A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

by Edward O. Thorp

Knowing when to haggle and when not to is valuable for traders. In the days of Princeton Newport our head trader used to crow about how, by regularly holding out for an extra eighth or quarter, he saved us large amounts of money. Here’s the idea. Suppose we want to buy 10,000 shares of Microsoft (MSFT), currently trading at, say, 71 bid for 50,000 shares, and 71¼ asked for 10,000 shares. We can pay 71¼ now and buy our 10,000 shares. Or, as our trader would do, we can offer to buy our 10,000 shares at 711⁄8 and see if we have any takers. If this works—and it does most of the time—we’ll save $1⁄8 × 10,000 or $1,250. This sounds good. Is there any risk? Yes. By trying to save $1⁄8 per share we may miss a big winner if the stock always trades at 71¼ or higher for however long we’re trying to buy. Those stocks we miss, which run away to the upside, would have given us windfall profits. Put simply, you might scalp $1⁄8 twenty times but lose $10 once. Do you like that arithmetic? I don’t. I asked our trader how he could tell whether his repeated scalping for an eighth of a point offset his losses from missed opportunities. He could not make a case for what he was doing. I asked other traders around the street the same question and didn’t find anyone who could clearly show that they gained more than they lost by doing this.