Crypto Market Wizards is RabbitX’s series of interviews with professional, sophisticated DeFi traders. We discuss their background, strategies, psychology, risk management, and other interesting topics that helped cultivate their process and make them the successful.
Our second interview is with Runner. He’s a portfolio manager and strategist for a global multi-billion-dollar hedge fund with investments across asset classes including crypto, equities, commodities, fixed income and FX. For privacy, we’re only using his pseudonym. He’s a serious player at a major fund; it’s always informative to learn more about the thinking of a whale’s whale.
We discuss how Runner got into trading, how a major fund looks at markets, and lessons he’s learned during his career working at one of the oldest and most successful hedge funds in the world.
We do this because it’s interesting, and we want to help everyone learn to be better investors and traders. Part of what makes DeFi great is we’re all learning in public together, every day. This content is our way of contributing to the community. Enjoy.
BTB = @BackTheBunny
BTB: Thanks for coming on Crypto Market Wizards. To start us off, tell us what got you interested in trading?
Runner: I’m from Chicago and my dad was in the trading business, so I grew up around the Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), and options exchanges.
Back when pit trading was a thing, grains trading and financial futures were traded out of the CBOT. My first job in 7th grade was as a “runner” on the floor of one of the grains pits. A runner is a job that doesn’t exist anymore. Back then, you’d have orders come in via phone call, someone answers, writes the order down on a ticket, and my job was to take that ticket to the broker in whatever pit they were trading.
I’d run in and give the ticket to a trader who would execute it in the pit. They’d write down the fill and I’d take it back to the clerk. Today a single mouse click fulfills all this. So when I went to college, I knew this was what I wanted to do and I studied finance. I had a lot of friends that went down the private equity or investment banking path, and I always knew I wanted to go down the trading route.
BTB: That’s quite the origin story. So how did crypto start to enter the picture for you?
Runner: I first heard about crypto in 2013 on the trading floor through a buddy who was very into Bitcoin. This was a true cypherpunk OG who wouldn’t even use his keyboard to create passwords after the PATRIOT Act. It didn’t get me fully interested, but put it on my radar.
The second time I started hearing about it through friends working at various proprietary trading firms (prop firms). Prop firms could more easily adapt to crypto than regular TradFi vehicles. Capital comes from internal sources at a prop firm, so you didn’t have outside investors to answer to, unlike hedge funds which invest outside capital and are much more stringently regulated.
Because there are a lot of prop firms in Chicago, it quickly developed a crypto culture that still exists today. There’s a rather strong Solana community there. Jump is situated in Chicago, and you also have Cumberland, DRW, etc.. Many of the crypto trading came out of prop shops and they saw the opportunity to pivot into a new, inefficient frontier.
BTB: Do you think involvement from DRW, Jump, and other trading firms is motivated mostly by an understanding of the tech and belief it will change things? Or driven by money?
Runner: I tend to think it’s the latter. Those guys who are big market makers, they looked at it and thought “I don’t know what bitcoin is, but the spread it's trading at is crazy”. I don’t think they even knew what it was, all they cared about was they could trade it and there was a spread. Crypto was a new financial market and it didn’t have the sophistication and tech behind it like a TradFi markets, so they sensed they had a competitive advantage.
But through that, they learned more about it and realized it was something that was going to stay, and they were going to build big companies around it. The first tap on the shoulder was that we need to trade this because the spread is super wide. But then it became this realization that this is a market that was going to stay, and we need to build companies around it.
BTB: So they got into it for the money, then stuck around for the tech. Many such cases! Tell us some of the best lessons from your time in the pits that you still carry with you today.
Runner: It’s something I would describe as “full-contact capitalism”. Back then it was literally that, you would see it in people’s body language and faces as you’re running into others while trying to trade and jostling for physical position.
But today what I mean by that is it’s a professional game and you need to be prepared for full contact. Because if you don’t know what you’re doing and you’re not responsible, eventually you’re probably going to lose everything. There have been people I worked around who didn’t show up to work the next day because they lost it all and had to go do something else.
What’s the lesson from that? It’s that risk management is the most important thing in any of this. Don’t trade something you’re not familiar or comfortable with, and don’t trade size that you don’t know how to manage. Because it’s full contact, you have to condition yourself the same way an NFL player does. And if you’re not ready to do that, then I’d say don’t step onto that field, because there are a lot of freak athletes that will outcompete you.
BTB: Go on…
Runner: The second lesson is a deep understanding of how the mechanisms of markets work. Example: the customer order to execution and how that reflects in the market price, and understanding the whole market stack. I think people in crypto forget that a lot of the development that went into TradFi are lessons we learned a long time ago. Builders look at the financial market today and think “oh I can code this up” and sometimes don’t take a step back and think about what it is that they’re doing and why it’s been done this way.
Finance has been around a very long time, there are lessons to be learned from history. I think many could stand to improve by making sure you really understand the product you’re just copying and pasting into the decentralized world; it’s not as easy as you think. There’s 150 years plus of lessons learned in finance to draw from, don’t forget that.
BTB: Besides trading, do you have any other risk-seeking interests or hobbies?
Runner: Skiing is a favorite hobby of mine. I’ve seen more ACLs torn through skiing than anything else. I also love poker because of the probability and social elements. I love sports like F1, it’s one of my favorite sports not just because of the thrill of it, but because of how data driven and team oriented it is, just like trading at a fund really. You have a team building the car to deliver the best performance possible, and then you have the team principal making the decisions on the strategy, and then the driver pushing the car to the limit. Putting the three components together is so fascinating.
BTB: Trading is a very emotional endeavor. Do you think emotions have a role in trading? And how do you manage your emotions?
Runner: A huge part of trading comes down to managing emotions. It’s incredible how euphoric you can feel in a winning position and how depressed you can feel when down. Not to mention, the FOMO of missing a trend.
I tend to find emotions as a net negative to trading, so having a well-defined trading process can help defend against this. If I catch myself acting emotional with markets, I take a step back and ask myself if I should really be taking these actions. Markets are charged by emotions and you want to be buying when there is blood in the streets, and your emotions may be screaming at you to do the exact opposite. Just look at what happened when crude oil went negative, or bitcoin when FTX imploded. Those were great buying opportunities.
BTB: Has trading ever affected your personal life, either positively or negatively?
Runner: I would say yes to both. Trading global macro assets and crypto means you need to be highly attentive because you’re often running a high-risk book. A famous macro trader used to always say “sell down to your sleeping point”. Meaning, don’t carry so much risk overnight that you can’t sleep. When things go haywire, you’re going to need to drop a lot of what you’re doing and pay full attention. That said, there’s nothing else I’d rather do and the people I’ve met in this industry are some of my closest friends.
BTB: Let’s dive more into risk and sizing. Give us your framework for risk management and when your size should be size.
Runner: It’s really important that you volatility (vol) weight everything and view your gains in context, not in absolute value. You need to keep your PnL in context to your notional value. I see people who say “Hey, I made X amount of money” but they don't really benchmark it to anything. And I'll ask them what percent is that, or how many basis points is that, and they’ll say “Oh I don’t know, I just made a million dollars.” And I think okay, a million dollars in terms of what? Did you have a million dollars and made a million dollars, so you’re up 100 percent? Or did you have a billion dollars and made a million, which is a much less impressive.
On vol weighting: When you trade treasuries, S&P, oil, gold, BTC, etc you want to scale your size according to a vol lookback window (note: a vol lookback window is the window period of time that you take the average volatility of an asset, the duration that you look back is discretionary). This helps you manage volatility, which functionally means drawdowns. You have to know the vol of the asset you’re trading to size it appropriately.
You then take that notional amount and vol weight everything. You do this so everything that you trade is in standardized units of vol size that represent the same market risk. So if I trade five units of crude oil versus five units of Bitcoin, I know my market risk is about the same.
BTB: To recap: the size of a position should be somewhat inversely correlated to its volatility. The higher the vol, the smaller the position to achieve a desired return and avoid an undesired drawdown. Standardizing units of vol helps you get an apples-to-apples comparison for sizing and exposure when nominal position size could be misleading.
$100 invested in asset A is not at all the same risk as investing $100 in asset B. You need to know vol of what you own and size accordingly. If you don’t manage your drawdowns, they’ll manage you.
Runner: That is correct.
BTB: So when you use a lookback window, you’re looking at historical volatility values. What happens when an asset class has vol that’s relatively lumpy?
Runner: To address that I generally use an average of a short-term vol window and a long-term vol window. For example: I use a short-term vol window of maybe a week and a longer-term vol window of a quarter and then average the two.
BTB: Do you use stop-loss and profit-taker orders?
Runner: Yes, always have a stop-loss. With take profit, it’s been an art form for me and something that I'm still refining. I think technical analysis (TA) is actually pretty good for this. And to quote someone anonymously that is a very old school trader, “nothing charts better than Bitcoin”.
I think that's because of the emotion that is felt in the crypto market versus other markets, which are more systematic, program-based trading; DeFi way too nascent for that. I always shoot for 3:1 to 5:1 risk/reward on trades, and TA can really help give you those setups.
I cannot reiterate enough you have to have a stop-loss in, no matter what, and you have to abide by it.
BTB: With stop losses, do you worry about stop hunting? How prevalent do you think this is in crypto and how do you mitigate against it?
Runner: I do believe it’s happening, especially before the bear market wiped out so many crypto CEXs. They do it simply because they can get away with it. And how do you mitigate against it? Well, as a trader, you just have to own up to the fact that you got stopped out. But if you think that there was a series of liquidations that went through that pushed the price to your stop, you could make a manual override that recognizes the predatory situation.
An interpretive manual override should be very uncommon though. But if you see a huge spike down, and then it's all of a sudden rallying back up…. if you’ve done your homework, know the orderbook liquidity, know the funding rate was high, know the open interest was high… that’s your judgement call to make.
I would also emphasize that if you saw all of those signs you probably should have reduced your position size anyways and avoid that situation all together. Be proactively defensive against behavior like that.
BTB: Does this sort of “run the stops” behavior happen often in TradFi?
Runner: It used to, but now it’s illegal and heavily enforced. If you get caught manipulating price to force other people out, someone's gonna look at the orderbook and come after you. If it’s valid and gets escalated to the SEC, you’re in real trouble. So no it’s not that prevalent in TradFi.
BTB: How concentrated will your best ideas get?
Runner: I bucket positions by asset class, and view them collectively as one trade. So you have equities, fixed income, currencies, commodities, and crypto. For me, I wouldn't want to go more than about 25%, maybe up to 1/3rd, if it’s very high conviction and the stars align. I wouldn’t advise more than that.
BTB: How often do high-conviction trades come along for you?
Runner: In a year, about 1-3 times. In this business, when you see it you have to just go for it. When those opportunities present themselves you need to take the shot and but you need to know exactly how much you're risking. If the market tells you you’re wrong, you get out and move on.
BTB: One of the hardest things is when to take profits and when to double down. So… when to take profits or double down?
Runner: I think TA helps. One of the first books I got when I started trading was on the principles of Elliot Waves Theory. Old-school, classic TA. The bottom line is the market moves in impulses and waves, and you want to make sure you're adding to positions on the wave and not adding when the wave is done. Don’t get stopped out before the next phase begins.
Something like RSI analysis is great. When everything aligns on a core position and you see a market start breaking out of a range, it's almost always in your favor to start adding to it, especially in crypto. Crypto can be quite impulsive and you have this FOMO that sends people into it and starts the big move.
Conversely, when you get a large wave that starts to slow, it's generally to your benefit to take some profit. I like to use the RSI overbought at 70 and oversold at 30; when you get through those thresholds, it's generally a move that's been overdone. So you try and take 50% off your positions, and readjust your stop to below it so you're playing with house money.
On retests, I think statistically these retracements are between 30-50% of the initial move. So I usually will try and set my stop below the 50% mark with the remaining half of the position. If I get stopped out, it’s fine.
BTB: Got it. Let’s talk about trade ideas. How would you describe your trading strategy?
Runner: I would say it's mostly on the flows and sentiment side, oriented around supply and demand. We know supply and demand is all the same, but if you can forecast those supply and demand imbalances, which I think capital flows determine, then you can have a structural thesis on where you think price is heading. It also helps you avoid an over-positioned market, for example: buying Bitcoin at 68k. You can see how big the open interest is, how funding rates are blown out, etc. and know to stay away. That kind of risk/reward doesn't skew in your favor because the capital flows don't support it.
I also overlay a macroeconomic view. That’s why crypto became so compelling to me, because it’s got such wonderful datasets of flows, sentiment, and capital movement that’s all onchain. A big part of why I got into crypto was because of how available that information was and how I already thought about markets.
BTB: On the flows side, do you look at exchange inflows/outflows to inform anything?
Runner: I'm still trying to figure out the consistent impact from exchange flows. It’s always changing. Thinking about the implications of who would be going to specific exchanges is also important. If you know what their behavior type is, it could inform a lot.
For example: I think it’s generally true that old-fashioned US institutions go to Coinbase. Whereas you’re going to get a lot of risk-seeking users heading to Asian exchanges. So those flows are going to be a lot quicker and fast-moving with a lot of leverage versus the institutional stuff that's more a longer-term bet on something.
BTB: Do you prefer trading majors, alts, a mix?
Runner: We tend to look at the majors at the fund for a few reasons. One is simple liquidity, it's hard to find liquidity in the smaller tokens. Two is counterparty risk. Since the FTX collapse, there are a lot more questions on counterparty risk. So playing in the majors allows us to reduce this. And then three well, I would say that I come from a macro view where I view Bitcoin and Ethereum like macro assets. Everything beyond that I would view as a form of VC investing.
BTB: Do you think regulatory crackdowns are going to start posing problems for CEXs?
Runner: Ultimately, yes. The easiest target is the on/off-ramps of crypto. If you can control the liquidity centers of the market, it's almost like controlling the blood flow of the entire ecosystem. Centralized exchanges had their chance to prove they were in it for the right reasons, but one bad apple spoils the bunch, and a lot have been exposed. FTX has done damage to more than just its account holders.
BTB: Any favorite books, podcasts or blogs?
Runner: For books: Market Wizards, Reminisces of a Stock Operator, Inside the House of Money, and The World for Sale are some of my favorite old school books. I also love The Infinite Machine by Camila Russo on the founding of Ethereum.
For podcasts: I like MacroVoices, Making Sense with Sam Harris, Joe Lonsdale: American Optimist, Bankless, and TED talks. I’d say I am very selective about the topics I listen to though. I will also listen to other podcasts depending on the interview.
For blogs: I love WaitButWhy, and have many popular VC, finance, and crypto figures in my Medium. I’d say that I read blogs as more of a pulse check of a community over something truly informative, as the writer usually has an agenda to push. Of course, one of my favorite ones is the RabbitX blog (Not a shameless plug! He did say this!).
Lastly, never underestimate what you can learn from a good old-fashioned White Paper. There are a lot of smart scholars putting out great work every day. In finance, the IMF and Liberty Street Economics are great places to start.
BTB: Any final advice to new traders?
Runner: Developing a process that works is more important than immediate success. This will take time for you to learn more about markets and how they behave and how you interact with them. A journal helps with tracking this. And it sounds cliché and redundant, but risk management is the more important tool to sticking around. Every good trader is still around because they didn’t blow up.
BTB: Thank you for sharing your wisdom with us sir. I think we’re all a little tougher and more prepared for some full-contact capitalism 🤝
Runner: You’re very welcome. Stay safe out there.
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