Paul Rotter, also known as “The Flipper”, has the envious reputation of being the biggest bond trader on the planet. Here we take a quick look at his life, his path to fame and fortune, and some tricks of his trade.
Paul Rotter’s strategy, which we examine in some detail below, and why he gained the moniker of “The Flipper” was to place a big order on the opposite side of his intended market.
When other traders followed suit, he would “flip” his position and take the other side of the trade and thus scalp the market. Back in 1985, In a single day, he might trade as many as 180,000 contracts.
Rotter began trading after spending a year as an apprentice in Munich’s HypoVereinsbank trading room. His job was mainly entering trades taken from clients on the Deutsche TerminBorse (DTB), a futures exchange.
He subsequently moved to Daiwa Securities in Frankfurt as a junior trader trading small contracts on the Dax.
After six months, he switched to trading bonds and was immediately making a profit. It was a simple strategy – he bought 5-year government bonds (Bobl) and waited for the price to move. He says that it was easy as there was no algorithmic trading back then, so he could take his time with directional trading.
Paul Rotter has tried several different trading strategies and says that he no longer does short term trading in which he would trade a couple of ticks and use the market-making style we describe below. His change of direction was forced by regulatory issues and the rise of algorithmic trading.
He complains that if he put in orders and cancelled them, he could be accused of market manipulation. Yet, although the FBI has investigated algorithmic trading, which is effectively market manipulation, for some reason, they decided it is legal. “They put in and cancel orders in microseconds at a rate of hundreds of thousands of times a day, yet nobody stops them.”
When he was short term trading, it mainly was with bonds, but now he concentrates on mid-term and long-term trades in various markets.
In a recent interview, he was asked what, for most of us, is a big question: “With all these algorithmic trading platforms in the market, do you think it is now still possible for small traders to make money out of scalping forex?”
His reply was an enthusiastic “Yes!” He said that today it was easy to scalp for a few pips here and there, especially following new data releases and speeches. It is crucial, he says, to have a feeling for the market. Retail traders might not understand where the market is going, but they can use the high short-term volatility for scalping.
He says that what separates the very successful traders from those that enjoy just moderate success is discipline and excellent money management.
Making money trading bonds
On the face of it, bonds are boring. They are the kind of investment our parents and grandparents might make to keep their money safe and make a little income on the side – not at all the ideal investment for dynamic young day traders who get a kick out of making money and a riskier deal. However, let’s take a second look at how The Flipper made his money.
During his very lucrative short-term trading years, Paul Rotter traded the German government bond market, though the same approach could be used in any similar bond market.
He focused on the Bund, which is a 10-year bond, using a combination of high volume and high-frequency trading. Strictly, the way he traded back then is no longer legal; if he tried it today, he could be accused of market manipulation, which of course, it was.
His approach also required access to significant capital and trading technology, not things available to the typical day trader. However, by understanding Paul Rotter’s philosophy and the forces that drive price fluctuations, anyone can become a better trader.
It was all to do with swimming against the current, in other words adopting a fading or contrarian approach. Condensing Paul Rotter’s strategy into a few bullet points:
- Step 1 – Rotter would post a large quantity of buy or sell orders in significant volume at a stated price
- Step 2 – The large volume was bait to attract other traders who would attempt to buy at the same price
- Step 3- Once the market got close to that price, he would withdraw his buy or sell order and reverse his position; in other words, change his buy order to a sell order or the other way round.
The effect of this on the bond market would be rapid changes in direction, which would leave behind characteristic signals.
Although market manipulation per se is illegal, many traders believe that the same tactics continue today and that the signals are there for anyone to exploit. All you need to do is identify which signals are real and which are false. Various tools are available that claim capable of providing insight on this.