What was it like in the early days of the electronic trading revlution? Did floor traders know that they were about to be reoplaced by machines and formulas?
Tradersrecently spoke with a former trader who worked at a number of different positions on the buyside. Starting out as a floor trader on an exchange, then working for Bear Stearns and JPMorgan before finally landing with a prop shop, Marc Orenstein had a ringside seat when the world of trading changed.
Read Part 1 of Traders interview with Marc Orenstein.
Traders: Give us a sense of what the pits were like viscerally.
Marc Orenstein: I’d been down to the NYMEX on the oil, natural gas and gold pits. I didn’t work down there because they were basically clerks. You have to start as a clerk, and you get paid minimum wage or whatever and it’s incredible down there. [They were] blue-collar people who came from nothing. It’s all animal instincts and street smarts. That’s not to say that there weren’t some highly intelligent people who [worked in the pits]. And a lot of option trading started occurring in the mid- to late 1990s. In general, if you’re a pit trader in any of the pits, just trading the raw commodity, that is purely a physical experience. It’s an unreal thing.
Traders: It’s not a quant staring at three or six screens.
Orenstein: No. It’s a football player who can yell or is not intimidated, and has the guts to risk his own money and take the other side of trades coming into the pit and make quick profits, just scalping. These orders come in and they know and they feel the market, whether it’s OK to buy or if they should short it or whatnot. The noise of the pit tells you a lot, as well.
But going down there, I realized it was a zoo. Even in the late 1990s, a lot of the floor traders wanted to go upstairs because it was a little more civilized. Even the New York floor brokers always aspired to get on a desk at a Lehman or J.P. Morgan.
Traders: They probably saw that this was going to be computerized sooner rather than later.
Orenstein: They probably did, yes. Around 1995, J.P. Morgan started automating. There were direct links from the floor broker. He had a touchpad – we’re basically using an iPad today — and he could put in his executions as he’s getting them, and they would be immediately synced to the block trader in front of him. That was happening even in ’95. J.P. Morgan invested a tremendous amount of money in this system.
Traders: There must have been a really big threat for a lot of people in the industry, that their jobs were going to be replaced.
Orenstein: People saw it coming then. What was most disturbing for me in particular, and for a lot of traders out there, is when the industry began to shrink. When you looked for positions in sales trading or brokerages, the job descriptions asked, do you know three programming languages? So [many people] were basically taken out of the pits, retired and put on the bench. And that would eventually happen throughout a lot of industries. I think Wall Street, because of the money involved and the amount of transactions that occur on a daily basis, was appealing to many quants at that time. That’s why the banks hired quants.
Traders: You were in London for a time in the late ’90s?
Orenstein: I was in London from 1999 to 2001. I was running a group of proprietary traders at that point. I left J.P. Morgan in ’95 because I felt that I had what it took to make money on my own decisions. I decided to throw my hat in the ring, so to speak, and try to out-trade.
Most of the institutions at that time were hedge funds. There were only three or four hedge funds that were trading equities that I knew of, and most of them were mutual fund companies. And then you had guys like Steve Cohen [of SAC] who started becoming big. People started learning about him, and he started doing a lot of business with the Street. He was one of the only people I saw as a customer of J.P. Morgan who would short the market. It was unheard of.
I said, who is this guy shorting huge amounts of stock and not afraid to short? I thought there’s got to be a great opportunity out there; it was the beginning of the tech market, the Intels, the Microsofts, all these interesting tech companies. The Netscape IPO opened at $50, $60. I thought, what is this? It’s a web browser. What is that? That was the beginning of the Internet.
Traders: People working at those companies are now multi-millionaires.
Orenstein: Exactly. It was an exciting time, and I decided to go prop and did it until the profitability dwindled. It happened at first pretty dramatically, and then it became almost impossible to earn a living with a mouse, sitting in front of a screen.
Traders: Why? Because other people were trading faster?
Orenstein: Right. You had the computers getting faster and faster. Speak to traders on the Street, even dealers, and they will tell you this: If they want to get filled — and you probably know this from the IEX example — their whole thing is if they want to buy 100,000 Microsoft at the market, they might see it there. But when they go to get it, as soon as whatever the amount of shares is, a couple of hundred thousand, the offer disappears instantly. So there’s no way to get in and out.
Traders: When you were prop-trading, were you buying and selling right away, or were you holding on for a while?
Orenstein: I was in a firm where I was allowed to hold positions. But in general, it was shorter term. The majority of prop traders in the mid- to late ’90s through 2001 were intraday or day trading. And even retail, right? You heard about your taxi driver who was day-trading Yahoo or whatever. I was not constrained. I was a partner in my company. I was given a pad or a book to trade, and I was allowed to carry positions overnight.
Traders: So what are you doing now?
Orenstein: I was a co-founder of a travel clothing company for almost three years. So I was completely out of the business, went into apparel and tried to apply some of the skills. The things you learn as a trader — even if you were a floor trader on NYMEX — is that it’s a very entrepreneurial endeavor. So traders can really thrive in new environments. I love startup situations, and you really have to have that mentality.
Right now I have an LLC to solicit capital for hedge funds, hedge fund marketing, helping hedge funds grow their AUM. That’s one thing I’m doing.
Traders: When you look back on your trading days, what do you think about? Is it an era gone by that won’t come back? Do you wish it would come back?
Orenstein: Of course. Every trader loves to trade. They would rather trade than do anything else in the world. I think you could get the same answer from any trader out there, especially a buyside prop trader.
