144: Tim Steenstrup – Learn an Arbitrage Strategy Used by Professional Stock Traders

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Traders, how y'all doing? Now I'm preparing this episode a couple weeks in advance because as this is being released, I will actually be away on holiday. I'm going to be in the mail dives for a few nights, channeling that Timothy Sykes lifestyle. You feel me? I'm kidding. I'm kidding. But I will be in the Mail Dives for a few nights and I'll also be in Singapore for a few nights. So I'm just taking uh taking off for I think it's about ten nights with my girlfriend.

Uh it'll be nice to kinda switch off for a little bit. The last couple trips I've been on have obviously been trading related, uh, and related to the podcast, etc. Anyway, on with the show. I have a fresh episode for you that Quite possibly will introduce you to a new type of trading strategy. One you mightn't have heard of.

My guest is proprietary trader Tim Steenstrup, someone who I actually met briefly while I was in New York City. Uh Tim came out to the event. We've had a few emails back and forth over the past kind of few months. And Tim's also a listener, uh long time listener of the podcast, which is very cool. So since twenty thirteen, Tim has been a cross border arbitrage trader at Conventus Capital.

But markets have been a part of his life going right back to nineteen ninety-four. Tim's been a part of a brokerage firm in Japan, a hedge fund, which was actually featured in the big short movie, and trading firm F. During this episode, we skim through Tim's backstory and then spend a large part of the episode going into the mechanics of how a cross-border arbitrage strategy works. Tim does mention that this type of strategy can be difficult to implement as a retail trader.

But regardless, I think it's good for you to hear about the various approaches of how professional traders are trading the markets. It's also quite interesting to hear how Tim's used insights from previous roles and experiences to shape his trading strategy of today. Like in some ways it's almost no surprise that he's wound up trading this particular type of strategy. It seems like it's something which is well suited to him given his background.

Tim also makes some helpful comments about taking and recovering from losses throughout the episode too. I hope you will enjoy this episode and learn a few new things. Here is Tim Steenstrap for episode 144.

Just for starters, Tim, how many years have you been trading now? I've been trading since well, I've been in the markets since nineteen ninety four and I've been On the proprietary trading side since two thousand four and really been truly my own proprietary book since two thousand seven. So it's kind of a combination. All right, well let's wind the clock back to around nineteen ninety four. How come you got involved in in financial markets? Like what attracted you to to all of this?

Right. I'd always been a risk taker. I always enjoyed risk when I was growing up. I was you know, played a lot of poker, which is kind of the typical MO and um you know, gambled a little bit when I was in high school and, you know, I loved risk, but After college, um my family definitely had the course for me to go to law school. It's a much more conservative course. So I graduated from college upstate New York, went to New York City, interned at a law firm, took my law school exams.

Um I did pretty well, but I wasn't really thrilled with the career choice. So I decided to defer applying to law school for a year and I thought I'd travel the world. And at the time Japan was you know, a very powerful force in the world. They had bought Rockefeller Center. They had um you know, they were ver you know, they were just a huge player in the world in the early nineties and late eighties. So I basically moved to Japan in nineteen ninety one. I thought I'd travel the world.

And I started with Japan and um one thing led to another while I was there. Uh I was just kinda having fun for a year or two and while I was there I met some guys who were working in the markets. And they asked me to interview at a brokerage firm. So um I came in for the interview. I loved the environment. Um I thought it was super exciting and they needed basically Western guys um in Tokyo to cover US and European accounts.

Out of Tokyo, and these were accounts that were coming into Japan to try and buy US bonds, Japanese government bonds, and things like that. So that was actually my first. stop in the financial markets. And I did that for a few years and um I liked the environment, but I was not a decision maker. I was kind of

helping other people buy bonds, which you know, there was a lot of excitement to it and you saw a lot of money moving around, but I wasn't the guy making the decision. I always wanted to be a decision maker. But I stayed on this path for a while because it was very secure. So I had good accounts and I was moving back and forth between Tokyo and New York and um

You know, it was an exciting business. Eventually I was working in Tokyo and I kept trying to get back onto the proprietary trading side. And one of my accounts was um a very famous place called Front Point Partners. And which was which became famous in that movie The Big Short. And they needed a trader for their growing Japan fund.

I got a job with them. Um they were situated in Greenwich, Connecticut at the time. And I was kind of trading very late hours out of Greenwich and then I was trading late hours out of New York, so I was basically trading Japan until, you know, one or two o'clock in the morning in New York City.

And I was part of uh you know it was quite a big hedge fund. It became a billion dollar fund after a while and it was fairly successful. But I was not really a decision maker there. I was reporting to my boss and he was making most of the decisions. So still although I was part of you know, a really good hedge fund environment and I was learning a ton and I was learning a ton about risk and

how to do the job, I wasn't the guy in control and I really wanted to be the guy in control. Um and eventually we parted ways in um two thousand and seven and that's when I really became a proprietary trader.

I got a job at a firm called which is one which at the time was one of the larger proprietary trading firms probably in the world. And I you know, I know you've had guys on the podcast before that have talked about proprietary trading firms. But um you know the basic dynamics of these firms can vary a lot.

And this one basically um you know, they gave you they gave you some capital to trade and they levered it up quite a bit. So and then you would make a percentage of whatever profits or losses that you made with the firm. So I joined there and it was a very rocky start because coming from front point, which had and a billion dollar fund where we were kind of running these long short portfolios in Japanese equities, um, you can't trade that way when you go to a prop firm.

you have to um manage risk much more quickly. Proprietary firms really don't allow losses to continue for long. So when you're at a hedge fund you can like short a stock and you can hope for some catalyst to come in the stock after a few months. And um if it goes against you by ten percent, that's okay because you've got this huge capital base to maintain losses. But when you're at a prop firm, you can't do that.

and uh you kinda have to cut losses very quickly and it was a very painful first few months for me and I had to learn that lesson and I would got into a hole very quickly, I'd lost I think I'd lost about sixty or seventy thousand dollars and they called me in and they were like, you know, what are you doing? You know, you need to manage risk better.

So I decided to go back and reread some of the books that I'd read in my early days in finance, which and the biggest one that I reread was Market Wizards. by Schwagger, who you've had on your podcast. And when I reread the book as a prop trader, it was so different from reading it as a non prop trader because You know, obviously everything related to me much more thoroughly.

And basically a lot of the prop chairs in there talked about managing risk over and over and how they were preparing for the great crash of nineteen eighty seven. And this really started, you know, ringing bells in my head. I'm like, okay. You know, let's manage risk a lot better. So I completely changed my strategy and I moved on to a much quicker strategy of um more or less I took a delta neutral strat strategy. for a while. So it was shorting one stock versus buying another stock.

And that strategy was really good in two thousand seven and two thousand eight'cause volatility was picking up and in a higher volatility environment, sort of a delta neutral strategy like that really works. Pretty well. And the other thing that I did was I really um got into a new type of trading called Um cross border trading or um ADR arbitrage.

So you want me to go through how what what that whole strategy is? Yeah, I mean I'm definitely keen to speak with you about that strategy. Just before we go that far though, let's backtrack just a little bit. I want to talk to you about those first few months at You know, you said you lost about sixty thousand dollars within the first few months there because your strategy just wasn't working out.

How did you come up with this new strategy? Like, where did that come from? You said you described it as a delta neutral strategy. Like, how did you come up with that? So what happened was I went uh it was really a uh you know a big moment for me because I was like, Do I can I hand can I hack this? You know and I went back and I read Schwagger's book, Market Wizards. And

It just the light bulbs the light bulbs started going off like crazy as I reread it. And I was like i i if you really read the book carefully, you know, there's a several of them that talk about the eighty seven crash and how they were how they were treating markets going into the eighty seven crash and how they were all managing risk.

And I hadn't been doing any of the things that they were talking about in the book and I said, Well, let me start doing these things and the what the the strategy that came Most clear to me was trading delta neutral. And I just said, well, I might make less money trading delta neutral because you always got one long versus

one short in terms of dollar amount. Looking back maybe I was a little naive, but it just it just clicked. And at the time the only delta neutral neutral strategies are only gonna work if volatility is decent because you're looking for dislocations in your stocks and to be able to take advantage of them. And if there's no volatility, those dislocations won't really happen much. So that was it. I just I I just that was like the first strategy I tried with Delta Neutral. And then I combined that

with this cross border trading and it just worked really well. Okay. Well let's speak a bit about this strategy because this is still the strategy you're trading to this day, right? Yeah, I trade it still to this day, although not as much. You need You need vol to trade that strategy. So although I still do it, it's um you know, you have to be much more selective about it. But yeah, why don't we go through um how it works anyway? Yeah, yeah. Break it down for us, explain the strategy, yeah.

Yeah, so obviously living in Japan I decided to do it with Japanese socks and there were other guys at that were already doing this, but they had never lived in Japan. Um they were just kind of using their own market knowledge to trade these to trade the strategy. So the most obvious way to talk look at this is um there's a lot of stocks that trade on different exchanges around the world.

Um and a lot of those stocks are fungible between exchanges. And the obvious example is a stock like Sony. Sony trades um in Tokyo under the ticker six seven five eight in Japan. It also trades in New York under the ticker SNE. You can buy SNE in New York. Do a foreign exchange transaction where you would sell yen at the same time. And then you would sell. six seven five eight inch pan. And if you have a broker that will help you, you can collapse that trade into one.

So, you know, the most obvious thing is let's say Sony reports earnings after the close in Tokyo, um and they're bad numbers, for example. And then uh the Sony shares in New York say they dropped three percent in New York because you know, all the markets and all the algorithmic traders are reacting to the bad numbers.

in New York, so they dropped them 3% below the Tokyo close. So if I think that three percent is too much of a drop, I can come in and buy S and E in New York, do an FX transaction, where I sell yen, and then hopefully um six seven five eight in Japan will open above three percent, less also the transaction fees. And that strategy

you know, works in high volatility when people aren't pricing things correctly. Um so that was basically the type of strategy that I started to get into in two thousand seven. Let's break that down a little further. The first thing you mentioned which I have a question around is you said you do an FX transaction uh to to trade the overseas product. I mean, what do you mean by do a FX transaction?

So you have to collapse so when you're buying S and E in New York, the S and E in New York is trading in dollars. And the six seven five inch shares in Japan are trading in yen. So to lock in the arbitrage it's not really an arbitrage, but to lock in the the arbitrage between the two markets, you have to do an FX because you're locking in

the price of SNE versus six, seven, five, eight and you know, the yen could move. You know, if the yen moves a percent or two percent while you have the transaction on and you haven't done your FX, you'll be making or losing money. depending on how the yen moves. So you have to do there's three there's three transactions to every one of these cross border trades. There's the trade you do in the US There's the foreign exchange transaction and there's the trade you do overseas. Do three things.

So when you do this FX transaction, what does that what does that mean? You're actually buying so you're actually trading the FX markets as well. So you're trading US dollar versus yen? Yeah, you have to you have to do an FX I I wouldn't yeah, exactly. It's a hedging transaction, but yeah. You're actually so let's say that I buy S and E and sell six, seven, five, eight, then I am uh I need to sell yen.

Okay, so I need to buy dollars and sell yen overseas. And if I'm doing the opposite, if I'm um if I'm selling S and E and buying six, seven, five, eight, I need to buy yen. So you have to do, you know, whatever the amount of yen that you're selling or buying, you have to you have to, you know, do an FX on that transaction. Or else you have it locked in your arbitrage. And that would be standard for any

you know, cross border arbitrage. When you're going between countries, there's always gonna be a foreign exchange. Even if it's merger arb between countries, you're always gonna do a foreign exchange to hedge out your risk. So is that the only reason why you're trading the underlying currency as well is to hedge Yes. Yes. I'm not taking a view on the underlying currency at all. In general. I mean we do occasionally, but that's not really the game.

Okay. So there is a chance, I mean, that part of the trade, like that particular transaction, you could actually lose money and reduce profit on your trade from that. But you're you're doing this as a stock transaction. I mean you're thinking to yourself, I'm here to trade the arbitrage on the equity, not the not the FX. And they very often they go hand in hand, you know, because when the Japanese yen is um

weakening that's generally good for Japanese stocks. So, you know, this is all very combined with each other, but still There's only a few hours there's usually only a few hours between the New York close and the Tokyo Open. So you're usually just getting minor movements in the yen and you've just you're just kind of locking in the stock price.

So but but you gotta remember in 2007 I was doing this mostly on a delta neutral basis. So I actually wasn't doing a lot of yen transactions because if I was buying SNE, I was shorting some other Japanese name against it. So I actually they would cancel each other out and I wouldn't actually have to do again transaction. in those cases. But in general you do have to do that. Right. And you said uh when you were first describing the strategy as well that sometimes or

depending, your broker might actually be able to help you out with this. I mean, is that a common thing or do you need a specialized broker for this type of No, yeah. It it's very you you really have to be at a fund to do this strategy, in my opinion, unless There's a retail broker that's willing to do this that to help you through because you can't collapse

the trade without someone actually funging those the the the the the US share versus the foreign share. Like you can't just do it naturally like a retail trader can't just go out there and do the strategy. It's very difficult. Now that's not to say it's completely impossible, but it's you know, it takes a lot of legwork. Um I had a friend who was very experienced

in this strategy we're gonna get a fund and he tried to do it on his own and he couldn't. He said it was just too he couldn't find anyone to collapse the trade for him. That's not to say it can't be done. I mean it's just saying it's I I just think it would be difficult. You also said when you were first describing the strategy that

If you think the str the the stock has dropped too much or gone up too much, how do you define what too much is? Yeah, well that's you know, that's the nature that that's that's where experience comes in and how you think the stock is gonna react. So I do a lot of work, you know, looking at the news and understanding the numbers and looking at how the stock has reacted before to similar news. So earnings are the most obvious. catalyst to move these stocks because they happen every quarter and

you know, they can move quite violently on earnings. And a very typical thing that happens is um let's say Sony again comes out with numbers after the bell in in Japan and um it drops uh three percent in New York. Um and I think the numbers are horrendous. Okay. I think they're much worse. I think I think Sony will open um you know I I think the market's gonna react much more negatively. So I might

short Sony in New York and try to cover it in Japan at a much slower price. Um but I have to really study the numbers and just see If that's justified. But very often what happens when you get a big discount on the screens, a lot of the algorithms or other traders that aren't as experienced come in and they'll buy.

You know, the bigger discount'cause they just see a big discounted number and they just come in and start buying it kind of blindly. Um, so you just gotta be aware and those are the kind of trades that I look for pretty regularly.

And it doesn't always work, believe me, I'm you know, I can be very wrong at times too. I mean if I if I guess wrong or if or if the market is mis or or some news comes out after New York closes, the whole thing could reverse very quickly. Sony could have You know, a conference call, you know, before Japan opens and say, Well, you know, we made a mistake when that was ordered in the numbers, or they could say,

Our sales of this product were much stronger than than we thought, and the whole thing could turn around. So there is a there is a lot of risk in these trades.

I think what might be helpful for not only myself but everyone listening to this podcast just to get some better context around how this strategy actually works. is maybe if you could give us another example. So here we've talked about the Sony uh example. I mean, can you walk us through maybe a recent trade that's uh worked out? Um what has worked out recently?

Or not worked out? Well, we can go through what have I done very recently that has been good. You know, there have been a lot of good trades recently in um see the thing is these trades aren't as exciting, but um You know, why why don't we go back to the financial crisis for a second when things were really starting to blow out?

And every day you'd come in and US futures would be down two, three percent. And what was happening, these what we call the ADRs, which is the American depository receipts of the Japanese stocks. were moving wildly because hedge funds had to dump, you know, massive positions or, you know, i it was just these huge dislocations were occurring and um

there were huge profits to be made and losses to be had at the time. So, you know, one of the biggest trades I did in those days was I I I think few I think we came in, futures were down about three percent. And I looked at um some high beta names, like there was a high beta name which was or a higher beta name which was Honda, which trades in New York and Japan, and a low beta name which was um NTT. which also trades in both markets and they were both trading at about the same level.

which was down like four percent in New York, something like that. And so what I did was I shorted Honda and I bought NTT, thinking that the defensive name NTT would far outperform Honda when Japan opened because markets were so volatile. And um sure enough, when Japan opened, Honda fell dramatically. It was a huge fall. It was something like fifteen percent. And NTT only fell like a couple percent. So that was like you know, a very typical kind of great trade that worked.

in those days. I had a couple disasters with this strategy. Two years ago, Nintendo, which is a stock that everyone knows, um came out with news after the Japanese closed that they were gonna move into the um mobile gaming business. Nintendo jumped uh in New York it had jumped up over thirty percent, which was above the limit that it could go in Tokyo. It was kind of crazy and I thought it was just much too much. So I started shorting it in New York, thinking I'd be able to buy it back

up twenty percent or something in Japan. But when Japan opened that night, Nintendo went right to its max upper limit. And barely traded. And I was kinda caught short. And the next day I had to cover in New York and it rose another rose like another thirty percent in New York. So it was a huge loss. But that's also happened on the good side a couple of times too, where you catch, you know, some stock will come out with earnings like

A couple of times Honda's come out with earnings and the market has just completely misinterpreted them, you know. You have the chance to short it in New York and buy it back in Tokyo when it drops much more, so you know, it kind of cuts both ways.

Okay, so why how come these trades turned into really big losses just because of how fast the price was moving and the the gaps on the open? Yes. Yes. I mean I had I I had underestimated the like the Nintendo trade, I had underestimated the magnitude Of how much the you know, how underowned Nintendo was in Japan and how many fund managers didn't own it, and they saw this as their catalyst to

Get into the stock. And they just bought it like crazy. And plus, there were a lot of guys who were short the stock. So it was there was a bit of a short squeeze on. That's what happened. It was brutal. You know, one thing you have to learn in trading is how to accept these losses and accept that losses are part of

you know, your strategy in the trading business and you just kind of have to roll roll with them and move forward. Yeah. And I know throughout your career you've had a few really big losses, uh somewhere around the Dollar mark. I mean, was that one of those? Oh yeah, that was one of those. Yep. Okay. So how do you move forward from that point? Like what do you do the next day when you show up at work?

Well, I have to say I've handled it differently over the years. After that loss I was just I was well I had I I I had planned a vacation the next day, so we were off on vacation for two weeks. Um and I was thinking about it on vacation, but it definitely got me down.

Um, but after that, you know, you kind of have you go through these phases when you take a big loss as to how to accept them and move on. And I think it's just a crucial part of training and I kind of had You know, I I I kinda worked in my head that, you know, you just have to accept that these are part of the business.

Um and you move forward and then you start chipping away at the loss and you start, you know, hitting singles and doubles and before you know it, you've suddenly made back everything that you lost and then some. And then you got you know, you're back in your groove and then you're starting to hit much bigger shots and you're you know, and you're seeing other trades that then you make, you know, huge money on other trade you make

So how long did it take you to recover from something like this? I mean it's It was actually much quicker than I thought. It took um I thought it was gonna take a while, but it just took me um The Nintendo loss took me a few months. Um and I was kinda right back to where I'd been. And um, you know, it just shows you you can't get too you can't get too down when these things happen. You just gotta fight through it.

Yeah. And I think that's really important to keep in the back of your mind like how quickly you can lose money. Like you lost uh over five thousand dollars on this particular trade within the space of what, two or three days?

Which took you then a few months to get back. I mean, I think that's pretty good that you were able to make that back in a few months, but just shows like how quickly it can all be taken away from you as well. Yeah, it can be taken away very quickly. And it can also be you know, you can also You know, there are other times that you don't realize you can make it very quickly too. You know, you y the one thing is if you get down about a loss, your brain is not ready to look at new opportunities.

So you just have to switch your brain back, you know, just like an athlete, you know, who has a bad play, he has to turn it off or else he's gonna make more bad plays in a row. So you just have to recover and get back in the game. You know, it's a good lesson for all life. Are you ready to get serious about trading? Then join Tasty Trade, Investopedia's best platform for options trading in 2026.

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Can we talk about some of the factors which have contributed to some of your most profitable trades? You know, just sort of switching switching this around here. Yeah, I mean definitely the most the most profitable uh I had been was during high volatility events or when I read the news really well Um and I understand that the market has misinterpreted the news. So I mean I I definitely so definitely during the crisis was were some enormous trades and they were happening almost every day.

You know, and recently, you know, the trades are a lot more boring. They're kinda like they're just like things like what happened with Sony. Sony came out with numbers after the close one day and they were ter they were terrible numbers and the market had only taken Sony down two or three percent. And I shorted it and it ended up

opening down something like ten percent. Um and these are the kind of trades that, you know, are much more common and regular, these kind of volatility events and they're happening. You know what's happened now to this entire cross border merger y this cross border um ADR arbitrage game is you know the algorithmic traders have really come in and you know on a normal day when there's no volatility there's very little to do in these trades. Um if there's not much news out

Then the algos just come in and they they they have their algo based on where Nikkei futures are trading in Chicago and where SP futures are and where dollar yen is, and they have an exact algorithm as to where these stocks are gonna open. So You know, it's a lot tougher now, but the volatility events are still there, and the best events are still definitely during earnings season when um

You know, when you can really get locations and the algos don't really know how to trade those events very well. How much time would you say you spend reading the news and actually studying for these particular trading opportunities?

Massive. Massive. I mean I'm in the office usually around 7 15 and I'm just reading you know news nonstop. And I'm reading it during the day too. I'm just reading news nonstop until To be honest with you, I enjoy it too. I mean I you know I think the markets are a giant puzzle.

You know, where you have news coming in from around the world and you kinda want to gather it and see how it all fits together and how it will impact especially the stocks that I trade and I love that aspect of it. But yeah, you are reading I mean, especially during earnings season, you know, I'm reading everything. You know, I'm reading analyst reports and I'm reading, you know, I'm doing a lot of historical checks to see how the stock reacted last time it had earnings and

You know, you're doing a lot and you know, but I really enjoy that aspect to this job. It's very, very challenging. And you're learning, you know, a tons every day, not just about your own stocks, but about other sectors, you know, that are going on and you're learning, you know, more and more every day. How does You know, how you know, when this US stock does this this, how does this Japanese counterpart that's in the same industry react?

Um so there's a lot of trades like that that are out there and the more you learn about the markets, the more you learn how to take advantage of them. And how do you keep all this information together? Like do you just store it all in your head or are you like ha are you taking notes or like do you have a a sort of a process around this?

Yeah, I mean I come in in the morning, I have my pad out, you know, I I basically put a line down the middle of the pad, good news on the right, bad news on the left. Um US News up front and Jap you know in Japan or the or you know Hong Kong news and Australia news on the bottom and I'm just Anything that I think is gonna impact some of the stocks that I trade, I just jot it down and see how it all fits together when these stocks open and you start seeing, you know, what they're doing.

Okay. And are there any news sources which I guess are a favorite of yours or you think are most credible? What news sources do you prefer to read from? Well, I mean I trade off of Bloomberg, um so we you know Everybody at our firm has Bloomberg terminals and you know, we use those for trading and you know, we pay for, you know, up to the second news and I'm also um You know, I'm on Twitter, I don't tweet much, but I do follow

uh you know, a lot of people on Twitter seeing what they're saying and I'm also I also get a couple of professional news services stuff that's gonna come very quickly and I'm also, you know, hooked up with a lot of analysts, so You know, we're seeing analyst reports flow in and um, you know, looking for for how news is gonna gonna impact the stocks that I trade based on that too. And just a couple of minutes ago, you mentioned Australia. So this is a question I actually meant to ask you earlier.

We've spoken a lot about the US and Japan. Do you trade this particular strategy or a strategy similar to this across other countries as well? I mean, either US versus Australia? Yeah, I trade we used to trade Hong Kong. Yeah, occasionally we trade a lot of these markets. Um

Just Japan is the easiest to trade because the cost of trading in Japan is is fairly low. Um we do trade Australia too, but the problem with Australia is the biggest stock in Australia is BHP and it's probably the most You know, even if it let's say in New York B H P is at a six percent discount to Australia, it will often open almost exactly where it closed in New York.

Um just because so many people are involved in it and they're kind of a self fulfilling prophecy. So if they all buy it, um they're all selling it in in Australia also. So it just kind of like and their break even is always the same price. So that's what happens. It's much some of these markets are much, much harder to trade than others. You know, but we have got we have a guy in our firm who trades Europe. Um we have um a couple of guys trading Japan. We have we have um

We have a you know, someone who specializes in India um and you know, Indonesia. So, you know, we are trading a few markets. Well how accurate is this statement that you want to look at places that fewer people are looking? Like, are there many people I mean Out of everyone I've had on the podcast, I don't think anyone trades a strategy quite like this. So is this a strategy that's I mean, obviously it's quite unique in many ways. Well it's very interesting because it varies.

The algorithms obviously make my job tougher on low volatility event dates. However, when a volatility event does happen, I feel that I'm you know, I like to think that I'm more knowledgeable about the stocks that I trade than a lot of the other people who are looking at these markets and trying to trade them. So I think they you know, I tend to think that they're gonna try and make a mistake.

Whereas, you know, I'm gonna be more often correct than they are. So, you know, I don't fear more people coming into these into these type of markets. But yeah, we are always looking for Obviously I think every trader is looking for where there are opportunities and there are usually more opportunities where you know, it's not as conventional. Like I do trade a lot of

pink sheet and um OTC names in New York and there's a lot of Japanese names that trade pink and OTC in New York that very few people trade. Um because they're very difficult to trade. You need to go through a broker Um, a lot of times and you know, there's not a lot of liquidity and they take time to get these these stocks on and you kinda have to you know, you kinda have to finesse your way through that market and figure out where where those opportunities are and it takes time.

And it's not easy to trade. So I d we do trade a lot of those and um You know, so it's kind of it's kind of a mixed bag whether whether it's good for more people to be in you know, to do what I do or not.

Can you speak a little bit more about that last comment about pink sheets and grey markets? What's that referring to? Sure, I mean there's a lot so I'll just give you like Nintendo is a prime example, although a little bit not a perfect example. Because it trades uh as a five letter name.

Um which means it doesn't really trade on a proper exchange in New York. So and there's a lot of them like that. There's a bunch of Japanese stuff. Maybe you've heard maybe you've heard of the big construction maker Komatsu, which is a um competitor to Caterpillar. They also trade as a five letter name um in New York. So basically they're very you know, they're not very liquid. They ch you know, they trade wide bid offer spreads.

market makers are, you know, very involved in protecting themselves in those names. So really the only time you can get liquidity in those names is um if there's an account in New York that needs to sell or buy in pretty good size. Um that's the only time you can really do those trades, but you you know you really have to know your stuff to get to get involved there.

So wh why do you get involved in those particular markets if they're Oh because you know, because I know these stocks. You know, I know I know these stocks. These are big Japanese companies. They just happen to for whatever reason they've decided to not list on one of the top exchanges in New York. They just you know, it the the listing fees to to trade OTC or Pink in New York is you know, in the US markets is, you know, obviously much less less restrictive for them. So that's why they

You know, that's one reason why they they trade on you know on the less liquid exchanges. But for me it's great because, you know, I know that You know, there there are no you know you i there's very few algorithms trading those names. You know, so you can come in on just a regular day and sometimes some of those stocks will be out of whack and you'll have a chance to take advantage of a dislocation. Now why would a company want to list in multiple countries? Like why do they do that?

I think it's again exposure in those countries for the most part. You know, they want they want access to US capital, so You know, and they want access to US investors and obviously they want their you know, a lot of you know, there are some US funds that can only buy stock in US dollar terms. So, you know, let's say there's a fund that can only buy US dollars but they want to own Sony.

So they don't have to go to Japan and buy six seven five eight. They can buy SNE in New York and stock, you know, and create a nice size position in that if they want to. You know, that's one reason, but obviously You know, all these companies are so tied to the US, most of them do a lot of business in the US, not all, and they all want exposure to US investors.

And what sort of you know, I know you're I guess you'd probably call yourself a a discretionary trader, right? Yeah, I'm a definitely a proprietary trader, yeah. Yeah. Is there any aspect to this strategy which is which you use quantitative modeling? Yeah. I mean we have um You know, I f uh well, put it this way, you know, um we're spitting out you know, all these names are coming off of um

our Excel sheet on a daily basis. So, you know, we're we're looking immediately to see what's sticking out, right? So but I wouldn't say that we're really modeling it because there's just, you know, I'm only trading I don't know, 50 names regularly. Um so they're all just popping up on the Excel sheet and you can pretty easily see what's sticking out and what's not.

You know, having said that, you know, we are you know we are moving into some some gray box kind of trading, doing other markets. Since I've been listening to your podcast, to be honest with you, I've kind of expanded

into other markets and especially the US and options trading and we are working on a gray box to trade some of that. Okay. Well let's speak a little bit about that and I also want to speak to you about You know, you said this strategy which we've been talking about for the last thirty minutes or or however long. is particularly good in high volatility markets.

What do you do in low volatility markets? Like how do you w how is most of your day spent? What sort of strategies do you trade when volatility is just simply not there? Yeah, well when it's not there, there's th it's oftentimes if if you're not in earnings season and you're not and there's no news coming out after the close in Japan and there's not much going on in the US.

You know, there's not gonna be much to do to be honest with you. I mean, the algorithms have completely taken over at that point. Everything's priced basically perfectly. So you're just I mean you're still scanning for ideas because you know it's one one part of this job is you still have to read everything'cause you don't know if you don't want to miss anything in case there's something out there other people haven't seen. So you're still doing just as much work, but it can be very, very slow.

on days like that for this particular strategy. But what's happened is since I started listening to your podcast, I started hearing, you know, other traders, you know, talk about trading US markets, talk about trading options and You know, I started experimenting with that and expanding my horizons a little out of this out of the strategy that I had been doing, and it's been pretty successful. Options are you know, a very interesting market for proprietary trading because they um

You know, you know your downside risk the second that you that you put on an options trade usually. So you can put an option spread, you know that your max loss is I don't know seven, eight thousand dollars. Um you can't lose more than that and so Those kind of trades work work really well, I think, for you know, they kind of fit in with the with this tr with the type of trading that I do.

Okay. So how are you using options though? Like um this is just for trading pretty much US markets? Yeah, I'm doing'em for US but I've actually expanded into I noticed that um You know, options do trade on some of these larger Japanese names in New York too, like. Uh you know, the Sony's, the Canons, the Honda's, the Toyotas, they all have options. So we sort of trade options in those names now too as an aside. But yeah, uh more typically we're trading um

straight US stocks, we're looking for upcoming catalysts in the stocks. We're trying to see how, you know, um the stock is going to react to those catalysts and you know s more or less place bets, you know, via options, um specifically option spreads on you know on upcoming catalysts.

in a name. So um you know, especially during earnings season, you know, if we think Google earnings are gonna be good, we might um sell a put spread an earning, y you know, uh in Google into the number, if we have some feeling that Google's gonna be good and then, you know, something like the put spread would expire worthless if we're right.

But it's definitely newer to me. I mean we are, you know, this has only been about a year doing this, but it's been relatively successful as we're you know, as I'm I'm getting more into it. So it's been good. It's been good to expand my horizons and adapt. You know, especially for the times when it is very low and very quiet with, you know, the main strategy of cross border. How he easy has it been for you to pick up on options? Like you haven't really traded them much in the past, like

prior to a year ago. I mean I knew, you know, I mean I had traded yeah, I I I had sold them a little bit in the past. So I basically knew them, but yeah, it took a little time. not that long. Once you you know, once you play with it, start in very small size and just get a good feel for them.

It took t I mean it it did take time, but once you understand that you can you can do spreads and you know your max loss as soon as you put on the position, you can get very comfortable with them. Um at least that's what happened for me. And I was kind of ready for a new challenge in my trading journey. I really wanted to do something new and um options were a great avenue for that.

So how did you start learning more about them? I mean, did you just start getting your hands dirty trading very small size, or were there actually some good resources that were quite helpful? Yeah, I just I really got I mean I already knew the basics to be honest with you. I like I said I broke them in the past. I I kind of understood them, but I'd never really traded them as part of my proprietary trading book.

Yeah, and I just started doing them in very small size and seeing how stocks reacted and seeing how it fit in with you know with my other strategies. And I just started doing them and just started growing in size and it you know, it was working. I si you know, I still can't say that it's my main strategy, but it's it's a growing part of, you know, how I trade and It's also expanded, you know, it's really expanded me much more into US trading and I've realized that

You know, reading much more about US stocks has also helped me trade Japan because so many of the stocks are related to each other. Um and it's you know, increased my knowledge base pretty massively. Just generally speaking, are the characteristics between US markets, like how they behave and how Japan markets behave, are they quite different or are they

Quite the opposite. I mean I asked this question because I interviewed uh Derek Wong on episode ninety seven and he's uh he's in China there and he was describing that the Just the whole market behaviour and how markets move, what they're driven by, is completely different to how markets are in the US or Australia and uh that type of thing. Is does any of that stand true?

I don't think so. I think it's I think the very s yeah, I I I don't think the market overall behaves that differently from the US, except of course it's a different market and it's a much it's a much smaller market. There's a much smaller or universe of stocks in Japan to trade, but you know, and you kind of get a feel for when funds are gonna gravitate, you know, you kinda get a feel for when funds are gonna gravitate to the high beta names in Japan and

you know, the lesser tiered names in Japan and you know and and those kind of things. But it's not like China, um, which can act, you know.

You know, i in a very different manner from Japan. Japan is a much more mature type of market. Now as you mentioned earlier, this particular strategy Is probably going to be quite difficult for someone uh who's just trading independently to try and replicate. In saying that though, how hard is it for someone outside of Japan to open an account to start trading Japan markets. I mean Well to trade Japan anyway, if you just wanted to trade Japan or just wanted to trade the US there's

Lots of brokers that will well not lots, but there's several brokers that will definitely trade both markets pretty easily. The problem is if you want to do that arbitrage type where you need to be able to do a foreign exchange transaction. Um and you need to be able to collapse the arbitrage, you really uh I I don't think you can do it as a retail investor.

Uh, you know, d I'm not a hundred percent sure but it it's very, very difficult to do. If you're just a retail guy who's starting up um on his own. Uh you kinda need to be you know, I I work for a proprietary fund right now called Convent is Capital and um you know we're very you know we're very involved in this type of trading. Um You know, and we have a broker, you know, that will you know that that helps us collapse these trades, so you know, and I think you kind of need to work for

you know, a proprietary firm to get involved with that type of business. You know, and I would just say also pr you know, anybody looking at proprietary firms should know they run the gamut. There are some of these proprietary trading firms that You know, um so you know, some of them, like mine, really want the traders to do well and, you know, their main purpose is that everyone's profitable. But then there's other types of firms where a big part of their business is just to um

uh you know, make revenues off the trader by charging the trader commissions. You know, and I think a lot of your listeners should be aware, you know, that's that that that's out there too. And, you know, so some firms might charge their traders a penny a share. you know, on every transaction that they do and so the firm is making money whether the trader, you know, makes or loses money.

Are there any things you would suggest that people maybe ask? Let's say they're going for an interview at a prop trading firm. Are there any questions you suggest they ask to try and Make sure they get in with a r a good sort of firm? Yeah, just you know, you wanna ask what all the fees are that the firm is gonna charge a trader. Like, you know, what what do I you know, what what am I paying in commissions? What what fees are you charging me on top of those commissions?

You know, questions like that. Um and they'll get a sense. And you'll you'll also get a sense pretty quickly when you're trading at a firm like that if you know, if you think you've made, I don't know, ten thousand dollars your first month and your check comes in and it's only uh, you know, two thousand dollars because there's fees, they've taken out fees galore.

And that kind of thing happens. So you just gotta be somewhat careful and, you know, look for look for a good firm. I mean there's no getting around the fees though, is there? I mean they're just gonna vary quite a lot. No, there is. No. Some firms some firms are much more

Some firms are you know really want their traders to succeed. The one that I work for absolutely does and the you know fees are really you know minimal. Um I have to say there's a huge divergence. So you gotta look, you gotta look.

Tim, is there any other final words you'd like to pass on, share to aspiring traders, anyone who's coming up through the ranks? Which you think might be helpful for them? No, I think I think a lot of your traders say it on the podcast regularly. Just just um, you know, understanding how to contain risk is, you know, the number one part of this business. Understanding that losses

are part of the business and you know they're just you know, every trader is gonna have loss along the way, how you react to those losses is um gonna be vital in your trading career. You know, bouncing back from losses is huge. Be you know, be creative. have the ability to change how you trade when the markets dictate, you know, always always try and learn.

New things. I mean certainly for me the desire to learn and challenge myself is a is a big reason why, you know, I really love uh, you know, trading and I love the markets and um the freedom that it gives. Well said Tim. I appreciate it, man. Thank you very much for coming on the podcast. Um if someone wants to

If someone wants to find out a bit more about you or uh I mean I I don't think you really ha you don't have a website or anything like that, I know that for sure. You're on Twitter though. Uh what's your Twitter handle? It's uh just at T Steamstrup. Um T-S-T-E-E-N-S-T-R-U-P. I don't tweet much, but I'm happy to uh converse with anybody who contacts me. Excellent. All right, Tim. Well, once again, I appreciate you doing the podcast and thank you very much. Thanks a lot, Eric.

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