Welcome to the TradingMarkets Big Saturday Interview! This week, I am delighted to be joined by Ron Shear. Ron began his trading career in 1966 and quickly found success in the field. With keen analytical skills he quickly became one of the largest market makers on the Amex. In 1984, Ron was awarded the specialist's book for the Major Market Index (XMI), a contract that generated so much volume the American Stock Exchange built a separate pit to accommodate it. Ron is also CEO and founder of Carlin Equities Corp and Carlin Financial Group. His combination of on-the-floor trading experience and executive leadership are essential to the smooth operation of Carlin Futures LLC.

Ashton Dorkins: Hi Ron and welcome to the Big Saturday Interview. Ron, you've been in this business a long time, tell us a bit about your background.

Ron Shear: I have gone from being a stockbroker many years ago in 1966 and I was a registered rep for 10 years. In that time I read just about every book I could on the market. The charts used to come in once a week, so I did my work every Monday night until about 1 or 2 AM. I was trying to learn how to make a living in the stock market.

By 1977, I left the brokerage business to work on the floor of the exchange as an options trader on the American Stock Exchange. I left there in 1991 after building a company that was a member of about 10 different exchanges, options exchanges, futures exchanges, even into Europe. I have an extensive floor trading and specialist operation with many employees that was a very nice and successful business. The markets were changing and there was more and more institutional type money in the trading business. For example, the options business had been characterized by a lot of little guys and locals, and then giant companies came moving in, like the banks and brokerage firms with proprietary options trading strategies, so the spreads and returns got much smaller in percentage terms, but good enough for the banks with 100s of millions of dollars. So for the little guys and locals in the options business, I felt the easy money was over.

"The biggest influence that I had was that I could not go home with any risk."

Ashton: What were your early trading experiences like and what or who influenced you the most?

Ron: The biggest influence of my early success when I went down to the stock exchange were my partners. I didn’t have any money, so I had to borrow $1000 from an aunt, and to get started my partners put up $99,000. The biggest influence that I had was that I could not go home with any risk. In other words, my positions had to be completely made into conversions, and I couldn’t go home with even 100 shares of stock at risk. Everything had to be locked up at the end of the day.

Ashton: So you had to have a lot of discipline.

Ron: Tremendous discipline

Ashton: Discipline is probably the hardest things for new traders to master but you were forced to do so. How did you achieve that? Was it through money management, or trading strategies?

Ron: I had low risk trading strategies, and I never went home with a risk position for my first year. By that I mean I would be completely hedged off. I tried to take advantage of emotions and swings in the marketplace throughout the day to trade the positions properly and to have a flow of market orders.

Ashton: Did you create your own strategies and rules, were customers or partners involved?

Ron: Yes, I had rules of my own, but there were no customers there. It was just a company, and I had a couple partners who financed me, and we were trading for ourselves on the floor. I didn’t have any money, but they let me draw some money out each month, but not if I was at risk.

Ashton: This must have given you a tremendous understanding of trading and how markets worked?

Ron: Well, from that experience I learned a lot about trading. I learned a lot about training individuals. I learned how the markets work, how the floor works, and how information flows. How different things affect the markets and news in the day.

Ashton: And from this experience you were able to build the Carlin Group? Or did that come later?

Ron: That is what allowed me to start up in the firm on an upstairs basis, yes.

Ashton: Tell us about the Carlin Group, how many traders and how many locations do you have?

Ron: Carlin Group today is really two businesses. One is a company called Generic Trading, which is all professional traders who are seasoned Wall Street professionals. They have backgrounds anywhere from the hedge fund world to being an ex-floor trader, to being a broker that is now trading their own sub-account that we support.

There are over 800 of them around the country. A lot of them are connected to us by the internet or by network. That is about a third of Carlin's business. The other two-thirds of our business is in servicing professional clients, meaning institutions. Where we have built a number of services for them, especially electronic trading. We also have a number of people who take advantage of our trading desk as well as the super technology products that we built there.

Ashton: That's a lot of traders. Does Carlin train traders or do you only take traders with a proven track record?

Ron: No, we feel that training people is not a winning business for us. We have never had training at this firm, we are sort of against it.

Ashton: So all your traders have a proven track record?

Ron: Traders today must have a history and a background. Years ago people used to come to the door and we would give them jobs, but not anymore, we are much more selective. But not everyone who graduates from high school wants to be a stock trader. Years ago, the first thing I would ask someone is "What makes you qualified to be a stock trader?" And the answer I got 80% of the time was, "I read Investor's Business Daily every day and I watch CNBC." For some reason there was this myth in America about trading. My answer was usually, that I subscribe to the Journal of Neurosurgery but I'm certainly not a brain surgeon. So the markets are an excellent place to make money, but unfortunately the makings aren’t that easy.

Our traders are people who have been around for a while. They are not in their twenties. Their average age is considerably higher. Their experience with the firm, on average, is probably about five years, and their Wall Street experience is much longer. So they are people who have been through the wars. Those kind of people know how to survive and know how to play within the structure of the market and get something out of it.

Ashton: Do you still trade actively yourself?

Ron: Compared to a lot of people, no. But if I fool around with my account because I am involved in the business, my average trading day would be about 60,000--80,000 shares and I don’t think that is very active.

Ashton: Do you have any trading strategies, insights or stories you can share with our readers?

Ron: Trading stories, I probably have millions. Generally speaking, as traders, one of the important things for success is not to have ideas or opinions contrary to what is going on on the tape. Today, its difficult to maintain that attitude sometimes, because of the tremendous amount of information and misinformation that people are circulating.

But let me give you an example of a stock I got in trouble with in late August. There was a merger between a company called Enterra Energy that trades on NASDAQ, and a company called Hyperion. It was a Canadian stock, and I thought the merger was very attractive. I ended up putting on 100s of thousands of shares in a position and I also thought that this Enterra Energy was at a pretty good price level of the chart based on the growing dividend it was at a good buy level and so forth. Somehow or another, the week that it closed, someone got a column in Barron’s somehow on how bad this company was. The stock went down more than 10%. Unfortunately I sold some, but not all, at the bottom because as a trader you are forced into a situation where you have to control your capital no matter if you are right or wrong.

The following week in Barron’s, in another section where they interview successful money managers and analysts, they interviewed someone who has got a wonderful reputation as a long-term investor and he talked about the same exact company and what a wonderful company it was and how management was doing a great job, and that he thought it was dramatically undervalued. Needless to say, the stock shot up, so I missed a big trading opportunity.

The answer is that there is a lot of daily and regular volatility and misinformation going around. The good news is I didn’t get fully shaken out of my position, but the bad news is I did get out of some.

"The best way to learn on Wall Street is to lose money, and I have lost money in every possible way..."

Ashton: So despite your instincts and analysis telling you to hold onto this stock, risk control forced you to lighten up on the position?

Ron: Yes. But the best way to learn on Wall Street is to lose money, and I have lost money in every possible way, and I hope I have made every possible mistake, but strategically I still make them every day.

Ashton: Over the years, what aspect of this business has changed the most?

Ron: Technology

Ashton: What are your thoughts on the merger between the NYSE and Archipelago, what effect do you feel the merger will have on the exchanges, even the open outcry pits in Chicago?

Ron: I think the individual members of the exchanges, like the NYSE, are delusionary if they think all the roles are going to continue. With the systems such as the ones we built, we can execute better on the NASDAQ than on NYSE because there is more clarity of information, which does not exist on the NYSE right now. To have our systems interact with intricate orders economically for our clients is what we would like to achieve. The more electronic the market, the better we can achieve that for our client.

Ashton: So you feel it is going to be more like Europe where they went form open outcry to all electronic training?

Ron: Right, I think that is the trend of the United States.

Ashton: Would you say technology is one of your company's strengths and how does it benefit your traders?

Ron: Yes it is. For example, I'll tell you of a product that we just rolled out only for our institutional clients. We rolled out a spread trading module on our Carlin Accel trading platform. We rolled out a spread trading module to a handful of clients. This allows them to put in a single order for two different stocks with any spread prices. So the difference between the two would be mostly for arbitrage trading, or pairs trading. The system works with a lot of intelligence built into it by our people. It enables our clients to be filled both substantially in size and at very good prices. That is something that is going to be a dramatic growth product for the Carlin Group over the next year or two. However, this is a strictly institutional product and is not available except to the institutional marketplace.

Ashton: So are you seeing large growth in quants?

Ron: Yes, and a firm like ours typically forms some kind of joint venture with these people. We get them some leverage because the profit per trade isn’t that great so they need more buying power to make the strategies work.

Ashton: And low-cost execution is important to them because they need to be able to trade with size in the most cost-effective way?

Ron: Absolutely.

Ashton: What other major changes have you seen in the markets?

Ron: There are a lot of people who have a totally different approach to the stock market today, one that I didn’t have. And that is everything is formulaic. The strategies that people employ are many. So they are picking the strong stocks or the weak stocks, on a daily basis, or a technical analysis basis. We have a lot of people who are coming to us because they want to have their trades selected by their spreadsheet and their formulas fed right into the markets. We see that a lot, and that is a whole other way to trade and a lot of these people are successful and we see some decent returns. This side of our business is growing dramatically.

"The problem today is that people don't do their homework."

Ashton: Is there anything else you would like to say?

Ron: Well, I just think that technical analysis still works by the way. The problem today is that people don't do their homework. They don’t read Edwards and Magee but they look at a website for 10 minutes and they think they understand what is going on in the world. All these things work, but you really have to do a lot of homework. We have a lot of traders working for this firm and the successful guys are the ones who really do their work.

Ashton: So you are saying there is no shortcut? You have to go out there and do your homework to become a successful trader?

Ron: Right, and they have to understand risk management. It's not the winning trades that make you at the end of the year if you add up all your winning trades and look at how much you made this year. Focus on the losing trades, and that is how you get your P&L better for next year.

Ashton: Ron, I've really enjoyed talking to you and I'm sure you could tell us many more interesting stories but I know you're a busy man so thank you taking the time to share some of your knowledge and experiences with me and our readers.

Ron: Thanks