116: Sean Hendelman – Taking Losses, Ultimately Winning, and Keeping Pace With Markets

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Tasty Trade Inc. is a registered broker dealer and member of FINRA, NFA, and SIPC. Podcast. Hope all is well. On this episode of Chat With Traders Podcast, I have with me the co-founder and CEO of T3 Companies. His name, Sean Hendelman. T three is one of the larger proprietary trading firms in the US and in case you're wondering, the three Ts of T three stand for Trading, Training and Technology.

A few of the things Sean and I spoke about include how he got his start, how he lost all his money twice, and why it was a worthwhile experience in hindsight and some of the great lessons he's learned in the business of trading. And even as CEO today, Sean is still very hands-on with T3's automated trading. So we also had an interesting conversation around this.

I think some of his comments and views may actually surprise you. And hand traders need not feel neglected because there is also something in this for you too. Before we skip to the interview, I'm just going to give you the heads up. The audio quality isn't ideal, so I do apologize for this. However, I think it gets a little better as we get going, or maybe I just got used to it. Anyway, folks, please welcome Sean Hendelman.

Yeah, I was expecting to catch you on your drive home. What's the deal? You you knock off early. I have uh something called Tiger Twenty One. It's this uh organization that I d I was I was able to leave at four, um, or four fifteen. Um, they bring in speakers, it's all you know, high net worth investors and and CEOs of companies and it's pretty cool. And uh so I do it once a month and today was a day and I did not realize it when I made the appointment I probably wouldn't have made it but

Well roll with the punches. So what is it? It's like a a meetup type of thing? So Tiger Twenty One is a group like uh uh there's a bunch of groups like this in the US, like YPO, Vistage, um they're they're it's a gathering of high net worth individuals, um, that get together and uh

Um, you have to have a certain amount of net worth and they talk about estate planning, investments, hedge fund investments. We have speakers come in We did a uh event out in Boca um two weeks ago where Michael Bloomberg spoke, Tony Robbins spoke, uh Zell and Byron Wien was there, like I mean you you're meeting Usher was sitting next to me, like it's like

It's pretty cool. Full on. So what are you are you just a member of that or are you I'm just a member of the organization. There's about fi four hundred members total. um around the US. Um and uh I'm just a member of it. Oh, that sounds awesome, man. I'm actually trying to get Tony Robbins on the podcast. I know he's not a trader whatsoever, but I think it'd be really cool to have on. Well

I think uh I think there's a good chance it might happen. I've been in touch with his PR guys and he's got a new book coming out, so hopefully uh that might be a bit of an incentive. We'll see. We'll see. Fingers crossed.

He's great. He's fantastic. So as we know, you're the CEO and the co founder of T three companies, but where did your trading career very first begin? Take us back to that point in time. Sure. So uh after I graduated from the University of Michigan, um I got my business degree within the next three years as well from I got my MBA at Stern Business School. Uh and my training career started on a on a mortgage

desk, uh mortgage backed securities, commercial backed securities, trading desk. Um they we also traded government securities, municipals, um at a company called Greenwich Capital Markets in Greenwich, Connecticut. Um I slowly went up the ranks um at that end um um at that company um where I was on the trading floor Dealt with the salespeople and the traders. Also, interestingly enough, dealt with uh computer programmers there and had a small team of people after three years.

And then in nineteen ninety nine I decided to move away from that space and I had some friends of mine that were were active traders in the market. in in in around nineteen ninety nine and I decided to to uh move over with them and start a and start a business. The business was trading. Um I proceeded to lose my money totally probably two times where I went from I think I started with just fifty thousand dollars and um

lost that within three or four months, uh, put in some more money. I think I lost that too, uh, if I remember correctly, and I kept kept at it, uh, became a very uh talented trader, um, did some all types of strategies from uh technicals to Statarb. Uh I was a very um always a very high volume trader in the equities and option space, mostly inequities.

So at that point in time I was trading a lot of volume, trading most of the high beta names um at that point in time. It took me ooh it took me about eighteen months to get to get good. And then from then on out I started my own business uh in uh T three. Uh prior to that it was called Nexus, Nexus Capital. Uh at Nexus we only had like forty traders.

And from there, uh that was about two thousand three and then in two thousand seven um I merged with Sperling Enterprise to form the now company called T three company.

Right, right. So there's a lot going on there. Let's break that down a little bit. So I just wanna go back right to the beginning. Were you ever a a retail trader, like sort of in the in the typical sense? I always had a retail account where I had long term positions um starting in uh nineteen ninety seven, uh graduating from school, or or even early before that, um I used to read a lot of Peter Lynch, um, one up on Wall Street. He he's one of my favorite guys.

Um I u I used to call it the uh I this is where my interest started even before probably in high school.

Uh my interest started in trading in ninety three, ninety four, and in that time period, uh Peter Lynch used to say, you know, they they called it the cocktail hour the the cocktail theory, which I don't know if that's the right term, but it was close to that and basically what it was is is whatever you like to do, whatever you hear your friends talking about, whatever the coolest thing in at that point.

are stocks that you should invest in. So I I'll never forget I have the same book that I read back in ninety four, ninety five. I don't remember exactly when it was, maybe even earlier than that. And I remember writing down Dell Subway, which was private, so I couldn't buy it. Um it was Dell, Subway, Cisco, Microsoft Didn't have Apple because Apple wasn't in then. But I remember it was a few stocks.

And I probably uh Oracle was another one. Um and I probably had one or two losers that w we we probably never heard of at this point. And I remember putting in I didn't have that much money, but I used to work as a tennis instructor over the summers at a private country club. I did that for about eight years. And I used to make decent amount of money. I was an entrepreneur right from the start. I d made decent amount of money. So I ended up putting I remember I put

between five and ten thousand dollars in all of those um positions. My parents I was lucky enough to have my parents pay for my c my college, my schooling, um so I had extra c money from the summers where I think I was making around fifteen thousand dollars a summer and I had that extra money to to put into the stock market. So as a retail trader I was b I I always bought names that I like. um that people were talking about.

Um and those were the names at that point in time. I remember Subway. I still think Subway might have been my best one. Um, because I used to love eating there. That grew my portfolio massively because that's a time period where um the dot com bubble was starting and I remember buying an apartment, I proposed to my wife.

I bought her a ring. So I did make some money um off of the money that I made off Summers. And I also made some money off the money that I was making at Greenwich Capital, um where I was in mortgage bond securities. That was in a retail account. So I thought I was a genius. I'm gonna go into active trading because I'm I'm the genius which in my opinion if I would have thrown darts at a dartboard I probably would have picked great stocks for in that time period'cause everything went up.

But I got lucky and then I bought my apartment in New York City and so I took all that money out and bought the apartment. Luckily enough that was where where the bubble started popping. Um ninety nine in that in that area. So I went into active trading at that point and uh

And and and that's really where it started. Okay, okay. I wanna pick up on that point where you said you lost your money about two times over. So was that when you went into business for yourself or was that before that point? So i so I I I would say three big points in my life were I graduated from the University of Michigan and I remember coming home and saying to my parents, I'm gonna live at home, um, you know, can I have five hundred bucks for the month to buy, you know, food, whatever?

And I I'll just never forget, my dad said to me, you know, you just graduated college, y there's no more money coming to you. So at at that point in time, you know, they said, If you want to go to business school, we'll pay for business school. um or figure out a way to pay. But starting today, y you know m you know, w we'll have dinner, you know, w we'll make you dinner.

So to me, my bank account at that point in time was close to zero. I mean again, I had those ten thousand dollar investments, I had some money in the bank. It was a portfolio that I was thought I was gonna hold forever. So that was a that was that wasn't a zero amount. Then I bought my apartment and I was cash poor because I had just gone through Greenwich Capital Markets.

And Greenwich Capital Markets I was doing very well. I made I I I I ended up d you know, breaking the six figure mark, which was exciting for me. And then from there I d I I I I wasn't saving that much money at that point because I had expenses. I just moved in, I bought my apartment in this in New York City. I was, you know, living, you know, a l probably above my means um at that point in time.

And I remember I fifty thousand doll I probably had a you know, hundred thousand dollars in the bank. I put took fifty thousand of it, put it into an account to actively trade, and proceeded in three months to lose it, um, where my closest friend um helped me trade. And act the active trader market was difficult and it took

It was expensive to learn how to trade at that at that point in time. Um it cost money'cause you were we were buying thousand share lots and I remember stocks like S DLI and QCom, like they were moving extremely fast. So um that that that that area was w was difficult. It was difficult to navigate and it took some time to get used to it.

Um I think one of my friends lent me some money at that point in time'cause I needed a couple dollars. So that was one of the times that I didn't have much money. Then I started actively trading more. I did do well at that point in time, um, made some money. Um then in two thousand two or two thousand three I started a hedge fund where I did okay. It was a stat arb hedge fund. Um it was still actively trading.

it broke even, it did it made a little bit of return, didn't didn't make or lose that much money, but it was expensive to start that business. So after I started that business and didn't receive income for two years around that amount of time all my savings at that point again was gone. So that was my second time I pretty much went went back to zero. And I can tell you you learn a lot when

when your savings goes down, um, uh especially to zero, um, you learn how to how how to do the most important part of trading which is uh which is being risk averse and knowing your downside of every trade. I would take that to the to the vault with business with trading, um anything you do in life, understanding the downside risk and the risk reward on anything you do is extremely important.

So you said in your answer there that you lost when you first started actively trading, uh the first time you lost your money, you lost it in the space of about three months. Do you know the reason why you lost that money so quickly? So I'm gonna I'm gonna use the analogy which I will never use the analogy that gambling is the same as as trading'cause that's

that's that's that's not I I disagree with that'cause you're you're trying to make your reward higher than your risk. When you go to the casino Which I don't do, but if you do go to the casino and you go there and with a thousand dollars in your hand, most people say to themselves, This is entertainment cost and I'm gonna spend a thousand dollars and if I lose it I lose it and that's it.

in trading, in my opinion, at that point in time, the fifty thousand dollars was a fifty thousand dollars to learn or get educated in how to trade. Now uh that's not fun because I didn't know that that was gonna happen obviously. Otherwise I probably wouldn't have done it. But if I didn't do it, I probably wouldn't be on the phone with you right now. Uh so uh um that was the you know that was a It was an eye opening experience but it was a very good learning experience.

um losing that money. I know that sounds crazy that you know you learned a lot from losing money, but yes, that's the way everybody learns in trading. In my opinion um by looking at all your losses, how to prevent them, how to risk manage them. So that was a great experience. To me, and looking back, I wasn't happy when it happened, but looking back I'm happy it did happen. Yeah. Yeah. What did it feel like the second time you lost your money all over? I mean, was there some sort of would

You know, you said that you're you're kinda glad these things happened and that really helped to get you to where you are now. But, you know, in the heat of the moment, how did you feel at the time? Like did you feel defeated? Were you sort of uh put off to actually try and make something again like what what was that like? Sure. I mean look, i i anybody that's lost money in their life feels at the lowest low.

um that you can. You get very concerned about w what your plan is for the rest of your life and if you're gonna have kids and how you're gonna support people, how you gonna s you know, do different things in your life that you wanna do. So it was very ad it was very difficult. Um and it was very hard to handle. The second time wasn't really a trading loss. It was more of not making money for, you know, while running a hedge fund, which there are expenses to hedge funds like audit

um administrators, um risk management teams, programmers or whatever it might be. Um and that was the second time. Um but that was more on the business side. And maybe that was understanding the reward side of the model, which I didn't understand. Understanding it now in in the hedge fund space you need a lot of money to to if you're gonna collect two and twenty on a hedge fund model you

Y y you either have to make really good returns or have a lot of capital. Um I had neither. I didn't have a lot of capital. I think I at the max I was at fifteen million dollars. and I was running fifteen million and and and that's just not enough to run you know if you're looking for ten percent uh steady return. Um so That was the second time, but that that was more of a business loss or or a business stagnation versus a trading loss the first time. Yeah, that makes sense.

And at the hedge fund, um, you said that you focused on statistical arbitrage. That was kind of your your main strategy uh at the fund. Was the strategy itself sound and you just didn't really have the enough capital to support?

The fund? Uh it was a little bit of a mixture. I don't think it was doing well enough and the knowledge that I have today, uh uh the knowledge that I have today and if I had better staff and better programmers and I call them the MIT Caltech guys um on my team like I've had more recently, uh I would have done a lot better.

Uh I'm not a quant, I'm not a math guy. I'm pretty good at math, but I'm not a programmer. I don't know the C plus plus or C sharp or Python or any of the ways to analyze data like you need to. Uh so I was a little behind the curve then. Uh and w would I've done better? Of course I would have if I had more capital to to use either. Probably not on the trading side. That doesn't make a difference.

To me if you have less capital that's usually makes your returns higher because you're more nimble, less slippage, and so on, less market impact. But if I had more capital for the business, I might have been able to build it into something different.

Okay. So let's just summarize a few of the things we've been talking about here, particularly around the business side of it. So what have been some of the the greatest challenges which you actually experienced, which you perhaps uh didn't expect to experience uh from running a trading business. Sure. So that's more recent. So w y when Nexus started and T three company started and T three Live and um all the different pieces, uh

There's a lot of challenges. Um there's from challenges in partnerships to challenges in in cash flow. um which which to me is if peo people that know me well I'm very into cash flow. Um all that means is uh make sure you're actually receiving money more than you're spending on every given month. Doesn't always happen.

But to me I've learned that lesson where you want to keep your cash flows positive. Now, that might create a lower risk situation and you not going for it and making a lot a lot of money, but that is a good way to keep a company stable like I've done really since two thousand three and Sperling um Enterprise, the one the company that we started I mean that we merged with started I think in ninety nine, if I'm remember correctly, or two thousand, and

So we've been in business for seventeen years. That's not very common for almost any uh trading companies. So what I've learned over time is cash flow is k cash is king. Keeping the cash flows positive is very important. And the second piece is is is to diversify obviously. So um one thing that I've done is, you know, try to understand if the market is not volatile.

um what would happen. If the market is volatile, what would happen? If we back too many traders directly, what would happen? Right now our sweet spot is around twenty to twenty five percent of traders we back. We fully back. A lot of the traders have a bank or capital in their accounts in the broker dealer, which I haven't gone over yet, which I can.

and and on the business side, th th those are some lessons that we've learned. You can't always focus only on trading. There has to be a lot of things to focus on. I mean, you know, our businesses run with a in a lot of different ways. We we can't just employ

or have traders that do technical analysis. Sometimes technicals don't work. We need the fundamental guys, we need the quant guys, we need um the stat hub guys, you know, i you name the gambit, we need the news traders, the Momo traders, the momentum guys. If you're really b building a business You have to have different suite of traders because if you don't, uh what will happen is th every trading style is not gonna be in st in style at that given moment.

And usually what happens is it's a it's a good diversification tool or a hedging tool to have different types of traders.

Okay. And just to put things in perspective, how big is T three now? Like you said you started seventeen years ago um and you merged with another company during that time. How big is T three today? How many traders are on your team? Sure. We have um we have about a thousand active accounts. Now We have two separate broker dealers. One is a retail broker dealer.

And one is a prop broker dealer, uh a pro prop or professional trading broker dealer. The the the pr the professional uh prop broker dealer is a Philix broker dealer, which is overseen by Philex. Um I'm I'm sorry, which is overseen by FINRA. Um that broker dealer, all traders that come in have to be licensed.

Uh we have seven offices around the U.S., only US-based traders. They trade equities options, Forex. Um we've traded futures over the years. We don't trade that much in the future space. And those all those people have to be licensed. Um it used to be the Series seven, then it was the fifty six, now it's the fifty seven, but they all have to be licensed traders.

And the way it works very simply is uh when Dodd Frank came out or any kind of uh Volcker rule or any kind of rules that have come out in in the space. hedge fund people um with the high regulations or anybody that has capital that wants to be that wants to get more leverage, they usually come to a place like ours, um, which we don't have many competitors in the space.

um on uh on the prop side. On the retail side there's a lot of competitors. But on the prop side there's really not that many. And so on that side we have those seven offices. And what a normal structure would be is something similar to

Um I run a hedge fund with uh ten million dollars or I'm on the Goldman Sachs trading desk or and I'm running a small book of thirty million dollars in biotech. Uh if I go to T three, if I'm running a hedge fund I run thirty million dollars and two million of it is my money and the rest is investor money and you come to T three, you might have to put in half a million dollars for capital contribution, which is locked up for one full year for good capital rules.

You put up half a million dollars or you put up even twenty five thousand dollars and you can get a much higher amount of buying power allocated to your accountant. So for example, if somebody puts in a hundred thousand dollars as a capital contribution, which is good capital, they could receive A two million dollar pad. So they can trade up to two million dollars and they get a very high percent payout of their capital.

In another sense they can come to us and say, Look, I have this great track record. Look at look at how well I've done. And then we would do something like a fifty fifty deal structure. In a prop model, we make money on things like commission, we can make money on profit splits, we can make money on interest.

And that's how you know that th th those are the different f uh features or ways that um a company like T three Trading Group would make would make money. On the retail side, it's pure retail. similar to opening up a a and that's a completely separate broker dealer. That is a FINRA broker dealer. That broker dealer you don't need to be licensed in. It's it's very similar to opening up a uh a Scott trade or an e trade account, but we only cater to active traders.

So maybe our competitors on that side would be interactive brokers or trade stations. Um w which both those companies do a great job. We probably cater to even more active traders. They could be high frequency traders. They could be just super active traders that are turning their book over multiple times in a day or multiple times in the in a week. So both those businesses together we have a lot of a lot of accounts. I mean both those entities.

So of the on the professional side you back about twenty five percent of those traders, correct? Uh yes. It's about twenty five percent, yeah. And that ranges from twenty to thirty percent probably.

So how exactly does that work? Because obviously when someone comes to you, you're giving them like you gave an example there where it was like twenty to one buying power. Does that not mean that you're backing them by by giving them that buying power, or how does the actual backing process add to that?

It's a very good point. We basically back everybody. It's a hundred percent we we we back everybody. It's one p it's it's one capital base um and and and and we back everybody. So that's technically what our firm does. What I was saying is sometimes people have none of their own capital at risk. But there's all types of ways to look at this. You know, if a trader makes$100,000, do they keep some of that money up in their account?

usually we h we would want to have a cushion because if somebody makes a hundred thousand dollars and you give them fifty percent and then they lose a hundred thousand dollars the next month It doesn't really make much sense because then you y y you know, the the firm makes fifty, then they lose a hundred and then The firm is negative fifty and the trader is positive fifty. That wouldn't be fair.

So there's all kinds of things with holdbacks and banks and and and and different types of payouts and structures. And for T three, we cater our business really to the trader. our ultimate goal is is not to have the trader trade too much or or or or do any of those things. What we're looking to do is get traders to make themselves money. And I and when I meet with traders I always say that. It's very important

for you to make money, for us to help you with either technology, tools, charting, um, T three live, which I'll go into a little bit, um, for us to help you make money. If we can help you make money, you become more loyal to us.

um part of our team, you become you you'd last longer, you you you trade for a much longer period of time. Ultimately, selfishly, we would make more money if you make more money. We we can open up second accounts, we open up black box accounts for that person. We can open up um uh uh a swing trading account for them, if they're a m momentum trader. Um we've done all types of things to try to get that trader bigger. We can say that we're gonna back them in a different account.

Um a lot of times when we back traders, it's not them coming off the street. It's usually them s being with us for about a year and getting a phone call from the head of business development and and and they would say, Can we back you? We'll take a we'll you know, we'll take a much uh uh we want a much bigger split of your P and L'cause you're a great trader and we want to get you bigger. We're willing to take more risk on you. You might not be willing to take risk on yourself because

Yeah, that could be scary for an individual and we want to take risk on you'cause we see that you're a good trader. So going back to a comment you made earlier, you said you trade uh stock

Forex and options and very little futures. I'm just curious to know why why futures is is not a main focus. And four X is not a main focus either. I mean we're we're we're mostly equities, second is options. Futures I'm gonna be up front with you. I don't understand it well enough and it's a high levered product and I need to have the right people in place to understand the risk side of it, like I said from the beginning of the conversation, before I trade it.

Um 4X is another one that we do we do some with. Um and and and the reason why I'm I'm I'm doing uh Forex slowly is for the same exact reason. You know, we want to understand it. I want to hire people to risk manage it the right way. And we have those people, but it's a twenty four hour market and there's other difficulties in both those spaces.

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Moving on, you're the CEO, co founder of T three companies. But you are still very hands-on with the actual automated side of trading. Uh so I want to pick up on that a little bit. Can you talk to us about what you do and the types of strategies that you're running, uh, the automated strategies? Sure. So I'm not going to get obviously too deep into it, but I will give you some ideas of really how automated trading works. It's very simple, much simpler than most people think.

Um the difficult part is building the infrastructure around it. I was on a uh I was on C N B C once in my life and and uh against Mark Cuban and a whole crew of people that were really uh difficult Um I was sort of uh blasted very quickly right when I got on there, which I didn't know that was gonna happen. And it was really about one general topic that high frequency traders have some advantage over the normal retail guy. Um I dispelled that, I think

um in that conversation. But what I would tell you is this. The problem even with my high frequency uh trading today, um or or T three's not mine, but T three's high frequency trading today is really around the fact that we're not willing to spend enough money on infrastructure to compete with the bigger high frequency traders out there. So

And and I'll get it I'll get to your question, but I just wanted to make sure that that's clear. So there's market data that's very expensive. There's routing that's very expensive. There's getting the futures line from Chicago that's expensive to to to give you some leg up. Um there is uh co locating in Carteret, which we do. We have multiple co locations NY4 Cartaret. Um Hudson and a a whole bunch of places.

Co locating your servers right where the exchanges are, getting connectivity to everybody. Then you need to do the compliance side and the regulatory side and the risk side. Um then you need the programmers that are The best of the best. And still when you come up with the best strategy, I promise you there's somebody else out there that also came up with that same strategy that's slightly faster than you.

So that's where it becomes a problem. We've done everything. I I w uh I'll be up front, T three was much more successful in high frequency trading in um from two thousand four all the from Nexus Years all the way up to uh um two thousand eight was w was the best year. Um and then all the way up um to the flash guys. We just have a statistic just now that we over the last ten years or twelve years, ninety six percent of all days we've been positive.

in in that time frame. And and the days that we were negative to be up front were probably m closely related to a software glitch or or or something like that. Nowadays it's much more difficult. So we're we T three is still making money on the technology side and we're still having that that percentage

Actually in the last two years it's over ninety nine percent uh of positive days. The problem is that we're just not making as much money as we used to. Um there's just not as much opportunity because there's more it's a more crowded space. More people are coming to it.

Most of the strategies that we run and this was could have been my biggest mistake in the history of mistakes because um when Hudson River started, when uh when Virtue started, all these different companies that were doing this way back when I when I started doing it. smartly on their parts, they started hiring a lot more people. I always f I always didn't want to hire a lot of people because I was waiting for the space to get crowded because it was too easy to make money a while back.

And it just I was I wish I did what they did because they they built a much bigger organization around the technology where I lean more towards the trading side. Most of the strategies that we run are momentum type strategies, very high frequency strategies. The other piece that I don't do'cause I don't believe in it or I do it extremely little.

Is have passive orders, posting bids and offers. Most of the orders that we put in are taking liquidity. Now, there's a big reason why since 2004 I did that. I thought And I was sort of right on this one. I was wrong about not hiring a big team, but I was right about this one a little bit, which is there's a huge regulatory issue in my opinion.

I mean we've done studies on this where ninety eight point six percent or approximately ninety nine percent of all orders in buy bid and offer are not real. Which basically means that you can go out and say, I'm willing to buy this company at ten dollars. But when somebody's willing to sell it sell it to you know hit the bid f on on that ten dollars, ninety-nine percent of the time that person's not there.

And then you have spoofing and laring and all these things came in came to be and then the the this is why the he this is why high frequency got a bad name, because their comments were, Well, I could get filled. I could get filled on the bid. So I've stayed away from h having passive orders. If you look at the spiders today, SPY, you'll see you see bids and offers flying up and down and you're like, what is going on? A lot of that is the same people flashing in and out.

most of those orders, most of those quotes on the bid and offer are not getting filled. So I've stayed away from that. Now I think a lot of people made a lot of money doing that um and playing the psychological game. I stayed away from it. I'm happy I did. Maybe I would have made a lot more money, but I know there's been some regulatory issues, um, so I'm happy I stayed away from that. Most of the strategies again are buying small share share size.

Um so if you think that high frequency guys are buying huge amounts of stock, you're completely wrong if anybody thinks that. Most high frequency guys are tr are trading very small size. Now, they can get bigger in their size, but they're not showing their hand. on the to the poker table and you had your hand out, you know, p and you're showing your hand and you have a whole group of people around you that's all has their hand, you know, hidden

you're gonna have a huge disadvantage. So hedge fund guys, they're not showing their they're not showing their their orders for real and they're also not taking liquidity at big size, because that also shows their hand because those go off as print. So most of the most high frequency traders are usually buying small share sizes. And so do we. But we've done all types of strategies from from news strategies all the way down to um scalping for for you know, trying to buy, you know, at one price.

um doing AI, artificial intelligence where we're learning, um machine learning of of how one particular stock might trade in a given environment. So we've done everything. I mean you name the strategy, I've probably done it. I've done short term stat orb. I've done everything Every type of equity strategy, um, somehow in our um in the last ten, fifteen years we've done it, either on the manual side or on the on the high frequency side.

Okay. So a lot of what you're talking about here is latency sensitive strategies. To this day, are you running strategies that aren't so latency sensitive as well? Like'cause you said right at the beginning.

of your answer there. You said, you know, most of the strategies are very simple, but the the tricky part with automated trading is that you need the infrastructure. But you only need the infrastructure if you're running Or, you know, to a certain degree if you're running very latency sensitive strategies, correct?

It's a hundred percent correct. So when I said it was simple, what I'm saying is if you have a strategy today and you say, um, if a stock has an ATR average true range of a dollar and you figure out what your y you know, you figure out I want to trade these two hundred stocks today and you decide that any time um any of those stocks go through its fifty two week high and retraces half a percent, then buy. It's a simple if then statement. They all are.

So if this happens and this happens and this happens, then do this. When I say it's simple, that's really what it that's all that's all it is. It's not some crazy um yes, they get th those statements can get really long. I mean people are looking for every type of advantage um they possibly can.

But it's the the process is simple. It's it's what you learned in math class or in anything that you do in life. And when your brain thinks of if a trader is sitting there, I always tell traders, like, know what you're going to do. If Trump gets elected, these are the twenty stocks I want to trade. If Hillary gets elected, this is what I want to do. If we have um gas prices go up, these are the stocks I want to short, these stocks I want to get long. That's an if-then statement.

This is what I want to do. If a anything, if there's a terrorist attack in France, again, what do I want to do? If there's a terrorist attack in New York versus Florida, what do I do? If if there's a drought in California, what do I do? It's an if then statement. You're literally walking through the steps.

Um, you know, you might want to buy trucking companies if you think um uh you know people are gonna have to uh uh you know, you have to know each and every single little if then statement, no matter what you're doing as a trader. It's the same thing on the high frequency side. Most active traders, people, don't really understand. That's what their brain is doing.

If somebody goes high bid, then I'm going to take the offer. If the spread decreases to three pennies from an average spread of ten pennies, I'm going to take the offer. This is what most traders are doing in their head, and that type of thing can be automated. The problem is that if you would have done that in two thousand four, five, six, seven, eight,

you would have done extremely well. Now that space has been flooded and it's much more difficult to succeed. The medium frequency trading, we do also. So the low hanging fruit for the super high frequency trading, it's very difficult to make money at this point. Um we still do pretty well but not as well as we used to and um it's difficult. It it definitely is difficult. There's a lot of big players out there that are that are taking that low hanging fruit.

We are involved in some medium frequency uh type strategies. Um we work with traders to build strategies for them. Um that's part of our technology group. So all kinds of strategies. I mean th they could be technical type strategies. Um, my partner Scott Redler, he talks about the red dog reversal, eighty twenty, those types of strategies we can I'm not gonna go over the strategy, but that kind of thing we can automate.

So if you have any type of if then statement, you can automate it. And I think there's some great technology out there outside of T three that that does that for you. I'm yet to hear people being very successful doing it because I think the space is crowded. Just my opinion.

So when you say that you think this the space is crowded, what exactly do you mean by that and why is that a a disadvantage? Sure. So like any other business, I say the turning point was when there was a there was a programmer at Goldman Sachs.

the cat got out of the bag, the guy took the program, they and then everybody started looking at Goldman Sachs's uh uh ten K and quarterly earnings and they're realizing that a lot of their earnings was coming from black box. And there was one programmer Eh I don't remember exactly what uh I think I do know his name but I'm not gonna say but there was one programmer that went to another company and there was a big lawsuit, it was all over Wall Street Journal and everywhere.

Um that was that was literally when that happened, everybody started understanding what was going on um in this space. and it became much more crowded. So anything in life if you want to sell hamburgers and McDonald's opens and then all of a sudden there's Wendy's and Burger King, trust me, McDonalds would be doing a lot better if Wendy's and Burger King weren't around. And we all know that. What happened was that there were only a few players.

in in the high frequency space and what happened once it got out that that people are making this much money Um which I thought that was the turning point, just my opinion. When that happened, everybody flooded the space. And when everybody floods the space, you know what happens with anything. It becomes everybody we're we're all sharing the dollar.

So if there's X amount of dollars to make, if there's a hundred dollars a year to make and there used to be a hundred people, now everybody's making a hundred a dollar each, now there's ten thousand people. You're breaking up that d that hundred dollars a lot more.

That's what I mean by crowded. Yeah. I I thought when you when you made that comment, um Just before I ask that question, uh you were referring to more of the mid frequency strategies, but I must have misunderstood so Oh I'm sorry, I'm sorry, the the I I was talking more about the high frequency, but medium frequency strategies, interestingly enough, look at the VIX today. The VIX is going straight down. Everybody's asking me, Sean, what do you think? Why wh why is the vol why is VIX so low now?

Um look, my personal opinion is I think th you know, the fix is that it's crazy how low it is and at some point it's it's it's gonna turn. But I still think that things are priced in very quickly. Go look at when earnings come out, what happens to the stock. Go look at when news comes out in the marketplace, what happens to the market. It goes straight down and then it goes sideways.

The reason why that's happening is because the boxes, there's so many people doing the high frequency, super high frequency stuff. that everything's being priced in quickly. On the medium frequency side, that is also happening where if you have a stat arb that you're trading Coke vs. Pepsi or or or a common versa preferred. things are being priced into stocks very quickly. Even if it's long term pairs.

or or or any kind of longer term strategy, um, that is what's happening. So things are being priced quicker. And when things are priced quicker, what happens, in my opinion, is the efficiency and the edge goes away. So no matter what you're trading, if there's a lot of people trying to do m medium frequency or high frequency, they're they're both gonna go away slowly or be much more difficult or the best will c rise up to the top and

it does become more difficult. I I will say on the medium frequency it's it's definitely a more even playing field because it's not as expensive to run a medium frequency type of bomb. So um you don't have to be co located. You don't have to have the best routing or the best market data or or the best whatever to and spend all that money per month.

So with that being said, uh we had a phone call uh a couple well actually it was a couple of weeks back prior to doing uh this interview right now. And we were just chatting and I said to you how I was focused on algorithmic strategies myself. Um, certainly nothing in the in the realm of high frequency trading, more sort of intraday um and multi day strategies.

And you were still quite negative on the idea. I don't know if negative's the right word, but you you almost said You tried to discourage me from it almost. I remember. So I just want to pick up on that point and hear your reasons for for making those comments. I think it's gonna be um might spark some interesting conversation and and might be valuable for listeners to Sure. So look my only Mm. Uh my only date I I'm very a numeric guy, so my only data point is really from experience.

And um having traders come to me and saying, I'm gonna do this, I'm gonna do that, if it's in the high frequency or the super high frequency space, um, I would say your success rate is gonna be close to zero. if y i if it's gonna be in the middle frequency like what you had mentioned to me about yourself, there is a higher success.

But I think it's really low. And I'll tell you why, and this is my reasoning is that I've just watched so many people come to me. I have tried to program people's strategies. And always Always, they've either overfitted the data, they don't understand market impact or slippage, which means when you go to get the stock, you're not just getting the last print. You're paying the spread, and you you are losing um commission dollars, and you're also having market impact.

of the stock. There's a lot of things in slippage in the slippage world that really come into effect. And what I've seen is it might back test fantastically. I don't back test ever, by the way, just as a side note, if I'm ever going to come up with a strategy, one piece of advice that I tell everybody is always forward test.

Build your strategy, let it run with a hundred shares, be willing to lose a couple thousand bucks, because if you back test and you try to get all that data, you're it's gonna be much more difficult. But when you do forward test, It's still from my experience The failure rate is extremely high from traders. Doing something on Trade Station or Interactive Brokers or whatever it might be.

The success rate is very low. And if they are successful, for that very small percent of people that are successful, they're successful for a very short period of time. So that's what I would say. I I I hope that doesn't burst a lot of people's bubbles, but It's a tough market. With the volatility where it is, it's probably even tougher. I hope that answers your question. Yeah, no, it does. It does. So, you know, there's there's measures and things that can be done to try and

reduce the amount of curve fitting that's done when you develop any strategy. Um, you can factor in slippage when you're you're back testing or your analysis. I know you said you don't do back testing, but many people do. Um you can also I mean market impact Yes, that's a that's certainly a factor, but s certainly more so when you're trading bigger size. You know, if you're just trading a hundred spy.

you're not really gonna impact the market too much. Correct. A hundred percent correct. So, you know, with those things being said, do you still feel the same way? I mean look, I still feel the same way. I mean look, I mean, you know, i I I would ask you this. Okay, everybody trades spies versus the underlying basket. Everybody trades IWM versus the underlying basket of that ETF. Everybody's already doing this stuff.

and looking for an inefficiency in the marketplace, the smart guys, the Caltech uh you know uh MIT guys, uh the really good programmers, they're already are taking advantage. The only way you have an edge is if there's something that you believe you know that other people don't. Now, back in the day that used to be insider information. Most people never called it that, even more recently. That doesn't really happen anymore.

Because the regul the regulations have been so strict. That could have been people's edges, possibly. There aren't any edges out there. There's not something that you know, I wouldn't think, that other people don't know and they have better technology and better programmers doing it.

I will say on the medium frequency side there are still opportunities out there, so I'm not gonna be completely negative on that. But there it's still Whatever your idea is, it's still going to be extremely difficult to implement it first, and it might cost money to implement it. And it might actually make money, but after commissions and could be market impact, it could be paying the spread, um, whatever it might be, there are implications of all of those things.

Have I seen it work? I just built somebody a strategy recently that's working very nicely. They're not s it's not scalable and it is more medium frequency. I don't love the standard deviation though. It's making money, but again, the standard deviation is too high for my taste. It's very small, but I'm just saying the standard deviation is not not exciting for me.

So I always look at everything risk return in a risk return basis. You know, what's the worst case scenario? And again, if you're trading small it it's it's it's probably okay. But I'm with you. So yeah, yeah. So what you're saying here is pretty much Whatever you find, someone else is if not if they haven't found it already, they're gonna discover it very soon.

Um and you know, that's a common argument that you hear. Um, you know, you're not the only one who says that sort of thing. But I just I kind of have a little bit of a tough time getting my head around that because You know, surely there's an infinite number of different trading strategies that one could come up with, right? Correct. And yours can be slightly different than other people's. But remember, if somebody is generally doing the same type of concept,

They're const the best black box traders are constantly changing. You have to be changing your strategy. So they will be changing their strategy to find I mean we run on our test we I I I have a test uh broker at T three and we we we have uh probably three hundred uh maybe less than that, maybe two hundred strategies running every day.

And we're monitoring and and we have a whole other set of strategies that are running live. So we have live strategies and and and and and broker and brokerage strategies that are that are with without real money, that have slippage, everything categorizing it.

We're looking at all those strategies and then we're making changes on them. If one is making money, you focus on the ones that are making money. The ones that are making money you you want to turn them live and then you wanna try every single different variable variation of every variable that you possibly can to figure out what the best

risk reward return would be. That's what everybody's doing. So if somebody's trading something similar to you and there's and and you're making good money, somebody's gonna find that also. Now I I I I have had the conversation I'm having with you right now on this call with so many traders and I always end up saying, I will help you, we'll do it. And then the always the And it always happens the same way.

I mean I can i if if it's if it's for every ten guys, one works. Maybe even less, half of one. Out of twenty, one works. And these are smart guys, these are smart, smart traders that have been trading for a very long time trying to automate what they're doing.

Sure. But that like sort of success ratio, I mean that's sort of the the general success ratio amongst traders in general though, isn't it? Fully. But this costs a lot more money though. Okay. So with this being said, let's say someone is interested in automated trading. They are interested in algorithmic trading, like we're talking about here.

They're gonna push ahead regardless of what you say. I uh a hundred percent. What advice would you give to them? Like what suggestions would you give to them? Just maybe save them and help them out a little bit. For high frequency, middle middle frequency or active trading, just regular active trading? Well I I presume if we talk about uh mid frequency it's probably gonna be relevant to more listeners, so let's let's focus on that.

Well a and look, mid frequency is the same as an active trader, in in my opinion. It's an if-then statement that you're you could be trading um manually as well. So it could be a man it could be a gray box where you're getting alerts. Um this is what I would tell every trader before they do this. Whatever time frame you think it's going to take to get this running, double it. Make sure you have enough capital in place to be able to see it through.

Um and then make sure all of your slippage components are very conservative, meaning almost the uh like if you're if you think your commission is gonna be X, do two X. Um and don't overfit the back test. Those would be my my suggestions. The number one s reason why people that doesn't work is because it takes too long to implement and they don't have enough capital to take the losses in the beginning.

Those probably are why most people fail on the um mid frequency black box type side.'Cause they have to pay a programmer, they have to get market data or whatever it might be. That's where I'm seeing the biggest failure rate. Um, the quickest failure i is from that. Scope out a plan. Pretend it's like a business where you're running a business. That's what I would that's my piece of advice.

Can you just pick up on the point of needing enough capital to sustain the initial losses? Like what what are the initial losses? Are you talking about if your strategy goes into drawdown uh as soon as you go live, or are you talking about other expenses and like Both. They're they're they're all of those expenses. Um On medium frequency strategies, even if you're trading 100 share lots, you could probably lose more than you might think. The strategy could be good.

But depending on when you start, you know, a good strategy would make would make money fifty five percent of the time on a on a medium frequency, even fifty percent of the time, and then the winners are bigger than the smaller the other than the loser. The problem is that when you start, that's that would be a good success rate after six months of running the same strategy and tweaking it.

and constantly tweaking it and making it better. What most people don't realize is that you're going to have to tweak it. You're not going to come up with a secret sauce right when you do it. It's going to take some more time. So There could be losses there capital wise. There could be your savings loss, meaning you you thought you were going to be making money quicker. There could be loss of um dollars for

co location or uh brokerage fees or market data or or port fees or d you know, there's there's tons of different fees that can happen. And then also understanding that if you don't make money for the next year, do you have enough savings to support yourself? So th all of those three it's really three things. It's it's savings to support yourself, it's the cost of trading, and then it's the losses that you could incur while you're tweaking the strategy.

Yeah, okay. And I know I'm jumping around a little bit here. Um you you've just mentioned tweaking again and then a few minutes ago you talked about you don't back test what but you sort of optimize the strategy and you try all the different variables when you actually go live. Is that not the definition of curve fitting? I know you're not doing it in a back test with in sample data. You're sort of doing it in live

Uh to some extent out of sample data but Okay, so I'll tell you I'll I'll I'll I'll give you a little bit of what I do. If I have fifty strategies if T three has fifty strategies running today, which is around what we have. And I'm running uh two hundred strategies on um I'd we call it a test broker, which is not real money. The fifty strategies that I'm running live, I'm also running those fifty strategies in test broker mode.

I'm trying to make the slippage perfect between those two. They're never going to be perfect, but try to make it as close as possible for those two. If I can make those two perfect

And it understands the slippage. I call that forward testing. I call that we're we're testing all of these strategies, these two hundred strategies and fifty are running live, and if they're making money on test broker live, Either live or on the test broker, I would wanna go from test broker to live the next day possibly.

So I don't know if you would call that overfitting or not, but we have stats, standard deviation stats, one minute bar but again I'm more on the high I I'm more on the high frequency side than the medium frequency. So Um, it's definitely different. Most of my strategies that I'm testing are on the um are more on the high frequency side. So it's probably not as applicable to that. But what I don't like is somebody comes to me, take a look at this, Sean. We went back three years.

And look at these returns, look at my sharp, look at my standard deviation, and I and I start laughing. I'm like, uh do you run this the my first question always is, do you run this with real money? No. Have you ever run it with real money? No.

So I say to them, okay, so you ran it for the last three years. So how do you know that the next three years are gonna be the same and how do you know that somebody didn't run that exact strategy that you probably overfitted over the last three years? Those are the things that I don't like as much and I'm not a big fan of.

I do it a different way where I'm I'm forward I call it forward testing where you're just actually implementing the strategy with live data, live running, and you're taking the standard deviation of minute bars and and and and y and P and L per trade and doing all kinds of standard deviation, sharp ratios, and risk reverse reward. on those types of strategies. Okay. And out of those strategies that you have running with your test broker.

You know, you you've got anywhere from fifty strategies upwards at any given time. How many of those strategies actually make it to live trading with real money? Oh very few. Very few. I mean well w look, right now we have fifty we have probably about fifty strategies running. Some of them make uh I think I have a strategy that that that barely trades ever, and when it trades, it might make twenty dollars in a day. But why wouldn't I run it?

Because it it hi over the last three years it's always made money. So w it and and when it makes a trade it has a eighty percent success rate. You have to realize y now now somebody might laugh at that and say, Well, well why would you r you know, that's a waste of time. It's not because I already have already built the uh the whole infrastructure, so why wouldn't I run the thing that makes twenty bucks every third day? You know, it there's no energy off me. It just runs in the background.

And then you're analyzing that. Um in terms of the other strategies, usually when they're not working and I'm running them, Um, usually I'm tweaking those strategies to try to make them work better. We we see something. Maybe there's a maybe there's a type of stock that trades better on that strategy. Maybe there's a time of day that that that is better for a certain strategy. Which is very common.

You know, some strategies don't work well um in the morning um with high high volatility. Some s some some trade much better early in the morning or very well in the last ten minutes of the day.

Let's do this. So the way you see it in in your position, you see a lot of traders every single day. You you know what's going on. What do you see are the main advantages of automated traders compared to hand traders? Like what's the pros and cons of each? Just like the the big points. Okay, well I'll always tell you that on the technical front, I believe that a hand trader is always better. Um I think they react faster to change. Um they they they can

analyze the market faster. I know that sounds crazy. Um it's not faster, I take that back. The word's not faster. Uh more intelligently. um understanding things that are going on in the world or with a stock or um have seen that same pattern before. Looking at ranges, uh, you know, if you're creating a black box, you you have to know a price. You can't look at range it's very difficult to look at ranges.

So as a hand trader, the advantage is pattern recognition, seeing things happening over and over again, and I know there's software out there that does this. I still think the human brain is ahead of of black boxes in that sense because I see very successful traders. And to me if you see very successful traders and they're consistently doing well, they obviously have some kind of advantage. I will tell you that the more momentum type traders

are going away. The guys like when I started buying and selling very quickly, the black boxes have taken over that area. That's the area that if you're a trader doing that, start changing your style into a much in a into a longer a little bit of a longer uh term outlook. It could even be two hour outlook versus buying and selling quickly in three minutes. If i i I'm seeing that the h if the whole time is longer, um tr hand traders are doing better.

Which is a case for your medium frequency concept. I just will let you know that, um, versus high frequency. And then your question goes to what is the advantage of a black box? Very simple on the black box side, which is the space that I understand well is You can program something, you can change it, and you can make it uh do exactly what you want it to do without emotion. The best traders that I see are the ones that don't have as much emotion or get very emotional only when they lose money.

They don't get excited when they make money. and they understand that it's like it's like swimming in a in in in a w on a wave. You but you have to go with that wave. If you go against the grain or you think you're too rich or you're making too much money, that wave is gonna smack you in the face. hard. So I'm getting off topic. But on the black on on the automated side, I think it takes out the emotion. You can really prepare prior to the trading day because you can get the strategy in.

And obviously it's much faster than a human being buying and selling security. I will tell you something that we didn't discuss just very quickly is the the gray box side where it's assisted, you know, picking, you know, it could be a scanning software or something like that, those those things are good also that can help a trader uh uh become better and be more selective in stock selection um or many other things.

Yeah, massively. No, I think that's a really great answer, Sean. Let's do two last questions, quick questions, just for fun. Uh just to put you on the spot. Best piece of business advice.

Best business advice. Business not trading, business? Business and then we'll do trading. So hit us with your business advice first. Um definitely on the business side change. I know it sounds crazy, but I uh you know there's this there's a book, it's I think it's a bestseller, uh, Who Moved My Cheese? Adapt. Change. Don't be scared to make changes. If you it's more risky not to make a change than to make a change. Um I know that sounds like a simple one, but it really, really rings true.

And my second one on the business side is look at your cash flow. You don't have to be an accountant. It's money in, money out. Very simple. I made a hundred bucks, I spent eighty. Congratulations. You have a profitable business model. Um, I am not a big fan of the dot com stuff. I it does it's not in my belly to take that kind of risk where I'm spending a hundred dollars on marketing and the return is ten dollars.

Change, don't be afraid to make mistakes. Um I love the cash flow idea. And then on the trading side, risk management and emotions. You gotta keep both really in check. Um and preparation I would say would be the last thing. My b the best traders are are are in the office very early, reading um adapting um to new markets.

And that's that that's extremely helpful. Yeah, and I th I mean I think your business advice uh highlighting the importance of change is also very applicable to trading as well. So it is. Adapting, flexible, change. Don't try to beat the market. You're never gonna do it. Don't beat yourself either. Stay very even keeled. Have a mantra.

Scott Redler, my partner, is a perfect example of that. He works out he's it's unbelievable. He gets into the office exactly at the same minute every single day. He studies the market at the exact same time. He leaves for the gym at the exact same time. It's it's amazing what he what this guy does. and if you if you live by that stable s you know, structure

It actually makes you a better trader. It's weird, but it does. Cool man. Let's leave it at that. Sean, if anyone listening wants to get more info about you, where should they go? Anybody can email me at Sean S E A N at T three professional dot com. Um our website is called Uh www.t3 live.com. Our trading website is www.t3 trading uh uh

Uh T three trading dot com, um T three live dot com is the education and T three securities dot com is the retail side. Sure. Well I appreciate you coming on, Sean. I've enjoyed this conversation and thanks very much for your time. Thank you very much. Take care. You've reached the end of this episode of Chat with Traders, but rest assured there are more. We'd love it if you'd leave a