This is totally Illegal… And I did it every year…

An excerpt from my book The Buy Side about the last day of the trading year.

The rest of Christmas week is quiet, as is Monday and Tuesday the following week. Though trading on Wednesday, New Year’s Eve, is also light—the Street is making last-minute plans or hoping to get out of Dodge—for me it’s one of the most important days of the year. This is the only trading day when unrealized profit and losses count towards your performance, whereas the rest of the year positions must be closed-out either by a sell or cover to be a realized gain or loss. The reason this is significant is because it’s the number we use to calculate our year-end performance. Then we take our 20 percent cut and I get my bonus.

There’s something known as “ripping a stock,” which is a manipulation of the stock price. Essentially, that’s what I’m trying to do today. The more stocks I can rip today the better our number will be for year.

I begin by identifying our ten largest positions that are illiquid. By illiquid I mean companies that don’t trade more than a few hundred thousand shares a day. It’s much easier to move the price with these than say a stock that trades a million shares a day. I find names like CYBX, Cyberonics, a neuromodulator company engaged in the design, development and commercialization of implantable medical devices that provide vagus nerve stimulation therapy for the treatment of refractory epilepsy and treatment-resistant depression. What? I have no idea what that means and I don’t care. The stock fits my criteria. Once I have all the stocks identified, I wait until the market is almost closed for the year to make my move.

Then about three o’clock in the afternoon, I get a call from a broker named Stacey who works for a firm that is light on research, but heavy on hustle and expense account—she’s taken me on several trips. Like all of my brokers, I talk to Stacey every day. But, she’s calling me at this moment because I ripped stocks with her on the last year on this day and she wants to know if I’m going to use her again. For her it’s a great boost to her commission run, millions of shares to trade with no risk. Her excuse for why she needs the orders early is so she can prepare. Bullshit! The thing about ripping stocks is the bigger banks like Goldman and Morgan Stanley won’t do it. You need a firm like Stacey’s that plays it fast and loose. Let me get right back to you, I say. And I hang up the phone.

In one way, I have to hand it to Stacey. She’s got a lot of balls. When I used her last year, I knew she leaked my orders to another client so they could front run my trades. I knew this because the stocks began to tick up before the time I told her to put my orders in. And now she’s on the phone again this year, looking to do the same thing. But I’m not the same trader I was last year. I’ve invested so much of my time and energy in trying to get people to like me. I still want everybody to love me. But if you are going to try and fuck me, I’ll fuck you harder. Maybe it was the MDRX trade Rosenbach had me shut out of, or maybe it’s just the natural jading process you go through working at a hedge fund. But whatever it is, Stacey has just made a huge mistake.

At 3:30, I call her back and explain how important this year is to me, and how I really need her to do a great job. Then I give her the orders with explicit instruction to not trade them until 3:55. “Not a second before,” I say.

“I know,” she says.

There are ten companies, and I’m shorting each million shares. I repeat the list of ten stocks back to her. A short of a million shares of CYBX in five minutes, for example, would typically take the stock down at least $5, probably more.

I have the ten stocks up on my computer screen so I can monitor them. At about 3:40, they start to move a little lower until all of them are red, negative for the day. I’m sure Stacey leaked my orders again. I call her. Remember, I tell her; don’t start selling any of my orders until 3:55. “Of course,” she says, sounding almost insulted I’d call to remind her. At 3:51, the stocks are still going down. At 3:52 they get hit another .30 cents. At 3:53 they are beginning to hold at their lower levels and at 3:54 it’s time for me to go to work. Whoever front ran my order is done and is waiting to buy them back when I hit the market. They think they’ll make a few easy bucks. It’s then I pick up the phone. “I know, I know,” Stacey says. “I’m getting ready to short all your stocks right now.”

“Actually,” I say calmly, “cancel all my orders.” The silence is priceless.

“What?” she finally manages to say.

“Cancel all my orders” I say. I’d reminded her twice not to place the orders until 3:55. It was 3:54, and she has no out.

As soon as I hang up the phone, I call Gus and give him the real orders; they’re actually buys not sells. By 3:56 the stocks are moving higher. By 3:57 almost all of them are flat on the day. By 3:58 they’re ripping—Gus and Stacey’s client can’t buy them fast enough, and by closing bell I’m up a few dollars on all of them. When Gus calls back with reports, he tells me he was only able to buy a few hundred thousand of each stock. He feels bad. I tell him it’s perfect. Argus just made an extra ten million dollars.

I call Stacey a couple of minutes later and apologize for the canceling of my orders. At the last minute, I say, we decided we didn’t need to short any of those stocks. “Not a big deal,” she manages to say, but she sounds sick to her stomach. Whoever she leaked my orders to must be livid with her. They had to have gotten crushed. Undoubtedly, they paid a much higher price than where they shorted it in front of my fake orders. Trading 101: buy low, sell high. Ooops. Nothing worse than losing a few million dollars in the last minute of the year. Happy New Year, I tell Stacey, but she’s already hung up the phone. I know it’s going to be a happy one for me.