It’s September, when many traders return to the markets looking for opportunity. It’s appropriate then that this third installment of “Wizards of Today’s Markets” features Ray Cahnman, Chairman and Founder of TransMarket, a trader who has been seeking out trades and making markets since the mid-seventies.
Founded in 1980, TransMarket has had offices in Chicago, New York, London, Madrid, Sydney, Singapore and Mumbai, and at one time, over 400 employees. In 2016, the firm is enjoying its most robust year in both volume and profits generated. I’m grateful Ray stopped by the Tech Tap to speak with me, as he was very open in discussing the highlights and lowlights of his career.
This series is presented as transcripts of the conversations, which have been lightly edited for readability. If you’d like to suggest a future interviewee for this series, please email us.
I hope you enjoy, and feel free to leave comments or questions.
Rick Lane, CEO
Rick: Thanks for agreeing to do this. I suspect most people who are reading our blog and reading this blog post in particular know all about you and how you got your start. But maybe for those who don’t know so much, could you just give me a little bit of insight into the early days of how you got your start trading?
Ray: In the early 70s, I was working for a computer time-sharing company, and I made a sales call at the Board of Trade.
Rick: Did you say computer time-sharing?
Ray: Yes. That doesn’t exist anymore.
Rick: That whole notion is?
Ray: With computer time-sharing, one could access a mainframe computer, and ask “what if?” questions. It was accessed through a dummy terminal, a teletype terminal that operated at ten characters per second. The company I worked for had a database of interest rates from Bank of America. This database consisted of daily closes. At the time, the CBOT was developing an interest rate futures contract, and I thought that their research department could use my company’s database to run a regression analysis. So, I made a sales call. I didn’t get a couple words out of my mouth before they started selling me on taking an application for their new Ginnie Mae futures contract. As I walked out, I was handed an application for a Ginnie Mae trading permit. I didn’t make the sale, but they sold me. Before leaving, I filled out the application for a permit. I heard a convincing presentation from Doc Sandor, and I was in the Ginnie Mae pit on day one.
Rick: Day one of the trading for that contract?
Ray: Yes. I was there on the first day trading interest rate contracts.
Rick: And what year was that, roughly?
Ray: It was in late September, 1975. But prior to that, I had gone over to the CBOE, looked on the floor, and I saw the commotion. I saw people jumping up and down; it appeared as if there were some athletic competition involved. I knew that it was all about numbers; they were shouting out numbers. I didn’t understand what they were doing, but I could see that the activity was competitive and it involved arithmetic. And I was a competitive tennis player. In 1975, I was ranked the number one tennis player by the Chicago District Tennis Association. Rather than having great shots, I got there by having a lot of determination and being very competitive. Similarly, I was good at arithmetic. I had a math degree, but my strength was in numbers, not Greek letters. I believed that if I could figure out how to play this game, I could be good at it. When the opportunity opened up with mortgage futures, I got involved.
Rick: It’s funny because, like you said, it’s not complex calculus that drives much of the trading in futures, but it’s the ability to do relatively simple arithmetic really fast. And that was—when I got my start and saw the guys who were really successful and really good at doing this—that just floored me, that they were able to price some exotic strip of futures contracts in net change on the day, basically in their head, on a moment’s notice. And that’s pretty impressive. Only I think a handful of people are good at that.
Ray: Yes. But as things have progressed—it’s 2016 now. Computers are way faster. It takes 400 milliseconds to blink, but the transactions that are going on through CME are taking place at faster than one millisecond—at microsecond speed. That’s a millionth of a second. Things have gotten so fast that it’s impossible for a human brain to react like you could in 1975.
Rick: I remember when I stepped foot in the Eurodollar and the S&P pit for the first time in 2005—this was back when it was still pretty rocking. But I think for a lot of people getting their start in this industry today, all they have are pictures and history books, and they don’t actually get that experience firsthand. Maybe tell me what your experience was that first time you stepped into the Ginnie Mae pit. What was the first time that you actually saw a floor and you saw those people jumping up and down and shouting and yelling? What was that experience like?
Ray: Look. It was real scary for me when I first went down there.
Rick: It’s intimidating.
Ray: I didn’t have much. After paying a $5,000 fee for a six-month permit, I had $3,000 left. It took me a long time to find anyone that would clear me. Why would anyone send someone down to the pit that had only $3,000 in capital—they’d have to be nuts to do it. The firm that cleared me, Shatkin—they did it more as a contribution to the Board of Trade. Doing their share in helping this market survive, they cleared one local that didn’t have much backing. The first day I was so scared that I didn’t execute a single trade. On the second day, I made a trade and lost three ticks. That was close to $100. I figured that, if I did this every day, in 30 days I’d be tapped out. My reaction: I didn’t trade for the next two days.
Rick: Trying to extend your career a little bit.
Ray: Right. And then on the next day I had an out trade. I thought I was buying, but the person I traded with was also buying. I’m sure I was wrong, because I was the new guy, and I was trading against a very experienced trader. He should’ve stuck me with the whole error, but he agreed to split it, and that saved me. I needed every tick that I could get. And I was able to survive. At the end of five months, I was the leading trader down there, and I was a thousand dollars in the hole. Our six-month permits were just about up, and we all went on strike. We said that if CBOT didn’t waive the next six-month fee, that we were all quitting. The Board of Trade waived the next six months’ fees.
Rick: Was this the first rebate system in place?
Ray: CBOT knew that they needed traders to stand in the pit and make markets. And no one would go in the Ginnie Mae pit if they could trade soybeans or corn. So they were forced to extend permits for another six months. The Board of Trade originally tried to sell 100 permits, but they only sold 19, because even today, the odds of starting a new contract and having it succeed are very, very small. So it seemed like a real bad bet. In retrospect, it was a bad bet. And that’s why only 19 stupid people bought permits. But starting at about the fifth month, instead of going up $1,000, down $1,000, I was up $2,000. Then up $4,000. And I was still scared. So I just put everything in the bank. I figured for sure it’d reverse again. But it didn’t. I kept accumulating ticks, and wanted to stay there because this job was really great. I didn’t have to report to anybody. I didn’t have a boss that I had to answer to. If I didn’t show up, the market didn’t care, it survived. It was an ideal situation for me. I didn’t have to play politics with anyone, and I didn’t have to split anything. Whatever I made, I kept 100%. That very much appealed to me.
And I also had very low aspirations. My goal was to make $15,000 a year. I could put food on the table and buy tennis balls. I didn’t know if I could be successful. I might have a bunch of days where I’d lose. Therefore, I saved as much capital as possible to give me security in order to survive a bad run.
Rick: But it sounds like you had more winning days than losing days. And that longevity is fairly unprecedented in this industry. Do you attribute anything in particular to that longevity?
Ray: I think part of it was having the shit scared out of me a couple times. Following a big winning streak, I bought a membership. I loaded up on some back month mortgage spreads. One day I’m looking at the market—it was on a Friday and I’m realizing, nobody else is buying. They’re all selling. It was a very thin market, and I didn’t know where I could get out. So I went up to [Henry] Shatkin and I said, “I have a problem. I don’t know where I can get out this position.” And he said, “Well give me a guess. What’s your exposure?” I told him that I really didn’t know. He said, “Take a guess.” I got scared and I said, “A million dollars.” And all of a sudden I saw his Adam’s apple bounce up and down and he put his arm around me and said, “Well, I’m sure it’s not going to be…whatever it is, go home, bring in all your bank accounts, let me know what you have, and we’ll take care of this on Monday.”
Rick: I’m sure that was a long weekend.
Ray: I didn’t sleep the whole weekend. I went down on Monday morning. I dressed up. I put on a suit. Because I only wear suits if I’m going to a funeral or perhaps if I’m indicted. I knew this was my funeral. At Shatkin’s desk, with all his partners standing around, he says to me, “Ray, we’ve discussed it—we talked to Doc Sandor, you’re going to get a bid. He’ll bid 32 ticks under the market. It’s going to wipe you completely out. But we’ll worry about that later. At least you’ll be out.” Shatkin added that the orders to liquidate were written up. I told Shatkin, “Look, if someone’s going to put a bullet in my head, I’d rather do it myself.” He said, “Just a minute.” All his partners went in the other room and they discussed it—should they let me go down to the floor? Could they trust me to blow out? Because it was known that if someone had to blow out, often they would double up instead. Finally, they came back and they said, “Okay, you can blow out the position yourself. But you better make sure that you do it.” So I go down to the pit. Everyone knew what was going on. Shatkin’s partners were down on the sideline to make sure that I wasn’t going to double up. As I called out the spreads it seemed as if the whole world had just surrounded me. And Doc Sandor even walked off the desk and he’s standing next to me bidding in my face, 32 ticks under. And finally, someone from the silver pit walks over, bids 16 under the market. I said “sold”. And then everybody else comes up—they’re saying, “Hey, I’m bidding 16 ticks under the market, why didn’t you split it up?” And I told them to all get lost. And I shook the hand of the guy that paid 16 ticks under. I said, “I hope you make a lot of money.” I walked out. And I survived. I basically had nothing. I wasn’t in the hole, but I didn’t have any liquidity. From that point on, Shatkin, for the next several months, made me trade one lots. That’s all I could do, and that taught me a big, big lesson: never go all in. I’m going to know what my exposure is. I’m never going to bet my family or my livelihood. I’ve seen lots of traders over the years go all in. It’s one thing to lose for themselves, but I have no respect for people that will bet on their wife or their children’s future. That’s out of bounds. The first million dollars that I made I put aside. I pretended that it didn’t exist. I’m never touching that. I’m starting all over at zero so I’m never in that position again. This discipline allowed me my longevity. I would bet big, but never the whole farm.
Rick: You always knew what your exposure was.
For Part 2 of this interview, see Wizards of Today’s Markets: Ray Cahnman, Part 2.