Last year I interviewed SMB co-founder Mike Bellafiore. Now I had the chance to speak with his partner Steve Spencer about some of the hot topics affecting proprietary traders in the current market environment.

Steve shares a lot of great insights for anyone looking to improve their trading skills:

Proprietary Trading with Steve Spencer

Prefer to read? Here’s the transcript of the podcast above:

Damien: Good afternoon, everybody, and welcome to the Wall Street Cheat Sheet Podcast. Today, I am speaking with the co-founder of SMB Capital, which is one of my favorite prop shops on the street.

SMB specializes in proprietary trading. They run a floor on the street with a bunch of traders, and also, one of their biggest missions is to make trading education better for prospective traders. And I, obviously, think that that’s a great idea, given how many people try their hand at trading every year and fail. These guys at SMB Capital are doing an excellent job teaching people how to trade professionally.

And today, co-founder, Steven Spencer, is with me. Steven, welcome to the show.

Steven Spencer: Hi, Damien, thanks for the kind words. I’m happy to be here today.

Damien: Great. Well, Steven, one of the hottest topics right now is, obviously, the financial reform, and I was just wondering, how does – most people think of how financial reform will affect the big banks—the investment banks, even community banks, and the investment business from sort of buy and sell side standpoint for brokers. How exactly will the financial reform bill, or at least what we know of it so far, affect proprietary trading shops such as SMB Capital?

Steven: Sure. The respective financial reform (inaudible) we didn’t see what exactly comes out of the bill over the next couple of weeks and see if it gets passed. But, the first thing that comes to mind is we’ve been contacted probably, by more traders from some of the larger banks (inaudible) who are concerned about their divisions being eliminated. And we’ve also had more applicants to our firm because many people who traditionally apply for those jobs have been discouraged to do so. So, in that sense, in terms of – from a personnel standpoint, I think we’re already seeing some impact there.

In terms of other impacts on us, I guess, it really will depend on, will it bring greater transparency to the marketplace? Will certain things, in terms of trading that were allowed before, that were allowed behind closed doors, will they no longer be allowed? And will more information be readily available to people such as us who don’t really have connections to have this type of information? So it makes a more of a level playing field from a trading standpoint for us, but, again, hard to really comment on it until we see exactly each and every provision that’s going to be in there. But so far, that’s what I feel.

Damien: Do you sense that eventually a lot of these derivatives are going to be brought into a public market and that will somehow affect – or not somehow, but will definitely affect the – another level of information that your traders will have access to?

Steven: Yeah. I mean, I think that’s a great thing. Any time that we can have more access to different products, and what people’s level of interest is in those products, it makes it a more level playing field for trading equities which we focus on.

And so, for example, there’s a transparency in the option world. We know if somebody’s making a large trade in the options world, putting a big call position on or put a big position in one of the equities we’re trading and we can tuck that in, into our decision making.

If people are making huge bets in the derivative markets on the success or failure of particular entities, and we have no access to that information, then I – and I believe I see that as a handicap, and so, I’m all for those things having more transparency and not being a complete free-for-all from a trading standpoint.

And then also, if I take my hat off as partner of a trading firm, just as a person who is a part of this country and part of, you know, “I want a stable economy, and I want things to work and for us to grow and do well.” I do not want these trillions of dollars of things done behind the scenes and there’s no transparency where I can just topple and bring down our entire financial system.

So, from that standpoint, I think it’s important as well.

Damien: And that’s a great point about bringing down the system. We – the last time I spoke with Mike, and we did a little interview, it was not too long after – where it was right around the big – the time of the big crash. And I know that we discussed the sentiment on the trading floor during that time, but since March, we’ve obviously had an incredible snapback rally that very few people predicted.

I was wondering, how has – how have things changed now that volatility has at least relatively come down since then and the markets have rallied? What’s the feeling on the trading desk and the emotions in your environment?

Steven: Sure. I think that anytime you go from a once-in-a-generation type trading environment, which we had in 2008 where the (VECs), you know, was up in the ’70s or ’80s and traditionally, has been in the 15 to 20-area, it created an incredible amount of opportunity.

So, we had new traders, we had new business making $5,000, $10,000 a day, putting up these ridiculous numbers and people got very spoiled by that level of volatility. And many people who thought that they were professional traders, when they really weren’t. They were trainees. They were people who were new and they were spoiled by this – the ability, basically, to put trades on that we taught them and instead of being rewarded by a 20- or 30-or 50-(inaudible) moves, they were rewarded with 5-, 10-, 15-point moves.

And when we had that transition where the market started to calm down last March and we started to trend up very slowly. Well, it was very difficult for those without years of experience to go from an environment where there were short – or long, there were short and just trading the volatility to, “Okay, we need to start to think about taking positions in riding some of these slower moves.” And that was a rough transition for a lot of people and I think that, you know, in the prop trading world over the last year, a lot of people have been shaken out.

I think in the last six months or so, I think people have, really, on our desk, especially have started to see that with this slower volatility, a couple of things are really important.

Number one, if you find a good short-term trade, whether it’s an (inaudible) trade or a multi-day trade, once you find a good entry, you really need to milk that trade for everything it’s worth. And the people in our desk have done a good job of transitioning to that.

And then the second thing, which are the style that we are –we’re big proponents of, one of the things that’s at our core, which I believe most firms don’t focus on, is we’re looking for where the volatility is on a daily basis.

And so, we’re not trading the market per se. I’m not trading, you know, the (SMB) or the (cues) on a daily basis, those may not move that much anymore. They have very small moves, but if I’m in at Akamai, in AKAM today, or I’m in (R-I-G or RIG), when there’s fresh news in those stocks, it’s like 2008 to those stocks. They don’t care that the volatility overall has come down in the market. There’s fresh news and the momentum players have to be in those names, and they’ll push them up and they’ll push them down. So, for us, as long as we can find two or three of those names a day, it kind of creates that sense of 2008 for us.

Damien: So, do you see sort of a little bit of a waning in the amount of people that are taking up interests in day trading or proprietary trading now that we’re sort of moved away from a space where, you know, people are telling stories to their friends that, you know, they shorted AIG for 20 bucks, and there’s a – you know, they shorted a layman to a broker. Because these stories aren’t out there, is that changing the amount of – the number of people, quantity of people you’re seeing?

Steven: Well, there are certainly the stories that I got hit in a bid at 600 (inaudible) yesterday and I just kicked it out of 720 today. So, that’s – they still have their stories.

I think that we still receive a ton of resumés every week. You know, I’d have to go consult with the HR person to see what the exact numbers are and see if there’s been a drop off over the last year or so. But as far as I know, they still have me interviewing two or three days a week and there still seems to be demand. And the other thing is, yes, there’s not that level of craziness where people are (catching) 20- and 30-point moves everyday, but when you have a very strong market and the market is rising steadily, there’s certainly opportunity on a daily basis. And so, I think that attracts another set of people as well.

But I would really have to get back and check with the HR people and see what exactly the numbers are.

Damien: How about – also, you guys run a public blog, the smbcapital.com/blog, which is an excellent resource for traders. What about in so far as the home-gamers are concerned, is there any change now with home-gamers being a little more frustrated or not having as easy access to volatility?

Steven: You know, the ones who follow our blog closely, definitely understand that we seek out the volatility on a daily basis. So, I think a lot of the comments we get from them, in terms of frustration, is more on the, “Oh, I got with that at some position because the (HR keys) pushed it through my (stop).” But the people, who generally are commenting and in touch with us, who follow us through our blog, seem to be, for the most part, for my standpoint, in the right stocks. Now, if you’re in the right stocks, that’s 90% of the battle.

Damien: And speaking of where the markets are and the right stocks, Steven, what type of stocks have been pretty full of momentum in general lately since – I know there’s a lot of people who keep setting up in shorts and at least through the mainstream media. You see a lot of people get – sort of suckered into preparing for the next big drop and the next big drop and I’ve seen that over the course of since basically last March, everybody’s been looking for the next big crash, but the market is going on in a different direction. What sort of stocks and plays have actually worked out well for your group?

Steven: Sure. I think one of the plays that’s working really well are stocks that over the past few months have touched 52 (inaudible) two, three, four times. And then, within – recently, let’s say, the last four or five days, we’ll consolidate clues to that level within a point or two. When they’ve been taking out that level, they’ve been having multi-point breakouts.

Now, the majority of the time that trade has been working. We did notice since the Goldman Sachs fraud charges came out, I think the percentage of that trade working has dropped off a little bit. And usually when a particular pattern is working really well, generally, people are able to gain that pattern a little bit more and it starts a lower percentage at the time.

One of my favorite trades in a strong market is always the stock that gaps up, has a strong opening drive, consolidates well above the opening price and takes out the morning high. Generally, there’s follow-through and if you will look at the chart in AKAM today, you’ll see that that’d be staying around 38.

When it took out the morning highs above 39, it actually went up another point or so, I believe. And, you know – but it’s also – and also, AKAM has other things going for (inaudible). It’s in the content delivery space and the broadband space and in the mobile, the expansion of the mobile Web and everyone with the Droid phones and the iPhones, they’re right in that hot (bed of) activity. So, I think the momentum (inaudible) and that the growth managers probably had to buy that up today in that (play) department. So, I don’t think it was just simply a technical play, but I think there are also some fundamental reasons why that particular trade worked out.

Damien: So, Steven, what are some of the plans that you and (Mike) have for SMB Capital in the coming month? You know, we’re going to be getting to the summer time and that’s usually a pretty fun time in Manhattan. Everybody comes out of their winter shelf in a major way, and it seems to spark lots of creative ideas and new directions with businesses. What do you guys have planned for the rest of this year?

Steven: Sure. Well, coming up in June, actually, we are having a six-month training program, where we’re bringing in a bunch of people and going to train them for six months and those who perform well will be offered an invitation to trade for our hedge funds, under our hedge funds. And so, that’s the primary thing that we will be focusing on this summer. For myself, personally, I think come August, I’ll try to take two or three weeks off. I say that every year, and usually, it doesn’t materialize, but that will be one of my focuses.

And then the other thing, beyond the fact that we’ll be very busy with a whole bunch of new trainees, and, probably, a bunch of interns, is you mentioned this early at the beginning, which is we’re trying to make our training accessible to those who were invited to be a part of the firm and work to those around the country and also in other countries throughout the world.

And I’ll probably be working with director of our remote training program to continue to provide more offerings to people who are interested in learning how to become pro-traders and try to provide them 100% the experience that they would have if they were someone who were actually invited to train with us on our desk in New York City. And that’s quite an undertaking. And so, my schedule will probably be full there.

I’m sorry for not talking about Broadway shows and, you know, I guess, I’ll try to go to Shakespeare (inaudible) up there to pick up tickets for me one day during the summer to catch one of those shows. Maybe a little Bryant Park Monday night at the movies as well and just enjoy, you know, what Manhattan has to offer during the summer.

Damien: Well, that sounds quite familiar. (Derrick) and I are trying to grow, obviously, just one business being a media business and you are trying to grow both the trading desk and education arm of your firm. So it seems as though you, definitely, will be a busy guy.

So, Steven, I wanted to thank you very much for taking the time to chat with me today. And I was hoping that you and I could again touch base maybe at the end of the summer and see how things are going over at SMB.

Steven: That would be great, Damien. I appreciated chatting with you today and thanks for your time as well.

Damien: Thank you, Steven.

So, once again, everybody, I would like to thank Steven Spencer, co-founder of SMB Capital. You can find SMB Capital on the web at smbcapital.com and they also have an excellent blog which I recommend joining their RSS feed for some great daily insights and get you started with trading. If you’re more intermediate or advanced trader, they have some excellent products, which I’ve personally tested myself, and they’re very valuable. And also, lastly, you can follow SMB’s Twitter.

Steven, what’s your Twitter handle?

Steven: @smbcapital.

Damien: @smbcapital. And they always give everybody their, you know, trade-of-the-day or something like that and it’s a really nice way to get an idea of what stocks are in play for the day and start introducing yourself to the group over there.

And again, thanks to Steven and we’ll see you next time on the Wall Street Cheat Sheet Podcast.

Steven: Thanks.

From our appearance on Yahoo Tech Ticker with Henry Blodget at the Nasdaq …

A few years ago, a magazine called Trader Monthly popularized a ranking of the “Top 30 Traders Under 30.”  In those days, successful traders were a dime a dozen and celebrating dynastic wealth was much in vogue, so the magazine’s list was a favorite on Wall Street.

Fast forward a couple of years and Trader Monthly and its “30 traders under 30″ have gone bust, victims of the crash and collapsed advertising revenue.  But Wall Street is back, thanks to the government bailouts and the Fed’s zero-interest-rate-policy.  And traders young and old are minting money again.

Of course, with the country’s unemployment rate still hanging near 10%, celebrating massive windfall wealth is no longer wise, especially at firms bailed out by the taxpayer.  So most of today’s successful Wall Street traders have the good sense to keep their mouths shut.

Earlier this year, the folks at Wall Street Cheat Sheet, Damien and Derek Hoffman, decided to reincarnate the Trader Monthly list.  They spent 8 months looking for 30 traders under 30.  Alas, thanks to institutional reticence and the Hoffmans’ insistence that the traders they celebrated had to have demonstrated a track record longer than a single lucky year, they only came up with 3.

But these 3 traders under 30, the Hoffmans say, are worth their weight in gold. (Which is good, because they’re probably paid at least that much.)   “Definitely they’re making millions,”  says  Damien Hoffman, but beyond that it’s hard to get an exact figure he admits.

Here are the Top 3 Traders Under 30:

#3  Jan Sramek, Goldman Sachs. Age: 23 Sramek  makes his fortune as a trader on the Emerging markets desk at Goldman’s London Office. At the tender age of 23, he’s already published the book Racing Towards Excellence, founded and sold a social media website and has the ear of most of London’s major hedge fund managers.

#2 Gilbert Mendez, SMB Capital. Age: 28 After studying mechanical engineering at Columbia University, Gilbert built a black-box trading model for the global Forex currency market. He then sold it before becoming the “head trader” at SMB and now its youngest partner.  He presently focuses on trading equities.

#1 Adam Guren, First New York Securities. Age: 28 This Duke graduate and former professional soccer player gets little sleep trading markets all over the world, at all hours of the day.  He cut his teeth trading Chinese equities but now looks to profit on any market volatility around the globe.  He starts his process by logging on premarket. Then he spends approximately an hour, sometimes thirty minutes, seeing if there’s news out in the basket of stocks he follows. This is how he figures out if there’s any opportunities because he looks for newsworthy events that are going to move his stocks, according to the Wall Street Cheat Sheet.

For more details, click here to see the original article Wall St. Cheat Sheet Top 3 Traders Under 30.

Since Trader Monthly shuttered, we’ve decided to pick up the popular Top Traders Under 30 ball. However, based on your feedback and our research, we’ve made one huge change: we’ve decided there are not 30 top traders under 30.

Also, we feel these elite traders are worth watching because they have survived the shakeout since the Great Crash of 2008. It’s easy to win when the market goes in one direction. It requires skill to navigate up and down scenarios.

So, after 8 months of due diligence, we are proud to present to you the first annual Wall St. Cheat Sheet Top 3 Traders Under 30 …

3. Jan Sramek – Emerging Markets Trader,

Goldman Sachs

Like LA Lakers phenomenon Kobe Bryant, Jan Sramek — age 23 — has hit the big leagues with a ton of talent and promise. Having made the national headlines in the UK by breaking the world A-level record, Sramek enrolled to read Mathematics on a scholarship at the prestigious Trinity College at the University of Cambridge. Shortly afterward, he transferred to the London School of Economics to work during his studies because London-based hedge funds recognized his potential and snapped him up during his 1st year.

Having accumulated a wealth of experience on both the buy and sell-side during university, Sramek moved over to the area where many of the current superstars of the industry cut their teeth: the emerging markets fixed income trading desk at Goldman’s (NYSE:GS) London office (a very active area given today’s debt and currency volatility). Although neither Sramek nor Goldman would confirm or deny any details about this trading desk, we can assume the group has done extraordinarily well since Goldman’s traders had a perfect 100% win-rate last quarter .

Sramek is considered somewhat of a prodigy in Europe. He has repeatedly made the headlines with his various achievements. Most recently, Financial News named him the youngest financier ever on their list of 100 Rising Stars of Financial Markets Under 40 — a list which previously included the likes of Greg Coffey of Moore Capital and Pierre Andurand of BlueGold.

Out of all the firms with which we spoke, Goldman was the least revealing. Nevertheless, informed sources suggest that Sramek’s mentors include several of London’s most powerful hedge fund managers who are clearly grooming him for the very top. It’s therefore possible Jan deserves a higher place on our list. Regardless, given his age, we are confident he will be considered for Wall St. Cheat Sheet’s Top 3 Traders Under 30 list for many years to come.

Unlike some of his contemporaries, Sramek openly reveals the keys to his success, and makes it all sound quite simple. I highly recommend reading his book Racing Towards Excellence(a top rated book on Amazon). The book is a nice blueprint for anyone looking to maximize their ambition and take the steps necessary to be successful in any competitive environment, including finance.

2. Gilbert Mendez – Equities and Forex Trader,

SMB Capital

Gilbert “Gman” Mendez — age 28 — is as textbook a pro trader as Orlando Magic star Dwight “Superman” Howard is a NBA all-star. After studying mechanical engineering at Columbia University, Gilbert built a black-box trading model for the global Forex currency market. Such an awesome achievement led top Wall Street proprietary trading shop SMB Capital to give Gilbert a desk and trading account. Not long after, the firm awarded him “Head Trader” status.

When I asked about Gilbert’s trading style, he answered:

I trade news driven stocks and whatever sector happens to get in play. In essence I trade the flavor of the day or week. I make my trading decisions based on the intraday fundamentals, the medium term time frame charts (15 minute-hourly), and time my entries using my tape reading skills. My real strength as trader is the ability to read the tape and psychology of the big players behind a chart.

After proving his skills through the biggest equities crash since the Great Depression, Gilbert was recently made partner at SMB Capital. That’s what we’d expect from a guy who SMB co-founder Mike Bellafiore calls, “one of the best young traders on Wall Street.”

Unlike most professional traders, Gilbert is highly accessible to budding traders. He contributes public posts and educational material to SMB’s blog. If you are looking for a glimpse of what it takes to be a top trader on Wall Street, Gilbert has a ton to offer.

1. Adam Guren – Global Equities Trader,

First New York Securities

A year ago we called Adam Guren — age 28 — the Lebron James of trading. Given his consistent success like King James, Adam was the obvious choice for the top spot on our first annual list.

After graduating Duke in 2003, Adam played professional soccer for a season with the Cleveland Force before starting in the prestigious training program at First New York Securities. After a 14 month apprenticeship, Adam started trading his own book while expanding his focus from Europe to Asia.

Now, Adam focuses on global stocks. His day looks much like a British colonel’s when the sun never set on the British Empire. But with patience and discipline, Adam finds a way to replicate his success in multiple markets. He starts his process by logging on premarket. Then he spends approximately an hour, sometimes thirty minutes, seeing if there’s news out in the basket of stocks he follows. This is how he figures out if there’s any opportunities because he looks for newsworthy events that are going to move his stocks.

When I asked Adam about how he makes his moves, he said:

I’m not a technician and I really don’t study charts. That’s not to say I won’t look at them to see where things are. At the same time, I’m not a big fundamental guy based on the nature of how long I hold a position. I mean, I do understand the fundamentals of each stock and what people generally expect, but for the most part I rely heavily on intuition and the feel I have for a stock based on watching it for so long. After watching the same 50-100 names, you start to easily understand how they trade and what moves them. It’s pattern recognition.

Another key to Adam’s success is his risk management:

Every trade I get into I have a very good understanding of the risk-reward. One of the keys to success is measuring risk-reward. And one of the best ways to do that, as elementary as it sounds, is to buy low and sell high. So you want to buy when things are beat up and sell when things are overdone on the upside. I’d say I do a good job of measuring risk. It’s probably one of the main reasons why I am successful at trading.

Although this sounds very basic, it’s obviously easier said than done. Given that over 85% of traders lose money, Adam has proven that mastering the fundamentals is the key to success as a professional trader.

If you would like to nominate traders for future awards, please send us an email or comment below.

After being in the trading business for a few years and spending several hours of my week training new guys I can’t help but chuckle at one mistake I see all of the time. And I laugh because I know HFTs are printing money off this concept. And I see this happen to both experienced and new traders around the whole number, the quarter, the half and any other level easily identified in any time frame.

For this article I want to spice things up a bit and show you this spoof of what I want to call “The Magic Whole Trading System”:

First we have to set a few concepts in place. We buy a stock when we consider it to be cheap, and sell it when we find it expensive – you know buy cheap sell when expensive old school concept. Let’s take a look at the following graph:

The graph shows that a stock gets cheap right above the level (because we always buy in front of it) and expensive right below it (traders are taught to sell it right when it drops). And this happens for every single level, the magic whole, the magic half and even the magic quarter (and if the stock is slow enough, the magic dime). We are also monitoring a second influence; we have a theory that the more zeroes a number has the more significant the level. For instance, 60.00 is clearly more significant than 61.00. 130.00 is much more of a level than 13.00. And the Dow at 10,000… we can’t even comprehend that one.

A typical trading day using this system might look like this: Say the stock is trading 49.87 (obviously a meaningless number (no zeroes at all), but it’s the price you see when you first type it up. You might try a feeler trade here just out of boredom or impulsiveness. Then the stock comes up to 49.99. This is the most expensive the stock will ever be, so obviously you short it. Then the whole lifts and it is 50.03. You buy to cover your short since the stock is so cheap at this price… and the magic whole drops again. Now it’s 49.98. What do you do? Have you been paying attention?!

Obviously… it’s now VERY EXPENSIVE so you sell what you bought above the whole. Now it goes down a bit and you don’t want to be reckless since you just did a few trades, so you wait a while and probably short around 49.92 or so. It trades up to 50.00 and you pause to think about all the zeroes in this number and obviously you buy back the cheap stock and close above the whole as you can. This is a complete trading plan that you can execute the entire day as long as your buying power and stop loss limit permits.

For those of you feeling a little uncomfortable as I just dissected your trading system please stop being a piker. Man up and learn to trade!

Again, this is not a real profitable trading system, just in case you didn’t get my humor.

Gilbert “Gman” Mendez is the head trader at SMB Capital.

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