Trader Construction Kit was written as a response to a decade and a half of inquiries from frustrated junior colleagues, analysts, risk managers and support staff seeking the best book to learn how markets worked and how to develop the skills necessary to make the move onto the trading desk. Unfortunately, there was no one resource at the time, so I would cobble together a reading list of a dozen or so texts, a handful of magazine and journal articles, and a movie or three. Some were classics in the field, others somewhat more esoteric, but each illustrated a particular aspect of what it meant to be a successful trader (or, in some cases, an extremely unsuccessful trader). That same list can also serve as the logical extension of the material covered in Trader Construction Kit, building on the methodological framework and expanding the reader’s knowledge base.
The Best Books for Beginning Traders:
- Liar’s Poker: Rising Through the Wreckage on Wall Street by Michael Lewis
- Bombardiers by Po Bronson
- Metal Men: How Marc Rich Defrauded the Country, Evaded the Law, and Became the World’s Most Sought-After Corporate Criminal by A. Craig Copetas
- When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein
- Rogue Trader by Nick Leeson
- Options, Futures, and Other Derivatives by John C. Hull
- Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy
- Dynamic Hedging: Managing Vanilla and Exotic Options by Nassim Nicholas Taleb
- Reminiscences of a Stock Operator by Edwin Lefèvre
- Market Wizards: Interviews with Top Traders by Jack D. Schwager
- The New Market Wizards: Conversations with America’s Top Traders by Jack Schwager
- Charlie D. The Story of the Legendary Bond Trader by William D. Falloon
- Every Hand Revealed by Gus Hansen
The first five books focus on what it means to be a trader, the next three build the technical skills necessary to operate in the market, and the final five act as an extended series of case studies on trading decisions.
Beginning with the first five experiential books:
1. Liar’s Poker: Rising Through the Wreckage on Wall Street by Michael Lewis
Liar’s Poker has probably set more people on the path to the trading desk than any other book (it certainly did, in my case). Liar’s Poker is Michael Lewis’ first-hand account of his time on the New York and London bond trading floors at the legendary Wall Street bank Salomon Brothers in the late 1980s. It is by far the most accessible book on trading, providing a clear, accurate (if slightly dated) perspective on how bank trading floors operate and the types of people that inhabit them. It is also extremely funny. Liar’s Poker is a must-read, particularly for those not currently in the industry or who are unfamiliar with how trading desks function.
2. Bombardiers by Po Bronson
Bombardiers is the fictional account of a group of bond salesmen at the San Francisco office of a global investment bank in the 1990s that are pushed to, and in some cases past, the breaking point by the stresses of the job. Bombardiers most accurately captures the frenetic feel and surreal insanity of a modern trading floor, and does so while managing to be funnier than Michael Lewis’ Liar’s Poker.
3. Metal Men: How Marc Rich Defrauded the Country, Evaded the Law, and Became the World’s Most Sought-After Corporate Criminal by A. Craig Copetas
Metal Men is a relatively unknown book (which used to be all-but impossible to find) that offers a view into the rarely-seen world of commodity merchants operating in an early-stage physical market. The book takes place during the advent of the spot crude oil market in the 1960s and 70s, and offers a wealth of anecdotal information about illiquid, physical trading that is unavailable from any other source. Aspiring traders would do well to take note and apply the lessons to their job search, as developing markets offer some of the best conditions for job creation and rapid advancement, as well as presenting the smallest hill to climb in terms of the established knowledge base. (Note: Portions of Metal Men describe behavior that is clearly illegal, both at the time of its writing and in the current regulatory environment. My endorsement of the text does not extend to the morals and legal transgressions of the protagonist.)
4. When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein
In the early 1990’s Long Term Capital Management was home to the most incandescently brilliant collection of bankers and traders ever assembled, deploying state-of-the-art trading technology to generate eye-popping returns and basking in the adulation and envy of pretty much, well, everyone. Then suddenly, impossibly, the firm imploded during a tumultuous six week period in 1994. Lowenstein’s book is a detailed account of the disaster, and a fascinating tale of hubris and poor risk management by a group of individuals that could have, and indeed should have, known much better.
5. Rogue Trader by Nick Leeson
Rogue Trader is the autobiographical story of how Nick Leeson singlehandedly lost $1.4B via a series of ever-larger unauthorized speculative positions while running the Singapore trading operations of Barings Bank from 1992 to 1995. Though it is sometimes criticized as being an overly self-serving interpretation of events, it is worth reading as an examination of how pressure to perform can lead a seemingly normal, relatively grounded individual into a destructive spiral of illegal activity. It is also an interesting case study of how much an organization can collectively delude itself, ignore common sense, and bend its own rules to accommodate a star employee operating what appears to be an extremely profitable business.
In the next installment, we will explore a trio of more scholarly texts to build the knowledge base necessary to operate in the markets.
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