Jesse Livermore’s Early Trading Career
At the age of twenty-one, tired of his problems with bucket shops, Jesse Livermore arrived in New York. His goal was to trade in the offices of a member of the New York Stock Exchange.
He began trading at the offices of A.R. Fullerton and Co. and within six months he had lost all his money.
Livermore realized that trading in bucket shops had left him ill-prepared for trading in the offices of a stockbroker.
Bucket shops offered immediate execution of orders, because trades were in-house – they did not pass through the stock exchange. In bucket shops Livermore also knew the exact prices he was buying and selling at.
Dealing with a legitimate broker resulted in costly delays. It took time to telephone orders through to the exchange and then more time to execute them.
According to Livermore, his trading style, which was a perfect system for trading in bucket shops, didn’t work in Fullerton’s office.
“The price of Sugar on the tape might be 105 and I could see a three-point drop coming. As a matter of fact, at the very moment the ticker was printing 105 on the tape the real price on the floor of the Exchange might be 104 or 103. By the time my order to sell a thousand shares got to Fullerton’s floor man to execute, the price might be still lower.
“…in A. R. Fullerton’s office the tape always talked ancient history to me, as far as my system of trading went, and I didn’t realize it. And then, too, if my order was fairly big my own sale would tend further to depress the price. In the bucket shop I didn’t have to figure on the effect of my own trading. I lost in New York because the game was altogether different.”
So, despite his remarkable powers in interpreting price patterns, Jesse Livermore’s trading style, developed in bucket shops, was unsuited to trading in real shares.
He returned to the bucket shops – this time in St Louis where he was less well known. Soon he was recognized and the bucket shops refused him further business. He had, however, managed to accumulate enough money to return to New York and resume trading.
“My task, as I should have known after my first reverses at Fullerton’s, was very simple: To look at speculation from another angle. But I didn’t know that there was much more to the game than I could possibly learn in the bucket shops. There I thought I was beating the game when in reality I was only beating the shop… The game taught me the game. And it didn’t spare the rod while teaching.”
His ability to read the tape in the stock market boom of 1901 soon made Livermore rich. He had, however, not fully learned his lessons about the dangers of the delay in executing his orders. His trading style still revolved almost entirely around tape reading and disaster would strike soon enough.
Jesse Livermore’s Fortune Reaches $50,000
In May 1901 Livermore had accumulated $50,000 in cash and he had turned bearish. In one day of frantic market activity – when the market moved fast and execution times were slow, Livermore’s orders were executed at prices as much as 20 or 30 points different from where the market stood when he placed them.
“The ticker beat me by lagging so far behind the market. I was accustomed to regarding the tape as the best little friend I had because I bet according to what it told me. But this time the tape double-crossed me. The divergence between the printed and the actual prices undid me. It seems so obvious now that tape reading is not enough, irrespective of the brokers’ execution, that I wonder why I didn’t then see both my trouble and the remedy for it. I did worse than not see it; I kept on trading, in and out, regardless of the execution.”
By autumn Livermore was broke again. He returned to the bucket shops and, by virtue of outmaneuvering crooked operators with several “stings,” he managed once again to get a stake together. He returned to New York.
“There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!”