Wednesday, March 19, 2008

Post# 4 - Arbitrage..."The Arb"

Arbitrage..."The Arb"
ar·bi·trage play_w("A0398900")(ärb-träzh)n.The purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy.intr.v. ar·bi·traged, ar·bi·trag·ing, ar·bi·trag·esTo be involved in arbitrage.[Middle English, arbitration, from Old French, from arbitrer, to judge, from Latin arbitrr, to give judgment; see arbitrate.]Noun1.arbitrage - a kind of hedged investment meant to capture slight differences in price; when there is a difference in the price of something on two different markets the arbitrageur simultaneously buys at the lower price and sells at the higher pricerisk arbitrage, takeover arbitrage - arbitrage involving risk; as in the simultaneous purchase of stock in a target company and sale of stock in its potential acquirer; if the takeover fails the arbitrageur may lose a great deal of money investing, investment - the act of investing; laying out money or capital in an enterprise with the expectation of profitVerb1.arbitrage - practice arbitrage, as in the stock marketccommerce, commercialism, mercantilism - transactions (sales and purchases) having the objective of supplying commodities (goods and services)
These descriptions are accurate but they don't really capture the magic that was trading on 'The Arb"! When I was hired by Steve Curry, he informed me that I would be working for an arbitrage operation run by Greenshields out of Toronto and Montreal, my first employer on the floor, and Drexel-Burnham Lambert out of New York. The Toronto operation was run by Peter Mitchell in the office and Steve on the floor. The Montreal operation was run under the Toronto operation but the voice of Montreal was Frankie Breaker. The New York arb operation was run by Norman Reich and Bobby Lupo and his number one man, Chickie, a Puerto Rican that was both funny and ball breaking. An interresting factoid is that Michael Milken was employed by Drexel, at that time running their junk bond department. Of course we called it 'high yield bond trading', which was a much cuter name. We traded for him on many occasions, according to Bobby Lupo, but we didn't get rich from his dealings. We were strictly on the equities side of the ledger. The movie 'Wall Street" was based on his story and the 'Arb Trader' in his office in the movie was based on our New York Arb Trader, Freddie, or so the story goes. In 1989 Milken was the fall guy in the largest fraud investigation in Wall Street history at the time. He did time. Today he is worth about $2.8 Billion. Crime pays! If you have enough money, justice can be eased if not denied.
Chris Martin was the head Toronto arb clerk, whose job it was to turn me into a clone, if possible. Chris was as smooth as silk in that job. He always seemed to know just how to calm down the ever crazy New Yorkers. They never seemed to be very happy, even when things were great and we were making scads of dough. It wasn't that they couldn't be pleased, it was more like they 'wouldn't be pleased! Even though they were very high maintenance you had to admire their drive and skill in this very competative arbitrage game.
When you traded the 'arb' you were required to be aware of every change in the exchange rate of the american/canadian dollar, the price of gold, the amount of shares bid and offered on a huge number of stocks, who had the big orders and how much and always, ALWAYS, everything that your competition was doing. Every time you didn't report a change in the status of any stock we were trading, the New Yorkers would blow your ears off with seemingly senseless screaming so you would never ever let it happen again. This happened about 100 times a day. That Chris Martin was able to handle this job as smoothly as he did was a tribute to him and his skilfull interpersonal tactics.
The job was unbelievably demanding. That was offset by the respect the job commanded and the amount of money you could make. People always stayed out of our way and for the most part, we traded the way we wanted. Always 'within' the rules but we knew the grey areas better than anybody else on the floor. The Pros' had to keep us in because if they didn't we could put a serious hurt on them. This just added to the hate but we really didn't care. We were there to make money and I was told every day that "you are only as good as your LAST trade" by Norman. He was right. Never has there been a more 'what have you done for me lately' attitude than on the arb.
At Greenshields we were a distant 'second' in the Arb world. Burns Fry was king. They were legendary. They had been Timmons, ultimate intimidating arb vetrans. In Toronto, Ricky, Marty Whittenbols, Scott Douglas, Gary Eamon, Frank 'Guido' Gradini, Paul 'the wop' Napolitano...they were a machine. The New York operation was second to none. Our guys were good...Steve Curry could trade with the best of them and Chris Martin was a great Arb Clerk, but these guys were unbelievable. In my career I was fortunate enough to work on the Burns Arb and it was as fearsome and professional as I always thought it was. Thanks Marty.
In 1980 the number three Arb operation was Midland-Doherty. They were as far behind us in the rankings as we were behind Burns. They had some great guys working for them, but they were more 'nice' than feared.
If you were an asshole, the Arb was where you wanted to be because being an asshole was a tremendous asset. Steve Curry told me that was why he hired me and I couldn't question that logic.
It took me awhile and cost Chris tons of patience, but I became, at the risk of ringing my own bell, a pretty decent Arb trader and loved every minute of it. All this despite Peter Mitchell's efforts to have me fired on at least three occasions in my first year or so. I just didn't drink enough for him, or something! Thanks to Steve and Chris, I was good enough to trade Arb for Greenshields, Burns, R.A Daly, Gordon Capital, good enough to trade pro for Nesbitt and good enough to start and run an independant Arb operation for McNeil Mantha, although they were responsible for the worst hatchet job I ever had to endure as a trader. Thanks Larry Hoes. McNeil-Mantha was a Montreal operation...So... Enough said!
Everyone in Toronto knows EXACTLY what that means.

Stay Tuned For..."I Can't Believe It's A Job!"


Chris Martin said...

Do I owe you money?How come you're being so flattering?I remember you next to me in the booth reading the paper with the headphones switched off.I think I asked Currie where he managed to scoop such a go-getter from,what an asset to the Greenshields wire.Then we hired Radar who made you look good.He would hand signal a trade to me from the floor, painfully slow,then inevitably make a mistake which he would erase from the air with his hand like he was cleaning a chalkboard.I think that was the beginning of the end for us.Then we hired Gerry Cordoba,then I quit.........just kidding guys,all fond memories.

jimmymac said...

Oh Yeah...that's right, You DO owe me money. You owe me $4 from Sammy's, another fine watering hole. But that's another story..hahaha
I love the memories man...seems like they are ALL only good ones.

jimmymac said...

I clearly remember the 'switch off' newspaper reading. You have to remember Chris, I was looking at this as stealing money when I started. I honestly thought I would be there for like a month. I was such as asswipe...hahaha
Stevie Gilbert used to pretend he was setting my newspaper on fire when he came up to the booth. I still sware he was jealous...hahaha!

jimmymac said...

You know I completely forgot about Jerry Cordoba. I used to get hypnotized by his tinted glasses.
Radar was so funny. I remember when Paul 'the wop' was going to eat him...haha