Insight From “The Flipper”: An Interview With Paul Rotter
Back in 2004, Trader Monthly ran a feature story about a gathering of fixed-income experts at a seminar hosted by UK analytics firm GannCorner. In addition to the chatter about new strategies and optimizing portfolio returns was gossip and speculation about a mysterious Eurex trader known around Europe only as “the Flipper.” At the time, attempts by other market participants to uncover the identity of “the Flipper,” who by then was the biggest trader on the Eurex, were frustratingly unsuccessful, due mainly to the anonymity that cyber-based trading allows.
The trader was thought to reside in Ireland at the time, and was notoriously known for aggressively working both sides of Eurex trades. It was the “steering of German government-bond futures markets in a tactical manner — posting substantial lot blocks, not all of which [were] traded upon, and doing so on both sides of the order book in numerous but nonetheless interconnected markets — that birthed the Flipper moniker,” according to Trader Monthly’s 2004 article.
At one point during the GannCorner event, one attendee stood up and asked the leader of the session if she had any information on the notorious Paul Rotter. “Yes, I know Paul Rotter,” she said bluntly. “He’s one of my clients. And he’s sitting right behind you.”
Since Paul Rotter’s unmasking as “The Flipper,” he has been as controversial as he is well-known in the world of electronic-trading. Rotter’s success coincided with the rise of the Eurex in 1996. The German/Swiss electronic futures exchange has been an undeniable powerhouse for international derivatives trading since its inception, and Rotter became very adept at utilizing the herd mentality prevalent there to his advantage.
At age 9, Rotter moved to Germany from the Czech Republic (then Czechoslovakia) and later made his financial start as a trainee on the bond desk of a Frankfurt-based bank. Rotter climbed the ladder, and was soon trading the Deutsche Bund (German 10-year notes) in large lots. By the time he left the bank in 1996, Rotter was the biggest single trader in German debt futures on the Deutsche Termin-Börse, Germany’s derivatives exchange and precursor to the Eurex.
During “the Flipper’s” reign, fellow Bund and Bobl (short for German 5-year notes) traders began noticing giant orders placed on one side of the market that soon flipped and went the opposite way. Unbeknownst to them, Rotter was buying and holding massive buy orders until the inside market began moving close to his indicated price, then flip the position by going the other way instead — causing mass bewilderment for his fellow traders and whipsawing more than a few of them. Eventually, as Rotter was unmasked as “the Flipper,” he went to Switzerland to form his own shop, Rotter Invest, in 2001. He has kept a relatively low profile since; but, after reading the 2004 feature article in Trader Monthly, we were curious what Paul was doing these days.
We recently caught up with him to get additional details on his history, his take on the current market, and thoughts for the future:
TraderDaily: You have a reputation for trading the Bund, along with Bobl and Schatz interest rate futures. What are you trading now? Is your emphasis still in Europe?
Rotter: I am still trading mainly the Bund and Bobl, but also heavily in the Eurostoxx because it is very liquid most of the time. Generally, I like markets with high liquidity. At moment, I am also relocating to Singapore and want to explore new trading opportunities in Asia. I am becoming a member on SGX, as they offer a variety of interesting products and their officials are very customer friendly.
TraderDaily: According to one report, you and Oliver Kinski first started trading on your own with $1.3 million in capital. Does one need more or less to start a successful trading operation today?
Rotter: At that time, we had some minimum margin requirements from our clearer. We were a DTB member and were thus connected directly into the exchange. There was no possibility for a pre-trade position limit; therefore, the clearer had to trust us to not overtrade. Today, the brokers offer you all kinds of trading software where they can set your limits based on your buying power or position size. Therefore, I think as a high frequency intraday trader, you could start with e.g. 300,000 EUR and aim for a profit of a few thousand Euros every day. If you plan to hire many traders quickly, and want to trade on many different exchanges, you would need more capital, especially if you need a membership on some exchanges. It is also important to choose the best location with the best technical infrastructure, low taxes, and a trader/investor-friendly environment. I think the best place for traders right now is Singapore – it is growing rapidly and has a great lifestyle, very safe, with the best schools and world-class infrastructure.
“In the old days, there were quiet periods with no data flow but, one machine starts creating…
TraderDaily: Two statements from your website caught our eye. First, you state that “total control is an illusion”, and then you say “machines cannot yet replace highly skilled people.”How do you balance the use of technical and algorithmic trading with the input of human judgment? Likewise, when it comes to risk management: how much do you rely on computerized risk assessment as opposed to human expertise?
Rotter: Addressing the second point first, I do all my short term trading manually. For our longer-term positions, we use computer-based models that generate automatic entry signals. My traders can exit two thirds of their positions at their discretion and the rest is liquidated when the exit signal is generated. These are mainly trend-following strategies and there could be good fundamental reasons to exit a part of the position before the trend reverses. On the other hand, risk management must be computerized, as there is no place for emotions. “Total control is an illusion” means that, for example, an exchange’s margins are based on recent volatilities and when some sudden unexpected event occurs, it could blow out a lot of traders even though their risk models were working just fine for a long period.
TraderDaily: Where do you draw the line between trading a market and manipulating it?
Rotter: This is the best question for all the regulators! The answer is very easy: there is no line! If you buy just one contract you already affect the market, especially with all the automated systems. If you enter a small buy-order below the market and cancel it couple minutes later you always can see an immediate reaction in the order book. Today, the algorithmic systems permanently enter orders and delete them very quickly to enter them again a second later…so what is manipulation? In my opinion, there should be very clear and specific rules for this topic.
TraderDaily: You were once known as “The Flipper,” a term that arose from distrust of short-term traders. High frequency trading has been suspect in market distortions and events like the May 6 “Flash Crash”. Do you think people are more or less skeptical of short-term trading than they were ten years ago?
Rotter: Basically, ten years ago, fully automated trading was not allowed and only locals were doing short term trading and providing liquidity. The typical locals were some unshaved guys sitting at arcades or smaller prop firms, dressed in just surf shorts and having their breakfast, lunch and dinner at their desks. Today, it is very fashionable to get involved in high frequency trading. My guess is that 70% of the volume is generated by algorithmic trading systems, so you can be sure that there will be more ”Flash Crashes” or ”Flash Squeezes” in the future. This could be great fun for some locals. And there we come back to the manipulation topic, as the Flash Crash was obviously caused or supported by the machines. In my opinion, people (especially regulators) will get more skeptical about this type of short-term trading.
…a trend and the others follow, so today’s ‘sheep’ are also machines.”
TraderDaily: Back in the 1990s, so-called “SOES Bandits” were criticized for gaming Nasdaq’s Small Order Execution System. Is there an equivalent of the SOES bandit in today’s world of electronic trading — for traders with relatively small amounts of capital, that is?
Rotter: I think it will be more and more a battle between machines, where the better ones try to destroy the smaller ones by learning from their behavior and trading against them. In the old days, there were quiet periods with no data flow but, today one machine can create a trend and the others will follow. Today´s ”sheep’ are also machines. I am pretty sure there are all kinds of similar ”bandits” in the different electronic markets.
TraderDaily: How helpful are $250 forex mini-accounts and products like the CFD (Certificates For Difference) to individuals who hope to parlay a small amount of capital into a fortune? Are these valuable tools or just the malt liquor of the financial world?
Rotter: In my opinion, this is just a kind of gambling similar to online poker. I know some smart guys who consistently make money in online poker, just taking it from all the gamblers. If you are not just a gambler, you need some professional equipment like news feeds, etc., and then, with the right strategy, you might turn even a small amount into a fortune. The biggest problem with these products is that you do not trade on an exchange and it is not regulated. That means your counterparty is the broker who probably doesn’t even hedge your position. So, if you are too successful, the broker won’t like you, and kick you out or just not give you good fills. I’ve heard many stories like that. The broker is your counterparty; you must accept his prices and his fills. So, basically it is “malt liquor” for these brokers and not for the financial world. You definitely have much better chances playing online poker, as this is level playing field
TraderDaily: Long Term Capital Management’s Andrew Meriwether said in an interview with Michael Lewis that the downfall of LTCM was partly the result of copycat activity by executing brokers the firm had to use after the traders left Slomon Brothers. How do you avoid losing your “secret sauce” to institutions that clear or execute your trades?
Rotter: Unfortunately, I have always had worries about other participants watching my activity. It could be the clearer, the broker, the software provider, or even some technical staff at these companies. The main protection is to have accounts at different brokers so nobody knows your exact position. Generally, I try to get in and out of large trades pretty quickly to avoid that anybody [attempting] to trade against me, but I am never sure.
TraderDaily: Your website says your “core competence is in trading financial derivatives, especially options and futures. On peak days, we trade contracts on the bond markets with a total value of up to €50 billion, more than many major banks.” Are you concerned that Basel II and other ongoing regulation efforts will make it harder to trade on such a large scale?
Rotter: This number doesn’t necessarily mean big position sizes. When I get heavily involved in the markets, I executed hundreds of trades quickly, in a few hours – this is the real high-frequency trading. I have been doing this now for more than 16 years and I’ve never really had a problem with any regulators. I am basically a “human” liquidity provider, which is important for any electronic market today.
TraderDaily: What happened to Greenhouse Capital Management, the firm you formed in 1998? Did you learn anything from that experience that you would want to pass on to others attempting to start a trading business involving a small number of traders?
Rotter: Greenhouse was a tremendous success for a short period of time. Originally started by my good friends Oliver Kinski and Michael Mareneck in Dublin, it brought together some of the most active, creative and successful proprietary traders of the day into one company. It was a victim of its own success in a way. We wanted to raise capital to bring in even more traders and increase our market presence and we were positioning ourselves for an IPO when the Tech Bubble burst in March 2000. The banks – not unlike their reaction to the economic turmoil of the last 2 years – pulled in their horns and the situation changed overnight. We went from 8-10 banks courting us to no one even returning our phone calls. From that point, everyone in the company was thinking different things about the future so we decided to wind down the company and go our separate ways. The advice I would give others in a collaborative effort is to clearly define your objectives, make sure you will be fairly compensated for your best efforts, stick to what you do best, keep the structure lean, and don’t depend on others to make it happen.
TraderDaily: Is the overall mindset of the market and the “sheeple” trading in it different than it was five or ten years ago?
Rotter: Today the herd is the computers, and I think they are doing very well being the herd. The trends created by them are more dynamic then before. They can reverse their mind very quickly and follow the opposite trend immediately, so I would call them the “dynamic herd”.
TraderDaily: How would you invest in BP if you had to do so today?
Rotter: I had an investment in BP for many years and sold it a bit too late. I won´t invest in BP anymore, but it is great for trading.
TraderDaily: Thanks Paul!
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