Street Freak: A Memoir of Money and Madness

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9781439181270: Street Freak: A Memoir of Money and Madness
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Like Michael Lewis’s classic Liar’s Poker, Jared Dillian’s Street Freak takes us behind the scenes of the legendary Lehman Brothers, exposing its outrageous and often hilarious corporate culture and offering a “candid look at the demise of a corporate behemoth” (Publishers Weekly).

In the ultracompetitive Ivy League world of Wall Street, Jared Dillian was an outsider as an ex-military, working-class guy in a Men’s Wearhouse suit. But he was scrappy and determined; in interviews he told potential managers that “Nobody can work harder than me. Nobody is willing to put in the hours I will put in. I am insane.” As it turned out, at Lehman Brothers insanity was not an undesirable quality.

Dillian rose from green associate, checking IDs at the entrance to the trading floor in the paranoid days following 9/11, to become an integral part of Lehman’s culture in its final years as the firm’s head Exchange-Traded Fund (ETF) trader. More than $1 trillion in wealth passed through his hands, yet the extreme highs and lows of the trading floor masked and exacerbated the symptoms of Dillian’s undiagnosed bipolar and obsessive-compulsive disorders, leading to a downward spiral that nearly ended his life.

In his electrifying and fresh voice, Dillian takes readers on a wild ride through madness and back.

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About the Author:

Jared Dillian is the founder of the subscription-based, daily financial market report The Daily Dirtnap. He worked on the Pacific Options Exchange from 1999 to 2000, and was a trader for Lehman Brothers from 2001 to 2008, specializing in index arbitrage and ETF trading. Dillian is a graduate of the United States Coast Guard Academy and earned a Masters in Business Administration from the University of San Francisco. He lives in Myrtle Beach, South Carolina. Visit JaredDillian.com.

Excerpt. Reprinted by permission. All rights reserved.:

PROLOGUE
Portrait of a Trader | October 2, 2007


Back in 1999, when the world was brimming with optimism, when there were purple Yahoo! taxicabs patrolling the streets of San Francisco, I was a clerk on the options trading floor of the Pacific Coast Options Exchange. It was there that I learned how the financial markets worked. I spent much of my time standing in the back of the Intel-Oracle pit with the other clerks and stock jockeys; that is, the area where traders in Intel and Oracle options congregated.

There was a trader in the pit named Jack Taylor. Jack was six four, 240 pounds, with no concept of personal space. He spent half his day in a personal fast market, almost as though he was on crack, trading everything in sight: “BUY YOUR BOOK, JAN 30 CALLS, 20 LOT! SELL YOUR BOOK, DEC 25 PUTS! SAGEOLA! SAGEAROONI!” He was all arms and legs, thrashing his crumpled-up risk reports, crashing into other traders in the pit, eating lobster and steak burritos, passing gas all over the rest of the crowd, and heading out back to have sex with one of the female exchange clerks behind the Dumpster.

I wanted to be like Jack.

I wanted to be like Jack because he seemed to be one of God’s simplest and most beautiful creations. Make money, good. Lose money, bad. Burrito, good. Hangover, bad. My life seemed terribly complicated, and if I could boil down my existence to this primordial level, then it would be an existentially freeing experience.

But I was wrong. Jack’s wild personality was a smoke screen, a defense mechanism that he had created to convince other people (and perhaps himself, too) that his life really was that uncomplicated. He was not a simple guy but a rather complex one: a smart kid who had graduated from an Ivy League school, who had made deliberate and rational choices about what to do with his life, and who was now having second thoughts. His acting out was his way of coping, his way of distracting himself from the reality that the financial markets are a cruel way to make a living.

Jack now owns a sandwich shop in Chicago: Jack’s Sandos.

All traders go through what Jack went through. They learn to cope with the idea that they are expendable. If you ever take a trip to an investment bank’s trading floor, look around. Try to find the rare and elusive silver fox. Try to count the number of traders over forty. You won’t find many.

Partly this is because of mathematics. If the markets are mostly a zero-sum game, then the winners stick around and the losers find other things to do with their lives. The likelihood of somebody lasting ten years is only about one in five hundred.

The bigger reason that you don’t see old farts on trading floors is because people self-select. After a number of years in the business, they say enough is enough, hand in their company ID, and they go raise alpacas outside of Spokane.

The important detail is that all traders are capitalists of one stripe or another. Some of them are even supercapitalists, staunch libertarians, politically well to the right of even the Republican Party. And capitalism requires a dedication to the pursuit of reality. A rock is a rock is a rock. A rock is not a tree, no matter what mental gymnastics you perform. Profits are profits. Losses are losses. And there is no evading losses. You see your P&L every day, and the negative number stares you in the face.

Back in the civilian world, people permit themselves to evade reality. If the market is down, they won’t open the brokerage statement. They will stop investing. They will give up. They will hope that things come back.

Being a professional trader allows no such evasion. Hope is not a strategy. If you have a loss, you had better figure it out, or you are out on your ass.

That is a hell of a way to live.

But only if you can get to work in the morning. Seven years of this.

I’m late. Again. Did I lock the front door?

If you’re a trader, it is important to exercise the illusion of control, because the reality is that you’re not in control of anything. The smartest man on Wall Street, after months and months of research on a single trade, has no control over the outcome. In the short term, his position can move against him and force him to liquidate the world’s best idea, only to make him watch as it appreciates 200 percent over the next six months.

I definitely turned the coffeemaker off. But I’m not sure I locked the front door.

Traders deal with probabilities. There is a probability distribution for interest rates, for the log return of stock prices, and for cheating on your spouse without getting caught. The world is filled with uncertainty, and you try to model it. You quantify it. I model the likelihood that someone will break into my house if I forget to lock the door, and I determine that it is infinitesimally small. But not small enough.

I’d better turn around and check the front door.

It is true that in the absence of trade, there is war. But trade is just a different kind of warfare: buyers continually demand lower prices, and sellers want more for what they’re selling. A transaction occurs when—for a brief moment in time—buyer and seller can agree on a price. You’d think that both parties would be satisfied at this point, but in practice, they’re more pissed off at each other than they were before. Everyone thinks he’s getting screwed. A trading floor is filled with unhappy people, because nobody is ever satisfied.

Okay. Here we go.

Unlock, unlock.

Step outside. Turn around.

Lock dead bolt. Test doorknob. Push against door. Feel that it’s locked.

Lock doorknob.

Lock dead bolt again. Five, four, three, two, one.

Lock door again. Five, four, three, two, one.

Lock dead bolt again. Three, two, one.

Lock door again. Three, two, one.

Lock dead bolt again.

Lock door again.

Jiggle doorknob. Locked. Five, three, one. Five, three, one.

In most of the world’s markets, prices are sticky. The price of milk does not change on a second-by-second basis. It does not tick. Neither do the prices of air conditioners, coffeemakers, or MP3s. But a share of GE stock is worth more than it was just a second ago. In the financial markets, quoted prices are good for an instant; after that, they’re stale. Numbers change, and there are consequences. People start yelling. In fact, traders yell all the time. Sometimes it’s because they’re angry with you, but mostly it is to convey a sense of urgency. Five bid for ten thousand, immediate. Higher, now! I’ve seen kids out of college who were completely unprepared for the brutality of trading. Someone yells, and they crumble. They literally shake. Trading is not for the weak, the indecisive, the passive, or the homeschooled.

Damn it.

Back to the house, all the way from the bus stop.

Forgot to check the refrigerator.

This is madness. The madness. It’s back again, isn’t it?

Intimidation, I found, works pretty well, but only to a point. It can get you the extra penny, the balance of the order, and the price adjustment. But it is not a necessary or even sufficient condition for success. There is the guy in the pit with the glasses that nobody pays attention to. He buys when other people are selling. He steps aside when a big order comes through. He’s cordial. He keeps up appearances, but it is impossible to tell if he is having a good day or a bad day. It is impossible to tell if he is having a good year or a bad year.

He is having a very good year. He is up $3 million.

The refrigerator’s closed.

Back upstairs.

I can’t stand this.

Windows. Bathroom windows, office windows, bedroom windows.

Computer off, printer off.

Concentrate.

Coffeemaker off. Lights off.

Porch windows.

Ready.

It is more important to be smart than it is to be big, or fast, or a jerk. And on Wall Street, there are all kinds of smart. There are mathematicians, people who can find the flaws in Nobel Prize–winning options pricing models. There are computer geeks. There are poker players. There are the social psychologists, like me, who know that human behavior runs in patterns over time. Any or all of them can get rich. The people who don’t are the people who don’t ask questions, the people who consider it a birthright to act as a tollbooth attendant, taking their nickel from the market, not a care in the world.

Different pattern this time. Nine, eight, seven, six, five, four, three, two, one.

Lock door.

Lock dead bolt.

Jiggle doorknob. Locked. Nine, five, one. Nine, five, one.

Remember that. And catch your bus.

This is a choice. You can choose not to do this.

There are those who think it is terribly unproductive to have an entire class of people dedicated to buying and selling money. They say that buying and selling money doesn’t actually produce anything. It’s just moving wealth around from one pile to the next. Even if that were true, it doesn’t mean that anyone should care: to most people, making money is an end in itself. There are those, however, who spend their entire career on Wall Street and can’t explain what it is they do for a living when they go home to their children at night. They’re embarrassed for themselves, because they feel that they’re not a force for good in the world.

To me, making money was an end in itself. But beyond that, it is important for any economy to have deep, liquid capital markets. Lost in the debate about the credit crisis—about whether or not it was good for banks to be lending money to people who would have great difficulty paying it back—is the concept that these people, for the first time, had access to capital. Without the existence of capital markets, without people like me and Jack Taylor, none of the dot-com companies, even the so-called good ones, like Amazon, would have been able to raise capital on such attractive terms. The same can be said for just about every bubble, every capital markets phenomenon. In markets, people make mistakes. But for every mistake made, someone, somewhere, benefits.

Did I lock the door?

You locked the door. You did nine-five-one.

I can remember doing nine-five-one, but I can’t remember locking the door.

So get off the bus.

Being a trader, to me, meant that for the first time in my life, I was looking out for myself. Me looking out for myself was a good thing. Because I was looking out for myself, because I sought to buy low and sell high, good things were happening in the world. A money manager was able to sell something at an inflated price, and his clients—dentists and teachers and bus drivers—all benefited. But I didn’t care. I just wanted to get paid.

This came with a price.

For most people, it is their sanity. Go to a casino late at night and observe. Money at risk brings out the worst in human behavior. There is the plainly shitfaced man in his fifties who is betting $2,000 on a single hand of blackjack, ignoring his wife’s calls, the phone vibrating incessantly in his pocket. There are the prostitutes. There are the counters, also known as the “advantage” players. All of these creatures exist in the capital markets in one form or another. Their behavior is excusable when there is money at stake. But it makes for a short career.

Again.

Back windows. Front windows.

Coffeemaker off. Lights off.

Porch windows.

This is going to be it. I’m not coming back again.

Plastic utensils and Velcro shower curtains are in your future if you keep this up.

I would be the exception, I thought. I was perfectly suited to trading. A former military officer and math whiz, thoughtful yet aggressive, intellectual yet vulgar, I could survive—no, thrive—in any trading environment. I remembered prices like they were yesterday. I saw patterns. And I was brutal enough to fight for the last penny. I wasn’t going to be one of those guys who bailed out after a few years and went to something soft and forgiving, like consulting. I wasn’t going to leave the business and write a book about how awful Wall Street was. Pussies.

I walked through life knowing that what I was doing was right. My insides matched my outsides. There is nothing so precious in this world as a man who is in the right place at the right time; who knows that he is doing what he is meant to be doing; who knows that if God exists, He placed him here on this earth to be a trader.

Oh no.

On the bus. Almost in the tunnel now.

Not again.

But take a hundred people and put them in separate rooms, each with a computer terminal and no windows, and allow them to trade futures. Give them each a million dollars. Don’t let them come out for a week. Ninety of them will lose everything. Nine of them will manage to break even, maybe making a few hundred thousand dollars in the process. One of them will get rich.

All of them will go insane trying.

I thought this was supposed to get better. I thought this was supposed to go away.

I had gone mad trying. But then, everyone goes mad trying. Lehman Brothers was too small to be an investment bank and too large to be an insane asylum. The difference between me and everyone else was that I was man enough to admit it.

Off the bus and running down the street, back to the house.

Just tell yourself you’re being crazy. That’s all it is. This isn’t real. It’s all in your head.

Sweating through my suit.

But when I get like this, I can’t tell what’s real and what’s not.

That’s why it’s called crazy.

People staring at me.

Did you remember your meds? I remembered my meds.

This is a hell of a way to live.

© 2011 Jared Dillian| 1
Spartacus | October 2, 2007


The market has its own intelligence. It has a sort of malignant omniscience that dictates that the market will do whatever fucks over the most people at any given moment in time. It knows your positions, and it knows your fears. You are a sinner in the hands of an angry God, and your positions are going to pay. Like Santa Claus, sort of, except that the market doesn’t care who’s been naughty or nice; more often than not, naughty wins. The market cares who is the most exposed, who is the most out over his skis, and who has taken the most risk at any given moment. And once the market has ascertained the point of maximum pain, it will move, violently, in that direction, causing the greatest number of people to lose the most money.

It was moving that way for me today, having just been lifted on two million shares of IWM, an exchange-traded fund that tracks the fortunes of small capitalization stocks. The perpetrator this time was Spartacus, a monstrous hedge fund that managed billions of dollars in assets, ...

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