ANDREAS STENO LARSEN

Brent, you’re currently the President of Spectra Markets, but you have a long career behind you – for example, FX trading in top tier banks in the US. But before we get to the four trades that sort of painted your life in trading, I would like to get a brief introduction to you as a trader and how you got into finance. So please enlighten us a bit on your career.

BRENT DONNELLY

Sure. So I yes, that as you said, I have been a spot FX Trader for most of my life. But I did some other stuff in between, I was trading my own money for five years, trading single names during the dot-com bubble. And I traded at a hedge fund for three years as well. So I’ve kind of traded like a lot of different capital sizes, which I think has given me a different perspective on trading. But you’re right, my specialty has been FX. And the way that I got into it was really from a young age. I got interested in trading, probably when I was about 14 or 15 – it was in the period of when Wall Street the movie came out, Liar’s Poker came out – so there was kind of like trading was in the zeitgeist at that time. And kind of one of the funny things is that those are both cautionary tales, really, right? Like Michael Lewis wrote Liar’s Poker more as a cautionary tale than as like an invitation to come to Wall Street. But and the same thing with the movie Wall Street. It’s a cautionary tale, yet both of them kind of were cool, and attracted me to the idea of coming to Wall Street. So initially, I think I was attracted to the money side of it, because you know, Liar’s Poker and the movies and all that make Wall Street look kind of like this glitzy place where you can make a lot of money – which is somewhat true. But then I think part of the reason it stuck with me, or I stuck with it, was not the money but much more like the puzzle solving and math and sort of just like the fascinating idea of this extremely complex puzzle that can never really be solved, but all you’re trying to do is like temporarily solve it long enough to make some money before the regime changes and everything changes. So that’s why I’ve stuck with it for so long. It’s just that I really enjoy it. So there’s an interesting aspect of that where my observation would be generally people that are in trading for the money don’t succeed because it’s so grueling and dispiriting sometimes that you have to have another motivation. And so I guess my underlying motivation always was fascination with math and puzzles. And that’s why global macro appeals to me because if you look at what the variables are in 2022 versus 2021 versus 2018, or any other year, it’s constantly changing, right? And I think that’s a really fascinating part of it that’s kept me hooked on trading for so many years.

ANDREAS STENO LARSEN

One of the things that fascinates me in terms of trading is how the environment that you grow up in as a trader, tends to shape you in terms of opinions and trading styles, etc. I’m born and raised in a world without interest rates. So I admittedly really struggled this year with sort of a regime shift and interest rate markets. What was the environment like when you entered financial markets, Brent?

BRENT DONNELLY

Well, so when I entered, it was actually before the euro, right? So coming into FX spot trading in 1995, ‘96, you know, there was the Deutsche Mark, obviously, and we traded Mark Spain, Mark Paris, Mark lira. So in terms of currencies, that was a major difference. But also a really big difference now is the volumes and the number of players is so much greater now that the microstructure is so much different. I mean, when I started, we were transacting through voice brokers. There was really like three or four major players in every currency, and then a couple of hedge funds that would participate here and there. And now there’s just 1000s of hedge funds, millions of retail traders. So the microstructure is very, very different. Like, in those days, people would try to push the market around and stuff like that. And certainly, that’s pretty much impossible in FX now. And then I think also now, the monetary policy and sort of like central planning aspect of markets is very, very different. So I think it always goes to understanding the regime that you’re in, but also being open to the fact that regimes never last forever and being ready for the new regime. So I think that’s like a fundamental aspect of good trading is understanding that, you know, whatever you grew up in, or what you made money in, because that’s an important one, too, is not just ones that you made that you grew up in. But in environments where you made a lot of money, you tend to have some subconscious dream that that environment will come back. So you know, fast markets, like 2008, a lot of people made a lot of money. And then everyone’s planning for the next crash. But you know, you can wait a long time waiting for that crash to come.

ANDREAS STENO LARSEN

The first trade you wanted to highlight for us today was made prior to the dot-com bubble in the early 2000s. So please take us through the environment heading into this dot-com bubble and the trade that you wanted to highlight.

BRENT DONNELLY

Sure. So when I started in FX, it was very flow driven and there wasn’t a lot risk taking as the way that I would think about it. And so I felt it was like a little bit like dealing blackjack all day or something like that. If you loved Blackjack, and you thought, “Oh, like I love Blackjack, I’m gonna go do blackjack all day.” And then you realize, “Oh, this isn’t really all that fun, because I’m not controlling the decisions. It’s more like clients are just telling me what to do. And I’m executing.” And it was more of like a broker role. So I quit, and I went home to trade the dot-com bubble – I went back to Canada – and I did very, very well at first. Like I had $25,000, basically, was my net worth. And I built that up to about $400,000, over about two years from like, ‘99 to ‘01 kind of thing. And that was a pretty good accomplishment, because I was paying my rent out of there, I bought an M3… I was spending a lot of money and still my account was going up a lot. And so the first trade, and this kind of references back to something I said before, was a bad trade. So I had my certain methodology, and it was the way that I traded, which was capturing a lot of bid offer on very high value stocks and using futures as kind of like the linchpin of direction. So like trying to get on the bid and stocks when the futures were rallying. You know, in those days, we had a squawk to the pit, and you could hear like, the volume is picking up and futures are starting to rally. So you get on the bid and a few stocks and try to make a spread, basically. And so at that time, I wanted stocks that were very high valued, because you wanted to transact the minimum number of shares possible because you were paying brokerage in those days, right. So you want to buy a stock at 100 and sell it at 101. And make you know, $1 on 300 shares, that’s $300. And you do that five times in a day, you know, times 250 days, that’s 400 grand. So that was kind of the way that I was trading. So every morning, I’d print out a sheet of all the stocks above $100. And it was like four pages in ‘99/ 2000. And then by then everything crashed, obviously. And by 2001. When I printed that off, it was four, there were only four stocks. So there were four stocks trading above 100 at that time, so it made it harder to find ways to capture big bid offer. But then after that, decimalisation came in. So before 2001, stocks traded in fractions in the US. So it’d be like 100 and a quarter to 100 and a half or whatever, and for that reason, mathematically, that meant stocks tended to try to trade wider. And there wasn’t really an algorithmic aspect to stock trading at that time. There weren’t algorithms front running, you know, the bids and all that the way there are now. So then decimalisation happened, and the stock prices had all gone from like, all these stocks above 100, to basically none. And so what ended up happening was, I was doing the same trade still, which was like riding the momentum at SNPs, capturing the bid offer, and I was still making money. So I was gross positive almost every day, still doing the same thing, but I was paying so much brokerage at that point. Because if you’re doing it with stocks that are trading at $50 versus $200, you have to do four times as many shares. So I was paying four times as much, bro. And so the fundamental thing that I didn’t realize – which seems really obvious in hindsight – was that we had entered a completely different regime and I wasn’t willing to acknowledge that because I had made so much money doing this certain strategy that had a lot of edge. And I wasn’t able or willing to switch or to recognize, “Okay, this doesn’t work anymore. So I’m going to stop doing it.” I just kept doing it and trying to tweak it. And then so my account started getting smaller and smaller and smaller, because then I was paying so much bro, that I was losing money. So really the bad trade there was to not recognize the regime shift and to just keep doing what’s not working. And the thing, though, is that in a way, I’m kind of glad that happened, because something that I’ve been really good at since then is understanding when regimes are shifting and adapting quickly. So for example, like people were making a lot of money buying calls on earnings into in 2021. And like so you bought one week Zoom calls, two days before earnings, and made like 20x on those. People were doing that quite regularly and that stopped working in 2022. And I know from talking to a lot of younger traders who would be about the same age as I was in 1999, that people just kept doing the same thing over and over even though it stopped working, kind of hoping “Oh maybe it’ll work. work this time, maybe it’ll work this time.” And in contrast, what you need to do is be a little bit early in recognizing the regime shifts. Because like, when someone says to me, like, “I’m a really good breakout trader, but I’m not very good, you know, in range markets.” That’s a huge red flag, because I think what you should be able to do is adapt to what the market’s paying, or what the market’s rewarding. And so that was a very bad trade for me, because I had to end up going back to get a real job because of it. But in the end, it worked out. And it’s also an example of like, if you fail, and you learn from the failure, then I don’t really chalk it up as a failure, because it kind of led to future success.

ANDREAS STENO LARSEN

Being born in 1989, I cannot really say that I traded the dot-com bubble to any extent, but I wanted to pick your brain on the similarities between what we’ve experienced this year, to the dot-com bubble. How big are the similarities between the tech sell off this year and what you experienced during the dot-com bubble?

BRENT DONNELLY

Very, very similar, it’s actually mind blowing. So, I read recently, a quote that said, “finance is the only industry, or the only field, where we don’t learn. We just keep repeating the same mistakes over and over.” I remember tweeting something about Shopify and Zoom. And saying, like, the price to sales were around 100 – and to me price to sales is a pretty clean ratio, because it’s harder to fudge than price earnings – and I tweeted that, and I said, like “Cisco, and most of the things in 1999 got to like 40-, or 50-times sales. And that was like, extreme level” And I got a lot of hate saying, you know, “Zoom and Shopify are changing the world” and all this kind of stuff. And so like, the biggest thing that is similar was people fell in love with the story and never looked at what they’re paying for the story. Like, no matter how good a company is, there’s still a price at which it’s too expensive, right? Like, if you look at like, McLaren F, whatever, like F1 or P1 or whatever, like some super expensive car – yes, it’s the best car in the world. But it’s only still worth $1.2 million. If you pay $15 million for a P1, you’re paying the wrong price. So you’re getting a good car, but you’re paying the wrong price. And when you go to sell that car, you’re gonna lose a lot of money. So I think that was one mistake that was very similar, was people being attracted to these stories and not understanding that there’s only so much of a price that you can pay for stories. The other thing was, and it’s kind of related, was like the religious fervor, you know, around Web3, around the disruptors, around Cathy wood, and that whole ecosystem. It was very similar in 1999. It was B2B, which is business to business, was like “this is going to change the world.” And it kind of did change the world. But you know, anyone that invested in that basically lost all their money. So I guess the similarity from a psychological point of view was that there was this very religious feeling that this was like a watershed moment in technology and in history, and that was going to change the world. And it’s probably correct both times. But that doesn’t mean those stocks are good investments. In fact, it probably means they’re bad investments. And my guess is that in 2040, we’ll just do the all the same thing again, and there’ll be some new other new technology, and it’ll all be the same thing again, right? Because, you know, 1999 wasn’t the first bubble either. There’s been plenty of other bubbles. I guess the difficulty though, is that even having lived through ‘99 and 2000, and identifying in 2021, because I wrote about it a bunch of times, the similarities is that it’s really hard to make money even if you know it’s a bubble because it’s very difficult to short because of the timing has to be perfect. And so actually what a lot of people do is they just cynically go along the bubble thinking that they’ll get out before everyone else. Like, “I know it’s a bubble, but I’m just gonna ride it” kind of thing. And that’s very difficult. So the problem with bubbles is that even when you identify them, which is, you know, half the battle, it’s still very hard to make money. So really in a bubble, I think part of it is surviving without getting your head blown off. And so I think, like I did that well, but it’s not like I was short everything. I was short a bit of crypto and stuff like that. I had a few moments and made money, but it is very difficult to short bubbles, because the momentum is so powerful.

ANDREAS STENO LARSEN

So right in between the dot-com bubble in the early 2000s, and the pandemic bubble in the early 2020s, we obviously have the great financial crisis of 2008. How do you remember that crisis from a traders lens?

BRENT DONNELLY

Yeah, so that was a wild time. So we’re using the term trade a little bit more broadly – not one trade, but more like a trading cycle, or a way of trading. So the first one I described as a bad trade, which is, I didn’t adapt to a new regime. And then in ‘08, I think I did a very good trade. For me, it was very good for my career because I kind of saw it coming. Not necessarily the subprime mortgage crisis, but more the change in markets – you could feel this visceral. You know, like, when someone sold 50 million Kiwi New Zealand dollars in 2007, it wouldn’t move at all. In ‘08, you could feel like “Man, it’s impossible to sell, it’s impossible to buy.” Pretty early on, you could feel that things were starting to break. And so in 2008, there was basically two things that happened as a trader: one, you either embraced it and said, like, “wow, this is a huge moment, and I’m gonna embrace risk and kind of be courageous, right?” So I was the dollar yen trader at Lehman Brothers, which is sort of like the epicenter of it because dollar yen at that time was trading off of Lehman Brothers stock because Lehman Brothers stock was kind of considered the barometer of the financial crisis for a long time. So there’s a lot of like circular aspects to that. But at one point early on, I was just like, kind of said to myself, like “Holy shit, this is absolutely huge. This is going to be a massive opportunity as a market maker and as a risk taker.” So I kind of just decided, like, I’m just going to not be scared. And I’m gonna go all in whenever it makes sense to do so. And because so many people had pulled back from risk taking at that time, there were just these incredible opportunities. So there were essentially two things that people did. One was like what I described, which was just embrace the risk and embrace the mayhem, embrace the chaos. And then a lot of people just went and hid under the desk and hoped that it would be over. And so for me, I made a lot of money in ‘08. But also, I think my approach got recognized. And that was one year that kind of made my reputation for the next five years, because I was like one of the people that killed it during the crisis. And so the lesson for people listening, especially, you know, people that are trading actively, is that it sometimes takes a certain amount of courage to take risk. And crisis markets and fast markets are the time when you make money, right? Like when it’s slow and quiet, it’s just harder to make money. Volatility is what you want as a trader. And what you’ll see on a lot of trading floors, is people complaining that it’s all volatile. And “this is so boring, these are bad markets.” And then when the shit hits the fan, the same people are complaining that it’s too volatile. And it’s, “there’s no liquidity and I can’t get out.” So, you know, you gotta pick one or the other. And so I think when when you identify as a trader, like, “Okay, this is a crazy market,” you recalibrate because your position sizes have to match the volatility, but then in that framework, like in a contained risk taking framework that’s rigorous, and that acknowledges, “okay, you can’t have the same position size now as before, because it’s much more volatile.” But in that framework, you then go, “Okay, I’m going to be really aggressive. And I’m not going to be scared. And you know, when the things are down two and a half percent, and my instinct is to sell, actually, no, I know that this is how overbought it got the last three times or how oversold it got last three times, so I’m gonna buy, even though it’s very scary to buy.” So sometimes you have to be able to do the scary thing, and have the courage and so that kind of ‘01 lesson of identifying regime shifts, and then kind of my age and my experience in ‘08 kind of combined and I was ready for that moment. So yeah, ‘08 was definitely a very good trade for me.

ANDREAS STENO LARSEN

If we look at the sentiment across investors in the early 2000s in the dot-com bubble during the great financial crisis of 2008 and the tech sell off after the pandemic, what’s your assessment of the sentiment we’ve seen this year in comparison to the great financial crisis and the dot-com bubble?

BRENT DONNELLY

So there are some metrics that make it look similar to ‘08 in terms of sentiment and surveys and things like that. But to me, it’s absolutely nothing like ‘08. And that’s part of why I don’t think this bear market is over, is that there’s been very little fear. VIX has barely gone above 30, there hasn’t been much panic – there’s been moments of liquidation and people definitely have been bearish – so that shows up in the sentiment indicators. But in terms of that visceral, “Holy crow, this is the world’s ending kind of thing.” Or – so there’s usually two ways things: like “the world’s ending, and then the Fed bails everyone out” is one, or just absolute despair like at the end of the 70s, the death of equities was the cover of Business Week. At the end of 2002, I would say people were like, “the stock market is stupid, it’s a waste of time. I’m going back to be a dentist” or whatever. Actually, that’s another similarity between 2000 and 2021 is all the people quitting their jobs to become day traders. So that was a very similar thing too is, in 1999, it was e-trade and the baby commercials and all that. And in 2021, it was Robin Hood and confetti on the app and all that. But essentially, it’s the same thing, right? It’s sucking in people to make them think that they can make money trading. But really what it is, is just that a bull market generates a lot of money for everyone. And when that bull market ends, then that separates who’s really a trader and who was just long and rode it up.

ANDREAS STENO LARSEN

I wanted to ask you – after the great financial crisis, you obviously had to leave Lehman, due to circumstances we all know. What happened after, where did you move?

BRENT DONNELLY

Right. So I would put that again in the category of kind of a bad trade, but then I’ll explain it. It’s kind of my philosophy, and I think it’s sort of like the cliche of, you know, “failure can lead to success.” If you view life as just a big long series of experiments, which is kind of how I see it, then failures are okay. Not every experiment succeeds. But when I left Lehman, I went to a hedge fund. And so the environment is very different. And so, initially, it was very good. I learned a lot. But one really tough part of that transition was I went from like the chaos of a trading floor – You know, it’s fun. You’re part of a big team. You’re talking to clients. I was writing a piece every day. So there was this very dynamic job that I was doing that had all these different pillars to it, or different lanes, I guess. And then when I went to the hedge fund, you know, you’re sitting in a quiet room. There’s 12 people, nobody’s talking. All you hear is tippity, tap on the keyboard. If you want to talk on the phone, you go to the phone room. So, nobody’s talking at all. That’s like a pretty dramatic culture shock coming from a team environment where everyone’s screaming all the time and stuff. So that was one thing. So I was at a hedge fund for three years – the biggest thing that I found that I missed – and the reason I didn’t like being at a hedge fund was more like an individual thing. So the fund that I worked at was great. I sat next to the Head of Risk, and he was like an awesome guy. And I got along well with everyone. But the thing that I found was, I really missed writing. So since 2004, I always wrote this daily – it was kind of part of my trading process, right? So I’d sit down in the morning, and go through all the charts, read everything that was going on, and then come up with my best idea or my strongest thoughts. And then I would write them, send them out. And that became the anchor of my trading, because it always, at least, forced me to think a little bit more slowly in the morning. And so when you work at a hedge fund, there’s no audience for a daily, so I wasn’t writing. And so what would happen a lot of times I found was, I would walk in – and it was the middle of the Eurozone crisis – there’d be a headline “Spain downgraded,” and I’d just sell 100 euros, kind of mindlessly reacting to a headline or reacting to price action. And so I felt like my trading wasn’t as good because I wasn’t anchored on a firm plan. And of course, I could write my own thing, but it’s a little bit like cooking for yourself or cooking for a group. You know, like, since I’m writing for an audience, my writing is a lot better than I would try to write for myself, but then you get distracted. I found generally that, from a trading point of view, the writing was really valuable, but then also from an intellectual point of view. So going all the way back to my 1998 experience, part of the reason I left initially was that trading flow wasn’t intellectually stimulating enough, like it was just too robotic. And so in a very different way, I found working at a hedge fund also wasn’t stimulating both sides of my brain. Of course, it stimulates the math part and all that and like the logic and puzzle solving part, but the creative part of my brain wasn’t being activated. I didn’t realize until I didn’t do it anymore, how much the writing just gives me satisfaction in life. And that’s part of the reason I’ve written books about trading and stuff is just, I like getting what’s in my head out in via writing. And I feel like it helps me process things. It improves my thinking. And so what happened was the first year I was there, I did well. The second year I was kind of flat. And I didn’t know if it was just like, “I’m not really making money, maybe that’s why I don’t like it.” It’s hard to tell sometimes if you’re dispirited about trading, or there’s actually something fundamentally about the role that you don’t like, and I couldn’t really tell. And then the third year, I started out really, really well, like I crushed it in the first quarter that I was there. And I still was kind of like dragging myself into work a little bit. I wasn’t enjoying it as much as I felt like I should be. And that was kind of what opened my eyes to the role specifically of working at a hedge fund wasn’t as good as I thought, because it didn’t allow me to do all these things that I enjoyed doing, which was not just writing, but also I like talking to clients. And I also feel like, part of my edge is this network effect of talking to a lot of people and you get an idea of like, “wow, everyone I talked to today is bullish dollar yen,” and “they’re all like Max long.” You know, that is a much more useful sentiment indicator than looking at CFTC data that’s from last Tuesday or whatever. So all that ended up being that I had gone to the hedge fund, and I was there for three years. I kind of felt like that was a bad trade on paper. It probably cost me a lot of money because I would have made more money working at a bank for those three years, etc. But really, I learned so much from that experience, not only about appreciating the dynamic role that I have now, in a more deep way. But also, I trade a lot of oil, futures and gold, and I did a lot of different stuff like that. And also, one big difference of working at a hedge fund is the risk management approach is much more rigorous generally at a hedge fund than it is at banks. Just because that’s essentially how they’re built. Like, that’s what a hedge fund does. Whereas a bank is doing many things, it’s talking to clients and market making and all that. So it’s not just like a pure risk-taking business. So I felt like I learned a lot about risk management, especially about scaling from smaller, smaller account size to massive account, like massive nationals. So I feel like all the stuff that I learned made me a better trader, but also I think it made me a better bank employee, a better person to talk to clients because I sat in the same seat they’re sitting in. So I understand and I have a better understanding of what they need and what they want.

ANDREAS STENO LARSEN

I left the biggest trading floor in Northern Europe late last year to join a private equity company within real estate. And I agree with you Brent – the silence is scary when you leave a trading floor and join a much more long-term setup.

BRENT DONNELLY

It’s tough, yeah. Especially depending on your personality. Some people like that, but if you’re an extrovert, it’s harder. It’s harder to be in that environment, you have to adapt for sure.

ANDREAS STENO LARSEN

Definitely. So, Brent, I wanted to move on to the last trade that you brought with you today, a good trade from the same period of time. So please speak to that trade and what you learned from it.

BRENT DONNELLY

Sure, so that this trade is actually the foreword to my book. Have you seen the original Indiana Jones? So one of my favorite things about that movie is it just starts right away. Like the guy, he’s walking through the forest and the blow dart hits the tree, and everyone’s like, “What’s going on?” I always like movies that start like that. So I wanted to start my book with something exciting or interesting, even though it’s more of an educational book. So I put the story of when I was at the hedge fund. One of the ways that I trade is called ‘lead-lag’, or ‘intermarket correlation’, which is looking at other markets to try to get a clue of what your market is going to do. And so I’ll look at like, say, what is crude oil doing and what does that mean for Canada, for Canadian equities or Canadian currency. And one specific thing that has worked for a very long time is looking at interest rates versus dollar yen. So generally, Japan has the biggest pool of savings in the world, historically. And so they want to invest in things that have yield. And generally Japan doesn’t have a lot of yield. So when yields go higher, Japanese money goes into those things. So they sell yen and they buy whatever that thing is. And the anchor of all that usually is US Treasuries. So if US yields go up, dollar yen goes up, if US yields go down, dollar yen goes down, and that’s one of the truest intermarket relationships in FX since I started. And specifically, since 2005, I’ve been watching it very closely. There was a point in 2010 that would have been like late April, early May, when yields started to come off and dollar yen was pinned very high for some reason. And a lot of times there’s a reason these things dislocate. So the underlying driver of both of those dollar yen and yields, is the US economy Fed policy. And so, you know, if the US economy is doing well and the Fed is gonna hike both of those things, yields and dollar yen are probably going up. And if things look bad in the US, both of those things generally go down. That’s kind of like the reason that they both move together is there’s the third driver, which is the US economy, but sometimes they’ll dislocate. And one of the reasons that they dislocate is simply that there’s flows in one market that aren’t in the other. So let’s say things are looking worse in the US but there’s a corporation that did an M&A and they need to buy $20 billion yen. So you know, yields start going tick, tick, tick, tick, tick lower, but dollar yen just stays up here because whoever that is, that corporation doesn’t care what yields are doing, they’re just buying their $20 billion yen. But then when they’re done, dollar yen goes down and catches up to yields, that’s kind of the practice of that’s how it works. And those orders create distortions, and you’re trying to identify them. So in 2010, yields started coming off, people were getting a bit nervous about there was a bunch of stuff, like, people thought maybe that, you know, the bounce from ‘09 was fizzling so the US economy, it was like a mid-cycle slowdown kind of thing. The Eurozone crisis was starting, so people were kind of starting to get nervous. So yield started coming off but dollar yen just would not come off. So I was short dollar yen. And sometimes these trades can be real, like, smash your head against the keyboard type situation, because it requires a lot of patience. And it doesn’t work every time. So at some point, you have to stop out, right. So, I hope I have the levels right. But, dollar yen was around 99 and there was protection of a barrier there. So basically, one bank was selling tons and tons of dollar yen right at that level and so my stop loss was going to be above there. And so dollar yen was going up here and fizzling, going up here, fizzling, going up here, fizzling and so this was going on for days and days, and I had a big position and I was trying to just ride it out. And like, you know, “good trading takes courage” kind of thing. And like the market won’t move when you want it to move, it just moves whenever it’s ready kind of thing. So I have my stop loss there. And I go out for a run. And in those days is BlackBerry still. And my Blackberry starts buzzing. I’m like, “What the hell” and I just ignore it and I keep running. Then it’s buzzes again, I’m like, Alright, I stop. And I check and dollar yen was down like 200 points. And that like was a big move. I was like, oh, that’s kind of weird. So went from 99 to 97 or something like that. And all my position that was decent cash. So I run back to the office and get back to my seat and now darling ends at like 95.50 or something like that. So still, in those days, we had the squawk from the S&P. And I would encourage, I don’t know, maybe we can link it after something, but for people to listen to the squawk. So the day I’m referring to was the day of the flash crash in 2010 when stocks did the flash crash. So I had my headphones on, and I had DeadMau5 playing in there and you can play, you can have two things playing, so DeadMau5 is like EDM and so I had electronic music and the squawk going, and the squawk guy just starts going apeshit like “50 and 60!” like Kentucky Derby style screaming. So stock started collapsing, and then dollar yen. So dollar yen’s like 96,95,94,93 and it was like one of the best trades of my entire life. And so I start taking profit around 92.50 – I probably have the levels wrong but give or take this is close enough. So I started taking profit around 92.50 or something like that and then all of a sudden – when you’re in the zone, you don’t have a lot of time to think about stuff and things were happening really fast. The squawk is screaming in my ears, everyone on the floor was saying “Holy crow,” like stocks were collapsing and no one knew why. And so I had made one of those stupid point of time decisions that like “his has come too far,” but I didn’t have any logic – it was just more like a knee jerk thing. So I started flipping long at like 92.50. So now I’m long dollar yen and I was up like I don’t know $4 million or something at that point of P&L and then dollar yen keeps going and the flash crash continues. So it’s like 92,91,90,89 and then I’m sitting there… so I’ve gone from like $3.5 million million or something a P&L now I’m up like $800 grand and I didn’t even know why I was long dollars, it was kind of one I did reactively and we had come too far. So now this like one week trade that I had managed perfectly and sat there and been super patient – all this is happening probably in like eight minutes or something like that. So in that eight minute period, this whole thing that I had done perfectly for a whole week had now basically been zeroed and I was almost down on the day. So then it keeps on going. So then I’m like “Shit, I gotta put a stop loss somewhere.” So I left a stop loss at 87.49. Then, dollar yen goes 87.50 given and then bounces and then things started to stabilize for a second. And I could hear the flash crash guy or the pit squawk. It was a little bit less crazy. And then I kind of came to my senses. And then so even though now I was actually down like $1.4 million on the day, I was like, “Okay, this now is definitely going to bounce.” You can feel like the electricity of the moment has subsided. And those crashy kind of moves require like a certain amount of electricity. And as soon as the electricity subsides – that’s part of the edge of being on a trading floor is you feel that electricity subside. So I bought even more. And then it starts ticking, ticking ticking higher. So part of the reason I put it in the book is, there’s so many behavioral things that I did wrong during this episode. So like, kinda like on paper, I had this great trade, and I did it perfectly. But then I started doing all these behavioral things that are totally wrong. So one thing people do is they’ll anchor on on entry levels, exit levels, P&L levels. So basically, as dollar yen started going back up, and people sort of were realizing, “okay, this was some kind of algorithmic weird thing that happened in stocks, and it made no sense.” So that’s even more reason to be long dollar yen or long stocks. But as soon as dollar yen got to the point where my P&L was back to high water, which is like $3.8 million, or whatever, I was like, “Okay, thank you, I made a stupid mistake, I’m out.” And then it kept on going. Like it went back all the way back up to like, 96 or something, so I could have been like $10 million that day. So I think it’s a good story in that it kind of captures the everything about trading, which is that like, you need to have a plan, you need to execute the plan. But then you also have to avoid all the behavioral things. You know, like whether it’s panic, which I didn’t do, but like doing trades, with with no edge, just because you know, it’s come too far too fast. Even very smart people do a lot of dumb stuff when they’re trading. And so this trade kind of captured all the smart things that I could do, and all the dumb stuff that that I could do or that many people do, all in one nutshell. And it obviously ended up being a good trade. But I thought it’s just interesting, from the point of view of how it was captured in the book. I labeled like 20 different behavioral elements of the trade. It just captures everything. That’s the great and terrifying and fun and bad thing about trading.

ANDREAS STENO LARSEN

It’s a really fascinating story Brent. And it leads me to the final two questions I have. I ask these questions to all traders I interview with the platform because I find them so interesting in terms of how to risk manage over time. First question is: in a scenario that you just depicted with a flash crash running, how do you stay true to your risk management principles when everything is falling apart?

BRENT DONNELLY

So that’s a great question. And I think, one thing that I learned was over the years is, there’s two ways to approach it. One, you can be extremely disciplined and robotic. But if that’s not your personality, at some point, you recognize, which is what I did, instead of saying like, “Okay, next time, I’ll be more disciplined. Next time, I’ll be more disciplined,” I came to a realization was like, “Okay, I’m not very disciplined in those situations. So instead, what I’m going to do is I’m going to automate my stop loss.” So for me, that’s a really important part of my process. Every time I put a trade on, I always put a stop loss in a system. And of course, you can override it and stuff like that but that requires a little bit more effort. So there’s two ways you can do it. So, if you over trade, what you want to do is create friction to make it harder to trade – like don’t have an app on your phone and stuff like that. And if there’s something that you should be doing that you’re not, then automate it. So, either have a person doing it or have it automated, which is in FX. Because it’s liquid, you can put stops and everything. So, I think that’s an absolutely critical part of risk management is to automate everything you possibly can. And I think actually, of the entire trading process – depending on what kind of institution you’re working at – the more stuff you can automate, especially around risk management, I think the more powerful and consistent your trading will be.

ANDREAS STENO LARSEN

One of the common traits of the best investors I personally know is that they can be basically long and short with the same asset with the same conviction. Do you have any tips on how to stay true to that principle?

BRENT DONNELLY

Right, so that’s an interesting one, because when I was a little bit younger, I used to go visit all the clients, like all the famous hedge funds and all that. And I was always talking with senior PMS, but not the founder of the fund. And so I would always ask them, “What makes that guy” – it was always a guy in this case – “interesting or different as a trader?” And almost every single time, to your point, people will say, “We’ll go in the morning meeting, and he’s telling us why he’s bullish, and he’s long a million shares of XYZ.” And then I look at the report at the end of the day, and he’s short 500,000 shares of XYZ. And so that’s kind of this concept of strong opinions weakly held. It’s really tough because they’re conflicting ideals, right? The ideal is, you have to have super high conviction and believe in what you’re doing and have the courage to go all in when the time is right, but then you also have to be receptive to new information that contradicts what you thought three hours ago. And so you know, in a bad expression of that, what it can lead to is just, you’re selling the lows and buying the highs, because you just keep changing your mind. So what you have to have is a strong framework that leads you to decisions, but then clear reasons why you’ll change your mind. And I think that’s a good way of looking at it: you have reassessment triggers, you say either technically if I’m doing this trade, because oil is doing something, then if oil reverses, obviously, this trade doesn’t make as much sense and I’ll reevaluate. So having more like logical reasons to reassess, and not just reacting to price action in buying and selling – buying it because it’s going up and selling because it’s going down – and that’s a really, really hard thing to do. But I think the ability to flip, in my opinion, is a really strong characteristic of a trader. But it’s very difficult.

ANDREAS STENO LARSEN

It truly is. Brent, it’s been a pleasure to unpack your life as a trader in four trades. If our audience wants to follow your thoughts, video or books, where can they find them?

BRENT DONNELLY

Sure. So I’m on Twitter. That’s an easy one. And then if you go to spectramarkets.com, that’s the website for my company. And you can see all my writing and my newest book is called ‘Alpha Trader’. It’s on Amazon or anywhere books are sold.