Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row.
Each Friday, I’ll share some of my personal stories from my experience over three decades as a trader. You’ll hear about my time on the trading floor, as a hedge fund manager, and everything in between. Let’s get right into it…
Hi everyone, today I’m excited to share the first video interview exclusively for subscribers of my new e-letter, Trading With Larry Benedict.
As you may know, I started trading in 1984 in the trading pits of the Chicago Board Options Exchange.
Being on the trading floor was a very loud and chaotic place to be. It’s certainly not for everybody.
But even though I moved on to manage my own $800 million hedge fund, many of the lessons I learned on the trading floor stuck with me.
So today with my longtime friend and colleague, Jeff, I’m going to discuss my time in the pits, the lessons I’ve learned, and how that compares to running my own hedge fund.
Stay tuned for the end, where I share my biggest tip for new and experienced traders alike.
Click below to watch the full interview. And if you’d like to simply read the transcript, see the section below.
Editor, Trading With Larry Benedict
JEFF: Good morning and hello, everybody, and welcome to Trading with Larry Benedict. I’m so excited to have you all here today.
My name is Jeff, and I want to welcome everyone to our discussion today, featuring none other than Mr. Larry Benedict. I’ve known Larry for over 30 years. I’ve closely followed his professional career from the trading pits of the Chicago Board of Options, to managing over a billion-dollar hedge fund.
I’ve traded with Larry for over 20 years, and he’s truly one of the best traders that I’ve ever witnessed.
So let’s get going today with some questions, and let’s get a little insight from Larry. And let’s hear what he’s got to say.
So let me start by just saying, hi, Larry. Welcome. And looking forward to spend a little time with you.
LARRY BENEDICT: Jeff, thanks for having me. I really appreciate it. It’s great to see you out there in the Chicagoland, and I’m in sunny Florida – or actually, hot Florida. And today, my office doesn’t have full air conditioning, so it’s an interesting setup. But I’m happy to be here. I’m happy to discuss trading and methodology with everyone. And I’m ready to go.
JEFF: All right. Well, let’s get going. So, the first question that I’ve been thinking about is that you started out in the trading pits of the Chicago Board of Options Exchange. Obviously, times have changed since then. There’s only a couple of pits still standing. Tell us how trading is different compared to then.
LARRY BENEDICT: Oh, it’s completely different, but I’ll go through the transformation that I’ve seen.
I started trading in 1984 in the pits of Chicago on the Chicago Board Options Exchange. And when I started there, it was open outcry, which means people were yelling and screaming at each other. It looked like pure madness. And trades were getting executed by peripheral sight and verbal confirmations, which at that time caused a lot of errors when they called out trades– people not knowing who traded with who, et cetera, a lot of errors.
But what was interesting about that time, when I grew up in the business when I was 21 years old, I learned really how to– what I would call feel the presence of the pit or really feel the positioning of the people in the crowds that we were in, whether they be long or short. And besides seeing the trading order flow and seeing trades go in and out, we could assess what was going on in those pits by the way the market would move versus positions, which you were in the S&P Jeff, so you saw it probably at even a crazier level.
I was an option guy and still am, so we saw it too. But really, the markets would move against the grain of where most of the positions were. So that being said, you had to be good at knowing what your neighbor or the guy standing next to you really had on. And that would exacerbate the moves. So not only reading the tape, which was very important, but seeing intermarket relationships and all of that, just knowing what everybody had. And that was where I started. And that was in Chicago.
And at that point, I was trading for a firm, but I also had my own money up. I was trading pretty small, but I cut my teeth there. So I would say– if you discuss it with me, I would say I was a pit trader. I understood how to trade in that environment.
If I explained it to my kids or your kids, they’d probably look at us with two heads – not understanding how that would even make any sense. I always like to go back to the movie Trading Places. And in that movie, it showed at that time– I think it was the crop report. Even though that was done in Chicago, they had that on the New York Mercantile Exchange. But that was really what it was like.
Move forward about five years from that period of time, I was still on the floor. And in 1989, I went to a company called Spear, Leeds, & Kellogg, which owned a number of different clearing firms and other businesses in trading.
But I became a specialist, which meant that I ran or helped run a full product. And that product was the XMI. And that product, in the time of the late ’80s and early ’90s, was a very high-volatility product on indexes, sort of like what the OEX or the SPX is now. No one really trades the XMI.
But the XMI was made of 20 of the most volatile stocks. It was the place where people did their first program trading. And program trading meant that they would buy baskets of stocks against options. So, we saw that firsthand. But as a specialist, I then was able to turn my knowledge of being a pit trader for my own money to work for a big company and run and handle all of the order flow in a particular product.
So having that advantage was really, really good. And then I had to run the people below me, so I sat on a big podium. And there was a trading crowd of 200 people below me. And I’d be on a microphone, and I’d be making markets. And I’d be running a position.
But again, what came back into my mind was, really, the pricing was important, but really knowing people’s positions was really more important. Because as most people have seen in generic corrections or mini-crashes or crashes, the psyche of people is really brought out.
In the market that we’re in now, there is none of that. The market has been straight up for – we discussed before we got the call – for 12 years, with very little correction. Obviously, a big correction during COVID. There have been a couple of mini ones, really not staying for more than a month. So, nobody’s really had to act. But back then, it was a different kind of market, and positioning was very important.
So that takes me up to about 1993. And in ’93, I was asked by the company to leave the floor and go upstairs and head up their index derivatives desk, where we traded Europe, Asia, and US currency, bonds, oil, really anything global macro.
So, I’ve seen the transformation from myself. And Jeff, you probably know this pretty well:
the hardest thing for a pit trader to do, or somebody that was on the floor, was to make the transformation off the floor.
And what that really means is before, all of the orders that came in had to come through us. So, we saw all of the flow. And was starting to happen in the early ’90s to the middle ’90s was there was electronic trading, or I think they called it Globex at that time.
So, you were able to trade off of the screen. The business transformed into this situation where people didn’t need to be on the floor. They didn’t need to execute off the floor. As you know because you were a pit broker, the business started to transform in the late ’90s into the 2000s.
And then they split the S&P and created an S&P E-Mini because if they had the old contract right now at $4,000, it would be insane the amount of P&L people would have. They couldn’t even trade it. So really, the smartest thing the exchange did was create the Mini. Now they have mini or micro minis. You could trade, like, for one millionth of a contract. It’s really given people access.
When we were trading, it was pure high-net-worth retail and professional traders, whether you were in soybeans or whether you were in S&Ps or euros. It was really big companies that were trading it. The game has completely changed.
That gets us up into the 2000s. So, it went from being on the floor yelling and screaming, which is the way it was from probably day one when they opened all of these exchanges, to the point where by the early 2000s, the pits were there, but they weren’t being utilized.
And if we can flip the camera, which it’s not going to do because it’s attached to my screen, you could see my screen, and I can point and click on every market in the world just sitting at my desk. So, the market has become more efficient. We could get into a chat about how now there’s algorithms trading, and there’s front running of orders and all of that stuff. But that’s for another time.
But really, looking at this, it went from open outcry, understanding the pit, and understanding the flow to basically now utilizing much more of a global macro picture and options to pick up what you feel the price action is rather than what I would call the heartbeat. The market really doesn’t have a heartbeat now, it’s really electronic. Before, it was fed on human emotion. People would panic. Now, it just seems to me, there is no panic. There is a steady flow, and everybody is pretty much trading computer against computer. So that’s what I’ve seen in the transformation of the markets.
JEFF: Very interesting, and thank you so much for that insight. So what else can we talk about? The scene down there, as we all know, was vibrant. It was exciting. There were a lot of bells and whistles. And obviously, when you sit in an office by yourself or with different computers in front of you, you don’t quite get that excitement. How have you seen the transition into the hedge fund world duplicate or recreate that environment, or have you not been able to see it again?
LARRY BENEDICT: Well, it’s funny because I really didn’t touch on something that is interesting. So let’s back up a little. So I was on the floor trading. I basically was yelling and screaming, and you had sweat on you, and the pit would be too tight to leave the floor. But the business transformed at that point to over the phone.
So if you came to my office in 1993 or ‘5, you would see a turret line, which was a line that had direct contact to basically 25 brokers on the Street. You would pick the phone up, you wouldn’t have to dial it, and you would trade. So the transformation was to the phone. So there was still a lot of – I would call it interaction. I would say yelling and screaming. But there was a lot of chaos on our trading desks. Lights were lighting up. When the market got busy, there were 20 phones ringing. I had a phone on one ear, a phone on another ear, and a phone on top of my head.
A lot of the business was done that way. I forgot to really discuss that. That was a big part of everything. So, there was a lot of personal relationships between people. Literally now, I’m sitting in my office alone because of COVID. My assistants do not sit with me. They sit either in their house or wherever they’re going to an office. And literally, we could have this entire call in my office right now. And my phone is ringing a little, but nothing like it was.
If this was 15 years ago, there would be yelling and screaming and people yelling out orders. Now you come in, and it’s dead silence. So that is a really big difference. I don’t think you feel the market flavor the way you did at one point in time.
But to be honest, the way the business has gone, it’s a bunch of younger people programming a computer to just do what they want to have done all day long. And they keep doing it until it breaks down. And it hasn’t broken down very many times. What’s interesting– if we back up to COVID, the beginning of COVID when the market had its really steep correction and things got really sketchy, what was interesting in that point – it was the closest time that I remember to being back to what trading was because the algorithms couldn’t handle the volatility, and they couldn’t keep the market smooth, so they had to shut off. And really, that was probably the best trading that we’ve seen in 10-plus years.
So right now, the algorithm is there, and it just buys or whatever it does all day long. And you can’t beat the algorithm. The algorithm is very, very tough. You’ve got to play along with it. We’ve manipulated what we do to go with what’s going on. But it’s been an interesting ride for the last 35 years, watching all of these markets do what they’re doing and see the efficiency.
I almost believe, in a way, that the market is too efficient, which could cause a dislocation at some point in time. And we saw that – I think it was in 2006, maybe. I don’t remember when the mini-crash was where all these computers broke down, and the market literally went down thousands and thousands of points and all of that. I think at some point, you will see that again.
I will say – we’re at the beginning of August, and I’ve never seen a market that’s been so bullish and so one-sided and everyone being bullish. So to me, that makes me a little bit cautious. But I know that wasn’t really the question, but that’s sort of my thought on that.
JEFF: Interesting. Well, thank you very much for that insight. What would you say – going back to your time in the trading pits, what would you say were the biggest lessons that you learned? And then also, as a transition into a second question. what lessons did you take from the pits to then bring over to the hedge fund management position? What did you take from those experiences to be your own hedge fund manager and as your own trader at your own business?
LARRY BENEDICT: What was the first question? You confused me. I’m old. I can’t remember.
JEFF: I’m sorry. What were some of the lessons that you took from the trading floor, and then how did you take those lessons and applying to being a hedge fund manager?
LARRY BENEDICT: Well, the lessons on the trading floor were pretty much every day. And I’m learning lessons to this point, 35 years later, pretty much every day. I’ll give you an example – so I started in the business with, basically, I think, a trading account with $5,000 or $10,000 at the most. I was trading my own money, but I was backed up by a firm.
And I had a buddy, Andy, who traded next to me. He was a very close friend of mine and, at the time, was a very, very successful trader. And he was making money, and I wasn’t making money. And I remember I called my mother, and I’m like, “Mom, I don’t understand. Andy’s making all this money, and I can’t make a dime.” So she said to me, “Well, why don’t you do what he’s doing?” It sounds easy, right? So, if I’m buying or he’s buying, I just buy with him.
But what was happening was he was much quicker and had a better, at that time, market feel than I did. I wasn’t getting out fast enough, and he was. And he was making money, and I wasn’t.
My first lesson from that was really to study the market more and become more of my own independent mind. I realized that I couldn’t copy anyone. And listen, on the CBO back in the day, there were a lot of really, really good traders that did very, very well. But you couldn’t copy them.
I realized early on that I had to come up with my own methodology. It took a long time. And I know a lot of people look to our website here and utilize my information and my education and what we could show you. But the one thing that I would say is I didn’t give up. And my patience was really the virtue that for a very impatient guy – and Jeff, you know me – I probably have the patience of a flea. I have no patience.
But I realized that I wasn’t going to give up, and I was going to keep going and going and going. And really, the lessons that I learned early on were that I had to develop my own style. I had to basically pick up my own nuances in the ticker tape and be able to capture a niche in the market, which I was able to do.
I used to hold positions really long, and I would let them go way too long. And what I became very, very good at was risk discipline and understanding how to cut losses, and how to take profits probably a little more quickly. But I used to say I wanted to “put a P on the page”. If I was able to put a profitable trade on the page, it gave me the ability to trade the next day and trade a little bit differently than I would if I had no P&L.
So, I would take my profits. If we made $500 in a day, and then we made $1,000, we had $1,500 on Wednesday to work with because I had been up money. I would be more risky with profits than I would be with losses. And when I had losses, I cut the losses very, very quickly. And I was able to maneuver around to get myself back in a positive page.
And when you asked how those lessons transformed into becoming a hedge fund manager at a much higher level, I just had numbers that I was shooting for to make on a daily and monthly basis. I remember – fast forwarding to my hedge fund – my CEO would come into my office every day at the end of every year for the beginning of the next year. And he would have a wrinkled-up piece of paper in his pocket, and he would put it on my desk. It would show the number that we would have to make for the year.
I looked at him and I throw the paper back at him… I’m like, you make this money if it’s so easy.
It took years and years and years to become successful. If I did not start at 21 years old, I probably wouldn’t be in the position that I’m in now because I was able to sustain multiple years of making zero, or very little, or even losing.
Everything clicked in the late ’80s. So here go three or four years of not really making real money, and then all of a sudden, I started at Spear, Leeds, & Kellogg. And that gave me the stability to really take my trading to the next level because I didn’t need the paycheck they were paying me, which is unusual in trading. Most traders have to make their own money on a daily basis.
I always said to all my guys that work for me, save your money. Save your money. You never know when you hit a rough patch. So, what I saw was guys buying Rolls-Royces because they had one good year. And then the next year, they didn’t make any money. And then the clearing firm owned the Rolls-Royce.
So, there were a lot of lessons along the way. But one, and the most important lesson, was money management, understanding how to use your capital to become a better trader, make more money, take more risk.
I went from trading probably one option contract, or maybe five was the least – I don’t remember what my numbers were, but they were tiny – to doing tens of thousands of options on a contract line and trading hundreds and hundreds of thousands of contracts a day. So that took a long time, but it did start from understanding the basics of money management. And the basic rule of money management is when you’re up money, you take bigger positions. When you’re down money, you don’t.
You have times where you can read and see the tape. And when you do, you press. And when you don’t, you take a vacation. One of my mentors who really taught me a lot of risk discipline – because I’ve watched him every single day, and we were partners. He was the boss, but we were partners. I had two guys like that, but one off the floor. And the guy was just so good. He knew when to be there, when not to be there. And a lot of that’s important.
Now, fast forward to where we are now at my brand, The Opportunistic Trader. It’s a very different market. We discuss it all the time. It’s a rigged market. It’s rigged to go one way. There is a 75% chance it goes up. But we’re still believing that that doesn’t exist. But we come in, and every day, the market marches a bit higher. So, you got to use that money management methodology. So obviously, I would say the number one thing learned off the floor and the lessons that took a long time were money management and how to size your position.
And I know we always talk about it. And I try to explain to you like “Hey, listen, if you have a really good trade, and you believe in it, when you’re up money, then you get double the size, triple the size.” And that’s how you really make money. It’s harder in this environment because the volatility is so low, and it’s not that easy. But there were a lot of lessons off the floor.
I saw – really, the greatest thing that I had the opportunity to have was to see guys that were 10 and 15 years older than me at the time and learn from those guys that had 10 or 15 years experience in the business. And having the opportunity to work with guys like that were invaluable. And that’s what I’m trying to do with this e-letter, is to take it out to the public and give you the opportunity to look at some of the stuff that I’m looking at and have the opportunity to make money with it.
JEFF: Very interesting. Thanks for sharing that with us. So, what would you say are some of your favorite aspects of the world of trading, some of your favorite things that you took away from the pit and some of your favorite things that you’ve taken away from your time as a hedge fund manager?
LARRY BENEDICT: Well, I think the coolest thing about being in the trading pit – and you know this because you were in the pit – you’re in a complete competition against the guy standing next to you. So if a trade came in, you would literally kill to get that trade in your account over the guy you’re standing next to. But ironically, the guys that I traded with for years and years and years are some of my best friends in the world that I would want next to me in a war. But yet from the bell at 9:30 to 4:15, we were mortal – I wouldn’t call it enemies, but mortal competitors.
And I think that that was probably the coolest aspect of the floor, the fact that we were all buddies, but we were competing against each other. Yeah, we’d try to help each other out if we could. But the bottom line is, listen, I wanted to tear out the guy’s heart and take his money. So, I thought that was a really, really interesting thing, working on the floor and working with people that I was very, very close friends with that were competitors.
Running a hedge fund was a great thing for a number of different reasons, but it was also an interesting thing. When you run a hedge fund and you’re taking in money from the top people wealth-wise in the world, which we had, you don’t have any rapport with the end users. So, it was interesting because we were just a number on the wheel. We had money from the chairman of SAP, let’s say, but we never spoke to him. The one thing that was interesting – we never had a personal relationship with the end user.
What was cool about running the hedge fund was that I made all the investment decisions and basically lived and died by the P&L of the fund. But it was a lot different, obviously, than the floor. It was fun. Did a little bit of traveling over that time. My CEO went to really, really cool places all throughout the Middle East, and went to Europe. So, the travel was interesting. Meeting people was interesting. But overall, it was really a business at the highest level. It was just a numbers game. It was not personal. But it was fun for sure.
JEFF: What would you say – if you were going to give advice to either a seasoned trader or a new trader, what would be some of the tips that you would try to convey to anybody listening here today, just to be a better trader and to make better use of their time in front of the screens?
LARRY BENEDICT: Well, I would say being a new trader or a seasoned trader, the most important thing that I would stress is position sizing and money management, which we keep hounding in here, understanding how to size positions. Understanding how to take losses is critical, your basic, vanilla kind of stuff. Obviously, be adaptable to the market. We’re surviving in times that, in my mind, don’t make very much sense. To have a 5% or 10% correction in the market will blow people out of the business.
We’re seeing – again, being adaptable, I think, is one of the most important things. And I’ve been able to be adaptable for so many years in so many different environments. And now we’re in the – I don’t know – what they call it – my assistant calls it “the meme era”. We’re in the meme era, and all you have to do is look where these retail traders and Reddit members are in the marketplace to see what’s going crazy.
When I was a hedge fund manager, I had a ton of capital. I could do whatever I wanted. And I was – I don’t know – you call it the bigger guy in the room. Now the hedge funds are sitting secondary to these young guys that sit in a room and get 100,000 guys together and basically – they call it gametizing, which means buying all these options, to side the big hedge funds. And they can sustain the moves.
So what’s happened with the transformation has been the little guy is crushing the big guy. Now, listen, if you look at all these stocks and all these option prices, in the end, the big guy is going to win because you can’t sustain it for that long. But if you’re lucky enough to pick up on your scanner that today, they’re buying Robinhood, you can make a lot of money. So, it’s being adaptable to the environment. We’re in a new bubblicious environment where earnings don’t matter, market caps don’t matter, nothing really matters. So, I would say being adaptable is the most important thing.
JEFF: Sounds good. Adaptability is certainly something that comes into play almost daily with all of us and with all of our different situations and environments. Alright. Well, at this point, I’m going to say let’s take a pause here. It was really great hearing your insight and your opinion on things, and thank you so much for your time. And hopefully, we can reconvene soon.
LARRY BENEDICT: Perfect. Look forward to it, Jeff. Take care. Thank you.
JEFF: Thank you, Larry. You too.