Yes, we tightened bid/ask quotes. If I was 2 bid, 2 1/4 asked, someone else might make it 2 1/16 by 2 3/16. And I would do the same. That’s the way competitive markets are supposed to work, but few if any traders acted that way. But we did.

People who entered trades in HWP (the old symbol for HPQ) received fair (or better) prices on their trades.

Some friendships were solid. But we had some pairings that were tense, and filled with anger. That seems so wrong now, but there were several situations with constant hard feelings.

2) I left the exchange in 2000, and thus cannot report as a market maker on the tech bubble of 2001 or last year’s debacle. Yes, insurance made a big difference for me. I am not telling you I came out ahead, fir I didn’t. But I was satisfied with last year’s results of a small loss. Better risk management would have achieved far better results.

In October 1987, I was trading off-the-floor for a bigger trading firm. I had bought in a couple of thousand put contracts at 1/16 as a precautionary move – and that made a gigantic difference.

But I still had negative gamma and Black Monday was the worst trading day of my career. The good news is that I did not go kaput and was able to stay in business.

If such a move happens again, I will not incur any losses. Thus, my trading style has changed.

3) The truth is that my chemistry background was not useful in any way.

Although it’s difficult to measure, I’m sure my facility with numbers and ability to act quickly and make rapid decisions was an important factor in my P/L as a market maker.

Using the Greeks, or using any risk management techniques, requires that the trader understand that he/she is not invincible and that taking open-ended risk is dangerous. Taking that risk is rewarding most of the time (after all, the probability of success is high). That’s the really dangerous part – profits are expected and risk seems to be something to ignore.

When that unlikely event occurs, as it must, the huge loss tends to be be far too costly, and exceeds all profits earned when taking the big risk.

Yes, most traders can benefit from thinking about what can happen, but sadly, this seems to be one situation that far too many people must learn for themselves.

Some traders may have a true instinct. But they are the rarity and what they do cannot be taught to others. The rest of us must manage risk well and proper position sizing – at the time the trade is made – is the best and simplest thing you can do to prosper over the long term.

Andy – I thank you.

Can you elaborate on “We did anything to undercut each other, to the benefit of our customers.”? Were your customers individuals or big companies? Did you ‘undercut’ each other by offering slightly better trades than the previous person? Were friendships destroyed that way?

I was wondering if you had more anecdotes about how big events in the market affected your trading style… like the crash of the 1980′s and the tech bubble and bust earlier this decade. How much did the latest crash affect you and how well did your practice of ‘insuring’ your trades protect you compared to others?

Finally, do you feel your scientific background has given you a unique perspective on the market? I hear about many traders who let ‘instinct’ and enthusiasm guide their decisions, but I appreciate your method of analyzing the numbers and greeks before and after entering a trade… that’s something most of us could probably do more of.

Thanks again,
Andy