203: Bob Bright – The Pursuit of Edge

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Welcome back traders. I am Aaron Firefield and thank you for joining me. This is episode 203. Today my guest is the great and legendary Bob Bright. Though unless you follow high stakes poker or you were maybe a prop trader during the nineties or early two thousands, it's likely you're unfamiliar with this man.

In short, it was 1974 when Bob threw in a corporate job, moved his family out to Las Vegas, and went all in on blackjack. Four years later, having consistently beat the casinos, Bob went on to the Pacific Exchange in California and traded options on the floor. Then in 1992, Bob and a partner formed Bright Trading, a prop firm which at its peak was home to 490 traders across 42 offices in the United States. Bright trading still exists today, but on a much smaller scale.

Now at eighty years of age, Bob remains an active market trader. And he is also a serious high-stakes poker player. In fact, if you Google Bob, the only photos you'll find are of him sitting in front of stacks of chips at various casino tables. I might also add, if you've heard my interviews with Blair Hull and Edward Thorpe, you'll notice that Bob's story has similar parallels. Over the next sixty minutes you'll hear Bob speak on pivotal moments from more than forty years trading and gambling.

his dependence on betting with a mathematical edge, which leads into what he's trading nowadays, leveraged ETFs against non-leveraged ETFs. If you do happen to get confused by some of the things Bob is describing on this subject around leveraged ETFs, I've included a link in the show notes which may help with some additional context. And then we finish it off with some talk of discipline and managing tilde.

After this interview, you know, personally I feel like Bob perhaps had a little bit more to give. I thought I might have been able to tap in, extract some more wisdom, but it's like occasionally my questions weren't quite connecting. Regardless, it was an absolute honor to chat with Bob, and I hope you'll dig the episode. Ladies and gents, here is Bob Bride. I believe it was the year nineteen seventy four.

It's when you left a corporate job after having worked there for twelve years, packed everything up, moved your family to Las Vegas, and decided that you were going to become a full time blackjack gambler. How confident were you that this was a good idea? Uh pretty confident I had uh for about eight months tested out uh poker in California and blackjack in Las Vegas on weekends. and I did not run into any real poker players that had much money. Uh a lot of top poker players in California

I ran into but uh I could tell they didn't really have much in the way of money. If they had a bad week, they were struggling. Uh the blackjack uh ba after reading books and getting a little bit of tutoring, I was able to uh win that without a big problem. So Uh the the uh playing bus playing blackjack at the business is the book I read that uh worked for me and

uh came to Las Vegas and had a weekend workshop with a guy that was teaching p that. And at that time that was in nineteen seventy three, I believe. And he um Charge a hundred dollars for a weekend, which is pretty low cost.

But he had twelve people. And uh he back in those days it was she'd put on the screen uh that would play on the wall uh Two cards would come up and your cards would come up and then you had to tell him what was the proper things to do because he told everybody they had to study.

Well out of the twelve people, ten of them he told him, uh, come back. Uh I'm keeping your hundred and yet next time study before you come here. Because uh people from New York and everywhere had come into the uh uh workshop he had and two of us stayed then for the weekend and we learned a lot and uh uh I used that methodology for four years and made enough money to get into the stock market and the the casinos

were happy that I left Las Vegas. So that was uh that that was a an experience. So that was twelve You know, over four years of on my own with Blackjack. The twelve years in uh the that I worked when I got out of college was with a large corporation and I worked myself up to a finance uh controller for a multi plant location.

And then uh the uh uh next way up was uh a division controller job and I checked everybody's profile and they all graduated from Yale or Harvard and some of the prestigious schools. And I did not and decided time for me to move on and do it on my own. Why would I work for somebody all my life? So

That's what I did. Moved to Las Vegas. I had three young kids and uh a wife that ha was going to go anywhere with me. So we uh we enjoyed it for four years and Uh I I ran into a few f other card counters and we m met every once in a while to sharpen our skills and But w we never recognized each other in a casino. If you saw uh w one of the other car counters you'd always never say a word to'em in a casino because that's how they find out if you're

the you know, part of the the people that beat'em. And they didn't they don't like people that beat the casinos, so but but since then it's been a a nice ride but uh since nineteen Seventy four when I finally left my one time one time job. Luckily I haven't had to work for anybody else uh since then. So I guess that's been what forty forty six years. Quite some time, yeah. So you had this methodology for when you came into playing blackjack um that you'd sort of been going over a little bit.

When it actually came time to put it into practice, you know, in nineteen seventy four, once you really committed to this, were you actually a good card counter from the outset or did you struggle a little bit to make a reasonable living in the beginning? No, I I actually s uh nineteen seventy three came to Vegas quite often on weekends and counted cards. I r I read the book originally probably early seventy three or early nineteen or sometime in seventy two.

So I was always interested in it. My brother had worked in Las Vegas as a dealer, uh not a blackjack dealer, but a uh dice dealer. So uh for n a number of years. So I was familiar with Vegas and once I understood the book It was fairly simple to do card counting and uh I came down with three thousand dollars in my pocket and uh had to rent a house uh and Uh that was uh my biggest suspense and then I went out and tried to s play very small stakes blackjack and did that for about seven months.

before I could jump into a little bigger stakes'cause I was playing five dollar chips uh for seven or eight months and finally got to the point where I could play the twenty five dollar chips and then then I finally started making enough money to where it kinda grew from there. And then I had a about three and a half years to accumulate enough money to Go get involved with the uh stock market.

I've heard you tell the story about how you went out one weekend with the intentions of making enough money from your winnings that you could then buy a house and cash and you pretty much did minus a couple of grand, uh you were short, but was that during your first year? No, that was in the um uh I think about the t I was two or two and a half years into it. It was in nineteen seventy six, I believe, and I was getting

So called uh I was getting tailed quite o often from the casino. Security people would follow me to my car, write down my license number, things like that. Uh if you win in Las Vegas, uh they tend to wanna know more about you. And of course I lived in Las Vegas but a Las Vegas uh uh license plate and everything. It got to be where okay I had to move to I figured I had to move back into California and drive up on weekends or move to Utah, which was a hundred

miles up the road and I decided to buy a house. We found one uh about a hundred and five miles from Las Vegas in uh southern Utah.

And uh for two years uh it worked out for me and for the uh security of the casino because Now I had an out of state driver's license, uh out of state uh license play uh and I could pretend to be a high roller and uh sit there and drink uh alcohol and play chips and uh bury my bet to go along with the card counting and act a little bit tipsy and play all night and they wouldn't bother me'cause they knew I was out you know, they they did not understand that I had

basically lived in Las Vegas for two years. I didn't realize that and uh I just happened to come in from out of state and check into a hotel for a weekend and Instead of having to play uh two or three shifts a day, uh, you know, I used to put in about three hours on every shift, uh, almost seven days a week when I first started, but in nineteen seventy six and seventy eight and seventy eight uh through nineteen late seventy eight.

I only had to work on weekends and it uh made more money and less less so called uh

uh heat by the casino. So that that worked out pretty well. Then I had enough money to go into the stock market. I went and got interviewed uh at a one of the stock exchanges and They said, Well what makes you think you don't know how to s trade stocks? And I said, Well I don't but I I will learn and uh uh it it was ended up on the options exchange and uh Well they asked me, Well, how are you gonna trade options? I said I'd I'd I'd figure it out. I'd uh pla probably play it the same way I

uh did the mathematics with blackjack and they said, Well, you know, why don't you talk to this so and so guy who he's he he's also was a major blackjack player and now he has a good operation here. So I did and we It turned out he turned out to be a pretty good player and I you I understand from Rob that you have interviewed him by the name of Blair Hull. I was just gonna say. Yeah. Yeah.

So he and I uh w worked together on the Pacific Stock Exchange for about uh three or four years and then he went on to Chicago and then he retired for a while, then I went on to Chicago and And he found out what I was doing, so he contacted me and uh came back to Chicago and uh uh uh uh drew uh infrastructure of what he really wanted to do and Uh he's done very well with his life and uh uh I and I have too and we both enjoy, you know, that period of time. And he's uh um

Uh you you know him well. I was Rob told me you had a quite a long interview with him.

He helped me a little bit when I first got involved with the options and he already had something with a kind of a th three sixty bod molem or something that uh you can get some computer work done on uh option uh models and back in those days in the late seventies uh not many people had those kind of things so we th th that's how I made money in uh doing options for quite a few years and and then in nineteen eighty four I moved to Chicago and

got into futures and the bigger options exchanged there and eventually in nineteen ninety two I started a my own trading firm uh when I was doing equities Uh I started doing equities then because a friend of mine told me that

Uh he was the second person on the west coast to be shown how to do equities from what they called upstairs. You did not have to be on the trading floor up until uh the early nineties you could not trade equities uh or options uh unless you were on the trading floor and uh Well, I w he wanted me to come over to his office for and I did for a while and i I was impressed with what he was doing. And the problem was he

learned how to make money trading equities in a c with a computer, in an office, without being on the trading floor, but he didn't have the capital. And I had the c a lot a lot of capital. So we joined forces and started bright trading.

and um went to Chicago and uh from that point on it we we grew to a pretty large firm and uh we're still around. Uh we didn't get involved with high frequency trading and now there's a few firms out there with high frequency, but we love having a proprietary trading firm and Uh that that went very well, nineteen ninety two, uh to now and we're still

Still thriving with a number of uh some of the best of the best are still with us. Uh we have a uh a firm that uh we enjoy d dealing with the traders and uh doing trade

I enjoy doing the trades. I bought my partner out there in two thousand three. Uh he got bored when uh things started going the other direction because he was uh uh his half of the partnership was he would find the managers to manage the building and do all the construction and electrical work to get offices going and we had forty two different uh

trading rooms going at one time and now we only have a couple, so people now trade from home. You can trade from anywhere. You can use your phone from anywhere in the world and trade and a lot's changed. I've seen a lot of technology change in the last uh number of years. I bet, I bet. Um so you've covered a lot of ground there. I think you sort of summarised close to maybe thirty years just then. I'd like to dissect a few of those

things uh a little more. Uh first of all I was just curious, when you were still in Las Vegas, uh did you ever cross paths with Blair Hull uh at that time before you you know, later work together or had some sort of um thing going on uh at the Pacific Exchange. No, uh he was at the exchange uh before me and I didn't cross paths with him. I crossed paths with a guy by the name of Ken Houston, who wrote a book, the uh Big Player.

And he uh also was uh uh uh like an IT uh manager at the Pacific Stock Exchange and he would come to Vegas on weekends and he had a team that played and uh it was uh probably nineteen Let's see what year would that have been? That would have been about nineteen seventy seven, seventy six seventy seven.

And he was the best known blackjack car counter then. Uh he ha he had high profile. He'd always re turn around and tell uh reporters in town how he did and probably embellished a little bit on that. But he had a a smart team that he brought in from California every weekend and uh I joined forces with him for a month. And we went around the world and played blackjack a little bit. He taught me everything about team play and I taught him how to play Lone Wolf and that was our agreement.

When we got back to Las Vegas, uh We uh played about one more week and then uh I told him okay, we've we both met our our goal of learning a lot from each other and I'm gonna go back on my own and be a lone Wolfman. He said, Well nobody's ever quit my team before. I said, Well, I can make more money on as a lone wolf. So he went on and became uh one of the m most famous blackjack players prior to uh

when uh some of those college kids got in from the East Coast, uh MIT team got in af about ten years after he did. He had a team going here for quite some time. I never decided to get into team play. I'd like to be the lone wolf and play uh play my own my own money and uh not worry about other people and that's how I did it with the blackjack and that's how I did it with

options for many years until uh nineteen ninety two when I decided to start a firm and um kinda grew because it was the right time. People were now leaving the trading floor. uh where a friend of mine who had stayed in San Francisco and I had gone to Chicago, he said, Well come back and visit me and I'll show you what we're doing and maybe uh we can get together and start a start a business and we did and it worked out very well.

When you first arrived at the Pacific Exchange, I understand that you were predominantly trading options. Your big thing is having an edge and I presume this is sort of ingrained in you from playing blackjack originally. Where did you find an edge in trading options to begin with? Well, back in those days it was very simple. Uh you would uh

B buy to the left, sell to the right. We had printed sh uh reports that we got from uh Blair Hull who had a little operation going where he was selling to about uh half dozen people, the mathematical model of what the fair value of option uh models are. And we were trading stocks with it. We were doing stocks and uh calls and puts.

And most people that did options back then, in fact the first year I did it in nineteen seventy-eight, um most there was not hardly any puts being done. It was mostly caused. But the uh the idea was It was pretty simple. If they somebody comes in and wants to buy uh calls or puts, you just look on your printout and you're able to uh to do it. It it didn't take long before you can you learn to do it in your head anyway. But options versus stock uh y with with a call and a put combination

You can actually do synthetic stocks. And I don't know if you're familiar with that, but a lot of traders might be, where if you buy a call, sell a put, it's the same thing as buying a stock. And sometimes you can buy a call, sell a put. and you end up with a a a price of a stock lower than the price uh that the stock's trading for. Then you turn around and sell the stock and you lock in of uh some free money.

uh or you can do the reverse of that. There's c what what you call convergence or reverse conversions and back in those days in the late seventies and most of nineteen eighties and early nineties Uh that was how a lot of uh professional traders made their money. But since then everybody's gotten involved with computers and uh seldom do you see things out of line enough to be able to do the th the three sided to where you lock in these profits without any risk.

So what year did you transition to computerized trading and I presume this probably forced you to adapt a little bit. I mean, I'm not sure if you were able to continue doing those same sort of trades. Uh once things became computerized. Rather than get involved with high frequency uh automated computers with auto you know, autoficial intelligence and have uh that

do the trades for you. I decided not to invest in that and uh it was still I'm still a point and click type traitor, but I uh And I I'm not a good analyst, but I find where there's mathematical edges is by looking at these things and uh

Compl and that's why I still point and click. And very few people now a lot of our best traders uh have uh but AI and they will maybe send in a few hundred stocks for the opening and and get things done based on some AI pro programming that they've done and and then they don't trade too much during the day and then they do a marketing on clothes and get out of everything.

Uh there's various niches in the market anymore. And you can do it with a lot of uh letting the computer do all the w work for you. And you gotta do a lot of homework to get the computer the information that's needed, or you just do it yourself with uh a niche that you may have in the market. And that changes periodically based on uh things like uh interest rates and things like that. You gotta uh follow

Yeah. You know, you gotta under s you w once you understand how the clearing firms make their money and the brokerage firms make their money, uh you find a way to where you can also make your money as a pro professional trader. So Yeah so but you still gotta pay the Piper a little bit because My clearing firm is Goldman Sachs and I've been with them ever since nineteen seventy eight when we started with uh uh them or uh or uh a a company that they had bought. They bought numerous companies uh

I had been with I I never changed firms. I s started with one firm and then it another firm bought them and then another firm bought them and then Goldman bought them. So I've been with Goldman ever since seventy eight, more or less, and uh I've learned how uh clearing firms and how exchanges make their money

and how a proprietary d uh broker can make money and how retail brokers make money. I never cared for the retail brokerage. There's always such a What you call handcuffs for traders that wanna work retail. The y you gotta almost be uh into a proprietary situation to where you're not limited to the so called pattern day trading rule with all the rules of the uh SEC and FINRA.

uh as a proprietary trader you have to take a lot of tests and so they know what you're doing and then uh once you get all the tests passed Uh you're uh you're pretty much eligible to do what you or your firm wants to do as long as it also the clearing firm that you're clearing with is is allowing you to do what what you want to do. So that's pretty much it. It took a while over the years, over the decades to learn to do that and I'm still doing it.

Yeah. Well I'd love to spend a little bit of time talking about I don't know if strategy is the right word, but really Now under Have you ever watched a stock explode and thought, if only I had the capital, or sat on the sidelines because your account balance felt too small to matter? Good news. With Trade the Pool's limited risk platform, you don't need millions or even thousands to start trading the U.S. stock market. Bypass the PDT and tap into over 12,000 U.S. licid equities.

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And uh perhaps today you aren't quite as active. You're still very active, but not to the extent that you were uh, you know, the past kind of thirty, forty years. Maybe if we talk about when you were kind of at your peak. really active and heavily involved day trading. If we were to come into your office during that time and we were to watch over your shoulder, uh for the trading session, I mean, what sort of trades would we see you putting on? Like what what would that be like?

Well things have changed a lot from those days. In in those days the rules uh were a lot different than they are today. Uh if you have a stock like uh say it's forty dollars and uh it might well there was a while there for the first few years they traded by eights of a dollar. Then they went to a teeny of a dollar, one sixteen. Uh and then they eventually went to pennies. But the point is, uh you could put in uh say a stock was forty one dollars uh bid and

Forty one dollar and five cent offer or forty two dollar offer even. Uh But you you could also put in o offers above the offer and then if some institution came in wanted to buy a hundred thousand shares when only a few hundred million are traded that day

th th they might be willing to pay forty three dollars for it. And say you had a forty two t ten offer, forty two twenty, forty two thirty, forty two forty offer, And if they came in and bought a big block of stock at forty three, you would get paid forty three dollars. Uh they changed the rules over the years to where now you don't get that money. Uh they get every price that you've had in as an offer now.

Uh and that changed many years ago. So those are one of the bigger edges we had back ye years ago. So you can't talk the the same in now versus the nineteen eighties, even though the uh uh computers taken over a lot of information that you that you can uh have alerts and you don't have to be watching everything. You can have a I have a buzzer that uh I put a lot of alerts in and when something buzzes I look to see what it is and then I know what to do. And i it's uh

The Heyday was when there were certain types of things done. Even in the eighties and nineties, a lot of people did not understand all ha options at all. They didn't understand how the a three way you can do a synthetic stock versus a regular stock and lock in a profit. And s you know, now you know, major operations, major firms have uh automatic computers for that with AI and everything else. So Uh things have changed, but there's still a niche for people that find the niche that they like.

Well, I still do probably anywhere from 20,000 Two or three hundred thousand shares a day. But it they're selective trades and it's mostly mathematics with so called leverage uh products. I use the leverage ETFs and you have to know um how that works. The uh I I like the ma the mathematic way of making money, not the smart way of being a uh good analyst and knowing exactly what a company does and

Count the number of trucks that go in and out of their factories and uh boxes of uh product in and out and all that. I just like to play the math and when you play leverage ETFs. Uh that leverage factor allows you to make money just because of the mathematics of leverage. Can you uh go into that with a little more detail? What is it about leveraged ETFs that appeals to you? Well let me give you an example. Let's say that

And that particular product, it could be a financial ETF, it could be a leverage uh a double or triple. And what that means is it will move two or three times. A double will move double, a d a triple will move three times the value that the underlying product moves. So therefore if you s have a product of a hundred dollars, a particular ETF, uh you can s uh sell it, it goes it

Say it goes up one percent a day and you sell it uh you sell the one side and you also sell the other side. You can sell the short, you can sell the sell the long. So you're actually selling Uh let's just for a p a good example is say Over a period of uh uh say three or four months. Uh it goes up ten percent and down ten percent. Well, i uh uh if you did the regular ETF, uh you start at a hundred dollars and you end up with a hundred dollars.

But if you do it with leverage, you can You take a hundred dollars from the And you short the long and it goes up to a hundred and thirty, because it's triple, right? It goes up ten percent, so ten, ten, and ten. So it goes up to one hundred and thirty and you've shorted it. And well you're losing on that side, but you're uh shorting the other side too, where the uh it goes uh down ten percent, down to ninety, eighty, seventy. So now you got

Now this is say over the next period of time it drops ten percent. So think now ten percent of one thirty as an example is not ten points. Ten percent of one thirty is thirteen points. So it drops 1313 13. So that$100 product goes back to$91. And you started at$100. Shorting it. Uh so y now you're it's back to ninety one on on the sell long side. On the sell short side it went the other way down to seventy, but now it goes back up ten percent.

And it doesn't go up from seventy to eighty to ninety to one hundred, it goes up ten percent of seventy, which is seven, three times. So now that seventy goes up to ninety one. So now you got the product that is has given you nine percent mathematical edge strictly because it moved around during a period any period of time uh

There's other factors you have to consider, but it went up ten percent, down ten percent, and here in March there were some of the products that had done that in a matter of a day or two. And think about it, when you have a ten percent movement On a triple, you're actually if it goes up ten percent one day, down ten percent the next day, and now you've got ninety one price on it instead of a hundred, you just made yourself nine percent.

So that's what I mean by mathematic game. I just it's similar to uh any of the mathematical blackjack games or mathematical poker games. You got you have to find where the edge is. And there's other to it, other things to it. You gotta put in a beta of the product that you're trying to trade. Over a long period of time, you know, what's the beta of it and the long term

uh movement that you can anticipate and you kinda factor the math into that. But in simplic to keep it simple, it's strictly uh the professionals short these products and the uh And in the prospectus it actually advises you never buy'em for more than a day or two because you lose money over time because they will de decay in value. But uh you know, the uh very few people take the risk to short these products and uh that's where the professionalism comes in in understanding the math.

So essentially what you're doing is exploiting the track and error of these leveraged ETFs. Well, it's it's a mathematical it's not an error. It's a mathematical real mathematical game. Kind of Jack blackjack is a real mathematical game. So if the w if if say IBM goes up ten percent and then back down ten percent and if you're guaranteed to make money on it, uh why not? So how long have you been trading these leveraged ETFs for? Like when did you come across this niche?

Well, uh when I first did it was probably ten or twelve years ago. Uh and I did it for a while and then of found out the clearing firm knew it better than I did and uh as I was making money as the market you know, it zigs around. It moves up a half, down a quarter, up a half, down a third. uh what point you know, and it moon's all over. And they charge you not what they call imputed value of interest and locate money.

to provide this product with you so that you can short it, because you're shorting both sides of the ETF. So that you're paying a fee for that and they can move that interest imputed interest of value around, uh, if a lot of people started doing it, then they have to go out and borrow more from institutions that might own it.

And these leveraged products no ba no hardly anybody owns it long term. So there's there's a constant battle one day the they might charge you a annualized two and a half percent, another day an annualized eight percent or and you really gotta watch the math that is being charged to you. So the first year I did that I put a bunch of money into it and I thought I was making out pretty good. I checked it out.

I was up two and a half million and I looked at the math of what the clearing firm made from me and they made three million from me. So I just said, well, I tried to negotiate with them that I would continue doing it but they had to cut back a little bit on what they were charging me and after some discussions they decided not to cut back. So I decided

uh close everything. And I had like a hundred million dollars going on at that time and uh within two days I closed it down. Then they called me and they said, Well how come you close everything? I said, Because you wouldn't negotiate with me. So w we could both make money. So y I'm not gonna Play any game that you are the only one that makes money.

What is the duration of these trades? Before you gave in your example you spoke about kind of ten percent moves. Um, you know, ten percent moves don't happen too frequently uh during one day. Um, are you trading this over multiple days, like these positions or these trades, do they have a duration of multiple days or are you trading these through, you know, smaller movements on an intraday basis? No, you you can put a position on uh that that would be a perpetual position.

And periodically if the clearing firm is charging too much to secure the long ETF for you, then you would reduce it periodically. So you're So you know, the way the market works, one day you might be up one percent, and then the next day you're up a half a percent, and then the next day it's down three quarters of one percent. And when I say it's up ten percent, down ten percent.

But the reality is over a long period of time most of these products or most of these uh ETFs well the the market itself is up about six or seven percent an uh on an annual basis. So you gotta factor the mathematics into that. You gotta look at the beta of the type of product you've got. And you also w gotta watch what you're getting charged for when they're charging you a locate fee and an interest rate fee.

So basically that's what I do anymore rather than spend time doing a lot of uh work like we used to do, where their rules favored proprietary traders. try to trade the leveraged products that the ru you know, the rules haven't changed. Those that short it and can maintain it and carry a a position for a number of weeks, days, years, whatever.

Uh you shouldn't make money unless you don't have enough volatility. Now this since February, late February, we've had some pretty good volatility in the global market. Uh there prior to that last year uh se in uh two thousand nineteen I actually closed I I had it up to maybe thirty, forty million and dropped it down to less than five million because there was little volatility. If you don't have the volatility, you better start to get out of the position.

If you have high volatility you just have to manage it a lot. And you can't really do that if you don't have enough Knowledge of how the math works. There's a lot of information on those kind of products and you're warned about it in the prospectus of The the products are made for retail to buy. What they don't tell you in the prospectus is that professionals tend to sell'em.

Mm. So what do you do in those periods where volatility does drop off? Do you have other uh niches which you've found to exploit? Well, I I really don't like getting too involved with other issues other than I have done it with REITs and different things where they pay uh pretty good dividends and high value real estate.

I uh I actually I'm not a good analyst, so uh like to dig into all that and I never really made a lot of money doing it because uh you'd always find out that the uh the the people that were putting together these products or REATS, sometimes they don't align them the their their business model with the uh uh investors and I didn't know that.They're not supposed to do that.

you know, any any business you get in, you you better hope that whoever you're doing business with is aligned with uh your part of that industry also so that you both make money. And when people put together a REIT, real estate investment trust, if they're not aligned with the shires of those trusts, Uh they they will try to make management money that kinda defeats the ability for you as an investor to make money.

And there's always been some people writing on those kind of things, but uh I don't like to get too involved with anything other than the mathematics so I don't have to deal with uh people that have other uh interest in what they're doing th rather than just uh motto that they say they're they're doing.

And that's sorta what I've done over the years with blackjack or poker or stock market. You gotta understand what the other people in the industry Uh what are they doing? Th they're not there to just make it nice for you, they're there to make profit. I believe in capitalism. And uh y he rather than dig into um like IBM or a car company or whatever to see what they're doing and all that. I I just I'd like to dig into what

the clearing firm does, or what the brokerage firm does, how do they make money? You know, they compete against other brokerage firms. They make money by selling order flow. They make money by charging their own customers. They make money by doing uh subpenny trades that you can't do if you're not a broker uh with you you can do subpenny trades with uh your own customer uh but you can't

You can't do it otherwise. Uh so there's all kinds of different rules and regulations that favor the uh big banks of the world and the clearing firms and the broker dealers and then the proprietary traders that have taken all the tests and understand a lot of that so that you can't go back on the SEC or something and say, Well, I didn't know about that. Uh you believe me, they They have some tough tests for people to get involved with

uh proprietary trading. And anybody trying to do short term trades really should become a proprietary trader, not a retail trader, because there's a a world of difference. Before when you gave the example of uh the edge you've discovered uh trading around these leveraged ETFs, um I mean that that was a great example of an edge you've discovered.

I'd really like to speak with you more broadly about edge, just the subject of having edge For you, what does it mean to have an edge in trading markets? Well in trading markets you have to have an edge that you know in the long run will make you money and that you're not feeding uh a brokerage firm uh or feeding an an exchange. The exchange makes their money by selling the information of the quote.

Uh the clearing firm will make money by charging interest. Uh they will take a margin account and take the stock that somebody has in a margin account and uh lend it out to other people. And then they charge a fee for that. They don't give you that fee if you're the margin account person. They keep that fee. So there's all kinds of little ways that.

Clearing firms make money. There's all kinds of ways that changes make money. There's all kinds of ways that uh some firms will buy and sell order flow. So th you gotta understand all that. Once you understand it, uh then you pick out the niche that you wanna do. And for the most part most people that have a mathematical or any kind of a real edge will want to get around the pattern day trading rule, which uh allows only about about six to one leverage.

And uh you can get around that because you get tested, you become a professional, you get uh whatever your bro uh broker dealer will allow you to do because you're actually using their firm the firm's funds. You put up uh some seed capital. We have people that put up fifty thousand or a hundred thousand, we give'em a million or two to play with, but we monitor very closely what they're doing. But i it it gives leverage. So even on a small edge, you might have a half a one percent edge.

But if you're leveraging it twenty times. That's a ten percent return. Uh so you gotta prove yourself to be able to do that, but that's uh what an edge is all about. You don't have to have a big edge. In blackjack, for the most part, you hardly ever had more than a one percent edge. And I I did pretty well sometimes when it was strictly a half a percentage or a quarter of percentage, because you can leverage yourself more by increasing your bet size when it's

when it's a one percent edge versus when it's a negative uh one percent edge. And you you move that's how casinos used to catch you, uh it'd watch your bet size.

And now they have uh artificial intelligence that does that with a video taking a picture of what you're doing and it's also card counting. And if your bet size is always higher when you have a so called positive count, And always a low bet when you have a s uh you know, a down a a negative count, uh th pretty soon you're gonna get tapped on the shoulder and asked uh

Uh why don't you play another game because uh this game's not for you, uh at least in our casino. So uh w we'd love to have you here, but we can't let you play blackjack because you play too well. And that's that's part of the business. And these days I understand that's happening in the brokerage business too. You may have run into it where you I I don't know about Australia but in the US a whole lot of the internet firms have gone to zero commissions.

And that's because they sell the order flow. But if you're too good with the your orders, if you you know, they will find out and the people that buy that order flow from them will find out who is really good. uh trader and they're gonna say, Oh, we don't want that guy's traits. You know, they they start to bar him just like they they use the casino model. If you're too good playing against them, then they don't want you. You know, go down the road play with somebody else.

I might just rephrase that question a little bit um and and sort of put a slightly different spin on it. For newer traders, let's say, what are some considerations for how they could seek out an edge in trading markets? Well they have to have a niche that they enjoy doing. An edge could be that they have worked in an industry for twenty years and they know everything about it. They

uh have contacts within the industry. They can make phone calls and find out some of the things that is public knowledge. Uh you know, I'm not talking inside information or anything. That's one way of knowing about uh you know, uh uh some of the top People will tell you that t trade what you know, trade the industry you know. Uh you gotta know uh that the more trucks that go in and out of a factory, uh

will tell you something. It's a lot of data that you would need to find find. Uh that's why they have quants these days that are providing all that data for you and you can pay to get that kind of data but still so many people have now gathered data based on such things as uh cardboard boxes and trucks going in and out of factories and you know, trying to guesstimate w how the business is. Uh that it's not near the edge it used to be.

Th that's an edge if you know your industry. If you have a background in the construction industry, you know uh if lumber goes up or down in price, you know how that's going to affect uh retail construction. Uh there so there's those kind of ways and then there's the mathematical kind of ways of like banks, they for the most part will want to lend long and

borrow short and they borrow money at lower interest rates and lend it out at higher interest rates. And everything seems to be kind of turned upside down in the last couple of years. In fact, since uh about six years ago when Europe started going this negative interest rate, or Japan did actually twenty years ago.

Uh we now have negative interest rates, so the the yield curve is you know kind of sloped a little different than it used to be. But it used to be pretty simple for banks. Uh they would lend long term uh you know, they'd borrow short term, you know, pay two percent, three percent to borrow money and lend it out long term at six percent on a long term mortgage. Uh that's that kind of edge has disappeared.

And rightfully so. These days there's a lot of information out there and everybody has apps and Uh cell phones to get any kind of information they want. They just go to Google and get whatever information you want. So the competition on a global basis. For mathematical games, uh you have to be a little more smarter than they were uh even fifteen years ago.

You go back thirty years ago, uh banks really didn't under s you know, they didn't own their own business, but they knew how to make money. If it's easy to make money when you borrow at three percent and lend it out at six percent and leverage yourself Uh it's not kinda hard to lose money doing that. How about the traders who came through the door of bright trading? Like how were they encouraged to find an edge in trading?

We try to work with people if they don't have a a niche that they want to that they think they have an edge, you know, we'd work with'em. Uh we work with a firm that's called Stock Odd. that has a database uh for use. Uh our traders are able to use it uh for free. They they they charge uh quite a fee for most people that uh are not with our firm, but with if they're with our firm, um you can get that f uh without any additional cost.

and it's a large database and say you want to hedge yourself all the time and which we recommend that you hedge yourself all the time, I would not short a triple uh ETF on one side without shorting the other side. If you short the long the long side, short the short side also. And it's just like I would not short GM without looking for another car manufacturer

in a similar basis to go long. You know, you might buy GM, sell port or whatever. You're gonna find those kind of things to hedge yourself to give yourself leverage with the s small edge that you have. And if you have a a good knowledge of the uh regular automobile industry, you can make some good money with some good uh hedging uh with what we call pairs. And that's you have to have a a methodology or database to be able to get that. And that that's Yeah.

So pears trading was quite popular amongst uh bright traders when it was at its peak. Well trading was very popular and the uh restarted the firm in ninety two when they started leaving the trading floors. Uh luckily I had experience in options and futures and equities up until that time and then when people started hearing about us

Uh they didn't not want necessarily want to be on a trading floor. Can we come to your office and trade from your office? Really? And uh sure, come on in, we'd we'd show you what to do and uh here's what it costs and we'll try to help you and Uh for the most part, uh people that don't have preconceived ideas about what way the market's gonna go, uh will usually do pretty well with a niche that they can find for themselves, something they enjoy doing.

If they know on uh for the most part on Monday mornings or on the last day of the month uh certain things happen that don't happen the other days, they're gonna play those kind of uh transactions. So everybody has their uh uh Ninch we taught we for the most part we taught everybody how to do pair trading back.

twenty years ago, thirty years ago. If you didn't know how to do pair trading, uh how are you gonna get leverage on yourself? You have to do pair trading, trade a pair so you can take a small edge. of say a half of one percent and turn it into a five percent edge because you can leverage yourself with enough size to be able to get that uh that half a percent uh to a multiple.

So that's you know, sorta what we've done. We grew to five hundred traders, four hundred and ninety traders I think at one time, and uh forty two trading rooms around the US and a few people around the the globe.

And since then uh artificial intelligence, high speed high frequency trading firms have gotten in. Uh you're probably aware of Cinnadel and some of those that it's really hard to beat them and they have uh micro seconds to uh t you know, they they might do twenty thousand orders in a second and uh when you're trying to do s trading you you

If you don't have uh R A I and high speed computer and have a server right next to the venue you're trading with, uh you you better have an another edge. And uh That's what I do. It's try to just always try to have an edge, whether it's blackjack, poker, or options or stocks or or a combination of everything. Um

Just a a couple more questions for you, Bob. This one on the subject of mindset, uh, and and probably more specifically discipline. Uh when I was preparing a few notes um for this interview we're doing at the moment. Um, I came across this quote, I think you were quoted in an article of some sort, and you said something along the lines of there were a lot of people trying to count cards at the time.

Uh the problem was ninety-five percent of the people that tried to count would lose eventually anyway. They couldn't handle the discipline. And I thought that was quite interesting because uh discipline's obviously a big factor in trading success as well. Can you speak to the importance of discipline and how you've managed to maintain a a good level of discipline with your your own trading and your own uh gambling?

Well I I learned the discipline back when I first started playing blackjack. Uh you you better have discipline in any kind of a gambling game. Uh you might know you have uh one percentage in blackjack, but time after time, hour after hour they keep beating you. And y you get these runs once in a while. Same way in poker, same way in the stock market. We just ran up uh here in the US I think eight days in a row. And today finally it went to a downside. Well, how many how often does

you you go from a three hundred plus point upside to a to a downside marker in the same day. Not that often. But and y and if you try to if you don't have the discipline to say something is changing During the trading day or the trading week or the trading month then y you're gonna lose money. And that's what happens. There's all kinds of different things, but you really need that discipline with those three

uh areas of blackjack, poker and trading. When I say trading as whether you're trading futures, equities, options, whatever it is You have to understand what you're doing and not get upset. Things happen. You stay disciplined. Um so If you can't stay disciplined. then you know, you get stubborn and you think you know more than the overall market does, the capital markets will defeat you every time. If you think you know more about

uh that you should get a blackjack because the book says so. Every twenty one hands you should get a blackjack and you've played eight hours and haven't had one. Uh now you're getting angry and if you get upset uh that blackjack's gonna beat you.

So y you have to know what to look for and not get angry when things happen. Uh when it comes back in the day in the nineteen seventies and sixties Uh actually in the seventies, uh there were some shady things that went on in some of the gambling casinos around the world. Most of that's all been cleared up, but uh uh I play high stakes poker. I would not play high play stakes poker if I didn't have m uh monitors, uh, you know, cameras on every every game that I would be playing with.

Uh I learned that the first day I moved to Vegas. I w got into a poker game and caught some people with some shady dealings and um Of course, you know, they they knew I caught'em and they didn't invite me back and I never ever would ever again play a private game in Las Vegas.

I I trust the casinos that they lose their license if they get caught with anything shady, so I'd always like to have their license uh there on the line when I'm playing within their casino because I know that Th if they do anything shady they're apt to lose their license and I'm only gonna lose a little bit of money.

I I guess this ties in as well to tilt and tilt's obviously a popular term amongst poker. You play a lot of poker, um, and that term is also kind of used by many traders as well. How do you avoid or at least manage tilt in trading and or poker? Well, y uh because I've played blackjack, I've played a lot of poker and yes, till is something in poker. uh that is more prevalent in poker because more people talk about it. There uh it's also tilt in trading. You ca you can't let tilt uh get to you.

In poker, you better not because other players on a table, if you got an eight or nine-handed table, there's going to be at least one or two players that will make comments purposely to trying to get you on tilt. And you gotta be able to know that and not uh allow that to happen. Uh there's uh you know, in in the capital markets it just happens. Things happen. Long term capital took billions of dollars and lost it, but they

You know, they they thought they wanted to hang on and hang on and uh not recognizing that uh things do change. You have to recognize when something changes and it was a not a shady situation. It was just uh S something back when I think it was ninety nineteen ninety eight where s something changed with the global uh interest rates. But those kind of things happened. Just like the COVID uh virus Uh in March, uh the whole world kind of

Went way, way down and uh it happens. So you better be prepared and not over when I say you use the leverage you can afford to do, don't over leverage. Don't get upset because something happens like a new disease out there. Everybody uh that should know that roughly every hundred years or more often these kind of uh viruses come along so You can't get upset. You know recessions come along. You can't get upset when you you ride a bull market up and then all of a sudden you get into a bear market.

Uh you better recognize it within a few days anyway, or a few weeks. Don't just hang on for the next three years while you go into a giant bear market. And that's really uh in I I guess I gain that in the seventies when I played blackjack, you could not get upset just because you weren't getting good cards and the dealer was getting all the aces and you were not getting any. Uh same way in the capital markets.

If you know it's an honest game, just make sure you know uh where your edge is and study your edge. Uh make notes at the end of the day of what you did right, what you did wrong. And bef before you know it you'd find out, Oh gee, I j I went on tilt. I didn't realize that. I went on tilt mil midday because I did this and it was the wrong thing to do and I didn't recognize it at first but then I had done it.

And I kept doing it, uh, because I wanted to get even. Well, you learn those things after a few decades or a few years of any kind of a industry uh that is risk taking. Trading is a big risk taking, so you have to Yeah. So we you know, we back in the day and I'm talking ten, fifteen years ago, we had a lot of training classes with new traders that came in and would teach'em how to not go on tilt. how to have a game plan, how to have a journal

uh study all they could about things, not just what the regulations say, but also the trading. You have to understand uh uh you know, our our website uh goes along with that pretty well where we clear up a lot of stuff by just looking at our website that traders need but most of them don't know they need it. When you go to Some private broker dealer for retail, they're not gonna they don't care if you know anything. Just send us your money and you can trade.

But uh if you wanna be a proprietary trader, you have to have a game plan. And I you know, I would say check us out at stock trading dot com and take a look at our website and some of the things that we tell you that you should be checking into before you uh change careers or before you get in heavily involved with any kind of a trading situation.

So uh that's I've done that for many years, uh, with stock trading And we captured that stock trading dot com website years ago and it's been nice for us and we've got an alliance with uh Stock Odds, another firm that provides databases for our traders. And we have one one of the premier clearing firms that clears all our trades and that's Goldman Sachs and um

Uh you gotta bring to the table uh a little bit of seed capital. We'd give you a lot more capital to play with, but you have to understand the rules and pass the test or the regulators won't let you do it. They want to know that you know the uh all all the uh SEC type regulations before you're allowed to have that kind of leverage that a proprietary firm can a allow you to have. Bob, just one last question to take us out here.

Uh, and I'm quite interested to hear your answer on this. Do you have any self imposed trading rules that you live by which have served you well over the years? I I I'm not sure I know what you're saying. Uh we we don't have any preconceived ideas. We everybody has an edge one way or another based on their lives experience, but they have to have the discipline, as you mentioned. They in order to pr trade proprietary trading uh that allows you leverage that retail doesn't.

You have to have an understanding of the industry. There's a test for that. You have to have an understanding of the products you're trading and you have to have the uh discipline and methodology of how do you're gonna do it. Whether you're gonna do it with a automated computer system or you're gonna point and click uh with with a single PC.

Or uh you're gonna flip a coin, uh every Monday you're gonna do this uh this and every Friday you're gonna do that. I I don't know. You know, he I I've given up on trying to talk people into uh uh

forgetting that edge because that doesn't make any sense because sometimes they tell you, well, it's it's worked for me for forty years, so I'm gonna continue doing it and I sometimes I see that that hey it still works for this guy. Whatever works for you You gotta understand that don't copy somebody else if you don't know exactly what they're doing.

I've seen people well, Joe and he he makes money all the time and he let me watch him, so I'm just did what he did, but uh I I lost money and he made money. How did that happen? Well, because he didn't teach you everything that he was looking at. You have to know what's behind why he buys himself at the instant he does it, and you you know, you have to understand what you are doing. So that's uh Y uh you know, I've taught uh we used to have like every two weeks it'd be a forty people class uh

I would try to get involved with and my brother ran it back years and years ago. Uh I mean like fifteen, twenty years ago. I'd go in for an hour or two uh in a week, but uh he was there constantly for a full week to drum into people's heads that they ha it comes from them. A trader has to know what he's getting into. It's not a flip of the coin. Not nothing in life is really is. Is that anything else? Yeah, no that that kind of answers it. I mean I was more thinking along the lines of

What's a good example? You know, there there's some people who'll say, you know, if I have three or four losing days in a row, then I might cut my position size, I might reduce my risk, um, to prevent like further drawdown, et cetera. Well that's p that that's not a bad policy. Uh that's just an example. I was more just wondering if you had some sort of you know, some rules like that or I'll never risk, you know, more than X percent or etcetera.

part I d I don't use that rule. I learned in blackjack you don't use that rule. When things are going bad and you're pretty darn sure you got a fair game. You get higher leverage if you're losing. So when I walk into a blockchain table, I hope I lose the first fifteen minutes because now they let you bet with bigger bet ratios.

If you're betting anywhere from ten dollars to fifty dollars and you're losing, losing, losing, now you're betting from twenty five to five hundred and and you're still losing, now you get to bet from a hundred to a thousand or you know, up to two thousand dollars or more and they don't bat an eye because they've seen you lose, lose, lose. And so I don't buy into always reducing

Not in blackjack. Uh in poker, yes, you might if you're going uh quite a long time in poker and you're losing in a particular table and you don't know all the players. Uh you probably better cut down because maybe some of the players are better than you, that you and you're not aware of it. Uh it's okay to play with players better than you if you're aware of it and you know that you have some knowledge of that player and some of his

ineurosyncrasies and some of the reasons he goes on tilt and y you will know when he does go on tilt. Then you stay around and you work it but uh the game. But you if if you can't figure out uh where the edge is eventually going to come to you in a poker game, it's best to cut back and cut back until you say, Well, this game's just not for me. I'm gonna move to another table or

Or give it up for the day. In the capital markets, when you lose three or four days in a row, uh that's why you should keep a journal. At the end of the day, write down the things you did good to things you did bad. and after th three or four days, you have three or four days in a row and you're losing money. You don't necessarily wanna cut your risk and cut your leverage, but you might. If you haven't figured out That the market has just changed due to some Uh capital market Situation.

Either gold went up or oil went way down or up or, you know, some commodity happened or something something happened in the world that changed. the capital markets. If you can put your finger on that, there's no reason to change your leverage. You might move it around a little bit, but if you can't figure out what changed, then I go along with the idea of reducing your leverage.

Okay. All right, Bob. Well let's leave it there. I must say I really appreciate you taking the time to uh speak with me this afternoon. Uh it's it's been a quite an honor. So uh thanks very much. Okay, you're welcome, Aaron. And uh thank you for the podcast and uh I hope I hope you get uh some of your traders to understand uh how to make more you know, don't get upset, don't go on tilt, get that edge and make some money.

I'm sure, I'm sure. No, it's been it's been really great. Uh what's on this evening? Do you have a poker game lined up? No, th these days there's so much happening in Las Vegas with all the COVID nineteen that you know, we get t a lot of tourists so there's still a problem in Vegas that a lot of the poker tables are not uh i in action.

Uh and there's so much with the volatility. The volatility is great greater than it's been in years. So I'm taking advantage of it and I'm trading uh anywhere from six to twelve hours a day with the high volatility. And it's uh I get plenty of action uh and it keeps Keeps the days going by pretty fast without having to leave the house too often.

Uh I don't know how it is in Australia, but here in the United States, uh there's a lot of hot spots and uh Nevada happens to be one of those hot spots these days, uh, because we do we we Our industry, casino industry, uh thrives on uh turfs all the time and you never know how many are uh already set by the time they get here. And they're here to have a good time. They're not here to

uh be c nice and wear a mask and not, you know, get into a party mood. So we have to be extra careful in casinos these days. And I haven't really gone in many casinos at all in the last uh since March. uh flew back from uh one of uh our really large poker games in Russia in uh March and uh that was the last uh cash poker game I played. Uh early March we uh decided to put get a private plane back to England and get back uh pretty share from there to

uh US before they uh closed the borders on uh uh you know, other countries' people from coming. Uh since we were US citizens, we could have got, you know, we got in the uh the Uh me and some friends got in uh the last day that we could get back without having to go through a whole quarantine thing and everything. And uh since then, no poker, but it's been a lot of nice uh trading.

Oh, right, right. Yeah, well I guess that's the that's the nice thing. You've got plenty of uh action to take advantage of in the market, so uh good stuff. Hopefully you can get back to playing poker soon enough as well. Bob, I'll let you enjoy the rest of your evening. Thank you once again, it's been a real honour. Okay. You've reached the But rest assured there. And zero high. Chat with traders.