Larry Livingston, the fictionalized trader narrating Reminiscences of a Stock Operator, enters May ninth, nineteen oh one, with nearly fifty thousand dollars in cash. He predicts a stock-market collapse followed by a recovery. Both happen. He loses his stake trying to trade them.
His account needs more than a correct forecast. Orders must reach the market at workable prices, money must last through the wait, and someone must be available when he wants to get out. Each requirement can fail while his opinion about the market remains sound.
The price he cannot get
Livingston learned in bucket shops, where customers wagered on quoted prices without buying the shares. He could close a ticket almost immediately after a small favorable move. The Exchange requires an actual buyer or seller. Its ticker prints reported transactions, and the market can move before he sees a quotation, sends an order and learns what price he received. His successful old method depends on conditions the new venue cannot provide.
The May panic makes the difference ruinous. Rival buyers seeking control of Northern Pacific have concentrated its available shares. Short sellers, who sold shares expecting to buy them back more cheaply, now compete for scarce stock. A fight over corporate control has created a corner, without beginning as a deliberate trap for traders.
Livingston sells the wider market, but frantic trading leaves the ticker and execution reports behind. He describes a stock showing one hundred being sold for him at eighty. By the time he recognizes the problem, he is selling near the bargain prices at which he meant to buy. He orders his shorts bought back and buys for the recovery. These purchases average fifteen points above his expected prices. He blames neither incompetence nor dishonesty at his brokers. His information belongs to a market that has already moved on.
A price limit creates another difficulty. It can keep an order from being filled at all. Livingston sometimes accepts an uncertain price to get out promptly; at other times that uncertainty is devastating. Neither choice removes the need to judge what remaining in the position could cost.
Financing the wait
In nineteen oh six, Livingston expects a serious money shortage and sells stocks short heavily. Prices fall, then recover. He tries again and suffers another reversal. Eventually an advance exhausts his stake. His forecast hasn't supplied the money needed to survive until the crisis arrives.
Margin is the money supporting a position against adverse price movements. A small deposit can permit a large commitment while leaving little room for prices to move the wrong way. Living expenses shrink the money available further. Livingston has committed too much too early. A broker's willingness to extend credit gives him another chance; his judgment alone cannot reopen the account.
The lenders have constraints too. In the nineteen oh seven crisis, brokers need loans to carry customers' stocks. When lenders demand repayment, brokers must borrow elsewhere or sell securities. Rising interest rates cannot produce cash that nobody will supply. Forced sales into weak demand drive prices lower, worsening the crisis. Livingston recounts emergency bank lending that lets brokers meet obligations without immediately selling their customers' shares.
Even his winning shorts become worrying. A deeper collapse might increase his paper gains while making them impossible to collect. He starts buying back, concerned about realizing his money, the damage to the country and the recovery ahead. Falling prices can eventually undermine the conditions that would let him profit from them.
Coffee takes longer
In a wartime coffee campaign, diverted cargoes leave America with abundant, cheap coffee. Livingston expects shipping destruction to reduce imports until consumption exhausts the surplus. He buys contracts for future delivery and carries them for nine months. The shortage takes longer. His contracts expire, and he sells at a large loss without changing his opinion.
He tries again with three times as much coffee and the most distant delivery periods available. Prices begin moving his way. The sellers, chiefly roasters in his account, own coffee in Brazil but lack ships to deliver it to the United States. Their overseas supplies cannot satisfy their American contracts.
Then, he says, the sellers appeal to the government. A committee caps raw-coffee prices and orders existing contracts closed by a deadline. Livingston sells out. The longer contracts gave him more time, but no protection against an authority changing the terms.
He regards the intervention as unprecedented, while allowing that the committee may honestly have wanted to restrain profiteering. His first campaign produced an actual loss. In the second, the millions he believes he would have made remain expected profits. He never collects them.
Enough room to leave
Size adds another constraint. A quoted gain needs enough buyers or sellers willing to take the other side. Selling a large holding can drive down its own price; buying back a large short can drive prices up. Concentrated ownership leaves fewer shares available. Livingston limits a short according to that supply, however attractive the forecast. A position can also require more attention than he can give it, or cause more worry than he can bear.
Capital tied up in an inactive holding is unavailable elsewhere. A favorable opportunity can pass while the money remains trapped, and cannot be summoned back once he is free. By then, being right may describe a market he can no longer afford to trade.
Three things to keep
A quoted price cannot promise the price an order will receive.
The account and its contracts must last until the forecast works.
Collecting a profit still requires someone able to take the other side.