Trading Edges From a Vegas Prop Firm
Finding Edges in the Least Obvious Places
Bright Trading
12 years ago I visited a trading firm in Las Vegas called Bright Trading. Truth be known, I just wanted to visit Vegas, stay in the Bellagio, and shoot some guns… But I tied it in with a visit to this prop firm 🙂
I was trading a decent bit of size and looking for a way to reduce my commission bill. Joining a prop firm was one solution. I met the owners. Don Bright and Bob Bright, brothers who started Bright Trading.
Bob was a former card counter and poker player (maybe not former, but he made a bunch of money doing that). Don was his younger brother who has sadly since passed away.
Anyway, I got to sit in on a training session for new traders and learn a bit about how they traded. They taught traders two strategies…
Opening Orders
Traders would put bracket orders into the order book across a dozen or so stocks on the NYSE.
The thesis being if a stock swung too far at the open from a few rogue orders after the specialist had opened it, these resting orders could capture that misprice.
Traders were trained in stock selection and where to put the orders.
The head traders were doing large size and making good money from this.
Don said that this strategy could only be used in a prop firm as the buying power needed to have that many resting orders was prohibitive for most retail traders.
Pair Trading
This was Bob’s play. He would identify stocks that were highly correlated and then pair-trade the two instruments.
EG:
FedEx and UPS
Both operate in the same sector, the same location. Almost identical companies.
The thesis being that if one stock rose more than the other over a period of time, that difference should correct itself as both companies are affected by the same variables and so should ultimately make similar profit margins.
The trade is: Long the underperformer and Short the outperformer.
You can chart the spread using Trading View by simply entering the formula.
EG: You want to pair trade Fedex against UPS you would type
FDX/UPS
And Trading View will plot a spread chart for you
Bob Bright was well-capitalised and openly admitted to adding to these trades all the time.
He would hold these trades for a long time, adding to the position as the spread widened, closing the trade as the spread narrowed.
As far as I understood his risk management was his bankroll!
He was trading with a hefty account size, not risking huge amounts per trade, and so was ultimately protected via his position size. No fixed stops.
To someone who was a pure tape reader, trading short-term order flow at the time, this was eye-opening!
Perfecting The Trading Edge
This company had found what seemed like a couple of unique edges, perfected them, then trained traders how to trade the edge, and took a portion of the profits.
(Remember this was before tech allowed easy automation and algo production. This was a small/medium size firm probably making less than $40m per year. Training humans was the best way to scale this edge.)
I never did join the firm, but I learned that there are so many ways to trade the market.
Our job as a trader is to watch, observe, and identify any edge we can.
And that edge might be in the least obvious place…