The Dragon Lady

submitted by Shamrock


The Long Term Capital Crisis “LTC” was at a boil.  You know what else was at a boil … Phish summer tour.  The only show I caught that summer was the tour ending Limestone Maine “lemon wheel festival.”

Phish was a nice Alabama gateway from work.  I was one of two clerks working for an amazing specialist.  She was a veteran, and she held the trading pit in check.  We had some great traders at our post, a lot of Ivy and top school grads.  Poker and bridge players took up the rest of crowd.

Vol in the banking sector went haywire as LTC’S credit imploded. Multiple fund positions moved against them in such force they got margin called to death.


The credit contagion rippled through the BKX like wild fire… I had never seen implied vol move that fast at that point in my young career.  I believe the front month got to 120 and the back end (2 year leaps) 70 vol, or something like it.  It was absolutely wild.

I did get backstage for sets 2 & 3 night 2 of the Lemonwheel.  My pal Jay came up big with back stage passes.  We sat in the rafters above Fishman and saw the first ever Harry Hood with a crowd glow stick war.  Then back to work.  Back to the crisis.

At some point the bank stock our crowd traded was down over 60%.  A big wire house came in to buy 40,000 PUTS, 2 years out.  It was the biggest trade I had seen live.  Two-year vol was near 70, which was normally 17.  This trade had massive Delta and massive Vega.

The dragon lady, my specialist, tells me to buy stock if we sell puts.  The opposite of the real hedge. This is a Texas hedge… in other words, a f*cking pile on, LONG DELTA, as the world was literally ending.

Bank stocks were bidless.  I thought the Great Depression was it beginning again or something.

Back then you had to call in big orders to trade on the NYSE.  As a specialist unit, we had dot machines and Instinet.  I was fast.  I had to punch orders in with a keyboard and mouse.  It was the very beginning of technology taking over.  The floor traders shared floor phone racks that were wired to Guys “upstairs” who took stock hedge orders.

Some traders actively hedged.  The pit had a steady flow of paper trading across all months and strikes. They were locking in fat time spreads, and legging butterflies for free.  It was truly the Gilded Age of open outcry market making.  The same banks had the same rolls month after month.  If you made good markets, especially during in tough times and hectic trading, damn, life was good.  Real good.

As a specialist, we were allocating you the proper slice.  Some buy side funds had taken huge positions in upside leaps in a lot of the financial names.  They were over writing, pounding the bids of up 20% calls thinking LBO’s could pin the unwind at strike!

Long story short the exact low was that big order.  40k puts 2 years out.  Was this Long Term Capital themselves?  Maybe.  Some joker HAD to cover.  Prime brokers were in tatters.  We were at financial WAR.

We sold 25% of the position, and the best traders got the rest.

“Sell 75k shares!” *wink*
I had adrenaline pumping through my neck veins.  There was so much action at our post the floor shook.  Traders were getting blown out, carted away in tap out trades.  It was like an NFL summer camp.  Each day a margin clerk would tap a floor guy out of the game.  Sometimes mid-day, like when the Turk got yanked.

Our real hedge would have been to sell 400k, but this was mayhem, so we bought 75k.  That was our play.  An easy buy.  The floor guys front ran the order and shorted the stock down a whole point, and we gobbled it all up.

Yeah, we traded in fractions and we used hand signals. That’s what I meant about the Goddam Gilded Age.

Needless to say, we never saw the stock at that price ever again. The crisis ended a few weeks later but that was the low in that stock and the highest vol would be for years.  I think we hedged half up $5 bucks.

We made markets 24/7.  The crowd ran the exchange pricing matrix as their personal business model.  We gave tight prices on rolls to keep the wire houses happy and everyone won.  A Gilded Age, by definition.

The Dragon Lady was a great mentor and really, a tremendous trader.  She was the best in the crowd and the best on the floor at the specialist post.  If I tell you, we cleaned house that year.

With hearts like speculators, we had all waited years for this.  Even the Russian judge would have given us a 9.8 out of 10.  Traders bought boats and pools with the money.  I was 24 I got my first Qualcomm mobile phone.

The #gildedage, man.