231: James Chen – Obscure Edges, Outsized Alpha

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Welcome to Chatwith Traders Podcast. This is episode 231 and I have the great pleasure of introducing to you another heavy hitter, James Chan. James is an equities trader and a partner at Sydney based fund Blue Lake Partners. It's probably a safe bet to assume that this is your first time hearing of James, as he's a fairly private person. So let me put it like this. There are good traders, there are great traders, and then there is James. He operates on an entirely different level to most.

For well over a decade now, James has been discovering edges and developing trades that I know the typical trader would consider as rather obscure. And for that reason, I think you and I were quite fortunate to have James on the record here, able to learn a bit about how his brain ticks. Which starts with James telling how he cut his teeth trading retail, then how he exploited a loophole in an ASX trading competition, won and got hired.

We then discussed trades surrounding index rebalances and dual listed stocks, otherwise known as ADRs, including specific examples too. Next, James imparts with comprehensive thoughts on finding Alpha. Then last thing, James mentions that he's actually looking to hire someone for a US support trader role. If you're interested to find out more, I've included a link to the application form in the show notes at chatwithraders.com slash two three one.

And for some reason, I don't know why, at the end I forgot to ask James to share his Twitter handle, as I usually ask every guest. Should you wish to follow James on Twitter, his handle is at Skyquake underscore one. Now I've done enough talking. Here is special guest, James Chan.

We won't spend too much time here, but uh obviously because there's plenty of other things that I want to get into with you. Uh but I think it's good to get some perspective on where you did begin. So I think Uh your origins as a trader was uh you started trading a personal account in university and Yeah. You know, how did you go then? Were you a gun trader from the outset? Did you have a bit of a knack for this naturally? Um, you know, what sort of things were you doing in those early days?

Uh I I certainly thought I did. It was I think oh four or oh five. It was like a commodities bull market. I do distinctly call BHP will be go up every day and I will buy um warrants in the thing. Warrants are just basically um options for retail. And Uh commodities are generally um they're less mean reverting. They have a lot of momentum. So every day you feel like a genius, right? And the thing goes up every day. And because I was leveraged via warrant.

Um, I felt like I was doing right thing. Like every day the the warrants go up by like forty percent or something. And now roll into um more leverage warrants and then those will go up forty percent the next day. I was dealing with small amounts of capital, but like it felt really good thinking, wow, look at these. loses making twenty percent a year.

When I can make forty percent a day and I think like there was like a random pullback and then everything went to zero. I was like, Oh, okay. There's some new answers.

on retail trading and getting into the market. And this is, you know, while I was learning about the C A PM doing finance, learning about how to value an option and Other interesting courses like uh like when we were trying to teach us compound compound interest in um economics one oh one, I was thinking, what the hell is going on here? So you were at university, like what were you studying? What was the original plan?

Didn't really much have an original plan. I was doing a commerce/slash law double degree. Didn't really enjoy the law part, I always enjoyed the finance. Mouth side a bit more. Yeah, but as I said, back then like just kids that had no idea what was going what was going on, what I wanted to do. Just wanted to um yeah, crave the uh crave the excitement.

And that obviously led you into uh joining a prop trading firm. Yep. I think this was maybe a couple years later, um, during the GFC. What was that like? So I joined Propex as part of their trainee group, um in 2008, right during the heat of the GFC, I think I was trading all kinds of derivatives. Um, but scalping on the ladder, um, it was quite fun. Um, because like instead of you know Instead of learning how to scout properly, um

the market environment rewarded um like rewarded a different kind of trading. Like if you held onto a position and the the markets would have a big move. You make like sc scalping wasn't rewarded. You were the there for the really big moves. Um and I guess everyone in that um in the area was doing really, really well.

'Cause you're trying to make two or three ticks normally, but then you have these fifty, sixty point moves in a straight line because a fund needed to get out or needed to get in. It was a very interesting experience. You make it sound like there was kind of um I don't know if incentive is the right word, but you were kind of you were ideally there to be a scalper but Yeah. You gravitated more towards the holding on for those those bigger moves at the time.

Yeah. It was also um I guess lazier, rather than scalping and reading a book, you just buy it set a two point stop or something and then hope it goes your way. Okay. And there was a bit of um bias because on the simulator there was no slippage, you got instantly filled, and if it gapped against you, you got stopped out usually for your two tick stop. And if it goes your way, it goes fifty points or something.

And is this I I presume this was trading um treasury futures, like you're an equities trader today. We traded everything. Um it was we traded treasuries, um, spy, uh Hangsang FTSE, um a lot of things in but basically all the instruments that were available during the UK uh during the Aussie session. Okay, so it was all futures though. Yeah, it was all futures. Okay. Um and so you came in during the trainee program. Um, you know, how did you go? Did you did you make it past that?

Uh no. Towards the end, um didn't make it past the train anything. It was I guess it didn't really fit um my personality. And then um I moved on. Okay. And what was what was next?

At that time I was still at uni'cause the the ProPix programme was over um was over the holiday so was over the uni holidays, so it didn't really affect my studies as much. But um so after that went back to uni and then there was the Trading Places game. Uh at that d at that time it's run by JP Morgan. Yeah, the the game was sponsored by Droger Capital, which is now Blue Lake Partners, where I work.

Basically, uh the game ran for about a month and uh the winner was supposed to get an internship at uh JP Morgan. Unfortunately it was at the right at the heart of GFC and uh JP Morgan did not see fit to offer any internships to anyone that year. Okay. Um, so you won that competition, right? Yes. Okay. And I believe there is bit of a story as to how you won that. I mean, would you mind sharing that?

Yeah, so the the the system is designed where um you could to be s slightly realistic where um if you're selling a stock, you're selling At the bid, and if you're buying a stock, you're buying uh at the offer. So you're basically crossing the spread every time. Um I think at the time it was also limited to the ASX. five hundred the all ors, not just the ASX three hundred. So there were quite a few um illiquid stocks to choose from.

So um what I found out and also liquidity wasn't an issue either. Um you assume to be able to do your full size on the bid offer and that was key. So what I did was um I would find a a microcab stock that doesn't do any volume whatsoever with extremely wide spread. And I found a stock that had a bit of two cents and offer of ten cents. And in my PA real trading account, I will put in an offer to sell like one share at three cents. And no August will come and pick it off.

Because the stock is so illiquid and in a trading places game, I'll buy millions and millions of shares at three cents. Once that order is filled, I'll cancel my um my three cent offer in the real market, then put in a um a bid at 9 cents. um in the real market. So now the stock is trading nine bit, 10 offered. And then I'll go into trading places and sell millions of shares at nine cents.

Um, I actually did get hit once or twice by real orders from real traders. Um got a um got a call from e trade after that asking was asking me what the hell are you doing? And I had to um lie and say, Oh, I was, you know, testing a couple of algos, testing on small size, blah, blah, blah, and they let me off the hook. That's that's hilarious. I mean, what was the I mean, what's the issue really? Like why did e Trade take um take an issue with that?

I guess I was printing a stock up, printing a stock down. Like I I did ha I the intent to trade thing and I guess it doesn't look good when you have a two cent stock selling trades at ten cents. Yeah, I guess so. So if I understand correctly, this is kind of like winning the competition. Originally you were meant to get a job at JP Morgan, they weren't taking anyone, but it sounds like Blue Lake took you in. Yeah, exactly.

Correct. So how come they looked at this? Did did they know how you won the competition? Oh they did, they did. So um they basically s called me up and said, Look, we know what you're doing. Um, we're gonna take away your ill gotten gains. And you're gonna have to start again. So I wasn't banned from the competition, which was very generous of them. Um

I like I think because I was already making some good money before I I stumbled upon the um exploit. And then um so then I kinda had to continue trading and um got pretty lucky here and there and eventually I did win the competition through uh skill alone. Even without the benefit of my uh ill cotton gains. Interesting. I thought that was partly the the reason why they hired you is because they sort of Yeah as well.

They figured it was like some kind of outside of the box thinking you were you know, looking for looking for a unique edge. Yeah. Anyway, okay. So what year was this when you started at Blue Lake? Uh it was two thousand and nine. Two thousand and nine. Okay.

Right after the uh basically right after the worst of the GFC and all the market uh all the big caps are doing placements. I was helping um I was helping Blue Lake um basically fill out all the forms for the various placements, um, back office, corporate action stuff. Okay, so you weren't really doing much in the way of trading. I was given a um a very small account to trade with in the beginning because when I joined, like they were just so busy with um all the back office stuff.

Yeah, and like after that, um after that period, I was given a small book to trade and um I was told to focus on ADRs and uh index rebalancing. It was a bit of a legacy book. At that time I had no idea what any of those things were. And I kind of grew into the role um with a bit of mentorship from the senior traders there.

Okay, cool. Well that leads us into uh index rebalances nicely. So let's just talk about that. Um I'm not sure if this is something you still do um to the same extent nowadays. I know ADRs are definitely a big part of what you do, so Um I we're gonna dig into ADRs, but um on the index rebalances, can you just talk a bit about, you know, some of the trades and what that actually means? Sure. Um just a brief introduction on index rebalancing. Every

quarter generally, funds need to rebalance their portfolios according to the SP or the FTSE or the MISCI. And based on the changes, the funds have to buy large quantities and sell large quantities of stock. Um, since passive investing has grown so much in the past few years, these funds um can have significant market impact. Um when I first started trading them, it wasn't very well understood, even though the funds weren't very big. They were having um outsize market impact.

And it was very lucrative. Like when I started training them, um I would get set two or three days before the rebalance actually happened. um to minimize my risk. Like oh um oh like if a rebalance will be happening on Friday other, I'll be buying it Wednesday or even Thursday and then flipping out everything on a Friday. Um, but as time has progressed, it has become remarkably more efficient rather than buying what gets added to the index.

You know, you had to then start predicting what would be added to the index. And then eventually it started being, you know, I had to get in a week before the predictions were released, then a month before the predictions were released. And then um

It became like a metagame. I would um in the last couple of years um I would be trying to predict what Macquarie we're gonna release in the index note. So then I'll be selling on the when Macquarie releases their note and you know all the clients start buying the stock. Yeah, it became too much of a meta game and then re the returns weren't there anymore. You probably had the same amount of returns but was spread over three months instead of two days. Okay.

So how did you know what was likely to get added to the index? Like, you know, two days ahead of the official announcement, I guess, um, how were you able to predict what was most likely to be added? added. Oh no, um in the beginning, um they would announce it two weeks before the announcement uh they will announce it two weeks before the rebalance event and I would get in two days before the actual rebalance event.

So I was just like reading an announcement and then, you know, copy pasting a bunch of stocks into an order blotter. But uh yeah, as the question goes, um right now um the indices release um guidelines and consultation notes about how they about the mechanics of um Yeah, about the mechanics of how these rebalances happen.

So then you kind of need to do the math, go through the index universe and find um stocks that you think uh match the criteria, match their um guidelines, and will be added to the index. For the more mechanical indices, it's um it's not too hard, but like um it could there could be like twenty stocks trying to fill ten spots and a lot of them are on the knife edge.

And you could be buying them um out three months in advance and half the stocks could have, for example, bad earnings, and then they will fall below the threshold and then um they would not be added to the index and then you have to cut them.

I guess a slightly different question, but When you first started trading index rebalances and you were buying the stocks that were going to be added two to three days before the You know, if it was if they were getting added on Friday, you would be buying them on uh, you know, Tuesday or Wednesday. Yeah. Yeah. Why w this might sound like a silly question, but why did you think those stocks would be higher in two or three days' time? Uh I'll do the brief back test and um

I looked at previous index rebalancings and then they would I would notice these uh massive Friday spikes in the auction. Like I remember one year Northern Star gapped up ten percent in the auction. Right, and everyone's asking, oh, what the hell's going on? Um this was when Northern Star was like a one dollar stock and gap down gap up to um a dollar twelve or something. And later on fan has oh the GDX um gold index was buying Northern Star.

And after people became very confident that, you know, oh, this is a two billion dollar fund, this is a five billion dollar fund, blah, blah, blah. Um, there's a lot of money to be made front running these uh uh index additions and deletions.

All right, so the ADRs, let's get into this. This makes up a big part of your trading from what I understand. Um ADRs, if I'm not mistaken, is an abbreviation for American depository receipts. Um, I'll use ADRs interchangeably with all kinds of um cross listed CDIs, dual listings and whatever. Um to me they just they just mean if a stock trades in both Australia and a foreign jurisdiction. Okay. So an ADR is just, yeah, a dual-listed stock, yeah. Yep, exactly.

So what's the attraction here? Um, you know, can you just give a very brief overview for kind of how they function? Um it's essentially the same stock, but it trades in multiple jurisdictions. Um think of it as trading the ES during Asian hours, trading the Eastern European hours.

and then trading years during the US hours. They all have a slightly different tinge to it, except with an um just I'll take BHP as the premiere ADR. It trades in the Australian market and Australian fund managers have a certain view of it. will trade in London and the London Fan fund managers will have a certain view of it and it'll trade in the US on the NYSC and then US fund managers again will have a maybe a slightly different view of it. So you can have these um Yeah, uh wildly different.

Valuations to the same stock. Like Australian fund managers could be extremely bullish, and the US fund managers could be extremely bearish on it. So you can have um every night the US would get sold off and everything Australia the share will get bought. And that creates um opportunity. Are these ADRs uh presuming that Australia is kinda like the main listing, is that right? And then these other ones are kinda like secondary listings? Is that one way to think of it? Is that generally accurate?

It's that's generally the case, but there'll be a couple of stock like uh Resmed where it trades um it's an Australian company but it trades far more volume in the US. than it does in Australia. Um Unibot Romanca is another example, trades far more volume in Europe than it does in Australia. Do you prefer to trade stocks one way or the other? Uh what do you mean? As in like do you prefer to trade stocks where they do the majority of the volume, let's say uh locally here in Australia?

Well, I kinda had a trade on both sides, but um uh I would try to um I would I would generally try to trade the side with less volume first, because that's a harder side to do more volume is. Just taking a step back. One interesting quirk of these of ADRs is um they're not it's never a live up. Like Australia is never open at the same time as the US, excluding post market. You know, Australia's never open at the same time as Europe.

So you can't directly, you know, buy Australi buy in Australia and sell Europe to um to ARP a free profit. You have to take timing risks. Like you could buy in Australia and then during the European hours something happens and the stock is significantly higher or significantly lower. And then you kinda had to make a judgment call on what on whether it's a well, it's still cheap versus Australia or it's still expensive versus Australia.

Okay. I guess uh just to my previous question, what I was sorta trying to get at is You know, when you gave that example of um, you know, Australian fund managers might have a certain view on BHP and then uh, you know, fund managers in the US might have a certain view on BHP over there. Um, like is there if the primary listings in Australia where it does the most volume here locally Y you kinda presume that that's maybe the more efficiently or correctly priced

Yeah. Yeah, as you said, the more um correct price. So if Australia's up ten percent versus the U.S. I might not try to fade it because um the the US would be like well Australia's up ten percent we'll just follow along but um if the US is up ten percent on low volume versus Australia um there is a

And especially if Australia does more volume. Um, the Australian Fund Managing Game, look, those Yanks have no idea what they're talking about. This is an Australian stock, I know exactly how it should behave. And, you know, I'll only trade it up five percent or something. So you can have these massive discrepancies um in pricing.

Right. So let's let's talk about this because like you just said, it's not really I know some people kind of refer to it as an arbitrage kind of play, but like you said, there is definitely a the the timing risk is a factor, so it's not really a a true arbitrage, right? Yeah, it's um often it's uh it's a very mixed Scenario like um I'll give again I'll take BHP as an example, right? So overnight, um the general

trade is um if BHP is at a discount I'll buy. If it's at a premium, I'll sell it. Then I have to consider okay, is the S P up two hundred points? If the S P is up two hundred points and BHP is only at a one percent premium to Australia

or most likely big buying it and then have to look at okay what else drives BHP? Is the copper price up a lot as well? Generally copper is possibly correlated with the S P. Um so I tend to be um of you know The usual scenario is that SP is up, copper is up, uh, iron ore is up, and I'll be trying to buy BHP at a, you know, one percent premium to Australia because tomorrow I think BHP will be up at least three percent. Okay. Yeah, so I guess that's kind of the nuance in the trade, right?

Yeah, exactly. It gets more complicated if um he has a lot of different leads like uh the SP is up. But the miners are down and copper's down. But R and O's up, but Real Tinta is down in London as well. So then you get all these mixed signals about where you think BHP should be trading.

And that's when you kind of widen your I guess your valuation band of what you think BHP should be. Rather than saying uh you know, BHP should be up one percent tomorrow, I'll say BHP should be up zero to two percent tomorrow. So I won't buy it if it's flat, but I'll buy it at, you know, maybe a one or maybe even two percent discount to Australia.

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How much discretion is going into this versus how much of uh these decisions are systematic? I've been trying to automate this for uh many years now because you know, I'm only trading this at night and um Uh I I would like to, you know, click a button and then go to sleep, but often that's uh quite impossible.

Um, I like to think there's quite a like I have various spreadsheets set up to take advantage of this. But often, you know, I'm looking at charts of S P, I'm looking at how valley is going, I'm looking at the Aussie dollar. I'm looking at how Rio is going, I'm looking at how um the US minus ETF is going. I'm looking at how South thirty two is performing. Um there were factors I can code into it, but there's uh always discretionary element.

Which makes it a bit tricky. Uh I'd say fifty percent discretionary, fifty percent systematic.

Now the part you haven't really addressed here is um you know Uh should you you know, if you just want to stick with this example of BHP here, um, let's say you buy BHP um in the US overnight, or overnight for us in Australia, what's the exit plan? Yep, that's also another tricky bit. Um often I found it's best if I just try to sell an ASAP the next day. Sell it in Australia. Yeah, sit in Australia um as soon as possible.

A lot of people are gonna sort of not know how you're able to do that. Can you just explain that part of it? Several ways I can do it. If I'm buying the the US stock. If I'm buying BHP in US, um, I can A convert the stock to Australia via my broker. So I'll buy BHP US and they'll deliver me BHP Australia and they'll take out Forex uh for me.

Or I can do it manually myself, which means um in the end, I end up long say ten thousand BHP US and short ten thousand BHP Australia. And sooner or later I have to collapse that or um take the opposing trade. Uh which approach is is most common? Like how do you decide when you're going to, you know, if you're long US, you're going to short Australia on the open, or whether you're going to convert the shares um through your broker?

Um generally I try to do most of a DMA. Um,'cause br if I pay'cause brokerage for these things, because it's a s a fairly special transaction, um, brokerage is quite expensive. And the edge is um the edge obviously gets eaten up if I'm paying um full commission on these trades every single time. There's also conversion fees on top of the brokerage.

Um so often um what I'll do is I'll look at my current positions. Um for example currently I'm short uh let's say I'm short a hundred thousand BHP US and I'm belong a hundred thousand BHP in Australia. If my trade is to increase that position on both sides. I might say, well look, I don't really want to increase both sides anymore. I'll do it through a broker. But if my position would decrease both sides, it's like, oh, okay, cool. I'll do that, um, I'll do those DMA.

So then I will kind of naturally um wind down that position. Okay, and DMA is Oh I'll just be hitting the market directly. Okay. Um now I think there might be a concrete example you can share um for a PLS trade that you did.

Yes, so that was one um on the twenty fourth of February, right during the uh Ukraine fears and um the Ukraine Russia uh invasion fears. Um I don't specifically remember which geopolitical headline caused it, but Australia got sold over very hard and the ES d was down like sixty points. is not really uh a g an ADF, but it does trade in Germany, um, on the Frankfurt Exchange and on TradeGate.

It's obviously much, much more liquid in Australia, but um you have a bunch of European investors who love the lithium game and they invest in this thing. So, you know When the European Australian Australia was down, I think five percent or so, um, had a pretty bad day, all the lithiums got smashed, um, and all the RISCON names got smashed. But when Europe Europe opened, there was like a full blown panic.

Okay, so Hon, let me just interrupt you there. PLS was down five percent in Australia for the day. Yep. Okay. Yep. So Europe the European indices opened down about five percent as well, and POS and a couple of the um other European uh ADRs of Australia, um they opened down nearly ten percent. So they will add an additional five percent discount to Australia. So with something like POS, it's you know it's a very volatile stock, so like a five percent move can be considered not too uncommon.

So then it this it comes to a decision like, okay, what's the SP doing? It's a spy up the rest of the close. Um, what's BHP doing? Um At that time, the market looked like it was kind of bouncing. SPY was up a little bit from where Australia closed and POS being a five percent discount was um yeah, it just felt incredibly cheap. Okay. So how much was it down then in um Uh where does it trade? Germany. Yeah, this one's trading in Germany. So how much was it down like in Germany on the day?

Down ten percent. Ten percent. Okay. So which was um at the five percent discount to Australia. Gotcha. Okay. And as the ES started rallying and Europe kind of rallied, um, there was a seller in POS. Um generally um POS doesn't do a lot of volume in Germany. So when a lot of volume comes in, I have to check and make sure there's no negative news and someone's trying to take advantage of um yeah, someone's taking trying to take advantage of and try to offload it.

Um, checked around everywhere, made sure there was no news. And I was, you know, I was happy to buy P as a discount when the spy, I think at the time was up one percent. And this continued on for a while. So I was buying everything um the seller had to sell and um by the time the US had opened, I think the market was up nearly two percent and the seller in POS got more aggressive.

At this point, you know, had to take a step back and think, okay, had to double check the news. Has there been a coup? Is there something news I'm not sure about? You know, has China said something new about lithium or whatever, have one of their partners blown up?

checked everywhere, checked Bloomberg Reuters, Twitter, all the um social media sites, no news and me meanwhile the ES was still rallying and the seller was still kind of walking the stock down. Then that's kind of like when you had to make a discretionary judgment call that um

Um that the seller just wanted to get out of the sector. Had a bunch of stock in the illiquid um exchange, Germany, and he probably wasn't able to sell in Australia, so he just wanted the whole thing gone and was happy to um Yeah, and I was happy to take everything he had to sell. Okay, so when you talk about just a couple of things. When you talk about the seller, you make it sound like it's just one person. Um, and I I know that's what you're getting at as well.

How were you able to identify that? I'll keep a spreadsheet of Arvol of um premium and discounts. Usually um if it's just a couple of retail trading volumes very low, the premiums and discount can get absorbed by market makers. But if there's a larger volume going through, or if the uh the premium discount to the Aussie price is very big, I'll have a closer look.

And um I also again I also look at liquidity on the uh different lines. Like Germany does maybe, you know, usually zero point one percent of Australian volume. So If Germany starts approaching one percent Australian volume, then it's like, okay, this is a sign to pay attention. Something's happening here. Either someone knows something and stomping stock or something else. So what did PLS close down on the day in Germany? Like what percent?

Um it got down as much as fifteen, but in the end, um In the end, because I was buying I was buying as much as I could get my hands on, um, in the end it closed down 10, which was a 5% discount to Australia. Okay. I mean, is there any reason why you were so confident that, you know, you weren't gonna come in the next morning and You know, Australian traders, investors see PLS is down ten percent in Germany overnight. Um, and then it starts getting marked down on the open uh in Australia.

Yeah, there's th there's always that fear, but that's when um volume comes in like PLS about thirty million shares a day in Australia, right? And then um so uh and in the in Europe that night it did about a million shares, a bit less actually. So the Australia and So I was able to buy a bunch of POS and sell them and I felt confident I can sell a million shares in or so in Australia without disturbing, you know, without

pushing the prices down too much. And because POS generally does maybe about fifty thousand to a hundred thousand shares in Germany, Australian investors do not care what's happened overnight in Germany. Gotcha. Okay. Because the relationship is so um it's generally incredibly one way. Australia does something, Germany follows. Australia does something and then Germany follows to the T. Only when do you have these um deviations that are really kinda step in?

How did you uh flatten that trade? Did you convert those shares? Yeah, I had to convert those shares because at the time I didn't know, you know, whether it was special dividend coming or something. Um, which was it was just safer to convert. Okay. So when you convert the shares you uh what your effectively long a million shares or so of PLS um from the Australian what equivalent? Like how how are those shares priced? It would be the German price multiplied by the um the Forex rate.

So in the case of um so in that case I think it was uh a bit under two dollars fifty and you'll print pre-market um as a LTXT on the ASX. Okay. So do you recall the numbers like basically, you know, your average buy price and then kind of the price you were able to flip those on the ASX the next day? Uh yeah. So I bought six hundred and seventy thousand shares or so um in Germany at a touch under two dollars fifty. And then I flipped them out um the next day at about two seven.

I think about two seventy-five was my average price in the end. Jesus. Okay. Yeah. Okay, very nice. Yeah, that's a that's a really great example. I love that that you could share that.

Yeah, it's uh it's nice when it works and um i historically um Very afraid of getting good volume done. I think in my first and second year of trading ADRs, I was on the wrong side of a combined total, I think, of about ten takeovers and capital raisings. Like every single time I'll be like, um, oh cool, there's a lot of volume. Oh cool, this stock's very cheap. Next day it's like, uh huh, capital raising. Oh

taken over by um or attempted take over by um I think it was Han Lung or um from China. So on the Friday night before the takeover, the stock was up ten percent um in Canada. Well, the Dow was down a thousand points. I was remembering that very clear thinking.

Who is this loser buying Batman up ten percent? You know, Paladin was down five, all these other uranium was down five. Well, this clown is buying stock. I'm gonna short as much as I possibly can. Mm-hmm. Um and on Monday it became all clear. No good. Yeah, it did teach me to be uh a bit more cautious when I'm getting volume. Especially in volume at great prices. Yeah, I mean when you talk about this like

You know, I was shortening as much as I could, or in this PLS example, I was buying as much as I could. Um, I mean, how are you thinking about size and thinking about your risk? I'm definitely in a cap that when you have an A plus trade You should do uh exponentially more size, not linear more linearly more size than your B trades or your even your C trades. Because that is, you know, the point of having these A plus trades. And with me, especially when trade these ADRs, um, I'm often

fifty or sixty percent of the volume. Like sometimes like sometimes I'm a hundred percent like in P in PL's example, I think I was like sixty, seventy percent of the volume, right? Because I don't want to share my AP Of what volume? Of the total volume.

Yeah. Yeah. Aka. It was just me and the other guy transacting with a couple of retail trades here and there.'Cause it's like when I have an A plus trade I'm gonna make that I felt very confident in, you know, I'm gonna be an absolute pig about it. Generally, you know, if you do a breakout trade, you're like, Yeah, it'll probably work out. You know, you have uh you know, uh fifty five percent confidence, you know, or you

or or even lowers like breakouts tend to work or whatever, or you have a technical system and you have sixty percent stats if you're very, very lucky. But with um these more Nuanced trades. you can have much higher confidence level. Like I'll give an example of um if Apple trades at a dollar the next day, I'll have 100% confidence in buying it, assuming you know nothing fundamental is strange, it's just a bad print or something. Uh-huh.

But r you know rather than Apple being down ninety-nine percent, what if it was only down, you know, five percent? I'll be pretty confident in buying it. As long as um if Apple trades in, for example, Argentina and then there's some fund who's you know, there's some funds blow and then just selling everything as a fire sale. It's exactly the same scenario. You want to buy in a weird, random market that no one else is looking at.

Yeah, these uh this example you gave on PLS, um, that sounds like it was kinda not an anomaly, but it was kind of quite a extreme case. Yeah. Uh obviously you don't have those types of scenarios, you know, every night. So, I mean, what's it like like how often do these kind of things roll around and what's kind of a Like what are you normally looking for? Like what sort of uh discount or or are you looking to buy at or premium are you looking to short at?

Usually about so on a regular night you'll be, you know, one or two percent. Um, depends how volatile the market is. Um right now, markets are pretty volatile, so you can have um

you can have much more panic going on, especially when the S and P moves a hundred points or something. You can have people who just threaten the tower, they just wanna get out of position. And then there can be some like truly massive premiums and discounts. Normally like I would say I'll get one of these um you know, swing for the fence of scenarios one for a month once a month. Aka.

Pro like but it would be you have a lot of clustering. Like I would have maybe ten of them up ten of them or maybe even more in February and then none in the past three months. Right. Yeah. Yeah. It's just a a factor of the market conditions, I guess. Yeah, yeah, exactly. Like when the volatility is low, no one's panicked selling out their, you know, their small cap and liquid stock on a foreign exchange.

If someone's listening to this and they're just uh a self directed retail trader. I mean, is this the type of trade that they could that would be worthwhile exploring for them? Or, you know, you obviously have um you know, some advantages of the um you know, with brokers and access and that type of thing. Like how feasible is this or or realistic is it for um, you know, a a at home trader to to replicate this to a certain extent?

I think it it's extremely hard to replicate, but it doesn't mean that um you can't take advantage of you can't take advantage of it. The infrastructure required for this is pretty onerous to set up and like even as an institutional trader, it's a lot of work. But um as a retail trader you can take advantage of um if you see, you know

If you're a retail trader trading BHP, you can look at what BHP did overnight, is trading at a premium, is trading at a discount. You know, was BHP up five percent overnight? and then maybe adjust your price accordingly. And then for example, we have um if you know if you see um POS trade

at a massive discount in Germany overnight and a lot of shares get done, you can kind of assume someone has bought a lot of shares and that someone needs to offload those shares neck the next day. And you can kind of say, Oh, okay, there could be some selling in POS today. If we just move on from this now, there's one other area I'd like to get in with you. And that is, I guess, talking about

Uh how you think about because obviously what we've spoken about here is just kind of a couple of your plays, right? A couple different strategies that you implement. And the thing which is so interesting about you, James, is that

The strategies that you trade and the edges which you exploit, they're quite unique. Yeah. And they're uh more or less sort of market neutral to a certain extent. And If if they're not unique, there's certainly strategies which uh a lot of retail don't necessarily have exposure to or aren't familiar with. Mm-hmm. So I'd just be interested to kind of ask you a bit more about

how you think about finding alpha and how you actually think about uh getting an edge. And I know there's an acronym that you uh use. Um so I was maybe gonna just ask you to if you'd like to step through that. Sure. Just briefly, I think if you're trading the same way as everyone else. You know, you're gonna get average results unless you are like a prodigy or something. It's much easier to compete in places where other people don't, won't or can't. Um

If you're trading in your own niche, um you're much more likely to succeed because you're just fa simply facing less competition. Um I stole this from um Angus Cameron at Limital Capital, um, who had uh Who explains Edge with a very nice acronym? It's Asia. And like all good acronyms, it has us several letters repeated. So the acronym stands for access. speed information. And analytics. So access, what I mean by that is um

You have access to other markets. For me it's ADRs, right? I get to trade in the German market. I get to buy um buy PLS in Germany. I get to buy oceanic gold in Canada. Right, so this is an edge in itself. Um, it could also be um access to liquidity where no one else can get. It could be placements, it could be um IPOs, it could be favorable treatment in uh special crossings.

So access itself could be edged. There could be funds um that are making money off the broker relationship, just doing IPO after IPO after IPO. The next one, Spade, pretty self explan um explanature is Just reaction to info, like maybe it could be order speed, maybe um you're always um scanning uh trading news or squawk box or bloomberger reuters and you know, you always see the latest headline first and then you'll be the first one to smash um an order in when everyone else is still reacting.

Uh next one I want to talk about is information. Like information as in it could be data, news, opinion or flow, um any kind of information that no one else has. It's slightly related to speed because information kind of diffuses very quickly into the market. Like it could be um a broke upgrade or downgrade that you just heard straight from the analyst. Yeah, and it could be um you know, like something that only you know about because it's your niche.

like an index rebalancing or um something like an intraday ETF flow mechanics that you're very familiar with and the rest of the market doesn't know about. And the final one's analytics. It's a little bit like information, but this is um I guess this is your own set of um Your own set of understanding, like how you think things will react to um

Like it could be um as simple as like it you can outsource, like you could, you know, an event can happen and you call the analyst in a stock and they'll give you color on whether this is bearish, bullish, whether it's pricey or not. Um It could be um being prepared for an event. Like for example, um last year when um there was talk of ETF um going through for Bitcoin. Um those who did all the prep work and had set up all the alerts on various news wires were able to buy um

were able to buy Bitcoin instantly when the news hit the wires. Or everyone also scrambling to see um is this news legit? Which wire did it come from? What will it mean for the ETFs? You know, will this have second order effects? pre gaming can be a source of like, you know, analytics as well because you have pre done all the analytics where everyone else is still thinking of the questions that you have answered months ago.

I like that point. Pre gaming. Can you talk about, you know, back testing and or not just back testing, but just general testing of your system to know whether an edge exists or not? Um is that something you do much of? You know, obviously some of these things that you talk about here, um, and you know, as as still a discretionary trader, even though some aspects are systematic.

discretionary trades can be quite hard to, you know, test rigorously. But what kind of testing do you do? I guess this kind of ties into analytics a little bit. Basically any idea, any correlation or relationship, a lot of Trading has these rules that people take for granted that actually don't really hold true. And a lot of it um are seemingly like um common sense rules. that might not actually hold water. Um an example I'll give is um you see gold go up, right, and expect gold stocks to go up.

It makes sense in theory? Um,'cause gold miners produce gold. They You know, then they sell the gold. If the gold prices up, they make more money. But if you test the performance of various gold stocks against gold itself, you might find out that oh actually some stocks don't actually react really well to a gold price. Um, it could be because they're hedged or something, right? Or it could be because um

uh like a whole variety of um different reasons. Like for example, Australian gold stocks might actually be performing um worse because of the Aussie dollar component. Like gold could be up, but an Aussie dollar could be up more meaning the gold price is actually down in Aussie dollars and these Aussie denominated miners are actually selling gold at um less than what they did before the move. A lot of these um seemingly

I guess basic rules in trading. Um yeah, I think people need to like cast a closer eye on them. Um because a lot of them is I like like they simply don't work. Can you speak or maybe just give some guidance to Let's say again, a self-directed retail trader at home. Who's maybe been at this a couple of years, maybe still trying to find their groove, feeling a little bit lost. Um, you know, trying to find some of these

more uh obscure edges that, you know, sort of take a page out of your book. Obviously they don't have the same access that you do. Um, but like Is there any guidance you could give to someone in that position for where they might be able to, you know, seek out a little bit of alpha? Playbook everything.

And then once you playbook something, try to do a back test it if you can. It's just screen time in the market. You notice something weird that's going on and then it's just all pattern recognition. Does this thing happen and again and again? If so, maybe do a back test on it. Um If for example, if like aga again, going back to the previous point, um most traders are um

most traders that follow um most day traders, right? They'll buy a stock during the day and then wanna be out before the close. Now if every single trader Does that, that implies the open of stocks will always be elevated and the close of stocks will always be depressed. So maybe if you run a back test on it, you'll find that um if you hold stocks overnight and sell them the next morning, sure you're at risk of gaps, but over the long term, maybe you'll be um you'll be able to make ten percent.

more every year if rather than holding selling at the clothes, you always sell the next morning. Stuff like that. Stuff anything you see that um s you feel is a bit oh, this is strange. I wonder if um this is a pattern or it's just a qu um

like a r a a a a random scenario that might never happen again. If you keep recording it, testing it and seeing You know, if something like this can happen again or has happened in similar markets, you establish kind of like a a mental model of how markets operate. And if you backtest everything and all these assumptions about the market, you can I think form a very good understanding of how markets actually operate.

Yeah, I love that answer. And I love that you said if you see something that looks a little bit weird, I think that's actually really key.

So just as we wrap things up here and sort of move towards the end of our discussion, there is one more topic which I would like to bring up and that's your uh more recent sort of involvements in crypto, like what's the attraction there? I first traded crypto I think in twenty fifteen. Didn't really understand what's going on. Traded a bit as a retail, you know, got in, got out, um

The environment wasn't very friendly for trading. The commissions were huge, spreads were huge. Um It's only recently I've kind of started to recognize that um despite what you believe what um crypto is or what it isn't or what it can do, it's like a fantastic trading environment. You're always training against retail rent institutions. Like there are institutions coming in, but the um you tend to not face the same kind of competition as you do in equities.

And um it kind of goes back to the previous part where like if you can find a niche that isn't crowded, you should definitely explore that niche. If you're always trading in an environment where you have minimal competition where like um

You're not you know, you you're not competing against ten other traders to fight for this, you know, the best price, to fight for the best tick, and then the flushes because every stuff the thing flushes because everyone is in the same crowd to trade. It's a great place to be.

It's kinda like, um, you know, you could be the best poker player uh in your town or in your city, but then poker has been shrinking in the past couple of years and you know, eventually start pip you know, all the easy opponents, so to speak, have left the game. And eventually start playing against harder and harder opponents and you have to um work very, very hard for a smaller slice of the pie or just to keep you know, keep s standing still.

if the pie is growing exponentially and all this dumb money is coming in and all these institutions are coming in, you can get away with just lazing around and just doing um well maybe not specifically lazing around, but you can get away with doing very little. Or even applying what you already know. So what you're saying is crypto is uh a lot um lot more inefficient than stocks.

It it yeah, it's a lot more inefficient than stocks. Um, an example I don't mind sharing because this edge will be gone soon is um Uh Ethereum tends to be a proxy, uh yeah, it tends to be a proxy of the Nasdaq. And um six months ago, um it will during like big motion of Nasdaq, you'll lag Nasdaq by like minutes.

was absolutely ridiculous. Now, especially recently in the past couple of months, it will still lag the Nasdaq by a couple of seconds, which anyone who trades futures knows is a massive advantage. Like especially when it's a big inflation print, um and the futures move, the ES moves, the Nasdaq moves, crypto will move a couple of seconds um behind all that.

There's been a lot of um I've definitely seen a lot of um ops have come in to try to reduce that to even lower and lower space, but there's still like a little bit of time left. I'm pretty sure in three months or whatever, like this entire thing will be gone. And now you know, you have to move on to some other source of alpha.

Yeah. See see those that that sort of example is like Exactly why I was so keen to have you on the podcast. Like just those sort of unique little um little edges. How did you uncover that? Like how did you spot that? How did you spot that weird little thing? I I was waiting for I was waiting for the inflation print and then um saw the print.

You know, inflation is higher than expected, markets get smashed, and then I realize it's like, oh my god, I'm long XYZ coins. And it's like, and then I log in to check them. I was like, oh, it hasn't moved yet. And then start moving. I was like, Oh my God. Cut like D DMA um just cut these things and then st NLC start moving. I was like, what the hell's going on?

And look back at the past and say, Oh my god, there used to be a, you know, a five minute delay and then it became one minute and then it became, you know, a couple of seconds. Yeah, and by the time this comes out it'll be going. Yeah, yeah. But just to wrap this up here, James, I know that you're actually looking to hire somebody. Do you want to just give a little bit of information about who you're looking for, who should apply, how to apply, et cetera?

I've been trading ADS for probably a decade now and I would like to sleep one day. Um and because I'm always tra up at night trading the US um It's a lot of fun, but I often can't keep track of everything that goes on, especially if you have a c keep track of what's going in Europe, keep track of everything that's going on um in Australia as well.

So I'm looking at someone to um basically um start off as a support trader for me in the US, um, tell me what's going on and may eventually start placing trades for me as well. Okay, and this would be someone who lives in the US, right? Yeah, I um I did because yeah, I wanna sell an ES because I wanted this to be a long term position. Um, I understand full well what happens if you stay up every night trying to do everything. Um, you you get burnt out very quickly.

Or you stop caring when the alarm goes off at five AM? It's just not a long term solution to have someone in Australia. That's something I was gonna ask you earlier, actually. It's like how do you monitor all this? Like you've got the Australian market during the day and then US or what, Europe I guess is What? Early evening. Yeah. Um, and then US like right through to the morning. Like, how do you how do you manage it all at the moment? Um it's burst of activity and loss of

I guess do nothing in between. So I do stay up fairly late to trade it. Um so it's quite taxing in that sense. But then I enjoy it immensely. Um watching the markets, figuring stuff out and um I guess it's like the ultimate game. Yeah. So okay, so um just on the person you're looking for, like who you know, what sort of levels of experience or anything like that, any more details you'd like to share?

Yeah, so someone ideally with good uh US microstructure uh experience. Um ADR experience is not essential because it is quite a niche field. Um someone who's decent at short term trading and understand the Intradate drivers of a stock. Um I'll I'll make a Google um forms sheet with a couple of the uh specifications. Okay. Um all right. So that's probably the best way to apply is just through the Google form. Yeah, yeah, that'll be best.

Well I will set up a link. I'll I'll pop a link to that in the show notes. How about that? Sounds good. Folks listening, if you'd like to get that link, go to chatwithtraders.com slash two three one as this will be episode two hundred and thirty one and you'll find a link there in the show notes. Awesome. Cool. All right, James. Well I just want to say I I'm so glad we could uh have this conversation. It it's great to have finally had you on the podcast.

You know, it's been in the back of my mind to reach out to you for a long time and anyway, I'm glad we could uh make it happen. So thank you. Absolute pleasure. You've reached the end of this episode of Chat with Traders, but rest assured there are more episodes. And zero high. if you'd leave a race Chat with traders.