Episode 39: How to Turn Pro as a Trader – Noel Smith & Darrin Johnson

In this episode I talk with Noel Smith, Chief Investment Officer & Founder at Convex Asset Management as well as Volatility trader, Darrin Johnson. 

We talk about How to Turn Pro as a Trader, How to Join a Prop Shop, How to Run a Prop Shop, The Business Side of Running a Trading Business, How to Build Relationships from Scratch and more! 

I hope you enjoyed this conversation with Noel and Darrin as much as I did!

 

 

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Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at info@mutinyfund.com.

 

Transcript Episode 39:

 

Taylor Pearson:

Hello and welcome. This is the Mutiny Investing Podcast. This podcast features long form conversations on topics relating to investing, markets, risk, volatility, and complex systems.

Disclaimer:

This podcast is provided for informational purposes only, and should not be relied upon as legal business investment or tax advice. All opinions expressed by podcast participants are solely their own opinions, and do not necessarily reflect the opinions of Mutiny Fund, their affiliates or companies featured. Due to industry regulations participants on this podcast are instructed to not make specific trade recommendations nor reference best or potential profits. Listeners are reminded that managed features, commodity trading, forex trading and other alternative investments are complex and carry a risk of substantial losses. As such they’re not suitable for all investors, and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer, for more information.

Jason Buck:

So this one’s likely to never going to get published due to compliance reasons, but let’s record it anyway. For those of you not watching the video, that are just listening on audio. Hopefully you’re used to my voice now. This is Jason from Mutiny Funds and I’ve got both Darrin and Noel with me. And so just from the voice sense, maybe we will kick it off with Noel first. But the idea was, Darrin and I were having a discussion about what’s it like to be a DIY trader?

Jason Buck:

And like, how do you raise assets if you wanted to, or more importantly, how do you maybe go work for a prop shop or what is it like to own a prop shop and then search out those traders? And I just thought, you know, why not instead of us having a private conversation, let’s try to record it. And this could be valuable to hopefully a lot of people assuming well, we ever publish it. So maybe Noel, maybe I guess, maybe the quick thing maybe would be just give a background on your prop shop experience or, and then your trading before the prop shop. So that maybe, that’ll give us kind of a jumping off point.

Noel Smith:

Sure. So I started prop trading in 96. I was a stockbroker for about 18 months before that. So that’s how I figured out what time the stock market opens and that kind of stuff. But when I was initially a prop trader, I went to go work for a guy that spun out of Susquehanna and then Stafford. And I was basically the guy that went and got coffee, got tacos and all those other super sexy jobs. And that was it. And prop trading, for anybody who doesn’t know is simply trading your own money. It’s like, a glorified version of you on your Robinhood app, just trying to figure out which way Tesla’s going to go tomorrow.

Jason Buck:

Right. So part of that is, and you and I were just talking right before Darrin jumped on, is over the last decade, I personally have been always like googling prop shops and figuring out, how could I work at a prop shop? All of those things. And there’s just zero information out there. Or there’s a lot of BS information where almost like, you have to buy your seed or buy your draw down kind of thing where it’s like, kind of pay to play. So I guess the first question and Darrin, you’re going to be much better asking questions about this stuff is like, if I am a prop trader and I’m just like trading, you know, out of my basement or at home, and I’m doing very well for myself, like, is there still any legitimate prop shops left? Or like, how would I even think about getting in touch with them? And like, what is that, what does that process even look like to begin with?

Noel Smith:

So, ah, so I’ll give you my answer real quick. All the major firms that you would probably don’t even think are prop shops kind of are, like Citadel. We pick on them because Ken Griffin buys a giant house every other week. So he gets a lot of press, but there’s Citadel Asset Management, which is the hedge fund. And then there’s Citadel Securities, which is really just a prop firm. It’s the same. Susquehanna’s the same. Jump is the same, there’s tons of them. But the reason that you don’t know anything about them is because, they don’t want you to, there’s nothing in it for them. So this is actually boomeranged back on me as somebody who’s launched a hedge fund because, I’m 52 years old and nobody’s ever heard of me outside of the prop trading community.

Noel Smith:

So when I talk to people about raising money or whatever else like, “Never heard of you guy, I don’t have any idea what your background is.” But because of that, I mean, I haven’t had a social media until like 18 months ago. I’ve had nothing. So you really had to try pretty hard to figure out anything about my background, but that’s been deliberate on my end. I’ve actually gone through great pains to not be a public entity on any level. And that’s how a lot of platforms are because it really doesn’t help them. And frankly, it can probably hurt them for anybody to really know what it is they do.

Darrin Johnson:

Even as an independent retail person, that’s the thing you run into when you start researching for propr shops is that, it’s almost like… To use the sports betting equivalent, it’s almost like a Billy Waters type syndicate, sort of cottage industry where it’s like nobody really knows. And then when you ask or you try to go through the sort of legitimate channels, there’s nothing really mentioned about it and the stuff that is available, like you said, there’s one firm in particular, well there’s two but they kind of merged that I won’t name on the podcast, but they call themselves prop. But, they’re making between seven to eight figures off of an educational arm, where people are paying for everything from learning how to day trade and scout stocks to income trading. And that’s what, and that’s positive to retail, who doesn’t know, who’s naive, who’s ignorant as an opportunity to be on prop desk and not to say that those firms don’t prop trade.

Darrin Johnson:

I know, though the parent company went through a pretty serious SEC audit, they are trading and they’re making really big money, but just like in the actual prop world to get into one of those coveted seats and get a decent size line as an individual trader, it’s basically just who you know.

Noel Smith:

Yeah.

Darrin Johnson:

I just felt like the… But the hunger games advertising the info products is just so gross to me. And it’s so disgusting because these are people who are already under capitalized. And then you’re going to ask them to put up six, seven, eight, nine grand for a course, for the potential to just, to potentially start off as basically like a clerk or an assistant on your desk, which they’re located in New York City in a very expensive place. So it’s… You just start thinking about it and you follow you say, “Oh, okay. They just don’t want. This isn’t a serious thing.” So yeah, from the retail side, everything that Noel said like, is absolutely… It’s been verified based on my research.

Jason Buck:

Noel, do you think maybe that’s a good place to start for, we’ll call it retail. We’ll just keep calling it prop traders maybe throughout this, is like, if you’re doing it yourself as a prop trader and you’re looking at maybe a prop firm, one of the initial red flags is maybe and you might disagree with me. It’s like, if they want you to pay for your education or they want you to put up money for the draw downs, because then typically aren’t they then in that scenario, they’re teaching you how to trade strategies that have high churn because they’re making a huge spread on the commissions. And that’s actually where they’re making money as a firm with all these quote unquote “prop traders” that are actually trading so many times a day that they’re just churning them out and then they’re just burning through the commission trade. What should people-

Noel Smith:

Yeah.

Jason Buck:

Let’s start with that. What are the red flags?

Noel Smith:

So I don’t want to speak out of ignorance. I haven’t looked for a prop trading job in a very long time. So it is not fair for me to comment on with the landscape that you guys are talking about, because I’ve this… This pay to play notion is, I’m aware of it, but I’ve never had to deal with that. I don’t know of any real prop firms, they’re going to ask you to write them a check. Zero. Hard zero.

Jason Buck:

Exactly.

Noel Smith:

They will ask you to get tacos. They will ask you to sweep the floors. They will ask you to scrub the whatever, and they won’t feel bad about it, but they will not ask you for money. So if you want to go get a job at, I don’t know, Susquehanna, they’re not going to ask you to write them a check. They will give you money and they will ask you for tons of effort and a very large commitment.

Jason Buck:

But if you’re talking about like the SIG, the Jump, PEAK6 of the world, they’re typically training their own traders-

Noel Smith:

Yes.

Jason Buck:

Getting them out of college right, and kind of raising them up. So what are the options for somebody that actually has a P&L and then also, how would you think to get your P&L accredited by some sort of third party entity, is also difficult where people even look at it.

Noel Smith:

Yeah. That’s common sense though. So you show up with your P&L and you say, “Okay, I have IP and I have no money,” or “I have money and IP”, which is the best combination. But if you can convince somebody who’s got money that you can make them money, you can probably get a job. It’s very hard to do that because a lot of the guys that are in the hiring position for prop firms are exceedingly smart. They’ve seen it all. They’ve heard all of the nonsense stories and those jobs are hard to get, but they pay really well. I mean, there’s people, one year out of college that are making six, 700 grand, and you’re not going to convince somebody to give you that kind of money, unless you can octuple verify everything you say.

Jason Buck:

Which is really hard to do, getting a verifiable track record, right? When you’ve been trading on your own. Sorry, go ahead, Darrin.

Darrin Johnson:

Yeah, no, I was going to say that’s really hard. And then on top of that, the stuff that you’re doing as an individual retail guy, even on a prop firm, which to me is kind of like just swashbuckling, whatever edge there is across global markets, whatever your edge is, right? Even in for that type of formalized entity, a lot of the stuff that you do as a retail person may not even be a good fit or scale to those operations, let alone like a traditional hedge fund or a bank desk if they exist anymore. So that’s the other thing is, as a retail person, is what you’re doing tractable and portable enough to be able to fit into even a prop desk, which is pretty liberal in terms of what you’re allowed to trade and the edges you can explore?

Noel Smith:

Agreed.

Jason Buck:

And part of that is, Noel correct me if I’m wrong. And maybe this is kind of where Darrin was headed to, is historically, and I may be incorrect about this, but a lot of prop shops had a really tight stop losses. If you blew out 5% on the year, you’re just shut down. So you had to have very conservative strategies and then maybe you’re using house money as you start to increase your P&L, is that still the case? Or are they… Allow a wide swath of strategies? Because a lot of times, if you had a more longer term convergent strategy, there was no way you were going to ever work at a prop shop because your draw downs would blow you out like immediately.

Noel Smith:

Yeah. So that’s true and not true. The public answer is that it’s true.

Jason Buck:

Okay.

Noel Smith:

It’s not true in the sense that, I’ve personally backed over a hundred guys, so let’s just say we have guy A and guy B. Guy A makes money and guy B loses money, but then you call them into your office and you say, “Okay, guy B why’d you make money, why’d you lose money?” And there is some sense of just common sense to this. Did the guy who lost money, was he just unlucky? And is his strategy otherwise still a good strategy? And the guy that made money, did they just get lucky and make a bunch of money? Are they just yellowing a bunch of Tesla calls or something. I’ve been mad at guys who have made money and I’ve been happy with guys that have lost money because they’re doing it for the right reasons. And their process is quantifiable and repeatable. So that’s the answer. And so if you’ve got a guy that lost 5%, but you know he’s doing it right. You’re going to give him a pass or you get another guy that’s down 1% and he’s a goofball shows up late leaves early, adios.

Jason Buck:

So back in the day, when you were in Chicago, was it just the serendipity of who was in your building? You could find individual traders there. How did you actually source these hundred guys? How did they even find you? How’d you find them?

Noel Smith:

So initially it was guys that wandered in my office, you know, knock, knock, knock, Hey, can I have a job? I worked for PEAK6 down the hallway, or I worked for Wolverine up a floor and so that’s a real thing. But the really good P&L generators, the earners, they’re not knocking on doors. It’s the guys that have blown out or just can’t make money or whatever else. So generally speaking, it’s through a… It’s just like anything else. It’s through a conduit, somebody you know in common. And then when we wanted to hire a new crop of people, I would personally go to universities, like universities we all know about and interview people and I’ve interviewed thousands of people and with varying success.

Noel Smith:

So we would hire people out of college and I’ve got a million interview stories, some really funny ones, but generally speaking, we would have a first or second interview on campus with a junior guy that would get escalated up to me. We would do a battery of questions and quizzes. And if they didn’t have any trading knowledge, we would go into math and stats and probability, and then just general knowledge about things in the world. How many fish are in the sea? I mean, those are real questions and those are… But reasoning through these questions gives you a window into their process and logic. And then you figure it out and you make a decision.

Jason Buck:

I know you just used Darrin’s favorite word earners. So I know he’s happy just having this conversation. Darrin probably uses earners like every other sentence when we talk. It is like, is somebody a good earner? But, has that changed in modern times? Would almost the vice be a good set of luggage? Should you just move to Chicago, hang out around the CME and the CBO and all those bars that are around there, as soon as the markets close and maybe hang out in those bars and just start to get to know people, or like… What would be the, what’s the wedge for anybody currently, in 2022, to try to get into a prop firm?

Noel Smith:

I don’t actually think it’s that hard. So the idea that you have to hang out at the preferred bar or whatever else, most of the people really making decisions, aren’t usually degenerate alcoholics or whatever else. I mean, guess that exists. But generally speaking, the real people making real money are smart, real people, and they work hard and they do their thing. So if you have a verifiable track record, you can pre answer every question that somebody’s going to want to know, which is… The really, there’s only one real question. How do you make me money with as little effort on my end? I want to do nothing. And I want you to be in my life and make me money. That’s it.

Noel Smith:

Everything else is just like nonsense. And it adds to the complications, but all you want to know is, will this person make me money? Yes or no. Next question is less important. But if you can prove to somebody that you will make them money and cause them no hassles, no compliance issues, no just stupid drama. You can get a job. And if you can just get in front of those logical questions, which is make it as simple and easy for the person interviewing you as possible to give you money, they will give you money.

Jason Buck:

Right. But part of that is though, I agree with everything you’re saying. That’s perfect. But the question still remains is actually the very first step is how do you even find those people to get in front of, to show you can make them money, right? That’s the rub, right?

Noel Smith:

So I’m a bad person to ask only because I already know. But if I didn’t know anybody, what would I do?

Jason Buck:

Right.

Noel Smith:

Just pound LinkedIn or something like that. So if I saw this interview, right, I would see this interview in a week. I would LinkedIn all three of us and I’d be like, “Hey man, I’m a no nothing guy that knows nothing. But by the way, I got a great P&L and I’m happy to have it audited. I spent six grand of my seven grand to send it to Ernst & Young and, it’s got the stamp of approval. This is all legit. I will go to the maths on this idea. All I want to do is give you a chance to show you how I make you money.” Look, okay. I’ll take a look.

Jason Buck:

Please send those DMS to Noel and Darrin, not to me. But that’s part of it though, my next question on that Noel is, historically too, do you want people that are trading a singular strategy or can they have a broad set of strategies? Could they run an ensemble approach? It always seems like prop shops is one instrument, one trade or is that fallacious?

Noel Smith:

Yeah, it is definitely fallacious. If you are in a situation where you don’t know anybody in the business, there’s no way you know 10 good trades. If you have been lucky enough to source out Japan versus Germany versus Iceland versus Mars, and that’s somehow the way you make money, it’s taken you a lot of time and a lot of effort to figure that out. And if you’re the only guy in the planet or a small subset of people that know how to do this, there’s just no way you also know 25 other trades. It just, it’s not possible. If you’re a heart surgeon, you can’t also be a rocket scientist or whatever.

Noel Smith:

There’s just too much information in any one person to do all that stuff. Now, those are extreme examples, but you can learn these things in time. But if you don’t, if you already have that much skill, you already have a job. And how you get that information is you go get a job at Susquehanna using them and they put you on the bond desk and then you do a good job. And then a guy gets fired on the gold desk and you go learn gold. Then you go learn oil. Then you go learn equities. That’s how you get that breadth of knowledge, but you’re not going to teach yourself that stuff. It’s just too hard.

Jason Buck:

Yeah, that was kind of my question is like, you show your competence through one trading strategy, and then when you’re getting in there, you’re getting mentored on all these different desks. And you’re going to ask all these different questions and you can learn how to broadly apply your skillset, is kind of the way to think about it?

Noel Smith:

Yes, that’s exactly right.

Darrin Johnson:

But even still, what if you’re like a former group one junior trader and you’ve been making markets on 30 different single stock equities. I would think that would still be difficult to switch over to the quote unquote “hedge fund” side of set it up, right?

Noel Smith:

Yes.

Darrin Johnson:

Because it’s a… So in other words, you’re filtering and filtering and refining and filtering until you get a very small subset of traders that can actually fit within the prop framework. Because former market makers, I mean, some of them could I’m sure, but a lot of them are horrible position traders. They really only know mispricings and quasi arbitrages right? Not necessarily position, taking a position. So if you think about from the [inaudible 00:18:14] perspective like, these guys really came in, not really having an opinion on volatility, they’re just kind of aware of it.

Noel Smith:

You’re totally right. Imagine like, you zoom into a little pond in your neighborhood and you zoom in close and you see two paramecium battling with each other about a little speck of algae or whatever. Right? They have no idea that there’s a fish over there and they have even less of an idea that they’re in a pond, where this pond is one of a thousand ponds. It’s in a state that’s in an island or whatever. So you’re right. So if you are a vol guy making markets and 30 different names on group one, you maybe know something about the vol surface of Tesla, but that’s about it. And you know how to use the software that they’ve worked on over the last 20 years. But why is Tesla going up or why are bonds going down? You have no idea.

Darrin Johnson:

Yep.

Noel Smith:

And it doesn’t scare.

Darrin Johnson:

Which is why, by the way, parenthetically, why so many of those guys are again, won’t drop any names, but have been selling income courses and income calendar, in triple income calendars since 2001. [inaudible 00:19:20] They left the CBO floor, were backed either by group one or some of the other larger firms down there on the CBO floor. And then they just pivoted to options income education. And that’s their new business. I mean, you can’t knock the hustle. It is what it is, but they didn’t go prop for a reason, you know?

Noel Smith:

Well, I mean, Groupon is a prop firm. The problem with the hedge fund world is that in some ways it’s more sophisticated, in other ways it’s less sophisticated. But the main problem is how does it scale? Because if you’re out there making markets in 30 Delta puts in Tesla, I mean, you can’t do that with a billion dollars. You can barely do that with 10 million. That’s about it. And by the time you actually lever up these $2 options, you go out buy 2000 of them, the market figures out who you are and they fade you as they should.

Jason Buck:

So part of that before I get to almost the flip side of what’s it like owning one of these firms and thinking about the way you did with aggregating a lot of capacity constraint strategies, let’s just say like, hypothetically, you had a prop trader that’s been trading out of their own house or WeWork or something like that. And they’re running single digit millions and maybe their capacity is maybe 10 to 20 million somewhere in that range. And they’ve been having a great P&L, but as you know, if you’re doing that, your P&L is also attributed to your personal life and everything. So it makes it a little bit more difficult. You can’t be as unemotional about it. What are the kind of pros and cons to going to work at a prop shop? Is it a good idea? Does that person just keep running their own book? Maybe it’s not even a good idea for them to go to a prop shop.

Noel Smith:

Depends on the pay right? It depends on the scale.

Jason Buck:

Yeah.

Noel Smith:

So I mean, if you’re running a hundred thousand dollars strategy and you know you can scale, you know, a thousand X then. Yeah, sure. But if you’re, you know, you’re trading something quirky, like soybeans at three in the morning, you know, they can, they can give you $5 million, but you might make a million or two, and then you get your, your cut. So maybe it’s not that great. And you know, that is true. Especially within the future’s world, a lot of guys have great PNLs and their sharpe is really strong, but they just don’t scale. I mean, if you actually have real big boy money.

Jason Buck:

Right.

Noel Smith:

You can’t put it to work, so you’ll blow them out so fast that they don’t even know what to do about it. So there are a lot of problems with that, but it ultimately it boils down to, what is your strategy? Does it scale? And, does it scale at the terms of the deal? And only the individual can make that decision.

Jason Buck:

What kind of scale would you be looking for? Are you fine with something that’s sub 20 million in capacity because you can combine it with your hundred other guys, is this fine by you?

Noel Smith:

Yeah, totally. So, if you have a guy that’s trading Exxon, another guy that’s trading Chevron and they don’t know how the other two work, you can cross collateralize those ideas. Or if you’re in the future’s business, so you only need to put up a certain amount of maintenance margin. And then you can put your gold guy against your beans guy against your fixed income guy. And you actually maybe need to have $10 million on deposit at the firm, but you are actually controlling something like a hundred million or maybe a little bit more. So those are all very realistic things that you can do, and you can do it less so within the equity space, specifically equity options, because the risk limits are going to be different. Assuming you have a prime relationship someplace real like Goldman or ABN where they give real margining. The methodology is known and yeah, it could be totally worth it to you.

Jason Buck:

That was actually, you just front ran where I was almost headed next, which is perfect. But also before we get there though, you also reference like the trader can make their cut from the prop firm, just like ballpark, what’s like an average cut? Is it just a percentage of incentive? Is that, and I mean, is it baseline salary plus incentive? I’m sure it’s kind of run the full gamut, but give us an idea, that color around like what is the actual, even the cut going to the individual traders.

Noel Smith:

So in the beginning, if you’re watching this interview, I assume you don’t already know most of these questions and answers. So I’m assuming that you’re a junior trader. With that assumption, it’s going to be something like 10 or 20%. It could be higher, but if it’s higher, that means it’s a smaller trade. So if you’re getting stuck on the bond desk, which is going to be a big number desk, they’re not going to give you 50% of the bond trade. There’s just no way. Because there’s billions of dollars there. So you’re going to get a small little chunk. But if you’re on the lumber desk, which is pretty thin and have been volatile, you get 30, 40%. Sure because it’s a smaller trade, but and the numbers are, usually low six figures to low seven figures. Is it realistic that a prop trader makes a million dollars their first year? I mean 10%. Is it realistic that a prop trader makes a million dollars within three years? Yes. That’s quite very reasonable.

Jason Buck:

Yeah. It is dependent on your allocation size and then, I’m sure as you become more and more successful, you can negotiate more of your incentive fee on the back end.

Noel Smith:

Of course.

Jason Buck:

But just so I know, is there any sort of base, almost minimum wage salary or is that just non-existent? Just so people know at like a…

Jason Buck:

Based like almost minimum wage salary or is that just nonexistent? Just so people know at like a legit firm.

Noel Smith:

Yeah. I think that the bases are something like 150 to 250. I know the…I know that even interns at some of the good prop firms are making more than that. So, you know, I know some firms out here in California that, you know, starting salary is like 500, but you know, these people that are getting these jobs are not dingalings. I mean, they’re very smart people.

Darrin Johnson:

Right. Yeah. That’s, that’s the key thing. I mean, Jason and I have a mutual friend who is at one of the big, big, big funds and he has his own book it’s quite substantial, but he’s a freaking mathematician from Georgia Tech.

Noel Smith:

There you go.

Darrin Johnson:

You know what I mean? Like he is, he is out of this world smart and he’d had proper experience prior, you know, before getting this, this now recent job. So, I mean, these are like the brightest and best people.

Noel Smith:

Absolutely. I was talking to these two guys from China here in my office in California and the one guy’s like, you know, Hey, this guy’s the math champion. I’m like of what? He’s like China. I’m like, what do you mean? What’s he like, no, China. I’m like the whole, the whole place? He’s like, yeah, like that’s pretty hard to do. I’m like, yes, that is very hard to do. To be the number one guy in math, all of China, no joke.

Jason Buck:

That’s like straight out the big short where they had the number two guy, was it when he was the runner up or something and then the Chinese quant. Right. So Darren, do you have any other questions on that side that you had been marinating on before I kind of almost flip it around and talk about what it’s like to own a prop firm. Like from the trader side.

Darrin Johnson:

The only thing I was wondering about was in your experience with interviewing and then managing hundreds of traders or whatever, do you find that most of the guys that work out well come from the future side, futures and options, or from the equity side?

Noel Smith:

I don’t have an answer to that question. The answer to the question that you didn’t ask is what is the, what makes somebody work out? It is moral ambition. What I mean by that is somebody who is, you know, an initiative taker, somebody who does their own job as best as they can, and they also want to be there. So you can be moral and you can be ambitious, but you could do things the right way, and you demonstrate a work ethic. That’s kind of a corny answer, but it’s dead true. I mean, I’ve known guys that are much smarter than other guys, but they’re kind of like, yeah, you know, I don’t really want to be here and they fail. And then you got guys that are maybe not as smart, but they’re like really trying to learn everything. Those guys have a much greater track record.

Jason Buck:

It’s amazing how you would think that like in our business, it’s all about black and white P and L, but all the dynamics from life still work out, like be a nice person, work hard, show up early, leave late, and everybody will give you the benefit of the doubt and everybody wants to help you out. Like, it’s really that simple. Huh?

Noel Smith:

It, it really is true.

Jason Buck:

Hmm. So I was…The impetus actually from this was, I was actually talking to Darren. I was like, you know, have you ever thought about starting a prop shop? So let’s kind of talk about that other side of like, what would it look like to start a prop shop? Like what you initially just talked about earlier that I think is one of the most fascinating things is like, if you have the proper relationships that you can actually run, you know, you can cross marginalize and run a lot more capital and that’s the point of the prop shop. Is it kind of almost set up…Like in a way I think about it, like when you want to start a bank, you get a bunch of people to put in equity in the bank and then obviously out of whole cloth, you know, banks create loans, but instead you could get maybe a few investors together, raise 10 million bucks, but then you could be running a hundred million book across, you know, multiple traders in multiple strategies. Is that like overly simplified or what would that look like from a setup process?

Noel Smith:

No, I mean, no, in theory, that’s not too far from what happens. So in the future space, it’s a double edged sword. It is easier to do, but because it’s easier to do, it’s harder to make an edge. And in the option space, you know, it is, or the equity option space that is it’s harder, but it’s harder to do and it costs more money. So it’s like, you know, do you want to be in the quirky business with all kinds of edge that nobody else does, that’s hard to get into? Or do you want to be in the easy business that’s easy to get into, but everybody else can do it, so there’s no edge, you know, and it’s just kind like common sense. So futures trading in general is, it’s cheaper, it’s easier and it’s easier to get into. But because of that, you know, you need very strong IP to make money. If you’re going to out compete, Optiver in the future space you need to know what you’re doing.

Jason Buck:

Yeah. So part of that though is like, so you put a couple million in equity in, you get the right prime relationships, which are sometimes harder than people realize, and sometimes it’s a certain size. Do you know if like, you know, if it’s GS or ADM, like they’ll come down in size or do you think it’s usually a hundred million, a hundred million in notional is usually the minimum or?

Noel Smith:

Nah, they, they say that, but that’s not true. I don’t want to get Goldman to yell at me cause I have a relationship with Goldman, but you know, the number is lower and if you’re a real person they’ll come down.

Jason Buck:

Right. So let’s just say, hypothetically, and I’m using the air quotes here for those listening in is like, if somebody like Darren or I wanted to start like a prop shop and let’s say we aggregate five to 10 million bucks in cash, and then you’re running at like 25 to 50 million let’s just say across the entire book, how would you then, you know, in the modern times, it’s very different from Chicago physical space, maybe back in the day where now you could probably source people from around the world online. And, but then how do you start to…How would you think about getting the first people in? And do you think about…You wanted diversification of strategies to make sure like you’re not blowing up because you are running that notional leverage across your book?

Noel Smith:

Yes. So kind of like what you do with Mutiny is very sensible and you and I have talked about this privately, you know, how… Where you got to where you are and where I’ve got to where I am, you know, the paths are very different, but the end game is not that different. So we’re looking for non-core latest strategies that make money all the time, no matter what. And ideally you have 10 strategies, 10 make money, you know, more realistically you have five strategies that go up five strategies that go down and the correlation is fairly low and they make money in aggregate most of the time. But, in terms of how do you find that you have to have the, you know, it doesn’t require that much mathematical heft, but you have to know how to, you know, figure out what’s related to what and how those relationships change with time.

Noel Smith:

So, you know, it’s, you know, the correlations aren’t static, right? They’re dynamic and they’re spurious. So you need to know that and how they change, and when they’ll be at the highest pain inflection point. And that’s, I guess probably the easiest thing to do, but getting these relationships as you pointed out, you know, if you just walk into Goldman Sachs and say, great, I’m here with my five million dollars. Can I have an account, please? They’ll say no. But you know, but if you can convince them that you’re going to make them, you know, a couple hundred grand a year, no less, make them, not you. I mean, a couple hundred grand a year doesn’t sound like much, but when you’re paying out 9, 10, 11, 12 grand a month in fees, and you’re like, oh, man, this kind of sucks, adds up. And, but they don’t care. Their business is their business, not yours.

Jason Buck:

It made me think about it in a different way, because like I asked you the question earlier and all that like, you know, what do you do if you don’t have any relationships and you answered that perfectly like via this podcast, LinkedIn, that hustle, right. You just need some sort of wedge.

Noel Smith:

Yeah.

Jason Buck:

And the same thing has happened to me even like, so I can’t even deny it, I’m like, if you want to find a good prime like Goldman or whoever it’s like, you just start hustling relationships.

Noel Smith:

Yes.

Jason Buck:

And over time you can…And then like you said, you look for what’s their incentive. How do I talk to them in the right way? And you’re going to get turned down a lot of times. But just even like back in the day when I talked to bankers for commercial real estate, I would get, I got turned down probably 35 times before I got my initial commercial real estate development loan.

Jason Buck:

And every time after they would turn me down, I’d go, Hey, I’m about to go across the street to this other bank. You know, what did I do wrong? Help me like improve my pitch, you know, what can I do differently? And they were always more than happy to help. And so it’s kind of like there, it’s like, everybody’s like, well, I don’t know where to start. And it’s like, you just need that first wedge. And then you just hustle your way into it in a way. But like, so when you’re, when you were looking at traders, did you have like a…

Darrin Johnson:

Wait hold on, hold on. Jason I don’t mean to interject, but…

Jason Buck:

Go ahead, go ahead. Please.

Darrin Johnson:

I just…There’s something that’s sort of implied here that I think we shouldn’t just gloss over. You have to have acquired the back office and compliance knowledge from some…About how prime relationships work, how across margining works, how sub-accounts work. In other words, there’s a regulatory nuts and bolts piece that the person going into this is assumed to have, not in addition to the cash or the capital. Right? Like, and so when you talk about issues of, okay, where do I start? Well, again, it’s kind of like, I always say like, it’s knowing the end at the beginning. Like you would have to have, you would have to know what you need to know in order to even get your organizational structure correct. Right.

Darrin Johnson:

Because like, what if you, what if you’re a guy and you, and you know, you, whatever, you cashed out a crypto and you have 20 or 30 million dollars, but if you don’t know that you needed a certain prime relationship and then there needs to be a certain amount put up for a haircut, and then the other portion of remaining capital needs to be kept at a specific type of bank, right? Like there’s all these different steps that people need to get familiar with, and again, this is why to Mo’s point apprenticeships, internships, you know, doing admin stuff at one of these firms is valuable. It’s primarily for the business hygiene, 1 0 1 stuff .

Noel Smith:

Spot on. I think you’re totally right.

Jason Buck:

Yeah, I couldn’t agree more with what you’re saying, but you also know my history too is like, I didn’t have any of those relationships. I didn’t have any of that apprenticeship and mentorship and what’s I do? I just started picking up the phone and asking a lot of dumb questions to a lot of people who told me to like go kick rocks. And I was like, wait, wait, before you hang up, tell me the…And like, and then eventually you start putting those pieces of the puzzle together. So it is doable. It’s just, it’s going to take you a long time and you’re going to have a lot of, you know, like false starts and you’re going to go down a lot of blind alleys and you’re going to turn around and everything. So I mean, yeah, I mean, you’re getting information here from this podcast. You Google, you start calling people, you start asking questions and you just can’t be afraid of getting your door slammed in your face and told you’re an idiot. Right. I mean, that’s, that’s what it boils down to.

Noel Smith:

So you’re, you’re both totally right. You know, there’s, there’s the business of the business and then there’s the trade. Right?

Jason Buck:

Right.

Noel Smith:

So that’s what…I have a COO Brian and you know, his job is to make sure that the business has, you know, followed up on whatever items of business you need to do. So to Darren’s point, you know, you need to figure out all the stuff you don’t know. And if you can’t get an account at Goldman, you don’t, you go to interactive brokers or you go to Wet Bush, or you go to one of the smaller prime brokers and then you figure out right where are they jamming me on fees, where are they negotiable on fees? What does it mean to me? And then after you do that for some period of time and you have a, maybe a bigger, better account, then you can walk into a Morgan Stanley or Goldman and say, Hey, I’ve, I’ve had an account at Wet Bush for the last three years, you know, Bob over at we Bush thinks I’m a good guy. Can I have an accountant here too, please? Thank you.

Noel Smith:

And then to your earlier point, Jason know how do you start? I mean, I remember at, you know, in like 2000, I wanted an account at Smith Barney. I wanted a relationship with Smith Barney. I didn’t have, didn’t have an account. This is before Smith Barney went away, and I remember walking up to the guy on the floor of the American stock exchange. I’m like, Hey, I’m Nole Smith. You know, hi Joe, nice to meet you. I wanted, you know, I want to look at some of your flow. I want to look at some of your flow business. He’s like, get out of here. I don’t know you. And I just completely blew me off. I’m like, I don’t, I don’t expect anything from you. This is what I’ll tell you. I’ll give you deep in liquid markets. I won’t take up your time and then I’ll give you good fills. And I did that. And I traded with him for Theo for like a year. And you know, it was a very grudging relationship. He did not want to build it cause you already had relationships, but it’s kind of like a drug dealer analogy. Right? Do you want to be able to sell, you know, small quantities of drugs to a thousand people or do you want to sell a gigantic pile of drugs to one guy, one time for a good price? Just a lot easier. Everybody is inherently lazy. Everybody wants to do the least amount of work for the most amount of money. And if you can convince somebody that you will make their life easier and more profitable, you can do business.

Jason Buck:

No that’s, that was perfect too. It’s not even like, because I know this exact experience is like not, you know, second or third tier, you know, prime brokers and they’re not the second or third year, but like that’s where you start because they’re willing to take on a smaller business because they’re not Goldman. And then you start finding out how everything works that way. And then you start asking the people that work with Goldman for any sort of referrals or anything like that. And then Goldman, almost like you just said earlier with the initial traders, like anybody that’s willing to work hard and show they’re willing to pull in the effort every day, then you’re going to try to help them. Right. And so if you start a smaller fund at like a, let’s call it a second tier, even though those are not tiers, like prime, then you’ve shown you built a fund, right? So then when you go to talk to Goldman, you’re like, look, here’s my fund. Here’s my track record. I’m not just asking you for hope and a dream. Here’s tangible evidence that I know how to build a firm. And then the door’s open where all of a sudden that the notional a 100 million can come down to maybe 25 to 50 because you’ve, you’ve proven that you’re somebody that’s going to go out and be an earner.

Noel Smith:

Yes. And, you won’t embarrass them by being outside of compliance or whatever else. You’re not going to want to follow the regulators. You’re going to be a play within the paint guy. They want, they want to know that, too. They don’t want to get in trouble because of you, they don’t want you…Your presence to add to their worry list. You want to make their life easy, not hard.

Darrin Johnson:

Do you…I would think that you would want at least two primes, right? Like just because in the event that a Lehman happens or like I had a buddy who started a small CTA, he started with, it was about 10 million and he just had horrible luck and MF Global happens and he ended up getting 80 cents on the dollar of his, of his SMA money and pulled money back.

Noel Smith:

That’s pretty good.

Darrin Johnson:

But that was three years later.

Noel Smith:

Yeah.

Jason Buck:

Right.

Darrin Johnson:

And he never really recovered from it. I mean, he got most, he was able to get back into like the high seven figures, but he was never able to build into a Chesapeake or Dunn or any of the other big names. He is a young guy. I mean, he’s our age, you know, and…But that was devastating to him, and it was just bad luck and he didn’t do anything wrong. His compliance, his audits, everything was on point. It was just really horrible, horrible luck. And so like, how do you deal with that as a problem or even Jason, in your case, like a fund up.

Noel Smith:

That, that’s just a hard, cool fact of life, man. Sometimes it’s just luck. Some people are lucky. Some people just slip on a banana peel and fall. I don’t know anybody that knew MF Global was going to happen. I had an account with Bear. I had an account with Lehman. We got out. But you know, if I, my account at Goldman goes to zero tomorrow. I don’t want to tell you other than man, I don’t know what to say. I mean, these…You are the last person they’re going to tell. So unless you hear it through the grapevine, they’re not going to tell the people that have money in their, you know, vault. It’s just not going to happen. So they’re going to do everything they can to hide that information. I had an account at a, a future’s account, at this firm and I didn’t find out until a year after the fact that they were pretty close to blowing out after Volmageddon in 2018. I didn’t know that, but they never told me, I found out through completely circuitous routes.

Jason Buck:

Right. Darren, to answer your question, like the way I think about it is it kind of makes it a pain in the ass, but you have to worry about these things especially if you think about the world in a long Vol sense it’s like, you know, we have multiple FCM’s, kind of multiple primes in a way that kind of do give’s up’s between each other. So you’re trying to diversify that way. I’m also kind of, even though I prefer the liquidity of SMAs on exchange and diversifying my FCM’s that way, I still will take a few funds off those centralized exchange that are maybe like clearing a Goldman or whoever else too, because like it’s adding more diversification there. And then you have to think about with your actual bank where you keep most of the cash, you know, are you buying T-bills, you know, where’s your segregated gold, you need to like constantly….Like, but Darren you’ve been an entrepreneurial your whole life, too.

Jason Buck:

This is all entrepreneurial risk, right? You’re always worried about somebody’s going to screw you in some way. So you’re like, and so Noel almost has a point. It’s like, there’s a bit of luck to it. I mean, you try to diversify your diversifiers. You try to hedge as much risk as possible. But you know, there is some luck, there’s some luck involved and you know, a lot of times like you’re, you’re friended, you can recoup the money, but it might be locked up for two to three years. And time is just as valuable as money, and that’s the really hard part sometimes. And then what happens is the exchanges will tell you and the FCM’s like, we changed a lot since MF global and it’s like, yeah, you did, because they figured out how to screw you. But the next person that’s going to screw you is not going to do it the same way as MF Global did.

Noel Smith:

Right.

Jason Buck:

And so like, that’s the risk like…It’s always…They’re fighting the last battle, and so you have to like, think about, yeah, like how do you diversify across FCM’s, across exchanges, across banks across, you know, all your different service providers. And it creates all these like kind of, you know, this rats nest of redundancy, that’s kind of like annoying, but like if you want to, you know, try to be as robust as you can, you know, that’s part of the situation, I guess.

Noel Smith:

Ultimately you don’t know. I was talking earlier today about Enron. I mean, Enron was audited by a big six firm. They were the ninth largest market cap in the country. They went to zero, you know, who knew? I mean like five guys knew, right? Everyone else is like, maybe, I don’t know, but I’m not trying to say don’t do your homework, but I’m just saying like, you know, you could spend a full time job just doing homework and not even focus on the 99,000 other things you have to do. All you can do is what Jason said, diversify it and you know, try to get the best information you can. But ultimately if people want to lie to you, they’re going to lie.

Jason Buck:

Yeah. It’s usually people like falsifying brokerage statements. I mean just outright fraud. That’s like stuff that’s really hard to even catch, that’s just insane that I’ve seen numerous cases of and I’m sure Nole has seen it, as well.

Jason Buck:

Part of it, I was wondering like, Nole, like I was just thinking out loud to myself, or in my, the voices in my head, besides even starting a prop shop, have you ever seen almost…And I’m sure you have is like almost a bunch of individual prop traders almost getting together so they could create a little superhero group where they’re able to cross margin at maybe the prime and then they’re able to diversify. So if like I’m somebody that’s trading one very specific like option strategy on SPX and I kind of know where my weak points are, does it behoove me to try to find four or five other guys or girls that are trading, you know, uncorrelated strategies to mes o I can actually diversify my own personal P and L risk, you know, as I’m trying to, you know, eat what I kill.

Noel Smith:

I mean, if you want to be the Traveling Wilbury’s of, you know, finance then sure. So totally yes is the answer, but realistically you probably don’t know a rockstar in gold, a rockstar in bonds, a rockstar in corn, a rockstar in, you know, mortgages and CDS. Just the idea that you would know all these people and they would all be off their non-competes and they’re all wanting to quit their multi-seven figure jobs at the same time. It’s tough to assemble that, you know, unless you are literally like a Ken Griffin type where you can just start anew, if you really wanted to. It’s really tough to do. Realistically, most prop firms that I know of that have been started, you know, are just two dudes that are buddies that also have some money and they figure it out and they both trade probably mostly the same thing or somewhat the same thing, and then you figure it out. That’s more realistic.

Darrin Johnson:

Yeah. Also Jason, like, I was just think…I was thinking with your question, right, like most profitable traders, like Nole was describing know guys who trade similarly to them. Right? So like if you’re a ball guy and you’re in equities and you deal with small caps, you tend to know people who tend to trade around that same edge, right? Like that’s who you tend to fraternize with and hang out with and talk to whether, even if it’s virtually, knowing somebody all the way on the other end of the spectrum, who let’s say is a rockstar and Nat Gas or whatever, like, that’s that actually, that’s probably not that common.

Noel Smith:

It’s not, it’s very rare actually. And it’s funny how, how many people, I know that only know guys that are Nat Gas guys or only know guys that are whatever guys, that’s very normal. So, you know, you’re on a desk with a handful of other people, you guys all gossip about the same stories about whatever, but the chance of you knowing about somebody that’s in CDS and that’s all they do, unless you have a reason to know them, you probably don’t.

Jason Buck:

Yeah. Part of it’s like, I always had a problem when like reading market wizards, like all these trend followers and everything that have these divergent strategies, and you’re like, where do you guys get hurt? Oh, in mean reversion or conversion strategies. I’m like, well, go make friends with a, with a mean reversion trader, and then you have a better P and L, but like, nobody wants to do that like you guys are saying, but like maybe, no thinking out loud is like, is maybe the way to do that is almost start like an exempt CPO of less than like 15 participants and then that’s how you can find the other traders and allocate capital to them to diversify your P and L.

Noel Smith:

If you’re doing a CPO, then you also have money and other stuff. So you have to comply within those percentages, as well. So, that I think would be, you know, cumbersome just from a compliance standpoint, I think it would be simpler to just, you know, you assemble a small team of people, assuming you have some level of capital, and what you do is you do your best to make a P and L, you have it verified to any preponderance of a doubt because anybody who…If you come to me and you say, Hey, I want…I’m a Nat gas trader and I want you to give me money. I will hammer you on your P and L there’s I…The bar to convince me that you’re going to make me money is high, but I’m convincable, you know? And I got to believe everybody, every other firm would be the same way. I mean, if you just figured out how to convince me, then we can probably do some business, but you’re going to have to super duper show with, you know, everything and everything. You got to take your pants down and let’s say, ah, because that’s how it’s going to have to be.

Jason Buck:

Well, let’s start with the, like, who would you even respect as auditors?

Darrin Johnson:

How long does the track record need to be for you?

Jason Buck:

Well, that’s a good question. Yeah.

Noel Smith:

Depends. So it’ll depend on the environment. So, you know, stocks are down right now, right, but they’ve been up for a long time. So, how do you trade Vol in 2022 versus how do you trade Vol in 2017? They might as well be Nat Gas and gold because they’re totally different. So if you want to demonstrate mastery of a marketplace, you have to have some time. If you just like, yeah, I’ve been selling putts and it’s 2017, I’m up 27%. All I do is sell putts. Well, that’s easy, because all the market has done nothing. Right. And your putts have died every day and you’re a hero, but then we go into 2018. Now you’re dead 50 times over. So I don’t know, are you a good trader or you lucky trader that’s the job on my end to figure out if you are a good trader or you’re just lucky for a little while,

Jason Buck:

Then obviously it matters like frequency of trades and everything too, for you to get more statistical significance. And…

Noel Smith:

Yes.

Jason Buck:

But what I was asking, too, is like what…Who would you respect to run the audited track record? Like if somebody wanted to bring you a track record, who should they think about getting it audited by that you would then say, oh, this is at least semi-legit. And then that keeps the conversation open.

Noel Smith:

You know, I used my, my first real accounting firm was Grant Thornton and they were very on above board. They were totally fine. It’s got to be somebody that’s Googleable. It can’t be the, you know, the CPA down the street. You’ve got to spend probably no less than five grand in an audit. I mean, an audit from a big six firm is going to be, you know, 30, 40 grand on the very light side. But, if you’re not spending at least five grand for an audit, I just can’t imagine the results are going to be taken seriously.

Jason Buck:

I mean, as you can’t be Bernie Madoff using somebody in upstate New York in a single family office.

Noel Smith:

Exactly.

Jason Buck:

Part of that though, like you just said is like, I have an audited track record. Right. And then depending on your strategy, you’ll know like frequency, but also from your experience, you know, like different trading environments, what it did well and when it didn’t do well, what are some of those other like initial filters? Like what would you look at it initially? Are you looking at like Sharps, Sortino, Skew, Cortosis or really just strategy depending…

Noel Smith:

Sharp ratios can be very misleading. Sortino ratio is better, but you know, other than, you know, so you, I guess you look at it, right. You know, like the basics, but the…

Jason Buck:

The start. Yeah.

Noel Smith:

Yeah. I don’t even know what my sharp ratio was for, you know, 15 years or more because it didn’t matter. The volatility of my P and L was high. So my sharp ratio was probably low, but the P and L was good so who cares? Who cares if you have a, you know, a 0.01 sharp, but you made a billion dollars. Great. So I think you look at all of those things at first glance, but if you were, if you are qualified to hire somebody, I would hope that you would know those things ahead of time. You know, you be, your BS nose, gets really, you know, really good, right? You’re able to sniff out nonsense pretty easily.

Jason Buck:

Do prop firms prefer people that run a higher Vol though because of like you’re…

Noel Smith:

Yes.

Jason Buck:

You’re making a lot.

Jason Buck:

Do prop firms prefer people that run a higher vol though, because you’re making a lot of bets spread across the aggregate? You actually are looking for people that are running more capital-efficient, higher vol strategies?

Noel Smith:

I said yes, but it’s not really true. You don’t necessarily prefer somebody who’s higher vol, but higher vol is usually accompanied by higher PnL. Not necessarily, but often. So high vol isn’t into itself good, but high PnL is good and high vol. Why? What was the extraneous circumstance? Why were you down 50% last Tuesday? Okay, well, so were we, so I understand that. So that’s what you try, as the hirer, the backer, that’s what you have to figure out.

Jason Buck:

And if you have a hundred prop traders, what kind of tech stack are you looking at? Or is there a way to almost piggyback the SMA tech as well? Did you have to build out proprietary stuff as a firm? What did it look like?

Noel Smith:

So this is a golden age of trading and for filmmaking. You can do more with an iPhone that you couldn’t do with a $50,000 camera 10 years ago. You can do more with a prop firm that you couldn’t do with a $100 million dollars 15 years ago. So high-frequency trading has become commoditized. First off, you have to figure out your time slice, are you high-frequency, mid-frequency, low latency? Where are you and what do you need for technology? If you really want to compete with Optiver or Citadel, good luck to you. It ain’t going to happen because these guys are spending $200 million dollars a year on nothing but ways to crush you. And so, unless that’s your budget… And not just $200 million dollars, but $200 million dollars and the guys that are spinning the dials are the best guys in the market. So they know what they’re doing.

Noel Smith:

So you can buy some of that stuff, but then you have to know how to use it. I can give you a guitar, but that doesn’t mean you’re Jimmy Page. So you got a guitar, but you ain’t Jimmy Page. And it’s the kind of the same thing. I use professional-level software. Some people probably would do better. Some people would maybe do worse, but I use it. I purchased it. Some of the stuff that is available, you can… most of the stuff that we used to have to build, you can now buy. And if you think about it, the reason is simple. Because the guys that built it in-house went and got a job or started their own company. Think about it. So if you started Susquehanna 30 years ago, the guy that built your vol models, or maybe one of the guys that built your vol models, he got bored, got fired, quit, whatever. And now he runs a vol modeling shop that will sell you his theos. And now that is a lot cheaper than bringing in six guys to all figure out how to build your own vol model.

Noel Smith:

So you can parse this stuff off the rack pretty easily. You know, it’s like a good bicycle. The frame is the main part, but you buy the fork, the cranks, the chain, and the handlebars from other people. But if you have the frame and you have your own unique IP on the frame, you can actually have a good product. You don’t need to invent the whole wheel is what I’m saying.

Darrin Johnson:

Yeah. And Jason also, man, even on the retail front, on the higher end of retail, some of the analytic enterprise offerings for vol modeling scans… not as much on the risk management stress test side, that’s still more institutional… but man, you can get some damn good stuff for a moderate price for high-end retail now.

Darrin Johnson:

Some of these offerings, because they’re selling a product, some of the marketing can be kind of cheesy and you may not like it. I’m thinking about right now, Market Chameleon, who you had actually introduced me to. And some of their marketing and their branding is kind of like, “Ah, this tastes of trade light, or whatever it is.” But then when you actually use their product… I’ve been using it for a month and a half now… it’s impressive. I mean, it gets you into all the ideas that you would try to build yourself through Python, [inaudible 00:51:49] or a combination of the two, or C++, or whatever. But it’s just a lot cheaper. It’s more affordable to do it that way. So I can only imagine on the institutional side like Noel said, you could pretty much just piecemeal that together with commercial offerings.

Jason Buck:

Like Noel was saying too, I think- [crosstalk 00:52:12] go ahead. I was going to say, to highlight some of the things you said, people don’t realize that not even necessarily the high-frequency trading firms, that market might get high-frequency traders, they are spending $150 to $200 million dollars a year down the drain just on the tech side. And even the ones that aren’t even competing that quickly, like the pod shops like Balyasny, if I recall correctly, I think they have 150 people on their tech team alone. So that’s kind of like what we’re up against, but I’m wondering like also… Noel, you want to say something before I ask Darrin a question, sorry.

Noel Smith:

I was going to just use an example from my life, which is if you are hiring enough PGA engineers… or if you’re fabbing an ASIC, let’s think about “What is an ASIC?”. Well, it’s a thing that does a thing, right? So you have to figure out how to architect this thing. You have to figure out the exact proportion of metals within the alloys for the semiconductors. You have to figure out the space between the circuits. You have to fab all the stuff virtually, and then you send it to Taiwan, spend $5 million dollars and get it back in two years, and maybe it works. If you can afford to do that 50 times over, you can run a prop firm, but it is very hard.

Jason Buck:

I was [crosstalk 00:53:22] just watching Darrin’s face for those of you listening to the audio. But Darrin, besides bricolaging together maybe these different platforms that you can use as a DIY prop trader, what else are your usual sticky points? Is it finding even good prime relationships, so you can better get better commission rates? What do you think that the quote unquote pros have over a DIY prop trader, in your estimation?

Darrin Johnson:

I think the advantage that they have is… so it was funny, I had a long conversation with… I call him Egyptian Chris or whatever… but we talked a lot about this. And one of the things that he gave me insights on at his time at SIG was that he was able to, from his desk, basically, just subscribe to a phenomenal data feed. Right? Of all kinds of amalgamations, of realized vol calculations that he would incorporate to make his markets, et cetera, et cetera, et cetera. It’s that type of stuff that as an independent person, to have that just outsourced to a team of devs of like 25 people. And all I have to do is pay a monthly subscription fee that’s added onto my desk fee. That’s a huge advantage over somebody like me, who one of the reasons why my days are so chaotic is because almost everything, I’ve either purchased the offering, but it’s still limited in terms of risk analytics.

Darrin Johnson:

So I have to do that myself and it’s a very discretionary process. So it’s really impossible for it to be efficient, especially when trading options, right? I wish I could be more streamlined, but to be quite honest, Jason, I just don’t have the resources to compete with prop guys where it’s like the equivalent of a guy who has all of his team supporting him, a whole team of people supporting him. And I just can’t compete with that. So a lot of the things that I do are much more inefficient in terms of time, in return on my time, as opposed to somebody who’s a prop guy. It’s amazing talking to Chris, all the stuff he had at his disposal. Essentially Chris’s job was to be a really good decision maker and to really use his discretion and his experience to sort of apply these really impressive weapons, right?

Darrin Johnson:

Chris’ job was just to be a really solid decision-maker under a level of uncertainty and to have really robust and strong relationships with brokers, with floor guys, with the independent guys that were on the Merc floor, like he would have relationships with those guys and understand what they needed to do. And if there were times where he needed to buy something under theo or sell something under theo or whatever have you, they would work with him. So there was a people component and then there was an applied data component. And when you merge the two, I mean, it’s bionic man, as opposed to me, dude, I’m just… not to always disparage myself… but the advantage that I have though is I don’t try to compete on time or speed, but I have the space to be able to really dig deep, particularly on single stock stuff. And I can really dig deep and really do the research and look at the vol service double and triple track, and then put on really positive [inaudible 00:56:53] trades that they can’t.

Darrin Johnson:

To be honest with you, I don’t even think a lot of those guys that made those markets, they even know how to do that because that’s not their game. So I stick to what works for me as an independent high-end retail person. And I don’t even try to compete on those terms, but I can’t sit here and lie to you and say that I’m not hella jealous when I talk to Egyptian Chris or [inaudible 00:57:16], and they tell me about all the stuff that they had going on at prop. And I’m like, “Damn that sounds sweet, man.” That’s like F1 racing, right? Just you’re the driver, and your job is to drive it as best as you can, but you have the best engineers for fricking France and Germany and all these places at your disposal on a daily basis.

Noel Smith:

I think you’re totally right. And I think that you could be the single best driver on the planet, but you’re not going to beat a McLaren or Ferrari or whatever because they have a whole army of dudes who do nothing but try to figure out how to shave microseconds. So that’s just not possible. Then once you just figure out you can participate in the motorsport, but you can just do it in a different way, then you don’t have to beat yourself up over that because you’re not going to beat them. You’re not going to beat Susquehanna or Citadel or Optima to market. They will take the first trade. But that doesn’t mean it’s the best trade because they do all kinds of losing trades.

Noel Smith:

So that what you can do is exactly what you just said. You can take it from a different angle. You can look at it differently. You can use different data sets. And you’re right, those guys that are looking at the vol surface and maybe making markets and adjusting their skews a little bit, they don’t know where the stocks going to go. And they might not even really care because that’s not their gig. So they try to look at it from a totally different level. Like those two paramecia in our pond, right? They worry about paramecium stuff. They’re not worried about hydra stuff or amoeba stuff. They’re certainly not worried about fish stuff. So as a macro guy, you might be a fish [inaudible 00:58:42]. You know, you might be the pond if you’re even a bigger macro guy, but you’re never going to win the paramecium game if that’s what you’re trying to do.

Jason Buck:

Noel, I was just thinking about what… this may be a twofold question… what is actually the difference between a pod shop like Balyasny and Millennium versus a prop shop? And maybe if you are running a prop shop and you have really good prop traders or what’s your value add? Like Darrin was saying, is it that I can provide the tech stack for you that you can rent from me or it comes out of your PnL and that’s the real value add for DIY or prop traders to come under a prop shop umbrella? Whereas typically at the pod shops, it was like, it was for a lot of people that didn’t want to go out and raise assets because as we know, that’s the most time-consuming and mind-numbing part of the business. But is that the primary difference? What’s the difference between pod and prop kind of within that structure?

Noel Smith:

Then you pretty much got it right. So if you want to go work at a prop firm, you’re going to have a commission structure that’s usually better, whether it be a 106.J at the CME or some kind of agreement where you’re paying two cents an option at Goldman, as opposed to, I think, 60 cents at interactive brokers or something like that. So there’s a huge difference right there. Your ability to get to market will be better. But in terms of the IP, that’s probably not that different. And if you know how to beans versus hogs, fine, then you’re the bean hogs guy. And you can do that at Balyasny or you can do that at Susquehanna but the tech stack will be different.

Noel Smith:

It’ll probably be worse at the hedge fund because they usually just don’t care as much, and there’s a hundred of you. And if you go down 3%, they’re going to cut your allocation. If you go down 6%, you’re fired, versus the prop firm is going to be probably a lot more forgiving, but also a lot more involved in what you’re doing. Cause there’s not a hundred of you, maybe there’s four of you know, and they’re trying to figure out how to massage that trade. So if you can scale, you’re probably better off at a pod. If you can’t, you’re probably better off at a prop firm.

Jason Buck:

That’s a great way of putting it. Because if you can run fixed income and billions of dollars, then you need that economy of scale that Balyasny or Millennium can provide.

Noel Smith:

That’s right. Your edge is that you buy 40,000 homes at one time, not one super good house that you can fix up. Right? I’m going to buy half of West Texas. That’s my edge. Like because nobody else has that kind of loot. That’s your edge. And that’s a totally different thing, right? So if you have, like you said, if you have a giant number that you can move, the barriers to entry are higher. Because the product you’re working in is different. That’s the way they went from spooz to E-Minis and now Micros because in order to be in the spoo game, you had to have a lot of money, and then nobody could trade them. So that’s why they developed the E-Minis, and now the E-Micros.

Jason Buck:

Man, Darrin, I forgot for a second that Noel is the king of the analogy and metaphor, but he just keeps throwing out these zingers every time. It’s always amazing. Noel, do you think that in 2022, what would be the pros and cons or, do you think you could run an actual virtual prop shop and people could be all over the world, or do you prefer that all your traders are in one room, so it’s a little bit better oversight and a little bit better education? What would be the pros and cons there and is it possible to do it virtual?

Noel Smith:

So it’s like saying, “Hey, can you have 10 girlfriends at once?”. I mean, maybe. Right? Not so easy in real life. In real life, if you have 10 traders doing 10 different things, you have to deal with the vicissitudes of their personalities, their work ethic, and everything else. That’s just, again, one of the hard, cold facts of life. But if you have 10 hard-charging individuals that are good at their job and always knock out their business. Yeah, sure. It could be done.

Darrin Johnson:

Jason, so I want to interject on that really quick.

Jason Buck:

Please.

Darrin Johnson:

You should actually answer your own question because you and your partner, Taylor, are some of the best people that I’ve ever met in my life at creating a culture virtually. Cause I will tell you as, like you said… I’ve been an entrepreneur since the beginning, since my twenties… that is one of the hardest aspects of entrepreneurship is management and establishing a culture. And to be honest, this is the one thing that… I don’t want to call them bucket shops… but the particular firm that I’m thinking of out of New York, that they do really well.

Darrin Johnson:

They have names for all their traders. They have really good marketing. Their online short video clips are, are somewhat informative if you’re like a [inaudible 01:02:59] equity day trading type. But the editing is really good. The camera work is great. And people see that to the point where the individuals with their monikers or pet names or their nicknames, people know them. Right? So it’s like, wow, they were able to create a culture, let you see it kind of almost through a case study method. And then people are envious of that. People are like, yo, like I want to send in my application or here’s my track record or I have this automated system. Can your system team evaluate, maybe I can get a… Now granted, most of those people would never even get a shot. They have to pay for the education package, but they’re so good at that brand building, that team building that culture. And I think that is really, really, really hard. But I’d be curious to hear you talk about how to do that.

Jason Buck:

Well, I appreciate the kind words, but if we’re upfront about it’s actually all Taylor. My partner Taylor Pearson, he’s been trying to run virtual companies with virtual assistance from all over the world for the better part of a decade and a half now. So he’s thought about it for going on 15 years and how do you build out that culture? How do you build that team? And like anything in life, he’s probably learned it all through mistakes, right? But he’s just had a lot of experience with mistakes and how do you build that culture. And there’s a lot of things he and I always discussed where he’s leading us as far as the amount of communication, right? You have to, a lot of the times, overcommunicate more than you realize, and realize a lot of times that things get lost in translation and things get lost in text.

Jason Buck:

So it is, it’s really difficult to build that culture, but it can be done, but like there’s maybe a handful of people in the world that have experience with building that culture for the past decade. So they know what kind of works and what doesn’t work. But anybody can figure it out. They’re just going to go out and make mistakes and kind of figure it out. But I’m just wondering if there’s anything Noel, from your perspective, that might be unique or idiosyncratic around trading or running a prop shop that like can’t be done online, you think?

Noel Smith:

You know, we also the same thing in different versions, which is the, just enthusiasm, the desire, the ambition to be good at anything, whether it be hockey, basketball, or trading options. You have got to want to learn. You’ve got to be reading stuff. You have to be consuming stuff. You have to put the time in. You have to make the phone calls that are a little bit embarrassing. You have to be willing to expose your ignorance. I mean, you’ve got to be willing to do it all. And through that times time, you all of a sudden become a thought leader in your space. But you know, there’s no magic to getting in the NBA. I mean, you maybe got to be a tall guy and athletic, but you still got to work. And you got to work from an early age. It takes time.

Noel Smith:

And the same thing goes for a lot of this stuff. So if someone wants to listen to a podcast and just figure out, ‘Wow, that’s the secret sauce. Here we go. I’m going to go start a prop firm tomorrow.’ Not that easy. If you have to figure out something that makes you a little bit unique, all I’m saying is that we’re all saying the same thing, which is you have to do the work. You have to be willing to scrub the toilets, make the phone calls, do the things that other people aren’t willing to do. That’s why you’re successful.

Noel Smith:

And when everyone else is home or… I worked with this guy, we started the same job out of college and we were roommates. And I started pulling away from him in terms of our income. And he’s like, he came to me kind of hat in hand one day. He’s like, “What’s going on, man? How come you’re making money and I’m not?” I’m like, “Bro, when you show up, I’m already there. When you leave, I’m still there. There’s no magic to this.” And I wasn’t even being a jackass to the guy. I was being sincere. I’m like, “You have to work harder.”

Noel Smith:

And when I’m at the office, I’m not talking to my girlfriend, I’m talking to people, I’m trying to do, I’m trying to do some gross over here. And that’s, that’s the message, which is you have to come up with something unique. You have to figure out the processes. And if you’re a nice person, you will exude that and people will be willing to help you. If you are like, ‘Hey man, I don’t know what’s going on. How do I get an account at Wedbush?’. “Eh, I know Joe Jones at Wedbush I’ll tell him that you called. I’ll tell him to expect your call on Tuesday.” Cool. Now you’re in at Wedbush and you figure something out. Now you got to do that times a thousand.

Darrin Johnson:

Jason, I think the challenge with what Noel was saying is… and this is something that I ran into. I have all the traits that he just talked about personally. With culture building in a upstart business, you have to figure out a way to almost codify yourself or you and your partner that start the prop front. That’s the really hard… so if I’m willing to do it, this is how you end up a lonely, higher-end retail trader is because you can count on yourself to be willing to do all those things. But copying yourself amongst 10 other traders and what you value, your work ethic, caring. That’s really hard. And then on top of that, when you think about doing it virtually… because I think that there is a human piece, like in person, when you think about the mystique and the folklore around particularly Chicago prop trading… it’s not just the edge, it’s the personalities, it’s the comradery, it’s the humor, that add to the mythology in the folklore.

Darrin Johnson:

One day, this guy, I knew he was back in the Minis and he had a million dollar day or whatever in 1988 or whatever it is. Right? And you’re just like, yeah and then he went out and bought a horse or something crazy. But all that fun stuff and the jokes and the camaraderie, that also is part of culture building. Right? So if you yourself have all those virtuous traits, that’s great. But can you onboard people like Chick-fil-A that have those same values regardless of their level in the totem pole?

Noel Smith:

That’s part of the job. That’s the crazy part. That’s part of the job, figuring out how to figure it out and how to make responsible hires. That’s part of it.

Jason Buck:

Well, there’s so many things that you both said, now I want to pull on one. First of all is, Darrin, it’s always my pleasure. CFA is… I am big fan of Chick-fil-A… but part of it, and then Noel was just saying this, that’s building any business, right? Business is just hard. And people don’t realize just why 90% of restaurants fail in the first year is because somebody thinks ‘I’m a good at home cook’, or ‘I know how to throw a good party’, and all their friends tell them they should go and do it. But they have no experience. And they have no idea how hard it is. And so the business of running a investment company is a business, right? That’s separate from your trading PnL. And then most people miss that. It’s like, trading’s the easy part of this business. The actual running the business of an investment firm is actually a lot harder than the actual trading side. And a lot of people miss that.

Jason Buck:

And you were talking about that comradery, it’s amazing. Actually, I’ll tell you anecdotes from watching even Noel in person in Miami, is those guys like Noel that have been around forever, they all start congregating together and they’re telling stories from 20 years ago on the floor and they got all those crazy stories that you reference. And that’s also why I love Chicago versus New York is all of those great lunch pail traders that came out of Chicago. And you’re saying, guys would buy a Porsche that day and they’d get repossessed next week. They all get together and they all start talking with their hands and their hand signals like they’re back in the pits. So there is- [crosstalk 01:10:19] like you said, there is something to that comradery and that’s maybe a reason to move to Chicago or something like that.

Jason Buck:

But then to your point, Darrin, about building the culture of an online business… and this is why I shouldn’t speak to it and Taylor’s much better at this… is because I’m actually learning from Taylor because I’m not so great at it. Because the things you reference is like, I’m a great entrepreneur, taking companies zero from one. And I just put my head down and I work. But if you’re building a distributed company like our assistants in South Africa for example… shout out to Melanie… It’s like, you have to be able to write down all of your thinking. You have to codify it like you were saying. And sometimes that takes a lot of time out of your day. And you’re like, I don’t have time for this shit, except for that helps the company go faster. For you slowing down and writing it out and codifying and us building all the SOPs and systems in place. You go just like the military, you go slow to go fast. Slow is smooth and smooth is fast.

Jason Buck:

And so those are the parts of the process that I think a lot of people that aren’t used to those kind of companies, that’s the real sticking or friction points or learning curve is going to be quantifying all your thinking, putting it down on paper so people can look at it asynchronistically and they can understand what you’re talking about. And that’s how you build the SOPs and culture over time. And that takes time for everybody to learn that, for everybody to develop the cadence, and for you to build that culture. It’s actually really hard to do, but just like every business, it’s hard.

Noel Smith:

You couldn’t be more right. You’re so right on that, dude. I was just saying, I couldn’t agree with you more. If you criticize an employee, some people just kind of look at their shoes and get all sad, and other people get all fired up and they want to go hard charging back into the thing. And you have to figure out how to play the play, and it’s not always the same. So as the manager, you have to be thinking five steps ahead of the people you’re talking with about what they’ve done right, what they’ve done wrong, and how to best get the result that you want. That isn’t easy. I

Noel Smith:

How to best get the result that you want. That isn’t easy. I don’t know how you do that without experience. You have to just deal with it.

Jason Buck:

You have to know how to deal with people. You’re saying Darrin’s done other businesses. He knows how to deal with people. It’s always people’s skills at the end of the day. And almost like Darren and you are saying, how do I come from out this side of this industry? How did I get to know these managers? I developed relationships with a lot of these managers three years before we ever launched our fund. I was emailing them, calling them on the phone, but thinking of good questions or value add, even though I was asking a lot of stupid questions and even going to events in Miami long before we had a firm and the idea was selling them on their dream, here’s what we’re trying to do.

Jason Buck:

But I was also just building those relationships over time. So when it came time to launch our fund, we had those relationships in place. And because of that, those managers were even able to come down on their stated minimums for who they would take it from because I had developed that relationship. It goes back to what Noel was saying at the beginning. People are going to give you the benefit of doubt if you put in the time and put in the work. And I know I’m not preaching to either of you two, because I know both of your backgrounds. It’s just like everything in life, right. It’s just going to take the time and the sacrifice and I was laughing Noel, you were saying that, how many times have all of us seen that?

Jason Buck:

On any given day we make tons of sacrifices of spending time with our families and loved ones and everything. And during when you make those sacrifices, they’re like, oh man, that sucks. They’re bagging on you. You should come spend these holidays with us and you can’t, I’m building my business and then one day five to 10 years later, you become what people think is successful and then they call you an overnight success. Did you forget all those sacrifices I made that you made fun of me for?

Noel Smith:

So true. I remember in college guys would go, we’re going to go out drinking. I’m like, I got to study. You know why? Because I’m curving against these dudes from China that are amazing at this stuff and they’re really smart. And I’m not even being facetious. That’s exactly what happened. I mean, I had to compete against really smart people and my buddies were out goofing off and I can’t and that’s just how it is. You have to make those sacrifices. I know this is an uninteresting part of it, which is work harder, be more ethical. It’s almost useless, but it’s part of it and you got to be willing to do that stuff. If you think you’re just going to start trading spoons and you’re going to be an overnight trillionaire, then it can happen unless you’re just crazy lucky.

Jason Buck:

Well, we’ve all had that experience where we got crazy lucky and we thought we were just at the beginning stage of that till we learned we were just getting lucky. But part of a lot of this stuff we’ve been talking about is things that through hustle and hard work and all this stuff you can learn, right? A lot of the different, different ways we were talking about trading, how to get into a prop shop, how to run a prop shop, all of that stuff can be learned. But one of the things we danced around earlier Noel, that I want to bring back up is the one thing that can’t be learned and there’s no answer for that I think is always, I love talking to you about, is the idea of correlations, right? If you’re running a prop shop and you have all these different strategies and you’re putting together an aggregate portfolio and correlations are conditional, how do you deal with correlations?

Jason Buck:

I think this is the one unanswerable question. I’m not sure either of you or I have great answers for it, but I think it’s something to kind of bring up and highlight as we get towards the end of this discussion. It’s the idea of how do you do everything? You said, sharp, sortino, skew, kurtosis. All of those can be measured, but it’s over what time window. But then as soon as you combine them with another strategy, now you have integrative complexity. And then if you’re complaining I can’t imagine you running a hundred strategies under one shop. How do you just put them in just gross buckets of this is basically long ball, this is short ball. How do you even start to break down those correlations because as you know they’re spurious and they’re conditional.

Noel Smith:

So there’s no one answer. Well, let’s use right now as an example, as you know already, I’ve been long haul in 2022 with mediocre results. So if you told me and I’ve been long this before going into 2022 and I got out of a lot of my Delta one risk. So I’m using this as an example to demonstrate that if I did exactly what I have right now on my book any other time for the last 25 years, it’s printed me money. It’s not really doing that great this year. Why? Because it’s idiosyncratic there is never always the same thing. I can give you the reasoning and that can be a whole nother hour. I’ll skip it. But bottom line is, it’s always a little bit different and you have to be prepared for that and you have to always be on the ball. Why is the wick not 50 right now or whatever, because it’s not okay. We can go to the reasons, but it’s not.

Darrin Johnson:

Love that comment.

Noel Smith:

You have to deal with what’s in front of you. And that’s why I try to focus and Jason, you know this. On the data, should Tesla be a thousand dollars or a hundred dollars? I don’t know, Tesla’s are cool cars. I think Elon Musk he’s a smart guy and all that other stuff, but I don’t know what Tesla’s worth. I don’t know what Apple’s worth. I have an iPhone. It’s great. But I don’t know if Apple’s worth 140 or 240 or 40 and nobody does, right. That’s the price discovery process. Now, if you have enough money, you can make it go higher because you can just buy enough. But my point is that it’s always a little bit different and the change of the change of the change and the third order derivative it’s like predicting the weather.

Noel Smith:

You can only get so far out. You can be pretty accurate about tomorrow because you look out the window it’s sunny, it’s going to be sunny again tomorrow, but give no idea what’s going to be like in six months. And maybe in December, it’s 80 degrees and maybe in July, it’s eight degrees. You have no idea. Now, all you can really do is use your data set that’s arrears. You can put a program on it that trains off that data and then you do your best. And at some point you put your finger in the air. And if you don’t think that everyone does that at some level, you don’t understand how the business works because everybody has to make some kind of a judgment. Because if you are only looking at the data, you have the same data everybody else has and you have a totally in consensus opinion and you will not make money, not for any period of time anyway. You have to make some judgments.

Darrin Johnson:

Now, also Jason, the framework that you were just describing, that’s also a Kelly problem. All things come back to Kelly with me, but that’s a Kelly problem where the prop owner or owners have to make a decision in terms of allocation. Is this guy who’s in micro caps and he’s doing really well and he’s running at 300% annualized right now. How much do we size to him? Do we size more with him? But then how correlated is he to our options guy who’s doing small cap options, ball trading, right? Are they two kind of correlated in just taking advantage of a really profitable regime for their particular edges? And if so, I want to be careful that I don’t get concentrated of corner risk by allocating too much. Let’s say 30% of the firm’s assets split between these two traders. Right? So again, even at the business owner level, there’s still sort of a Kelly criterion sizing dilemma.

Noel Smith:

Yes. So if you own a firm, I know a guy who trades Nat gas who’s up nine figures this year. That doesn’t mean it happens every year because Nat gas is crazy hot right now, but it won’t always be that way.

Jason Buck:

I wonder if we know the same guy, but part of that though is Darren was trying to set me up though there Noel. I’m going to ask you so that way I don’t have to get set up here. How do you think about Kelly criteria? Is it a ludic fallacy, is continuous Kelly even in markets that have a broad distribution of returns. Could you ever even know what a proper Kelly sizing is?

Noel Smith:

I don’t think so. These things are all-

Jason Buck:

It’s like correlations. You said, finger in the air kind of thing. You do it best approximation of a rough band of correlations is kind of similar with the Kelly sizing, right?

Noel Smith:

Say you take all the data, right? I mean, literally all the data. What did Socrates say to his aunt in the year 600 BC? I don’t know, but that’s in your data set, right? You know everything there is to know about everything, you still only know about what happened. You don’t know about what’s going to happen and how those things all interact. So the predictive nature of that and how you allocate and proportion your risk or your risk capital to that. I don’t know that you can always be right on that. And because if you were, the data does exist, the people that have the most data and the best programs to parse that data would have all of the money. And I mean, almost literally all of it.

Jason Buck:

Darrin, I didn’t want to get us into a Kelly… You and Sinclair have done a great job. Everybody should go out, read Yuan’s work on Kelly and listen to time Darrin’s talked about it. It’s phenomenal, but it’s one of the ones I always like to poke him a little bit with. Changing tact a little bit, Noel, I’m always trying to get maybe Darrin to move maybe a little closer to where we are. Is there a big prop community in Tahoe? Isn’t Dakota’s up in an incline village or something, have you met any other real traders there? Is that the point of why you live in Tahoe to get away from all the traders?

Noel Smith:

No, I live in Tahoe because it’s a cool place to live. That’s it?

Jason Buck:

Darrin had a great question too, and maybe Darrin can illuminate it, but the idea is too, is, if you have all these parameters for a prop shop, how do you ensure? And, and cognitive diversity, ethnic diversity, and almost outside the box thinking if everybody’s almost aggregating kind of towards the same resume or the same trading style or things like that, maybe Darrin, you could say it in a different way than I’m thinking about it.

Darrin Johnson:

Yeah. I was just thinking that, how do you avoid the problem that you see playing out with a lot of publicly traded companies right now. The ideal candidate, at least you think is such a specific avatar or specific profile that really just feeds into your biases. So you end up with a bunch of rich, mostly prestigious university grads who are stem, who have had 10, 15, 20 years of experience, et cetera, et cetera. Have an established track record. That’s great. But then we’re really just as prop owners, we’re just being pitted against each other by mercenaries who are looking for the best pay split or compensation package, as opposed to, and this is what’s really important to me and something that I care a whole lot about, which is I care about the people who actually don’t meet those filter.

Darrin Johnson:

I know what that’s like and a lot of those people do suffer greatly. Maybe they went to a state school and they suffer from imposter syndrome. So a job description on LinkedIn that is that specific is worded in very business financing language. They don’t even apply, even though that could be the person with loads of potential. And also most importantly a truly idiosyncratic diverse worldview on trading, there are several retail people that I know that I don’t understand why everybody’s talking about it’s a difficult environment, I’m doing better than ever and I know I’m running hot. My sharp is running at a nine right now. And I know that’s not realistic over the long haul, but I’m doing really well and I don’t get it. Well, it’s because this person was never formally trained.

Darrin Johnson:

They were never indoctrinated with the way to think about markets, the way to present themselves, the way to think about the diversification, the way to think about edge. They just kind of had some basic quad skills and some applied math skills and a temperament that was amenable to speculation. And they just took all those things and they figured it out on their own. Now whether that’s scalable and that could fit into a business model is a whole different thing. But that’s the kind of person that I care the most about our mutual friend, who is at one of the large firms. Like he’s a great guy and he is our friend, but like, I care about the people who didn’t have all those opportunities. And so how do you maintain standards, but also really try to reach and get like unique perspectives and diverse individuals, I guess. That’s yeah, that’s my question.

Noel Smith:

So I came from the inner city of Chicago. I didn’t come from money. My background is nothing like what my LinkedIn page would suggest, nothing at all. I went through a state school. I was in the military, et cetera. I’m more aware of what you’re saying without all the words that you didn’t put in there than you probably think and I totally get it. We never had any females. I put many females on the interview list. I’ve interviewed them and frankly, they just didn’t qualify. We were not, not hiring women, but we did not hire women. And the reason is because they didn’t meet our criteria. I don’t care if we were all women, but we didn’t have any women. I purposefully tried to hire people that I thought would add value first and foremost.

Noel Smith:

And maybe somebody else would pass over for whatever ridiculous reason that I didn’t care about because that’s not my background. And anybody that’s ever done it right by me, I always wanted to pay it forward. And if I have got two people in front of me, I’m going to try to give an opportunity to somebody that I think maybe wouldn’t get it someplace else. That’s my nature. That doesn’t mean it’s right. It’s just how I did things. But there are a certain amount of skills that you have to have to play in the NBA. You have to be tall, you have to be athletic. And just because you want to hire somebody who’s short and non-athletic, that doesn’t mean he’s a good hire. It just is what it is. You have to have some kind of quantitative heft.

Noel Smith:

You have to have some skills that are relevant to the business, but once you’ve reach those table stakes, my feeling is that you should consider all people, but then there’s also the time function, right? So you have to figure out, I can’t just interview 10,000 people. So you have to do your best. And the first part of what you said, which was, how do you not have automatons of yourself? I don’t know that you can, I’ve tried to do that and I failed.

Noel Smith:

I’ve learned this through time. And then, especially when you’re the boss, your jokes are always funnier. Your shoes are always shinier and everyone’s always kind of brown nosing you. I noticed that after a certain period of time where I thought I was hiring people that were dissimilar from me, despite their ethnic background or whatever else, they were more similar to me than I thought. Despite my best efforts, I’m going to say I failed. And I’ve seen this through so many different firms where the guy in charge is the guy that stems the culture. And a lot of it exudes from that person. The answer is I don’t know.

Jason Buck:

Yeah. It’s hard to get that cognitive diversity, like you’re saying. And Darrin, almost though the question back to you, because I think about it too, if you’re saying somebody is more introverted or they might be potentially intimidated by let’s just say a LinkedIn ad for a job posting or whatever. How do you get around that? How do you help somebody that’s intimidated by just that job posting to try to find those diverse people to hire. And then the second part of that would be, if you feel that there’s an edge there as three entrepreneurs sitting here, don’t you think there’s a structure that then you could build and you could kind of think through how do you find those people or filter those people or catch those people. If you think there’s true value add there then you could build the business around it.

Darrin Johnson:

I think it’s a lot like trying to find a spouse or a serious partner, long term partner. As somebody who’s had reasonable success with the opposite sex. But what I figured out was the best relationship including my wife now have come from and I hate to say this, and this is kind of why this system is the way it is, but it’s come from personal interactions and me. So in other words, I’ve always had really bad luck with passive dating, right, where I’m just going to wait for this girl to show major interest in me. She’s extremely attractive, whatever, but I’m going to play more of a passive role, that never worked. What I found with dating and I also found it hiring when we had our logistics company was whether I was at a coffee shop or I was anywhere, or I was at the doctor’s office with Kim when he was a baby.

Darrin Johnson:

The fact of the matter was if I recognize something in somebody and I was like, you are exceptional at customer service and you could be at the local coffee shop just outside of Dallas by my house. I’ll actually talk to that girl and say, you know what have you ever thought about just like a part-time job? And I know you don’t have any experience with logistics or anything like that, but you’re so good and so conscientious. And I can just tell this immediately, let me just exchange contact information with you. And that person ended up coming and working for me. That’s how I’ve always found people. That’s how I found Casey, my wife. It’s always been a very proactive process.

Darrin Johnson:

And I think when you are a big bank and when you have the capital, the temptation can be to just sit back and let people play hunger games with each other. Just kick back and let them feud in the last one, standing with survivors that’s who I’ll pick. That always has failed for me. I’ve never been good at that and maybe I’ve just never been that adequately capitalized to allow that to work, but that never worked for me. For me, it was always a very messy, very manual, very proactive process. That’s how I’ve always found the best people because I hate networking, but I inadvertently end up doing it because I build real relationships with people, but that’s a very long-term, very messy process. It’s not formulaic at all.

Noel Smith:

I agree. I don’t think you can, especially in the quantitative world, there’s so many different quirky people. I’ve had guys work for me that are very weird people that are still good people and very smart. When I was in high school, I wanted to become a neurosurgeon. So what I did is I called up a neurosurgeon out of the yellow pages. And I asked if I could come hang out and learn about his business. He said, yeah. I’m 16 and I find myself in the neurosurgical ward at Condell hospital in Libertyville, Illinois. This guy had a brutal stutter. So you’re like, hi, doctor. He’s like, hello. And it is very disarming because you know he’s a genius, but yet he has a speech impediment. Those two things aren’t really relevant. He is still a genius.

Noel Smith:

Despite the fact that he doesn’t speak maybe the way you anticipate him to. Same thing applied for me. And that lesson was very deeply learned that if I just met him at the coffee shop and I didn’t know he was a neurosurgeon, I would think he was just unintelligent. How unintelligent of me to assume that, how unfair of me to judge him so fast. So I learned that young and I learned that and I’ve never forgot it. So when I had guys that come interview for me or girls that come interview for me, I didn’t care at all what they came off like. I only cared, going back to the beginning of our conversation, how are you going to make me money because this is a business. And I don’t care if you did that with long hair, short hair, curly hair, blue shirt, red shirt, don’t care. What are you going to do for me? And what are you going to do for yourself? That’s it.

Jason Buck:

That’s perfect. I think it was Nancy Davis talked about it on a recent interview. She loved trading because it was just P&L. It doesn’t matter what you look like or what you do as long as you can get some. Find your way to get a wedge your foot in the door. It’s all down to P&L in our business.

Noel Smith:

They don’t care.

Jason Buck:

Yeah, I want to thank both of you guys and hopefully both Noel and my compliance will allow us to publish this podcast. I think they will but I think there’s a lot of little nuggets of value in there for a lot of DIY or prop traders and different things for people to think about. I appreciate both of you coming on and being willing to do this. For everybody listening, as soon as we stop record, I know these guys were probably going to talk a little bit after, but I hope you got a clear understanding during this podcast that we’re not going to talk about secrets after we turn off the recording. There are no secrets. Everything was laid out in this podcast about how all of us have gotten to where we are. There are no secrets other than what we talked about in this podcast. So both Noel, Darrin, thanks guys for coming on. I appreciate it. And I look forward to our future conversations.

Noel Smith:

Thank you.

Darrin Johnson:

Cool. Thanks for having with us.

Taylor Pearson:

Thanks for listening. If you enjoyed today’s show, we’d appreciate it if you would share this show with friends and leave us a review on iTunes, as it helps more listeners find the show and join our amazing community. To those of you who already shared or left a review. Thank you very sincerely. It does mean a lot to us. If you’d like more information about Mutiny fund, you can go to Mutinyfund.com for any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email. I’m Taylor@mutinyfund.com and Jason is Jason@mutinyfund.com. Or you can reach us on Twitter. I’m @TaylorPearsonME and Jason is @Jasonmutiny. To hear about new episodes or get our monthly newsletter with reading recommendations, sign up at Mutinyfund.com/newsletter.