Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my head of office has a forever center. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivateWealth.com. Markets, speculation, and risk. This is the Chatwood Traders Podcast, hosted by Aaron Fifield.
Welcome to Chat with Traders podcast. This is episode 231, and I have the great pleasure of introducing to you another heavy hitter, James Chen. James is an equities trader and a partner at Sydney-based fund Blue Lake Partners. It's probably a safe bet to assume that this is your first time hearing of James, as he's a fairly private person. So let me put it like this. There are good traders, there are great traders, and then there is James. He operates on an entirely different level to most.
For well over a decade now, James has been discovering edges and developing trades that I know the typical trader would consider as rather obscure. And for that reason, I think you and I were quite fortunate to have James on the record here, able to learn a bit about how his brain ticks. Which starts with James telling how he cut his teeth trading retail, then how he exploited a loophole in an ASX trading competition, won and got hired. We then discuss trades surrounding index rebalances and dual listed stocks, otherwise known as ADRs. including specific examples too. Next, James imparts with comprehensive thoughts on finding alpha. Then last thing, James mentions that he's actually looking to hire someone for a US support trader role. If you're interested to find out more, I've included a link to the application form in the show notes at chatwithtraders.com slash 231. And for some reason, I don't know why, at the end, I forgot to ask James to share his Twitter handle, as I usually ask every guest. Should you wish to follow James on Twitter, his handle is at skyquake underscore one.
Now I've done enough talking. Here is special guest, James Chen. We won't spend too much time here, but obviously because there's plenty of other things that I want to get into with you. But I think it's good to get some perspective on where you did begin. So I think your origins as a trader was you started trading a personal account in university. Yep.
You know, how did you go then? Were you a gun trader from the outset? Did you have a bit of a knack for this naturally? You know, what sort of things were you doing in those early days? I certainly thought I did. It was, I think, 04 or 05. It was like a commodities bull market. I do distinctly call BHP. We go up every day and I would buy warrants in a thing. Warrants are just basically options for retail.
Commodities are generally, they're less mean reverting, they have a lot of momentum. So every day you feel like a genius, right? And the thing goes up every day. And because I was leveraged by a warrants, I felt like I was, I think like every day the warrants go up by like 40% or something. And I roll into more leverage warrants. And then those who got 40% the next day. I was dealing with small amounts of capital, but like it felt really good thinking, wow, look at these losers making 20% a year when I can make 40% a day. And I think like it was like a random pullback and then everything went to zero. I was like, oh, okay. There's some nuance to this thing.
But yeah, that was how I cut my teeth on retail trading and getting into the market. And this is while I was learning about the CAPM doing finance, learning about how to value an option. other interesting courses like when we were trying to teach us compound interest in economics 101. I was thinking, what the hell is going on here? So you were at university. What were you studying? What was the original plan? Didn't really much have an original plan. I was doing a commerce slash law double degree. Didn't really enjoy the law part. I always enjoyed the finance math side a bit more. Yeah, but as I said, back then, just kids, they had no idea what was going on, what I wanted to do. Just wanted to crave the excitement. And that obviously led you into joining a prop trading firm. Yep.
I think this was maybe a couple of years later during the GFC. What was that like? So I joined Propex as part of their trainee group in 2008, right during the heat of the GFC. They got us training all kinds of derivatives, but scalping on the ladder was quite fun because instead of learning how to scout properly, The market environment rewarded a different kind of trading. If you held onto a position and the markets would have a big move, scalping wasn't rewarded. You were there for the really big moves. And I guess everyone in that area was doing really, really well.
because you're trying to make two or three ticks normally but then you have these 50 60 point moves in a straight line because the fund needed to get out or needed to get in it was a very interesting experience you make it sound like there was kind of um i don't know if incentive is the right word but you were kind of you were ideally there to be a scalper but yeah gravitated more towards the holding on for those those bigger moves at the time yeah it was also um I guess lazier rather than scalping reading a book. You just buy a two-point stop or something and then hope it goes your way. And there was a bit of bias because on the simulator, there was no slippage. You got instantly filled. And if it gap against you, you got stopped out, usually for your two-tick stop. And if it goes your way, it goes 50 points or something. And is this, I presume this was trading treasury futures, like you're an equities trader today. We traded everything. It was, we traded treasuries, SPY, Hang Seng, FTSE, a lot of things, but basically all the instruments that were available during the Aussie session.
okay so it was all futures though yeah it was all futures okay um and so you came in during the trainee program um you know how did you go did you did you make it past that uh no towards the end um didn't make it past the trainee thing it was i guess it didn't really fit um my personality and then i moved on Okay. And what was next? At the time, I was still at uni because the Perpex program was over the holiday. So it was over the uni holiday. So it didn't really affect my studies as much. But so after that, went back to uni and then there was the Trading Places game. At the time, it was run by JP Morgan.
Yeah, the game was sponsored by Droga Capital, which is now Blue Lake Partners, where I work. Basically, the game ran for about a month and the winner was supposed to get an internship at JP Morgan. Unfortunately, it was right at the heart of GFC and JP Morgan did not see fit to offer any internships to anyone that year. Okay, so you won that competition, right? Yes. Okay, and I believe there is a bit of a story as to how you won that. I mean, would you mind sharing that? Sure. Yeah, so the system is designed where you could...
To be slightly realistic, where if you're selling a stock, you're selling at the bid, and if you're buying a stock, you're buying the offer. So you're basically crossing the spread every time. I think at the time, it was also limited to the ASX 500, the all odds, not just the ASX 300. So there were quite a few illiquid stocks to choose from. So what I found out, and also liquidity wasn't an issue either. You were soon to be able to do your full size on a bid offer, and that was key. So what I did was I would find a micro cap.
stock that doesn't do any volume whatsoever with extremely widespread i found a stock that had a bit of two cents and offer of 10 cents and in my pa real trading account i'll put in an offer to sell like one share at three cents and no algos will come and pick it off because the stock is so liquid and in the trading places game i'll buy millions and millions of shares at three cents Once that order is filled, I'll cancel my $0.03 offer in the real market, then put in a bid at $0.09 in the real market. So now the stock is trading $0.09 bid, $0.10 offered. And then I'll go into our trading places and sell millions of shares at $0.09. I actually did get hit once or twice by real orders from real traders. I got a call from E-Trade after that. He was asking me, what the hell are you doing? And I had a lion say, oh, I was testing a couple of algos, testing on small size, blah, blah, blah. And they let me off the hook.
That's hilarious. I mean, what's the issue, really? Why did E-Trade take an issue with that? I guess I was printing the stock up, printing the stock down. I did the intent to trade thing, and I guess it doesn't look good when you have a $0.02 stock selling trades at $0.10. Yeah, I guess so. So if I understand correctly, this is kind of like winning the competition. Originally, you were meant to get a job at JP Morgan. They weren't taking anyone, but it sounds like Blue Lake took you in. Yeah, exactly. Is that correct? So how come they looked at this? Did they know how you won the competition? Oh, they did. They did.
They basically called me up and said, look, what are we doing? We're going to take away your ill-gotten gains and you're going to have to start again. So I wasn't banned from the competition, which was very generous of them. I think because I was really making some good money before I stumbled upon the exploit. So then I kind of had to continue trading and got pretty lucky here and there. And eventually I did win the competition through our skill alone.
even without the benefit of my ill-gotten gains. Interesting. I thought that was partly the reason why they hired you. They figured it was like some kind of outside of the box thinking you were looking for a unique edge. Anyway, okay, so what year was this when you started at Blue Lake? It was 2009. 2009, okay. Basically right after the worst of the GFC and all the big caps were doing placements. I was helping Blue Lake basically fill out all the forms for the various placements, back office, corporate action stuff.
Okay, so you weren't really doing much in the way of trading. I was given a very small account to trade in the beginning because when I joined, they were just so busy with all the back office stuff. Yeah, and after that period, I was given a small book to trade and I was told to focus on ADRs and index rebalancings. It was a bit of a legacy book. At that time, I had no idea what any of those things were. And I kind of grew into the role with a bit of mentorship from the senior traders there.
Okay, cool. Well, that leads us into index rebalances nicely. So let's just talk about that. I'm not sure if this is something you still do to the same extent nowadays. I know ADRs are definitely a big part of what you do. So we're going to dig into ADRs. But on the index rebalances, can you just talk a bit about some of the trades and what that actually means? Sure. Just a brief introduction on index rebalancing. Every quarter generally, funds need to rebalance their portfolios according to the S&P or the FTSE or the MISC. And based on the changes, the funds have to buy large quantities and sell large quantities of stock.
um since passive investing has grown so much in the past few years these funds um can have significant market impact um when i first started training them it wasn't very well understood even though the funds weren't very big they were having um outsized market impacts and it was very lucrative like when i started training them i would get set two or three days before the rebalance actually happened um to minimize my risk like um like if the rebalance will be happening on friday although i'll be buying it Wednesday or even Thursday, and flipping everything on Friday. But as time has progressed, it has become remarkably more efficient. Rather than buying what gets added to the index, you had to then start predicting what would be added to the index. And then eventually it started being, I had to get in a week before the predictions were released, and then a month before the predictions were released. And then it became like a metagame. In the last couple of years, I would be trying to predict what Macquarie were going to release in the index note. So then I'll be selling when Macquarie releases their note, and all the clients start buying those stocks.
It just became too much of a metagame and then returns weren't there anymore. You probably had the same amount of returns, but it was spread over three months instead of two days. Okay. So how did you know what was likely to get added to the index? Like, you know, two days ahead of the official announcement, I guess. How were you able to predict what was most likely to be added? Oh, no. In the beginning, they were announced it two weeks before the rebalance event. And I would get in two days before the actual rebalance event. So I was just like reading an announcement and then, you know, copy pasting a bunch of stocks into an order blotter.
But as the question goes, right now, the indices release guidelines and consultation notes about the mechanics of how these balances happen. So then you kind of need to do the math, go through the index universe and find stocks that you think match the criteria, match their guidelines and will be added to the index. For the more mechanical indices, it's not too hard, but there could be like 20 stocks trying to fill 10 spots and a lot of them are on the knife edge. and you could be buying them out three months in advance, and half the stocks could have, for example, bad earnings, and then they would fall below the threshold, and then they would not be added to the index, and then you had to cut those. I guess a slightly different question, but...
when you first started trading index rebalances and you were buying the stocks that were going to be added two to three days before the you know if it was if they were getting added on friday you would be buying them on uh you know tuesday wednesday yeah why this might sound like a silly question but why did you think those stocks would be higher in two or three days time uh i did a brief back test and um i looked at previous index rebalancing and then they would i would notice these are massive friday spikes in the auction like i remember one year northern star kept up 10 in the auction And everyone's asking, oh, what the hell's going on? This is when Northern Star was like a $1 stock and it kept up to $1.12 or something. And later on, they found out, oh, the GDX gold index was buying Northern Star.
And after people became very confident that, you know, this is a $2 billion fund, this is a $5 billion fund, blah, blah, blah. There's a lot of money to be made front-running these index additions and deletions. All right, so the ADRs, let's get into this. This makes up a big part of your trading from what I understand. ADRs, if I'm not mistaken, is an abbreviation for American Depository Receipts? Yep. I'll use ADRs interchangeably with all kinds of cross-listed CDIs, dual listings, and whatever. To me, they just mean if a stock trades in both Australia and a foreign jurisdiction.
Okay. So an ADR is just, yeah, a dual listed stock. Yeah. Yeah, exactly. So what's the attraction here? Um, you know, can you just give a very brief overview for kind of how they function?
It's essentially the same stock, but it trades in multiple jurisdictions. Think of it as trading the ES during Asian hours, trading the ES during European hours, and then trading ES during the US hours. They will have a slightly different tinge to it, except with, I'll take BHP as the premier ADR. It trades in the Australian market, and Australian fund managers have a certain view of it. It will trade in London, and the London fund managers will have a certain view of it, and it'll trade in the US on the NYSE, and the US fund managers, again, will have maybe a slightly different view of it. So you can have these wildly different.
valuations to the same stock. Like Australian fund managers could be extremely bullish and the US fund managers could be extremely bearish on it. So you can have every night the US will get sold off and everything in Australia, the share will get bought. And that creates an opportunity. Are these ADRs presuming that Australia is kind of like the main listing? Is that right? And then these other ones are kind of like secondary listings?
Is that one way to think of it? Is that generally accurate? That's generally the case, but there'll be a couple of stocks like ResMed where it trades, it's an Australian company, but it trades far more volume in the US than it does in Australia. Unibar Romanco is another example. It trades far more volume in Europe than it does in Australia. Do you prefer to trade stocks one way or the other? What do you mean? As in, do you prefer to trade stocks where they do the majority of the volume, let's say, locally here in Australia? Well, I kind of have to trade on both sides, but I would try to...
I would generally try to trade the side with less volume first because that's the harder side to do more volume is. Just taking a step back, one interesting quirk of ADRs is it's never a live ARB. Australia is never open at the same time as the US, excluding post-market. Australia is never open at the same time as Europe. So you can't directly buy Australia and sell Europe to ARB for your profit. You have to take time and risk. You could buy Australia and then during the European hour something happens and the stock is significantly higher or significantly lower. And you kind of had to make a judgment call.
on whether it's, well, it's still cheap versus Australia or it's still expensive versus Australia. Okay. I guess just to my previous question, what I was sort of trying to get at is, you know, when you gave that example of, you know, Australian fund managers might have a certain view on BHP and then, you know, fund managers in the US might have a certain view on BHP over there. Like, is there, if the primary listings in Australia where it does the most volume here locally, you kind of presume that that's maybe the more efficiently or correctly priced? Yeah, as you said, the more correct price. So if Australia is up 10% versus the US, I might not try to fade it because the US would be like, well, Australia's up 10%, we just follow along. But if the US is up 10% on low volume versus Australia, there is a, and especially Australia does more volume, Australia, if I'm managing, look, those Yanks have no idea what they're talking about. This is an Australian stock. I know exactly how it should behave. And I'll only trade up 5% or something. So you can have these massive discrepancies in pricing.
Right. So let's talk about this because like you just said, it's not really, I know some people kind of refer to it as an arbitrage kind of play, but like you said, there's definitely the timing risk is a factor. So it's not really a true arbitrage, right? Yeah, often it's a very mixed scenario. Again, I'll take BHP as an example. So overnight, the general trade is if BHP is a discount, I'll buy it. If it's at a premium, I'll sell it. Then I have to consider, okay, is the S&P up 200 points? If the S&P is up 200 points and BHP is only at 1% premium to Australia, I'll most likely be buying it. And then I have to look at, okay, what else drives BHP? Is the copper price up a lot as well? Generally, copper is positively correlated with the S&P. So I tend to be...
The usual scenario is that S&P is up, copper is up, iron ore is up, and I'll be trying to buy BHP at a 1% premium to Australia because tomorrow I think BHP will be up at least 3%. Okay. Yeah, so I guess that's kind of the nuance in the trade, right? Yeah, exactly. It gets more complicated if it has a lot of different leads. Like the S&P is up, but the miners are down and copper is down. But iron ore is up, but Rio Tinto is down in London as well. So then you get all these mixed signals about where you think BHP should be trading.
and that's when you kind of widen your i guess your valuation band of what you think bhp should be rather than saying you know bhp should be up one percent tomorrow i'll say bhp should be up zero to two percent tomorrow so i won't buy it if it's flat but i'll buy at you know maybe a one or maybe even two percent discount to australia Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my out-of-office has a forever center. An IG private wealth advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at igprivatewealth.com.
How much discretion is going into this versus how much of these decisions are systematic? I've been trying to automate this for many years now because I'm only trading this at night. I would like to click a button and go to sleep, but often that's quite impossible. I like to think there's quite a... I have various spreadsheets, so I have to take advantage of this, but often I'm looking at charts of S&P, I'm looking at how Valley is going, I'm looking at the Aussie dollar, I'm looking at how Rio is going, I'm looking at how the US minus ETF is going, I'm looking at how South32 is performing. There are factors I can code into it, but there's always a discretionary element, which makes it a bit tricky. I'd say 50% discretionary, 50% systematic.
Now, the part you haven't really addressed here is, should you, if you just want to stick with this example of BHP here, let's say you buy BHP in the US overnight, or overnight for us in Australia, what's the exit plan? Yep, that's also another tricky bit. Often I've found it's best if I just try to sell it ASAP the next day. Sell it in Australia? Yeah, sell it in Australia as soon as possible. A lot of people were going to sort of not know how you're able to do that. Can you just explain that part of it? Several ways I can do it. If I'm buying the US stock, if I'm buying BHP in US, I can A, convert the stock to Australia via my broker. So I'll buy BHP US and they'll deliver me BHP Australia and they'll take out Forex for me. Or I can do it manually myself, which means in the end.
I end up long, say, 10,000 BHP US and short 10,000 BHP Australia. And sooner or later, I have to collapse that or take the opposing trade. Which approach is most common? Like how do you decide when you're going to, you know, if you're long US, you're going to short Australia on the open or whether you're going to convert the shares through your broker? Generally, I try to do most of the DMA because if I pay, because brokerage for these things, because it's a fairly special transaction, brokerage is quite expensive and the edge is, the edge obviously gets eaten up if I'm paying full commission on these trades every single time. There's also conversion fees on top of the brokerage. So often what I'll do is I'll look at my current positions.
For example, currently I'm short, let's say I'm short 100,000 BHP US and I'm long 100,000 BHP in Australia. If my trade is to increase that position on both sides, I might say, well, look, I don't really want to increase both sides anymore. I'll do it for a broker. But if my position would decrease both sides, it's like, okay, cool, I'll do that. I'll do those DMA. So then I'll kind of naturally wind down that position. Okay. And DMA is? I'll just be hitting the market directly. Okay. Now, I think there might be a concrete example you can share for a PLS trade that you did.
Yeah, so that was one on the 24th of February, right during the Ukraine fears and the Ukraine-Russia invasion fears. I don't specifically remember which geopolitical headline caused it, but Australia got sold out very hard and the ES was down like 60 points. POS is not really an ADR, but it does trade in Germany on the Frankfurt exchange and on Tradegate. It's obviously much, much more liquid in Australia, but you have a bunch of European investors who love the lithium game and they invest in this thing. When the European Australia was down, I think 5% or so, had a pretty bad day. All the lithiums got smashed and all the risk-on names got smashed. But when Europe opened, there was like a full-blown panic. Okay, so let me just interrupt you there. PLS was down 5% in Australia for the day? Yep. Okay, yep. So the European indices opened down about 5% as well and PLS and a couple of the other European ADRs of Australia, they opened down nearly 10%. So they were at an additional 5% discount to Australia.
So with something like POS, it's a very volatile stock. So like a 5% move can be considered not too uncommon. So then it comes to a decision like, okay, what's the S&P doing? Is the SPY up the rest of the close? What's BHP doing? At that time, the market looked like it was kind of bouncing. SPY was up a little bit from where Australia closed. And POS being a 5% discount just felt incredibly cheap. Okay. So how much was it down then?
Where does it trade? Germany? Yeah, this one's trading Germany. So how much was it down like in Germany on the day? Down 10%. 10%, okay. So which was at a 5% discount to Australia. Gotcha, okay. And as the EES started rally and Europe kind of rallied, there was a seller in POS and generally...
POS doesn't do a lot of volume in Germany. So when a lot of volume comes in, I have to check and make sure there's no negative news. And someone's trying to take advantage of it and try to offload it. Checked around everywhere, made sure there was no news. And I was happy to buy POS at a discount when the SPY, I think at the time, was up 1%. And this continued on for a while. So I was buying everything the seller had to sell. And by the time the US had opened, I think the market was up nearly 2%. And the seller in POS got more aggressive.
at this point, you know, had to take a step back and think, okay, had to double check the news. Has there been a coup? Is there something new I'm not sure about? You know, has China said something new about lithium or whatever? Have one of their partners blown up? Checked everywhere. Checked Bloomberg, Reuters, Twitter, all the social media sites. No news. And meanwhile, the ES was still rallying and the seller was still kind of walking the stock down. That's kind of like when you had to make a discretionary judgment call that the seller just wanted to get out of the sector. And a bunch of stock in a liquid exchange, Germany, and he probably wasn't able to sell Australia, so he just wanted the whole thing gone. And I was happy to, yeah, and I was happy to take everything he had to sell.
Okay, so when you talk about just a couple of things, when you talk about the seller, you make it sound like it's just one person. And I know that's what you're getting at as well. How were you able to identify that? I keep a spreadsheet of our volume of premium and discounts. Usually, if it's just a couple of retail trading volumes very low, the premiums and discounts can be absorbed by market makers. But if there's a larger volume going through, or if the premium discount to the Aussie price is very big, I'll have a closer look.
And again, I also look at liquidity on the different lines. Like Germany does maybe, you know, usually 0.1% of Australian volume. So if Germany starts approaching 1% Australian volume, then it's like, okay, this is a sign to pay attention. Something's happening here. Either someone knows something in something stock or something else. So what did PLS close down on the day in Germany? Like what percent? It got down as much as 15, but in the end...
in the end because i was buying i was buying as much as i could get my hands on um in the end it closed down 10 which was a 5 discount to australia okay so what i mean is there any reason why you were so confident that you know you weren't going to come in the next morning and you know australian traders investors see pls is down 10 in germany overnight um and then it starts getting marked down on the open uh in australia yeah there's always that fear but that's when um Again, that's when volume comes in. POS does about 30 million shares a day in Australia. And in Europe that night, it did about a million shares, a bit less actually. So I was able to buy a bunch of POS and sell them. And I felt confident I could sell a million shares in Australia without pushing the prices down too much. And because POS generally does maybe about 50,000 to 100,000 shares in Germany, Australian investors do not care what's happening overnight in Germany.
Got you. Okay. Because the relationship is so, it's generally incredibly one way. Australia does something, Germany follows. Australia does something and then Germany follows to the T. Only when you have these deviations that I really kind of step in. How did you flatten that trade? Did you convert those shares? Yeah, I had to convert those shares because at the time I didn't know whether there was a special dividend coming or something. It was just safer to convert.
Okay. So when you convert the shares, you are effectively long a million shares or so of PLS from the Australian equivalent. How are those shares priced? It will be the German price multiplied by the Forex rate. So, in that case, I think it was a bit under $2.50 and you'll print pre-market as an LTXT on the ASX. Okay. So, do you recall the numbers like basically, you know, your average buy price and then kind of the price you were able to flip those on the ASX the next day? Yeah. So, I bought 670,000 shares or so in Germany at a touch under $2.50 and then I flipped them out the next day at about 275 was my average price in the end. Jesus. Okay. Yeah.
Okay, very nice. Yeah, that's a really great example of that, that you could share that. Yeah, it's nice when it works. And historically... very afraid of getting good volume done. I think in my first and second year of trading ADRs, I was on the wrong side of a combined total, I think, of about 10 takeovers at capital raisings. Every single time, I'll be like, oh, cool, there's a lot of volume. Oh, cool, this stock's very cheap. Next day, it's like, aha, capital raising. I remember when Bannerman got taken over by, or attempted to take over by, I think it was Hanlong from China. So on the Friday night before the takeover, the stock was up 10% in Canada, while the Dow was down 1,000 points. I remember that very clear thinking.
who is this loser buying Bannerman up 10%? You know, Paladin was down five, all these other, Uranium's down five. While this clown's buying stock, I'm going to short as much as I possibly can. And on Monday, it became all clear. No good, no good. Yeah, it did teach me to be a bit more cautious when I'm getting volume, especially volume at great prices. Yeah, I mean, when you talk about this, like, you know, I was short as much as I could, or in this PLS example, I was buying as much as I could. I mean, how are you thinking about size and thinking about your risk?
I'm definitely in the camp that when you have an A-plus trade, you should do exponentially more size, not linearly more size than your B-trades or even your C-trades. Because that is the point of having these A-plus trades. And with me, especially when I trade these ADRs, I'm often 50% or 60% off the volume. Sometimes I'm 100%. In this example, I think I was 60%, 70% off the volume. Because I don't want to share my A-plus. Of what volume? Of the total volume. On Germany? Yeah. Okay.
It was just me and the other guy transacting with a couple of retail trades here and there. Because if I want to have an A-plus trade, I'm going to make that I felt very confident. I'm going to be an absolute pig about it. Generally, if you do a breakout trade, you're like, yeah, it'll probably work out. You have 55% confidence or even lower. Breakouts tend to work or whatever. Or you have a technical system and you have 60% stats if you're very, very lucky. But with these more...
nuanced trades, you can have much higher confidence level. I'll give an example of if Apple trades at a dollar the next day, I'll have 100% confidence in buying it, assuming nothing fundamental to trade. It's just a bad print or something. But rather than Apple being down 99%, what if it was only down 5%, I'll be pretty confident in buying it as long as if Apple trades in, for example, Argentina, and then there's some fund who's selling everything as a fire sale. It's exactly the same scenario. You want to buy in a weird random market that no one else is looking at.
yeah these uh this example you gave on pls um that sounds like it was kind of not an anomaly but it was kind of quite an extreme case yeah obviously you don't have those types of scenarios you know every night so i mean what's it like like how often do these kind of things roll around and what's kind of a like what are you normally looking for? Like what sort of discount are you looking to buy at or premium are you looking to short at? Usually about, so on a regular night, you'll be, you know, one or 2%, depends how volatile the market is. Right now, markets are pretty volatile, so you can have, you can have much more panic going on, especially when the S&P moves 100 points or something. You can have people who just throw in the towel, they just want to get out of position and then there can be some like truly massive premiums and discounts. Normally, like I'll say I'll get one of these, you know, swing for the fence scenarios once a month.
Okay. But you have a lot of clustering. I would have maybe 10 of them or maybe even more in February and then none in the past three months. Right. Yeah. It's just a factor of the market conditions, I guess. Yeah, exactly. When the volatility is low, no one's panic selling out their small capital liquid stock on a foreign exchange. If someone's listening to this and they're just a self-directed retail trader,
I mean, is this the type of trade that they could, that would be worthwhile exploring for them? Or, you know, you obviously have, you know, some advantages of the, you know, with brokers and access and that type of thing. Like how feasible is this or realistic is it for, you know, at home trader to replicate this to a certain extent? I think it's extremely hard to replicate, but it doesn't mean that you can't take advantage of it. The infrastructure required for this is...
pretty onerous to set up and like even as an institutional trader it's a lot of work but um as a retail trader you can take advantage of um if you see you know if you're a retail trader trading bhp you can look at what bhp did overnight is trading at the premium is trading a discount you know was bhp up five percent overnight and then maybe adjust your price accordingly and for example we have um if you know if you see um pos trade at a massive discount in germany overnight and a lot of shares get done you can kind of assume someone has bought a lot of shares and that someone needs to offload those shares the next day And you can kind of say, oh, okay, there could be some selling peers today. If we just move on from this now, there's one other area I'd like to get in with you. And that is, I guess, talking about how you think about, because obviously what we've spoken about here is just kind of a couple of your plays, right? A couple different strategies that you implement. And the thing which is so interesting about you, James, is that...
The strategies that you trade and the edges which you exploit, they're quite unique. And they're more or less sort of market neutral to a certain extent. And if they're not unique, they're certainly strategies which a lot of retail don't necessarily have exposure to or aren't familiar with. So I'd just be interested to kind of ask you a bit more about... how you think about finding alpha and how you actually think about getting an edge. And I know there's an acronym that you use. So I was maybe going to just ask you if you'd like to step through that. Sure. Just briefly, I think if you're trading the same way as everyone else, you're going to get average results unless you are like a prodigy or something. It's much easier to compete in places where other people don't, won't or can't.
If you're trading in your own niche, you're much more likely to succeed because you're simply facing less competition. I stole this from Angus Cameron at Liminal Capital, who explains EDGE with a very nice acronym. It's ASIA. And like all good acronyms, it has several letters repeated. So the acronym stands for Access, Speed, Information.
and analytics. So access, what I mean by that is you have access to other markets. For me, it's ADRs. I get to trade in the German market. I get to buy POS in Germany. I get to buy Oceanic Gold in Canada. So this is an edge in itself. It could also be access to liquidity when no one else can get. It could be placements. It could be IPOs. It could be favorable treatment in special crossings. So access itself could be edge. It could be funds that are making money off their broker relationship, just doing IPO after IPO after IPO. Next one, speed.
pretty self-explanatory is just reaction to info, like maybe it could be order speed, maybe you're always scanning Trader News or Squawk Box or Bloomberg Reuters and you always see the latest headline first and then you'll be the first one to smash and order in when everyone else is still reacting. Next one I'll talk about is information, like information as in it could be data, news, opinion or flow, any kind of information that no one else has. It's slightly related to speed because information diffuses very quickly into the market. It could be a broke upgrade or downgrade that you just heard straight from the analyst. And it could be something that only you know about because it's your niche, like an index rebalancing or something like an intraday ETF flow mechanics that you're very familiar with and the rest of the market doesn't know about. And the final one is analytics. It's a little bit like information, but I guess this is your own set of...
your own set of understanding like how you think things will react to um events like it could be um as simple as like you can outsource like you could you know an event can happen and you call the analyst in the stock and they'll give you a column whether this is bearish bullish whether it's priced in or not um it could be um being prepared for an event like for example um last year when there was talk of ETFs going through for Bitcoin. Those who did all the prep work and had set up all the alerts on various news wires were able to buy Bitcoin instantly when the news hit the wires. While everyone else was scrambling to see is this news legit? Which wire did it come from? What will it mean for the ETFs? Would this have second order effects? So pre-gaming can be a source of analytics as well because you have pre-done all the analytics where everyone else is still thinking of the questions that you haven't answered months ago. I like that point. Pre-gaming.
Can you talk about backtesting, or not just backtesting, but just general testing of your system to know whether an edge exists or not? Is that something you do much of? Obviously, some of these things that you talk about here, and as still a discretionary trade, even though some aspects are systematic, discretionary trades can be quite hard to test rigorously. But what kind of testing do you do? I guess this kind of ties into analytics a little bit. Basically, any idea, any correlation or relationship. A lot of trading has these rules that people take for granted that
actually don't really hold true and a lot of it um are seemingly like um common sense rules that might not actually hold water um an example i'll give is um you see gold go up right and expect gold stocks to go up it makes sense in theory um because gold miners produce gold they you know, then they sell the gold, the gold prices up, they make more money. But if you test the performance of various gold stocks against gold itself, you might find out that actually some stocks don't actually react really well to a gold price. It could be because they hedged or something, right? Or it could be because like a whole variety of different reasons, like for example, Australian gold stocks might actually be performing worse because of the Aussie dollar component. Like gold could be up, but Aussie dollar could be up more, meaning the gold price is actually down in Aussie dollars. And these Aussie denominated miners are actually selling gold at less than what they did before the move.
A lot of these seemingly basic rules in trading, I think people need to cast a closer eye on them because a lot of them simply don't work. Can you speak or maybe just give some guidance to, let's say, again, a self-directed retail trader at home who's maybe been at this a couple of years, maybe still trying to find their groove, feeling a little bit lost, trying to find some of these more obscure edges that sort of take a page out of your book. Obviously, they don't have the same access that you do. But is there any guidance you could give to someone in that position for where they might be able to seek out a little bit of alpha? Playbook everything.
And then once you playbook something, try to do a backtest if you can. It's just springtime in the market. You notice something weird that's going on, and then it's just a pattern recognition. Does this thing happen again and again? If so, maybe do a backtest on it. For example, again, going back to the previous point, most traders that follow, most day traders, right, they'll buy a stock during the day and they want to be out before the close. Now, if every single trader does that, that implies the open of stocks will always be elevated.
And the close of stocks will always be depressed. So maybe if you run a backtest on it, you'll find that if you hold stocks overnight and sell them the next morning, sure, you're at risk of gaps. But over the long term, maybe you'll be able to make 10% more every year if rather than holding selling at a close, you always sell the next morning. Stuff like that. Anything you see that you feel is a bit, oh, this is strange. I wonder if this is a pattern or it's just a random scenario that might never happen again. If you keep recording it, testing it, and seeing if something like this can happen again or has happened in similar markets, you establish kind of like a mental model of how markets operate. And if you backtest everything and all these assumptions about the market, you can, I think, form a very good understanding of how markets actually operate.
Yeah, I love that answer. And I love that you said, if you see something that looks a little bit weird, I think that's actually really key. So just as we wrap things up here and sort of move towards the end of our discussion, there is one more topic which I would like to bring up and that's... your more recent sort of involvements in crypto like what's the attraction there? I first traded crypto I think in 2015 didn't really understand what's going on traded a bit as a retail you know got in got out the environment wasn't very friendly for trading the commissions were huge spreads were huge it's only recently I've kind of started to recognize that despite what you believe what crypto is or what it is in a way can do it's like a fantastic trading environment you're always trading against retail rather institutions like there are institutions coming in but the you tend to not face the same kind of competition as you do in equities. And it kind of goes back to the previous part where if you can find a niche that isn't crowded, you should definitely explore that niche. If you're always trading in an environment where you have minimal competition, where you're not competing against 10 other traders to fight for the best price, to fight for the best tick, and then the thing flushes because everyone is in the same crowd of trade. It's a great place to be.
It's kind of like you could be the best poker player in your town or in your city, but then poker has been shrinking in the past couple of years. And eventually all the easy opponents, so to speak, have left the game and eventually start playing as harder and harder opponents. And you have to work very, very hard for a smaller slice of the pie or just to keep standing still. If the pie is growing exponentially and all this dumb money is coming in and all these institutions are coming in, you can get away with just lazing around and just doing, or maybe not specifically lazing around, but you can get away doing very little. or even applying what you already know. So what you're saying is crypto is a lot more inefficient than stocks. Yeah, it's a lot more inefficient than stocks. An example I don't mind sharing because this edge will be gone soon is Ethereum tends to be a proxy, yeah, it tends to be a proxy of the NASDAQ. And six months ago, it will, during like big moves in the NASDAQ, you'll lag NASDAQ by like minutes.
was absolutely ridiculous. Now, especially recently in the past couple of months, it will still lag the NASDAQ by a couple of seconds, which anyone who trades futures knows is a massive advantage. Especially when it's a big inflation print and the futures move, the ES moves, the NASDAQ moves, crypto will move a couple of seconds behind all that. There's been a lot of, I've definitely seen a lot of ARPs have come in to try to reduce that to even lower and lower speeds, but there's still a little bit of time left. I'm pretty sure in three months or whatever, this entire thing will be gone and have to move on to some other source of alpha.
yeah see those that that sort of example is like exactly why i was so keen to have you on the podcast like just those sort of unique little um little edges how did you uncover that like how did you spot that how did you spot that weird little thing i was waiting for i was waiting for the inflation print and then um so the print you know inflation high unexpected markets get smashed and then i realized oh my god i'm long xyz coins it's like and then i log in to check them i was like oh it hasn't moved yet and then start moving. I'm like, oh my God, like DMA, just cut these things. And then I see start moving. I was like, what the hell is going on? And look back at the past and say, oh my God, there used to be a, you know, a five minute delay and it became one minute and then it became, you know, a couple of seconds. Yeah. And by the time this comes out, it'll be gone. Yeah, I'm sure. Jump Crypto will be all over it. Yeah. Yeah. Just to wrap this up here, James, I know that you're actually looking to hire somebody. Do you want to just give a little bit of information about who you're looking for, who should apply, how to apply, et cetera? I've been trading ADRs for probably a decade now and I would like to sleep one day.
um and because i'm always up at night trading the us um it's a lot of fun but i often can't keep track of everything that goes on especially if i can keep track of what's going in europe keep track of everything that's going on um in australia as well so i'm looking at someone to um basically um start off as a support trader for me in the us um tell me what's going on and eventually start placing trades for me as well Okay, and this would be someone who lives in the US, right? Yeah, I want someone in the US because I want this to be a long-term position. I understand full well what happens if you stay up every night trying to do everything. You get burnt out very quickly or you stop caring when the alarm goes off at 5am.
it's just not a long-term solution to have someone in australia that's something i was going to ask you earlier actually it's like how do you monitor all this like you've got the australian market during the day and then us what europe i guess is what early evening yeah um and then us like right through to the morning like how do you how do you manage it all at the moment um it's burst of activity and lots of i guess do nothing in between so i do stay up fairly late to trade it um so it's quite taxing in that sense but then i enjoy it immensely um watching the markets figuring stuff out and um i guess it's like the ultimate game Yeah. So, okay. So just on the person you're looking for, like who, you know, what sort of levels of experience or anything like that? Any more details you'd like to share? Yeah. So someone ideally with good US microstructure experience, ADR experience is not essential because it is quite a niche field. Someone who's decent at short-term trading and understand the intraday drivers of a stock. I'll make a Google forms sheet with a couple of specifications.
Okay. All right. So that's probably the best way to apply is just through the Google form. Yeah, that'd be best. Well, I will set up a link. I'll pop a link to that in the show notes. How about that? Sounds good. Folks listening, if you'd like to get that link, go to chatwithtraders.com slash 231 as this will be episode 231 and you'll find a link there in the show notes. Awesome. Cool. All right, James. Well, I just want to say I'm so glad we could have this conversation. It's great to have finally had you on the podcast. You know, it's been in the back of my mind to reach out to you for a long time. And anyway, I'm glad we could make it happen. So thank you. Absolute pleasure.
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