A Prop Firm's Transition to Building Multi-Product Multi-Market Discretionary Quant

Traders with The PlayBook

Mike BellafioreCo- Founder, SMB Capital

Co-Founder, SMBUAuthor, One Good Trade and The PlayBook

SMB TRAINING is NOT a Broker Dealer. SMB Training engages in trader education and training. SMB TRAINING offers a number of products and services, both electronical (over the internet through smbtraining.com) and in person. SMB TRAINING also offers web-based, interactive training courses on demand.

The seminars given by SMB TRAINING are for educational purposes only. This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities. You shall be fully responsible for any investment decision you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.

This material is being provided to you for educational purposes only. No information presented constitutes a recommendation by SMB TRAINING or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy. The content neither is, nor should be construed as, an offer, or a solicitation of an offer, to buy, sell, or hold any securities. You are fully responsible for any investment decisions you make. Such decisions should be based solely on your evaluation of your financial circumstances. Such decisions should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance and liquidity needs.

SMB Training and SMB Capital Management, LLC are separate but affiliated companies.No relevant positionsPlease note: Hypothetical computer simulated performance results are believed to be accurately presented. However,

they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commissions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.”

Goals• Share my experience co-founding a prop firm• Explain how SMB had to adapt and why• Teach how discretionary traders are modeling• Highlight our vision for the future of trading• You can be better tomorrow than you are

today!

What We Do• NYC Prop Desk• Back discretionary traders• Back algorithmic trading models• Train and back new traders• Teach new traders globally

SMB Begins• One Really Bad Idea!• Hey why don’t I just start a prop firm• From my apartment and underfunded• Singapore Presentation Admission– Delusion– Naïve– Arrogant

I Asked My Best Friend- A Trader

• “Why would I want to do that?”

I Just Started• Providing a solution• Demand to be trained• Insufficient trader training• Willingness to teach and develop

• Turns out we were quite good at it!

Business Model/Career Path

• Consistently Profitable Active Trader• Get Bigger• One product, one market career path• So 2006ish• So wrong for today!• Margin of error too small

Built our Firm to 60 Discretionary Traders

• Taught and developed new traders from scratch trading our capital

• Did the work others were not willing to do• Very profitable years• Developed a strong reputation in new trader

training space

A Little Branding Luck• One Good Trade• Wall Street Warriors• SMBU Blog

One Good Trade• “trading classic”• “the bible of prop trading”• Invited to build trainingprograms globally• Hedge Funds, prop desks,foreign brokerage houses

Wall Street Warriors Branding

• “Why would we want to do that?”, Spencer.• There was no HD programming• A constant and free infomercial of SMB

SMBU Blog Branding• 80 nations visiting daily• Sharing free stories and trading tips daily• We had no idea the blog would be so popular• The destination to learn how to trade

SMBU Born• The Spinoff• 60 percent of our business overseas• Destination to learn how to trade US markets

–SMB Systems Training

The Perfect Storm

• Some of our better traders left• Contraction in Prop Trading• Government• Regulation and fees increasing costs• HFTs

HFTs Game Out Some Setups

• Micro scalping• Momentum trading

HFTs Challenge

• The Friday e-mail• Why do you guys even bother?

•You are a dinosaur!

SMB Adapted and Got Stronger!

• Swing trading• Trades2Hold until Reason2Sell• Developed a new PlayBook• More upside• Built trading models • Encourage our traders to build auto strategies

• Here’s what more have to do in our game…….

Discretionary Traders undervalued…If!

• Archive their best setups with detail• Bionic• Auto trading• Multi-product• Multi-market• Constant Coaching• Scalable Risk

Understanding their A+ setups

• Recent recruiting of Experienced Traders• Over-reliance on their intuition

•A lack of methodology

Develop Your PlayBook

The PlayBook

• Archive your favorite setup after each close• Template form• From these trades choose your A+ setups

• Increase risk on A+ trades!• Swing: (2-5 percent)• Intraday: 30 percent of your intraday stop

The All-In Trade

• A+ A+ trades• Predetermined detailed variables combining• Risk their week/day in their favorite trade

The PlayBook Template

• Big Picture• Fundamentals• Technical Analysis• Reading the Tape• Intuition• Trade Management• Trade Strategy• Trade Review

Quant Speak• News catalyst• +/- 3 percent• Increased RVOL• 2xs ATR• Risk/Reward 5x1• Holding above/below VWAP• Past 10AM• SMB Radar In Play Rank • Trend Trades

Make the trades your own!• Jim Rogers in Singapore• Told everyone to become a farmer

• Give me a hot stock tip!• Internalize your trades

Build from your Strengths• Understand what you do well• Trade them more often• Trade them with more size• Trade them with a system that is scalable• Trade them with more confidence

Bionic Discretionary Trader

• Custom Filters that spot their A+ setups• Exit Management Tools• You cannot miss your A+ setups!

Multi-product• Become a CPT in one product• Become a CPT and then trade bigger• Not the best career path anymore• Margin of error is getting smaller in all • Express your favorite patterns in other

products• Intraday swing traders better with options

Multi-market (South Africa)

• The largest prop firm in South Africa• 10 percent of their market• Teach them US equities• And help them with LSE and JSE

A suburban oasis• Mansion• Two maids- braii• Fully stocked bar • Lounging area• Pool• Gym and shower• 2nd Fl trading desk

First Rule of Coaching• Show you care• Credibility• Trader First

A core firm philosophy• Elite tennis players turned pro traders• Former athletes will fight better every tick

Elite traders need coaching too

• You do not get to make up your own trading fundamentals

• Head traders must keep traders on track• Mindset of Brody

First Rand • The Made Up Fade Trade• Broke out on fresh news and volume• Shorting and shorting and shorting• Short the first pop• But after Time and Volume now you are

making a fundamentally poor trade

Naspers (NPN)• Caught the break above 52 week high• Made 50k instead of down 15k• Held until Reason2Sell

Scalable Risk Management• Discretionary traders are wasting energy

complaining about their risk rules• Rules based on percentages and not P&L• Percentages are scalable• Just give them a bigger book• Develop clear rules

• Trader Buy-in• If not get rid of them

Great and Continual Coaching

• Never a destination for a trader• Improve everyday• To become great at anything requires:

Domain knowledge, sustained energy, critical feedback and purposeful practice

• The Talent Code, by Dan Coyle

The Coaches of Phil Mickelson

• Swing coach- Butch Harmon• Short game coach- Dave Pelz• Putting coach- Dave Stockton• Psychology coach- British Open improvement• Strength and conditioning coach• Caddie- Bones

Trader Coaches• Strategies • Psychology• Mentor• Head Trader

Auto Trading• Easy software• Quant support for discretionary traders• Another revenue line• Improves their discretionary trading• Discretionary traders best chance to figure

out the next new market

Discretionary Traders Auto Trading

• You do not have to be a quant to join the world of the quants!

• SMB discretionary traders building models

Algos that Hurt Us• LULU auto buyer 50c to 75c• .2c cutter• Liquidity on off dark pool adding slippage

The Highly Competitive World of Proprietary Trading

• Right with direction of stock• Pay the spread to gather a position• Contend with slippage with large orders out– Algos run away from your stops– 49c exit becoming 12c– 51c stop becoming 78c– Adds up for active traders

Three Takeaways• You can be better tomorrow than you are

today!• Be grateful!• Multi-market Multi-product Bionic Quant

Discretionary Trader

Contact• mbellafiore@smbcap.com• @mikebellafiore