The Market Monsters’ Momentum Shift
Featuring Peter and Jon Najarian
Published on: April 9th, 2019 • Duration: 61 minutes • Asset Class: Options • Topic: Career, Trading, Passive Investing, TechnologyPeter and Jon Najarian, co-founders of Investitute, are the best known faces for options trading. In this wide-ranging interview with Real Vision veteran Tony Greer, the brothers explain not only why they left football for finance, but why they eventually left the trading floor entirely. The finance industry has gone through a technological revolution via algorithmic trading, passive investing, and AI. The brothers relive the experience of that revolution and outline how to take advantage of its future. Through all the change, they still see plenty of opportunity for young entrants in the business. Filmed in New York on March 14, 2019.
JON NAJARIAN: They're basically hitting you so fast that you can lose more money in half a second than you can make in a month.
And the good and bad of electronic trading is it makes the markets that much tighter. Which is great for the rest of the world, not so good for a guy who's in the industry of trying to take that money in between, right?
The XIV failed because it was built to fail. That was the dumbest product. The only way you can hedge that is with your ego, because there's no way you can stay up with.
TONY GREER: Hi, this is Tony Greer, and we're going to talk to two extra-large personalities from CNBC today, Pete and Jon Najarian. We're going to find out how they got their start on the floor in Chicago, and we're going to find out about how they founded their monster brand of financial platforms, and we're going to find out what they had planned for Investitute's future. Let's get started.
So, as a student of the market, this is an honor and a privilege for me to speak with you guys.
70 years of trading experience under your belts, accomplished authors, you're serial entrepreneurs, you've started a number of platforms and products, and sold them to relevant players in the markets.
I think I'd like to start where you guys started, and where I started, down on the floor of the exchanges, in open outcry. So if you would tell me a little bit about, number 1, what got you down to open outcry, and then what was your path throughout your open outcry experience that led you to start starting these products? You know-- where do you guys want to start talking about your floor life.
JON NAJARIAN: I was down first, so I'll start. Because everybody always asks, Tony, well, are you guys twins?
TONY GREER: Right.
JON NAJARIAN: And I always say, no, 6 years apart.
PETE NAJARIAN: I'm not sure if that's a flattering thing for me or not.
JON NAJARIAN: Flattering for me.
TONY GREER: Is it a volatile spread, or does that spread look pretty much tied to 6 years the whole time? It looks good. You guys look great. That looks right.
JON NAJARIAN: And I came out of playing football for the Bears-- played 4 games, 4, for the Chicago Bears, got cut. I don't know why I was so surprised when I got cut. I was surprised only because I played in the preseason, and Singletary held out on his contract. He was the guy they drafted in the second round. They drafted Van Horn in the first. Both these guys started and had long pro careers, and Singletary is in the Hall of Fame.
But once they figure out his skill set, which was immense, they decided to cut me. And so like I say, I shouldn't have been so surprised, Tony, when I heard that--
--knock on the door, but I was, for whatever reason.
But my agent gave me an opportunity. He said, do you want to come down onto the trading floor? Because I said I didn't want to go up to Canada. I love Canada, I just didn't want to go up and try to play football up there. I know, number 1, they have a limited number of Americans on each team. Number 2, they don't cover you at all for any injuries that occur. Only the Canadians are covered. So in other words, you're going up there, you're a gladiator. You're thrown into it making no money, because I think I would've made, like, $5,000 a game or something like that. $5,000 is not nothing in 1981, but it's also not what I was going to be making in the NFL. And I figure if I'm going to risk getting hurt like that, I think I'll pass.
TONY GREER: So football was actually your connection to the exchange.
JON NAJARIAN: It was. Because my agent had 3 traders down on the floor that were basically running money for him, and they were all 3 former pro athletes. One was hockey, one was football, one was skiing. And he'd represented them in their various contracts. So when those careers ended, he said, hey, come on down because I'm looking for guys that have discipline. And that's one thing I think that athletes in general, pro or otherwise, have to have discipline. And it's Pete's number 1 thing, mine also, as far as you got to have discipline if you're going to make it in this game. Because a monkey can make money picking stocks. I used to have to go against a monkey every year.
TONY GREER: Really?
JON NAJARIAN: When I was at Fox--
PETE NAJARIAN: Back in the day.
JON NAJARIAN: Yeah. They would bring in a monkey every year. And the monkey from the zoo would get a dart. And he'd either throw it at the dart board, and they'd have stocks on the dart board, and so I'd have to beat that monkey. Or they'd have a monkey come in and he'd crap on a newspaper, and wherever the crap landed on the newspaper, that's the stock--
TONY GREER: Very technical approach they had.
JON NAJARIAN: Yeah.
TONY GREER: Got it, yeah.
JON NAJARIAN: So the monkey can obviously pick stocks. I'd like to say that I always beat the monkey, because I did. But the reason I beat the monkey, at least partially, is because, Tony, I know just like you, as a pro trader, I know when to cut my losses. You've got to have discipline.
TONY GREER: Risk management skills.
JON NAJARIAN: Yep. And if you can't cut your losses, you're not going to make it. Because even the monkey can pick a stock that goes up 12%. But can the monkey cut the losses, and/or does the monkey take the profits?
Anyway, so that's what got me onto the floor, was my agent was putting traders on the floor.
TONY GREER: Very interesting. What ring did you start in on what exchange.
JON NAJARIAN: I started on the Chicago Board Option Exchange as a runner. And so I literally-- it's a euphemism. They didn't let you run, but you walked fast, from the booths at the periphery of the floor to wherever an order needed to go-- in the middle of the floor, usually, to a broker.
I couldn't execute or anything like that. I was just basically going back and forth as a runner, bringing orders from the desks at the periphery-- remember, this was way before cell phone. And so all the guys have got the 2 phones to their ear, like in Wall Street--
TONY GREER: I remember.
JON NAJARIAN: --with Michael Douglas, and Charlie Sheen, and all that. Pretty similar, except that was, of course, upstairs, where you did a lot of what you did, Tony. And this was down on the trading floor, but same idea.
TONY GREER: Very interesting.
JON NAJARIAN: So that's what I did, was basically learned what was going on for about 3 months, and then I started taking tests and getting ready to become a trader.
TONY GREER: And then you got your badge, stepped into the ring, started trading options in open outcry.
JON NAJARIAN: Yes, sir.
TONY GREER: And when did your brother join you?
JON NAJARIAN: So then Pete joined about 6 years later. Because like I say, I'm 6 years older than Pete.
TONY GREER: You paved the way for him a little bit. You said come on down, little brother.
PETE NAJARIAN: Kick it through and everything.
JON NAJARIAN: And he'd been trading-- or he'd been investing, and he'd come through Chicago. I'll let him tell you about that. But on his way-- he was playing for Seattle, and the Vikings, and Tampa Bay.
TONY GREER: Very cool.
JON NAJARIAN: And on his way to and from some of those gigs, he'd come by the trading floor in Chicago.
TONY GREER: OK, so what struck you about the trading floor? Was it the activity level, excitement level, competitiveness? What turned you on?
PETE NAJARIAN: All of what you jut said, everything-- absolutely everything about it. I was intrigued early on. I was playing for the Vikings, Jon mentioned. And eventually I was down in Tampa. And whenever I'd do the trip back and forth, bring my car down for the year, I would stop in Chicago for a couple days, join him on the floor and watch, and be confused beyond words because it's the most confusing thing ever.
TONY GREER: It is.
PETE NAJARIAN: I think people that have never been on the floor or seen it in person, it's not only confusing, but you have to understand that people are called market makers, which I don't think very many people really get that. They think you go to the floor, and you buy a stock, or an option, or whatever. And that's really not the case. You're making the market. And that's what Jon had been doing, and I watched him. And it's the most confusing thing you'll ever see in your life to watch in person, as you know.
But it was intriguing. And I was lucky enough that I played and something called the World Football League. I actually did make a trip up to Canada as well. So I kind of played everywhere. I was asked-- not long after I came to Chicago, I was asked to be a player-coach in the Arena Football League, which would have been cool. And I didn't do it, but Gruden's younger brother, who's now the head coach of the Redskins, did it. But somewhere along the way, he and I had crossed paths earlier, too, as players.
But so while I was playing in the World Football League, the first year, we did well, and I was lucky enough to be an All-World linebacker-- which is much better than All-Pro, by the way.
JON NAJARIAN: Much better.
TONY GREER: I understand.
PETE NAJARIAN: I mean, this is the whole world.
TONY GREER: Yeah, the whole world, clearly.
PETE NAJARIAN: But then, the second year, we won the whole thing. And I had gotten injured. I got injured in the first year, I got injured again in the second year, and I just decided I was almost done. I was pushing 30 years old. I got to get a real job. And as much as I'd love to play in the NFL, there were guys coming out of college who didn't have any injuries, and I had a phone book version of injuries.
So I went to Chicago. I thought it was interesting with Jon, early on. But it was the most confusing thing. It took me a long, long time. And then once you get it-- and he said this from day 1. He goes, there will come a day where you're going to say, that makes sense. And that day finally came. And I did the same thing as Jon. I went from runner, to clerk, to assistant, to a trader, and then eventually became the risk manager of our firm.
TONY GREER: Right. So I've done a number of those jobs on the floor as well, on the commodities exchanges. And I will say that once the light bulb goes off and you learn that your liquidity is making eye contact and finding, physically, where the buyers and sellers are, and your other best friend is the board up there to look at, and now you're starting to get your sea legs on the floor, and you say, OK, I know what's going on, at least. Because when you first go down there, it's like literally being thrown into the center of a pinball machine, and there's things going on all around you that you don't understand, like you said.
So tell me what-- the exchanges were functioning down there, you guys had a functioning role, you were making markets, et cetera. What led you to this huge entrepreneurial run that you went on? OK, in 2004, you sold Mercury to Citadel. In 2016, after founding Options Monster and Trading Monster, you sold that to Citadel.
JON NAJARIAN: To E-Trade.
TONY GREER: Oh, excuse me, to E-trade. Excuse me, excuse me. I repeated the same name. I apologize. Sold that to E-Trade. 2 massively impressive feats. Congratulations, first of all. I'm in awe of that.
But more importantly, I want I want to know, from the places that you were sitting, what needs did you see in the market that the market was desperately calling for that you guys spotted and you looked at each other and said, hey, if we can provide this, we've got something on our hands? You know what I mean? Like what was the light bulb moment where you said, that's it, this isn't being done right, we're going our own way with our own product and our own idea? Can you speak to that?
JON NAJARIAN: Sure. I think what we are is very close to first movers in a lot of situations. We're sort of mercurial as well. Because we will change and go with whatever seems to be working best. And to your point about when we sold the DPM, the Designated Primary Market Maker, or Specialist, when we sold that business, we didn't really have much choice.
We knew the whole world was going towards high-frequency trading. It wasn't what it is now, but it was going towards that. And you either had to commit tens of millions of dollars to IT spend, as well as connections, and hiring a bunch of engineers, and all the rest, which is what everybody else did. You know, that's what Citadel did and does, DRW did and does, Jump Trading, Virtu, all those guys. They were building that stuff at the time.
And we'd be trading, and we would see these "much faster than we could trade" trades come at us electronically. They'd pop up on this-- or populate on the screen. And they're basically hitting you so fast that you can lose more money in half a second than you can make in a month. So if anything about what we were doing was wrong, they would pick us off-- as you know the phrase--
TONY GREER: Any arb opportunity, they would just wipe it right off the screen. If you were offering or bidding something that was out of line, you were either wearing it shorted or whatever.
JON NAJARIAN: And you were taking it from a situation-- again, back to what you did as well, Tony, when all the orders are coming in by phone, some are coming in onto a teletype and then being carried out. You can imagine, those orders are taking 30 seconds to a minute to get out there, to cancel them, to get a response back, that sort of thing.
All of a sudden, you get to where it's popping up on a computer terminal, and it's saying buy this, buy that, buy this, buy that, sell this, sell that. And they're able to drive those bids and offers to you faster than you can respond. And then you take it to the next level, where they basically say, we don't need these 7,000 traders in Chicago. We just need to let the bids and offers hit in the data center in the basement or in Mahwah, New Jersey or Carteret, New Jersey. We'll let these orders interface with each other. And that's high frequency.
And again, you need tens of millions just to put down the opening-- just to basically match what those guys are doing. And that doesn't mean you're going to be successful. Because they're continuing to develop AI and all the rest. So it was a no-brainer. We had to sell. Luckily, we did, to Citadel, and Ken Griffith's firm. And then we started developing things that we'd already had, like Heat Seeker. Because we sold the floor trading operation, and every one of our guys but one got a job with Citadel when we sold it. The only reason he didn't was he wouldn't take the drug test.
There's a shocker.
TONY GREER: So you sold the business to Citadel, who is a very high-profile firm nowadays.
JON NAJARIAN: Was then, too.
TONY GREER: Yeah, that's true, that's true.
PETE NAJARIAN: He came on the scene, and--
TONY GREER: Tell me more about it. What was it like working with them? What was it like interacting with those guys?
PETE NAJARIAN: Yeah, you suddenly realized that you are meeting, in our eyes, the devil. And I say that, not in a negative way towards them-- although it sounds like that-- but I mean, they were what's crushing what was happening. I mean, one of the biggest things that pushed us off the floor and into the world to actually sell our firm was the margins. I mean, the good and bad of electronic trading is, it makes the markets that much tighter. Which is great for the rest of the world, not so good for a guy who's in the industry of trying to take that money in between, right?
So when you eliminate that, and it gets tighter and tighter and tighter, and the margins are getting to the point where our overheads-- we've got insurance, we've got the trading leases, all the things that we've got-- it was impossible. So we could make what most people would consider incredible amounts of money per month and still lose money because the overhead aspect of it, and the lack of any margin at all for us to make money.