It is late September 1989, and like Rod Stewart in the song, I really should be back at school. But my managed account business has grown rapidly. I have begun consolidating small accounts into funds, and I still have over 500 accounts on the books. FedEx brings new accounts to our office daily. Lucky for me, I have the best Ops Manager in the world, Gina. She is only 25 but knows the business inside and out, and she is proactive and focused.
The Program and the Office
Often I work from home, which is where the computers making the decisions are located. I am extremely paranoid about someone stealing the program! It is the first AI trading model, and it is doing really well. I travel quite a bit giving lectures on AI, including one at the University of Chicago’s Symposium on AI. Gina makes sure the program stays online and enters orders when necessary.
It is not a big deal; JW makes very few trades, which drives the brokers who solicited new accounts nuts. On a conference call to one brokerage house in Iowa the manager chides his brokers: “When have you seen a program actually make money for your clients?” I think this was when JW had just produced 11 winners in a row. But in the end, the brokers have their say.
I decide how many contracts to buy or sell per $10k. Gina calculates the total and calls the orders in to the floor. The floor reports the fills and Gina gives them the account numbers. Occasionally an order is very large for the market, and we give the floor trader discretion to work it as best he can.
“They’re Here, Michael!”
One day I am home and check in with Gina. She informs me the CFTC called to verify our address. I think nothing of it, but Gina says, “That means they will be here to audit you soon!” She tidies up the paperwork. “We need a complaint folder,” she tells me. But no one has complained; they are all making good money. We did have a client write with questions about how fees are calculated. Gina says we need something in the folder and sticks in that letter.
About two weeks later I am at home, early, when Gina calls: “They’re here, Michael!”
I go to the office. Not one, not two, but three young auditors fresh out of college are sitting in the lobby. I introduce myself. They acknowledge I am being audited and say, “Because your business has grown so quickly, we may be here awhile.” Neat. Why do you think it grew so fast? People were making good money with extremely low risk parameters.
They go out in the field and interview a local client, Mary. She basically reads them the riot act. “I hope you are not interfering in Michael’s business. This is the first time in my life I’ve made money in the markets!”
A Month and Close to $100k
I have to bring in my accountant, Linda, because the auditors do not know basic accounting. An audit specialist flies in not once but twice. I consult with my attorney on a couple of issues. The upshot: they are camped out in our office for over a month and it costs me close to $100k. My accountant baby-sits them the entire time, and her bill is $38,000. She is able to renovate her home with the nice hit.
They are not going back to Chicago for Thanksgiving, so I offer to let them use my condo in Steamboat Springs for the weekend, and they accept. Monday we are all back in the saddle. Finally, they leave in early December.
The entire process is traumatic and distracting, especially for Gina and Dinah, my secretary, whom they are constantly querying about this and that.
The No Action Letter
In late January we get a registered letter from the CFTC. It is clearly only a single page. Gina says it is either very good or very bad. She opens it. It is a “No Action” letter. They do not like the way I am keeping notional capital in a small fund on my track record. That is it!
Notional capital is when someone requests, for example, that $1,000 be traded as if it were $2,000. It is possible with JW because its use of capital is extremely conservative. And it was not even my fund; it was a small piece of a fund out of Florida. Nevertheless, I call the CFTC: “Can you give me the guidelines for notional capital please, and we’ll make the adjustments.” They reply, and this is what they said, so wait for it:
“We don’t have guidelines for notional capital but we just don’t like the way yours is kept.”
The experience, and the constantly nagging brokers, basically soured me on managed trading, but I continued for another 18 months.
I can only imagine what today’s CTAs must go through with the CFTC and NFA, all in the stated name of protecting small investors. I am sure it is a very expensive business today.
Good Trading!
Michael Duane Archer
Related Reading
- The $400,000 Account That Arrived at the Wrong Bank
- Three Clients, Three Life Lessons from a Money Manager
- Goodmanisms: Charlie Goodman’s Sayings on Trading, Explained
Keep Learning the Goodman Way
If this article was useful, these are the next steps:
- The Method: propagation, intersection and the 3-C Principle, drawn plate by plate.
- The Goodman Library: the books, from Goodman for Grasshoppers to The Goodman 6 & 6.
- The Trader’s Playbook: the Molokai setup in one printed, numbered volume.
- Mentoring: work one-on-one with the authors.