all honesty, I don’t think that FNMA loss shook me that hard. It didn’t get to the point where I questioned with every fiber of my being whether I wanted to trade again, whether I could trade again–like what had happened to Frankie. That loss felt so preventable; it was completely in my control. Trade it the way it was meant to be traded instead of worrying about size and PnL. It wasn’t a lesson I had to learn the hard way. I was already one of the most risk-conscious and responsible traders at the firm. If there was a betting pool on who would have the most spectacular blowup on the MBC Desk, I would have been one of the last traders picked.

I spent the next few days trading at home and scalping FNMA’s echo swings. For the rest of the week, I tallied another $30,000 on my personal account. My personal net worth actually increased despite the big loss wiping out my February MBC paycheck. I had already heeded Hanzo’s advice to “get back in the pilot seat” and I hadn’t even spoken to him yet.

Word had spread about what had happened. Traders on the desk text me like I just got diagnosed with cancer–“sorry about what happened, you’ll get through it“. I don’t know how to respond other than thanks? Since I hadn’t heard any word about being fired, I assumed they would still keep me and let me trade out of the drawdown.

I started to think about my options. I took inventory of myself: I had money now. I had winning strategies. I had the Bitcoin Fund. I had a network of traders I knew to exchange ideas. The prop trading business model was not something that I needed to make a living anymore. It was just a question of: do I want to stay on just to be there? I mulled over the good and the bad.

Good things if I stayed at MBC Securities:

  • I could trade with a lot more buying power.
  • Pr0Trade is a good platform
  • This is the best place to trade imbalances and special situation strategies
  • Can use Pr0Pie create automated trading strategies
  • At WTG, you always have that ‘all-in, not my money’ card to cash in when there’s a big unusual move in the market4although id have to work very hard to get that card back in my pocket
  • My friends are there
  • Faster internet connection

Bad things if I stayed at MBC Securities:

  • I’m now in a six-figure drawdown and have to make it all back to get my next paycheck
  • I always have to give up 50% of my profits.
  • The Knight Direct platform sucks
  • I suck at trading imbalances so maybe the positive is moot
  • I suck at building automated strategies so maybe the positive is moot
  • My current strategies are very lean on buying power so it’s all just surplus
  • I don’t like drawdown, I’m a grinder who wants a lot of green days. When am I ever going to “go all-in” and take advantage of the risk model at WTG? It’s mostly a dream scenario
  • Commuting to Midtown sucks
  • Have to keep pretending to listen to Avery’s morning meetings
  • I didn’t like the feelings of trading on a desk and competing with everyone’s PnL and being hyper-aware of every single trade and position out there–I could never seem to get over that heightened anxiety
  • The feelings of shame and guilt over losing a lot of money

I leaned towards leaving. I already had thoughts about leaving before any of this had happened and now I had financial incentive. But I didn’t want to be hasty so I decided to take a weekend to think about my decision. My MBC pals had invited me out to an Friday evening happy hour sesh and maybe I’d feel better being around the team again. There’s where Hanzo made a surprise appearance and told me the story about Franklin Chase over a pint.

I started thinking about that story. What would be my version of the mental jail that Franklin found himself in? I imagined myself on the trading desk, dragging around this massive boulder of shame.

Look at me now. I went from rising star to number one loser. Every day I’m trading with desperation and misery because only when I’m out of this drawdown will the shame and guilt go away. Meanwhile the rest of the desk thrives while I struggle. The trainees have nicknamed me ‘TNT Pete’ for my blowups–both at them and on the trading blotter. I don’t handle setbacks well. I’m not built like that. My trading process now starts at a rotten place–so badly do I want to rid myself of the boulder that I start to take excess risk all the time. I’m going to go balls deep on YOLO option bets and I’m going to stick my hand out for every falling knife and forever dig this never-ending hole even deeper. I’m trading on tilt and scrambling my trading brain forever. I’ll flame out and my name will only be whispered around the desk like cautionary tale–the headcase who couldn’t get out of his own head. Just like Franklin Chase.

No, that can’t be the way forward. That’s when the decision became clear. I had reached my mental stop with prop trading.

Why let the bad vibes linger? Move on and start fresh. You have the luxury of being at your high watermark on your retail account. You can surf the higher highs in your PA’s PnL and just like that–what just happened had never happened. That was all someone else’s money. This is your money and you know you’ll be more careful in the future with it.

So that was that. This happy hour was now my de-facto goodbye party. I wished everyone a fond farewell–“best of luck and don’t blow it all up like I did.” I sent my resignation e-mail to our floor manager CJ and told him I just wanted to leave quietly.

That weekend, I made a healthy attempt to decompress for once. I ran for a few miles along side the Battery Park boardwalk. I stayed off the adderall. I would try to focus on the present, narrating myself doing little things like laundry or eating a sandwich… and then just like *that*, I would just find myself replaying the loss in my head. It still doesn’t feel real that I actually did that. I’d cringe again. Fucking idiot. But that’s normal, I think. Time will make it go away.

Then I get a phone call from a person I was hoping would not call me.

Victor: Pete, I heard you’re leaving????

Pete: uhhh.. yeah I decided I’m going to trade my own money. I just want thank you for giving me the–

He interrupted me. Before you do anything Pete, you have to listen to what I have to say. He’s trying to change my mind and get me to stay. He went over all the usual talking points–bionic trading, deeper pockets, support staff, and the competition of being on a live trading desk. These are things that will push me to be a great trader, he says. There was something said along the lines of… “the traders who leave never make as much on their own.” I get it. I didn’t want to argue. But I had already made up my mind.

Victor could sense he was losing me with his standard talking points. He started to raise his voice, which happens a lot on the floor but never in any of our one-on-one conversations. It was always all the other traders who received this more stern side of him. Don’t be foolish. Don’t get short sighted about a six figure drawdown when your future is eight figures, he’d say. Stay at MBC Securities and fulfil your limitless potential.

I winced. I felt bad. I told him no and I hung up.

That’s the end.

(this is the penultimate chapter in Prop Trader Series and will conclude with Epilogue, where you get to find out what happened to all your favorite side characters from MBC Securities. Thanks for reading if you made it this far).

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5 thoughts on “Stopping Out

  1. This is honestly, the best thing I’ve ever read on prop trading. You should pitch a TV show based on your dealings with this fictitious firm.

  2. Good stuff.

    These sick manipulated squeezes happen more and more lately. Love to know who’s really behind the float captures.

  3. I started reading (this site) tonight and cannot stop. Incredible stories, thanks for publishing them.

    I had a similar experience some months ago. VTGN went from $1.5 to $60 in the PM (seemingly an almost unnoticed event). I was only moderately short (partially covered calls between $5 and $10) but the losses I saw were mind blowing. Fortunately the stock was back to $20 at the open. Some of the feelings you describe (a.o. here and in the FNMA post) are really recognizable!

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