Risky Business, Sound Thinking

Blair Hull’s traders don’t out-shout their competitors. They just outsmart them.

Step onto the floor of the Chicago Board of Options Exchange (CBOE) and you feel the pandemonium. Thirteen hundred traders are crowded around 63 different trading posts, talking on several telephones at once, clutching stacks of paper, shouting buy-and-sell orders. But one group of traders exudes a strange sense of calm. They talk quietly on telephone headsets. They carry small computers with wireless connections back to headquarters. They each of them makes plenty of trades — between 100 and 150 per day — but seldom raise their voices. They just study their handhelds, type in their orders, and stand back and enjoy the show.


These unflappable traders are from Hull Trading Company, one of the country’s largest and most successful independent trading firms. Hull makes lots of money by making lots of bets on complex securities: options on stock indexes such as the Standard & Poor’s 500, futures contracts on these index options, options on individual stocks. But Hull’s biggest bet is how it operates. Hull isn’t just a company, it’s a system designed to beat the odds in one of the world’s riskiest businesses.

The system is working. Blair Hull, 52, started his company in 1985 with four people and $1 million. It now has 160 people and more than $80 million of capital. On a typical day Hull traders account for 7% of the index options traded in the United States, 3% of the equity options, and 1% of the shares traded on the New York Stock Exchange.

Four principles explain how Hull beats the odds:

1. To win a risky game, play it safe.

Blair Hull’s forged his trading philosophy in the early 1970s, at the blackjack tables in Las Vegas. In certain situations, he learned, the bettor actually has a small advantage over the house. Winners are smart enough to recognize those situations, patient enough to bet only then, and disciplined enough to keep each bet small.

Fast forward from Las Vegas in the ’70s to Chicago in the ’90s. The trading room at Hull headquarters looks like NASA mission control. Powerful workstations process streams of financial data, flashing advice to the handhelds carried by Hull traders at the CBOE and the Chicago Board of Trade (CBOT). Different workstations track the firm’s risk profile, sending handheld-equipped traders at the Chicago Mercantile Exchange instructions about how to use futures contracts to hedge trades being made at the CBOE and the CBOT.

The goal of this remarkable technological firepower is simple: not to take big risks but to find sure things. Hull’s computers search the markets for temporary price imperfections, devise transactions to profit from the imperfections, and hedge those bets to protect against other risks. It’s a lot like blackjack. “All you need is a mathematical advantage and the controls to ensure that you stay in the game,” Hull argues. “Everything else takes care of itself.”


2.To act quickly, think clearly.

What kind of people does Blair Hull bet on? Not free-spirited gamblers who trade on instinct, but clear-headed thinkers who trade on insight. Consider the company’s financial engineers. Members of this group, several of whom hold advanced degrees in physics, develop and refine Hull’s trading models. There’s no mistaking these software wizards for Wall Street buccaneers. They spend much of their days scanning academic journals and data sources for ways to improve their algorithms. At lunch they play chess (often two games at once) to clear their heads and recharge their competitive spirit.

Trading even sounds different at Hull. “Our trading floor is virtually silent,” says Dan Brennan, 33, who runs the company’s index-options business. “We like to say it’s the sound of thinking. The pit is boisterous, noisy, physical. This is intellectual.”

3.Trading is a team sport.

Hull and his colleagues reject the idea that winning big requires big egos. Their system, they believe, works best when everyone works together.

Even Hull’s system to share profits — a source of rancor at most financial companies — reinforces teamwork. The company distributes its multi-million-dollar bonus pool through an electoral system involving the entire firm. It’s business democracy — the more votes you get, the bigger your bonus — with an important dose of meritocracy: No one is eligible to vote until he or she has received votes from their peers. “It’s easy to determine who has the most credibility around here,” says Hull. “They’re the people who get the most votes.”


4. The worst of times can be the best of times.

Hull’s disciplined system is most powerful during periods of crisis. “When the market drops,” explains CFO Timothy Hunter, 40, “there’s lots of business to be done. But people in the pits panic; the market makers can disappear. With our technology, we can handle the risk.”

Indeed, Hull has created a Fast Market Team that kicks into gear at the first sign of a disturbance. People who normally stay close to headquarters — programmers, accountants — rush to the pits and help clear trades. The team holds “fire drills” to keep itself in trading trim.

Trader Jeff Beehler, 28, remembers the first time he saw Hull in action during a crisis. He’d joined the firm just before the Gulf War, an event that sent financial markets plunging. “The people I saw in the pits looked liked their world had come to an end,” he recalls. “I went back to the office and figured the show was over. I asked how we had done. People were so calm: ‘We had a pretty good day, actually.’ It was just amazing.”