Breaking Through: Linda Raschke, Part 1

Our second interview was withBrynne Kelly, who took a far different route through the trading industry, finding success on the merchant side of energy trading. Read her story inBreaking Through: Brynne Kelly, Part 1andBreaking Through: Kelly, Part 2.

Our final piece in this series is a conversation with Linda Raschke, who moved from the trading floor to the trading screen by chance, yet went on to have an extremely successful career. Read on to learn about Lindas career path, how she bounces back from losses and more.

Kara: You started out as a market maker in equity options, but have become better known as a futures trader. Talk to me about how you made that shift and why you ended up in futures.

Linda:When I started off trading equity options on the floor-this was 1981-82-a lot of things were out of line. There was tons of opportunity, but still, it was not like the liquidity that we have nowadays. So usually we would all leave the floor for breakfast, go upstairs, and then look at other exchanges and other markets to trade. I started trading the S&P futures on the very first day they were listed, only because we were sitting upstairs and looking for other ways to get into trouble. I really liked to trade that product. And what happens after the crash in 1987? The liquidity dried up for a good period in equity options. So I just naturally transitioned more from the S&Ps to the bonds to the currencies-pretty much all the financial futures. And then in 1991, I decided to become a CTA and just concentrate on the futures.

Kara: Youve had a pretty impressive career. I think it would be great to hear how you got started in this space. Can you talk to us a little bit about the beginning? How you ended up in trading?

Linda:It wasnt so random. I had always wanted to be in the markets because I saw my father have an interest in charts when I was growing up-and he was sort of an entrepreneur. You grow up with feast or famine. Youre either on the verge of bankruptcy, or else cashing in big on something. I went to San Francisco after I graduated from college and decided to be a stockbroker, and of course everybody laughed at me. And rightly so, because whos going to hire a 21-year-old to handle their portfolio? So I took a job across the street from the Pacific Stock Exchange and just started going over there early in the morning and hanging out. Then somebody noticed my interest, we formed a partnership and I was in business.

Kara: And how long were you out there?

Linda:I was in San Francisco for about two years, and then I moved to the Philadelphia Stock Exchange and became a market maker there.

Kara: Talk to us a little bit about what the floor was like, and the transition away from it.

Linda:All I can say is, if you didnt have a thick skin to begin with, you werent going to last very long on the floor. And once youre on the floor, you develop an even thicker skin.I made the transition to upstairs-thats what we used to call it back then-only because I had had an accident and couldnt stand on the floor any more. So I was trading off the screens upstairs, which just consisted of a large Quotron monitor, basically, and a Monchik-Weber. And we didnt have charts in those days, so I had to do everything by hand. You know, plot the market by hand, and monitor the numbers by hand. That was a very good exercise.

Kara: So you eventually transitioned into starting and running your own hedge fund. What was that like?

Linda:Yeah, its a slow evolution. You dont immediately open up your own hedge fund. I became a CTA. I had a combination of managed accounts and individual accounts as well as some funds. Eventually I started trading for three funds. I was one of the hired guns, if you will. Its funny because over the years, what the customer wants-or what your client wants-has changed. For a while there, they all wanted to be in a fund just because that limits your downside risk. And so as people were gravitating towards that, I actually started three funds over the years in different capacities-one was offshore-at different times in my life to accommodate my clients, who then converted their managed accounts in the fund. Then obviously, with some of the regularities in the financial industry over the last decade, people wanted the flexibility of going back to the managed accounts, especially if they were larger clients. So the industry adapts. Always driven by the customers needs indirectly.

Kara: What are some of the biggest lessons you learned in your career in the trading space?

Linda:Biggest lessons learned? Oh boy. Dont sell straddles on takeover stocks. I learned that one in the first three months of my trading. It was like my first year of trading. The biggest lesson is R-I-S-K. And you learn that the hard way once, and that teaches you a lesson real quickly. It took me about five years to pay that one back.

Kara: The stress of trading-theres a lot of highs and lows. Were there certain coping mechanisms? Were you always built to deal with that type of stress?

Linda:I found the people that gravitate towards trading and tend to stick with it have a less emotional aspect towards it. For example, I tend to be more mathematically oriented.If youre playing poker, bridge or tennis, youre going to have lots of losing points and losing hands, so you certainly cant take it personally. But I think you do have to have outside interests or activities to get your mind off of the markets. Anybody thats in the business, or wants to be in the business, just make sure that you take a break every day.

Kara: Tell me a little bit about one of your proudest trades.

Linda:My proudest trades? Probably recovering from losses. I seem to have this knack for always being on the wrong side of an outlier. And boy, that started with my first time that I got caught in a takeover stock, being short straddles-that just was an unexpected event.

I can remember one time when I was pretty bearish on the market, and it was a Friday afternoon. I had sold about 900 futures contracts-a combination of the S&Ps and the Russell futures. And I had to leave the last hour of the day to go to the dentist to have some work done. I was sitting in the dentist chair, and I got a message from my assistant at the time, who said, Did you see the SPYs? And I was like, No, Im sitting in the dentist chair. He said, Well, theyre up some ridiculous amount. That was the day that the Fed had come in and said that they were going to take over Fannie Mae and Freddie Mac, and literally, I had just sold a significant number of futures just a couple hours earlier. Now its Friday night and the markets are closed. Needless to say, when everything opened up Sunday evening 60 points higher, that was not a comfortable feeling. But I traded my way out of that and actually ended up +3% on the month. My ability to come back after being on the wrong side of every outlier possible. Its called survival.

Kara: Are there any notable mentors youve had throughout your career, or people you look up to?

Linda:I have really been blessed. Ive learned from so many people lessons that still hold true today. For example, at the time that I went to the Philadelphia Exchange, I was still paying off my losses from City Service, and a group of three people had backed me. One of them was a fellow Ill just call Nate, who didnt trade, but liked to give advice to me all the time-usually along the lines of, Buy wholesale; sell retail. If they dont come for your inventory, mark it down and move it out the door. So in other words, if youre holding inventory, be it in futures, stocks, options or anything, and theres not the demand for it, you have to get rid of it. Especially with the decay in the auctions and so forth. Very practical advice-and it would be appropriate for running any business. It made an impression on me.

The other fellow of the team was one of the partners, and he just set a tremendous example. He hardly talked at all. But he would be there two hours before the markets opened and two hours after they closed, doing constant preparation and homework. Plotting the strategies for the next day, determining what things were out of line. That spoke volumes to me.

I had a wonderful friend named Mike Epstein, who has now passed, but who was on the floor of the New York Stock Exchange in the 1950s, first as a broker and then in numerous capacities. He ended up being head of the financial lab for MIT-very quant-oriented. He would tell me so many stories, but the one thing that made the greatest impression on me was watching Mike a little less than ten years ago, when the yield curve started to invert. And the bonds had this tremendous upside breakout. Nobody had seen that before. Interest rates were on the verge of going to zero. Mike had severe diabetes and was practically blind, so he would look at his screens with this giant magnifying glass. Heres this gentleman in his seventies still trading, still going down to MIT every day. And I was talking about what he was doing, and he goes, All I know is the markets breaking out. I have no idea why, but Im long the bonds. I could not fathom interest rates dropping to this new threshold or level. It was just a testament to the power of the technicals. We dont know why.Youll always know the reasons for a move after the fact-thats what Ive found. The market knows. Were not smarter than the market.That was a good example of when we were going into new, uncharted territory, and here was this person who had been in the markets for 60 years, still trading the breakout from the triangle.

Kara: Youve been trading full time for around 36 years?

Linda:36 years.

Kara: How have the markets changed, and how has your trading style therefore changed?

Linda:When I first started trading in the early 80s, there was a lot more inefficiency. We didnt have the internet, we didnt have broadband, all these kinds of things. So it took a little bit longer for information to flow. You had a lot more checks and balances along the way. When I started in options, the strategy was more of an arbitrage approach, and those periods when things were out of alignment lasted a little bit longer than they do today. Today, theyre maybe a millisecond. You cant play the arbitrage game anymore like you used to. That went away pretty quickly.

I think the biggest change Ive noticed over 36 years was something that was really spoken to by Perry Kaufman-whos another very good friend-16-18 years ago, about the increase of noise in the markets as more participants have come into the markets, and more participants on different timeframes. For example, you have your institutional traders down to your very short-term algorithmic traders and so forth. The noise level has increased significantly, and when the markets are making a markup or a markdown, or a breakout from a chart formation, theyre extremely efficient. You dont get the little reactions and trading opportunities along the way. So the differentiation between the states demands that you have an adjustable strategy if you are a quantitative type of trader-that you can distinguish between the states or environments (some people call them routines-theres all kinds of different terminology for them). If youre a discretionary trader, you need to be extremely conscientious about, This is a breakout, now were in the consolidation phase, and its going to be a completely different type of trading environment. So that extreme between efficiency and noise is just greater than ever.

But other than that, I would have to say that my basic strategies remain the same, as they have through all the years, because Im pretty much a swing trader. Its trading an individual leg, if you will, technically. It could be a daily leg or a weekly leg of the swing. Versus some type of fundamental play. Thats stayed the same. You just have to be increasingly discriminating on how you differentiate the states.

Kara: What advice would you give to someone whos looking at a career in trading?

Linda:You know, theres a lot of misconceptions about what a career in trading really is. Its what you want to make it. For some people, a career could be just trading your own money and being able to support yourself trading. And thats a big deal because its not a matter of Are you profitable trading? Its a matter of Can you pay the rent? Can you put enough money aside to put your kid through college? Can you pay all the bills? So a career could be just an individual trader, and that is pretty much like any other role. If you want to become a doctor, youre going to do X number of years of education, X number of years of internships. You dont just do a year of medical school and expect to go out and make six figures. Its the same thing with trading, truly. You have to reach that point where you can be consistent and make enough money every year trading that you can support yourself. For other people, a career might mean being employed by a quantitative shop, working on algorithms solo or with a team. I see a lot more of that nowadays than we used to, say 10-20 years ago. If youre on an institutional desk, youre not so much trading, youre executing for the client. Theres a difference there. Somebody thinking theyre just going to get a job in trading-theres pretty limited opportunity there.

Kara: When did you first feel successful in your career?

Linda:I felt successful the very first day I stepped on the floor because I made money that first day, you know? After three months of trading as a neophyte, I think I was 22 years old and I was up $30k. I thought, This is great! And thats how youd think about it until the market comes and smacks you and humbles you and proves you wrong. When youre young, in your 20s, youre not thinking about having success or not having success, youre just enjoying the game, the camaraderie and the whole spirit of an exciting new frontier, which is what it was.

Look for the second half of this interview here on Trade Talk in the coming weeks.