How Ethanol Prop Traders Vectra Capital Navigates Volatility

Riding the energy wave, there is plenty of opportunity in recent market surges and dips.

When Vectra Capital opened for business in 2013, the mission of the proprietary trading firm was crystal clear. “The first order of business was to make money,” said Michael Cosgrove, one of the three Vectra Capital managing partners. Cosgrove, along with former Latium Capital traders Joe Verdi and Robert Esposito, started the ethanol trading firm in Midtown Manhattan.

“We wanted to establish the core trading activity, and we did it,” Cosgrove said.

Cosgrove first met Verdi and Esposito when all three worked at brokerage firm GFI, trading on the energy desk. The 58-year-old Cosgrove has a long history in energy trading: In 1981 he joined Amerex, a U.S. domestic-product and crude-oil broker, and then in 1986 moved to London, where he became a partner. While building Amerex’s businesses from 1989 to 2006, Cosgrove oversaw “a couple of hundred employees” in six offices around the world. GFI purchased Amerex’s U.S. energy, petrochemicals and environmental-commodities business in 2006, and Prebon bought out its European and U.K. businesses the following year.

During this wave of mergers, Cosgrove returned to the States, where he ended up running GFI’s commodities business for North America until he became an energy director in its commodities business. During this time, Cosgrove met Esposito and Verdi, who worked inside GFI’s Latium Capital division, and an idea was born.

“They came to GFI, where they were one of the most consistently profitable and pleasant professional groups in the company. After I left, two of them had decided that GFI was not the perfect place for them to fully develop a trading business,” Cosgrove said. “I was asked if I would like to be a partner and start a trading company with them, and I did, and so we began Vectra in January 2013.”

Verdi remembers that he was ready to make his move and embrace risk. This was in 2012, when the markets were still reeling from the credit crisis of 2009, brokerages were closing their doors and very few people were brave enough to hang out their own shingle. “GFI was mainly a brokerage shop, which is just not as comfortable with risk. We were presented with a great opportunity to go on our own and grow our trading, our businesses and our footprint,” Verdi said. “We knew that the way were trading with the capital we could raise-which is all of our own capital-that we would be able to continue do the business that we were doing, but also at the same time grow our business and increase our footprint in the ethanol market.”

Esposito didn’t have to wait to jump into the ethanol trading market. “Joe and I have been doing this together since 2008, and I believed in the business and in our abilities to go out on our own,” Esposito said. “So it was no question that I would put my own money behind us.”

When asked if he could ever work for anyone else since starting as a prop trader, Esposito was emphatic. “No way,” he said.

While the three managing partners, who also trade, declined to divulge the size of their prop trading fund, the principals had enough funds to not only open their own shop but to eventually grow to a firm with 12 traders. In fact, this summer Vectra Capital hired a pair of new traders who started in the fall: Lloyd Bloom and Tom Holland, who both worked at Mitsui & Co. Risk Management on the firm’s natural gas and power trading business. “We don’t have outside assets; the biggest thing for us is not having anyone to answer to, and we made all the decisions ourselves,” Verdi explained. “We had the privilege to do that by not having money from outside people and no one knowing our financials.”

Both Esposito and Verdi were present at the very beginning of ethanol trading, according to Cosgrove, who added that this was the reason to make ethanol trading a core focus inside Vectra.

“Because they were present at the beginning, there were some extremely good customer relationships, and frankly, Rob and Joe are two of the best traders I’ve ever seen in my life,” Cosgrove said. “Ideally, you like to be trading in optimal markets, but the expertise sort of overwhelmed what was otherwise a suboptimal trading market.”


The traders inside Vectra Capital run algorithmic trading strategies, and though they would not be considered standard high-frequency traders, they are low latency. “We can’t put an order in and hang around and get picked off,” Cosgrove said. Vectra is not low latency by the standards of HFT figureheads Citadel or Virtu, but according to Cosgrove they execute “fairly low-latency trades.” The firm runs some algorithms that make a little bit of money, he added: “We’re so late to that party that in terms of an arms race, we’re kind of thundering onto the field with pitchforks and sickles, and there are guys out there with nuclear weapons.”

“We have some proprietary low-latency tools that we’ve built for ourselves, but they’re not high frequency, they’re just relatively low latency,” Verdi said. “They’re low enough latency that it gives us an opportunity to trade our fundamental view without being so late to the party that we don’t just sit here and try to make a penny on 10 million trades. That’s not what we do.”

Besides, gas trading is not built for millisecond deals. “Ethanol is traded over the counter, so the majority of it is not traded electronically,” Esposito said. “It’s still a voice-traded commodity. It would be very hard to have a high-frequency plan in ethanol.”

Vectra also doesn’t buy shares and flip them in less than the blink of eye. “It depends. We have some strategies that are very short term, so we might buy and sell several times in the course of a day in some markets; in other markets, we may put a position [and hold],” Cosgrove said. “We had a very nice position last year in a currency pair that we put on in July and took off in February.”

While it is primarily an ethanol trading shop, the traders at Vectra Capital do occasionally branch out to other asset classes besides commodities. These assets include currencies, single-name equities and equity options. “We take a very opportunistic view of markets generally and we’ve traded quite a number of asset classes, although the vast majority of what we trade is energy,” Cosgrove said.


The energy sector is in the midst of a revolution. The past decade has seen the rise of Russia as an energy oligarchy, a natural gas boom in the Badlands of the U.S., and the price of a barrel of oil dropping to unseen lows. With these disrupting factors and a stock market that experts predict is ripe for a correction or a crash, the managing directors and traders of Vectra Capital are trading on. In the midst of the recent wave of market volatility-one that culminated in a steep stock market dive on August 24-Verdi, Esposito and Cosgrove are keeping their cool.

Vectra Capital is “long on some things and short on other things,” according to Cosgrove, and the firm does not care if the market swings up or down very much. “Frankly, we don’t even care if the markets are active-we can buy and sell volatility,” he said.

When the markets do erupt in either direction, the traders turn to the firm’s ping pong table. “That ping pong table has easily saved or made us $5 million in the last 18 months,” Cosgrove said. “There are times when the best thing we can do is play ping pong and walk away from the market, although there are some players right now that would say you’re better off trading than playing ping pong.”

When asked who the best paddler is, Cosgrove pointed to Verdi, who reportedly stayed calm in the recent wave of volatility that shook the markets. And Verdi likes it that way.

“Extra volatility is always something that I don’t want to say I cherish, but I’m someone who likes playing in a high-vol environment,” Verdi said. “I like to trade at the bottom and top of massive moves because those times in the market are when people and institutions make decisions that are not based on real facts; they’re more based on emotion. Usually at those times, you can find value in a market that normally you would not be able to find.”

As for Esposito, the ebullient Cosgrove chimed in: “Nothing gets Rob’s blood going. With Rob, the world could be ending, the building could be falling apart, and I think Rob would be the calmest guy in the city.”

This is the essence of trading for Vectra Capital-seeing opportunity and staying calm when others panic and see the end of the world. Even in these days of precise algorithms and automated execution of orders and automated liquidity sourcing, these clear-eyed traits remain elusive in today’s modern human trader. “I’ve literally spent 35 years trying to figure out what makes a good trader and what doesn’t,” Cosgrove said. “There are some things you could learn, that we all suffer from emotional and cognitive biases. We’re all badly wired in one way or another, and trading tends to provide an opportunity to expose that. But in Joe’s case, when a building is on fire and everybody is running for their lives, Joe tends to be running into the building. That’s when we tend to make a lot of money.”


The trading desk uses tools from Bloomberg, CQG, Reuters and Trading Technologies, as well as Cloud9. “We have proprietary systems. We also use Global Risk, CME Direct, CME Messenger-we use a lot of different systems here,” Cosgrove pointed out.

When asked what piece of trading technology they wished would be built to help them do their jobs, the Vectra partners didn’t want new gear but better humans.

“Probably just more good traders,” Cosgrove said.

“The trader makes the technology,” Verdi added. “My opinion is a little bit different on computer-based programming versus actual trading and the action of the market. I think they’re two different things.”

“When we started the firm, we wanted to hire people very selectively,” Cosgrove said. “We never had an agenda that we wanted to be in this market or that market; we simply wanted to bring in people we respected who were intelligent, who we felt had an edge in the market, who knew how to control risk effectively, and who we would be happy to share our day with.”

“Those are pretty powerful filters, and I think if any of those filters were missing, we’d probably have more people working here right now,” he added. “But we’re very careful about the folks we allow in. Everyone who comes to work I think really has a ball here, and we want to ensure that we never disrupt that chemistry.”