Why Friends Don’t Trade Other Friend’s Money

Jeff Watson is a veteran of the pits and has forgotten more about trading that most of us retail guys will ever know.  His blog masteroftheuniverse  goes into extended periods of hibernation (like now) because Jeff is an active trader and that is his priority. However, when up you can probe the archives of his blog to find trading wisdom that is as relevant today as it ever was.  Note: Jeff’s blog is being revamped and will be back up in early December.  Bookmark it now anyway.

Back in 1984-85, or somewhere in that time frame, I had a lawyer buddy ask me to put on a couple of trades for him.

I was leery at first but he talked me into opening an account for him with my clearing firm and I got the them to open an account with just $1,000 in it, which wasn’t a big deal back then.  Guys who weren’t brokers but still members did this kind of stuff for friends all the time, so my firm felt that it passed the Kosher test.

My buddy got a deal on commissions, paying $12 per round trip, which was pretty good in those days.  I didn’t make a dime off the account and was just doing a friend a favor.

I remember the first trade was for a couple of wheat puts, where he made a few hundred dollars.  Then I started trading 10,000 bushels (2 contracts) of wheat for him capturing several cents a week, net.  We went for the base hits, the low risk trades, never the big spec size.  I ran his account for 3+ years and he ended up with $46,000 (after taxes had been paid).

Kansas City Board of Trade wheat pits.

He wanted to trade bigger size (at that time we were putting on 25,000 bushel (5 contracts), and I disagreed due to my strict money management system. But eventually I went along with as it was his money to lose after all and lawyers can be very persuasive.

One morning, he asked me what I thought the market was going to do.  The cash market was very firm, and I thought that wheat was going open a dime higher (the whole floor had been bullish for a couple of weeks).  He told me that he wanted to buy 100,000 bushels (20 contracts) at the open, at the market.  I objected, but he demanded that I get it down.  Needless to say, when the market opened 12 cents higher, he bought the very top tick.

Within 90 minutes the market sold off hard and  closed down a dime.  I talked to him on the phone after the market had sold off, and he was pissed, telling me to sell and that he never authorized that trade.  I sold his wheat near the lows of the day.

His account lost well over $20,000 and he was really pissed at me for “losing his money.” Nevermind the fact that he started with $1000, Three and half years before and nevermind the fact that last fateful day, I would have been selling hard into that strong open and probably would have made a few dollars for myself if I hadn’t been trying to get his trade down for him.

I told him that I preferred not to trade for him anymore and had my clearing firm cut him a check for the balance.  To the best of my memory, the check was for $22,000 and change.  We didn’t speak after that.

Several weeks later, the exchange started an investigation of me for acting as a broker(I was never a broker or dealer, just a local trader).  Since most locals ”helped” our friends from time to time, I didn’t think that it would be a big deal, but the exchange was being prodded by the CFTC, with whom he lodged a complaint.

I was friends with the CFTC rep for the exchange and that complaint ultimately ended up disappearing.  To make a long story short, I ended up getting suspended by the exchange for 30 days, and fined $5,000.  I was OK with that, and took my lumps like a man. I had been suspended for many little things like foul language, fighting etc, so I was cool with this.

And when my ex-friend dragged me into Civil court, my lawyer advised me to settle, which I did.

This expensive lesson made me realize that I should never, ever do anybody a favor when it comes to trading and markets.  I made a guy an enormous return on his money, and he sued the crap out of me when he lost half.  He was still $23,000 richer than when we started.  I did him a big favor, made him a whole lot of money, and  still got fucked. I ended up having to pay him $24,000 plus various lawyer fees and court costs, plus I lost a month of work.

Suffice to say I didn’t feel too bad when he later got a spinal injury and was confined to a wheel chair.  Well actually, the only thing I felt bad about was that I wasn’t able to push him and his wheelchair down a flight of stairs.

Not Jeff…!!!

This is why I don’t trade other people’s money.

Moral of the story.  Don’t do a favor in the market for anyone who’s not an exchange member and in a position to reciprocate. It just isn’t worth it.

Also by Jeff Watson  “Could You Handle What Really Trading Is Like?”

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  • http://twitter.com/MarkWolfinger MarkWolfinger

    I so agree with your position. Nevertheless, there are going to be friends who resent the fact that you will not trade for them.

    • http://bclund.com/ bclund

      Ah, but are they really friends then?

  • http://twitter.com/abror_aa ABROR

    Machiavelli said “for men forget more easily the death of their father, then the loss of their patrimony (also money, I would add),” appears like a good description to me

    • http://bclund.com/ bclund

      Great quote.