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Six of the oldest tricks in Wall Street's book

The oldest trick in the book is tapping someone on their left shoulder when you're standing on their right. It's all about misdirection. And in the world of Wall Street, there's no shortage of trickery.

The con comes from all angles — especially in trading. It's like stumbling into a pickpockets' convention: Swarming children babbling excitedly and holding up bits of cardboard to distract you … purse snatchers snatching … seducers seducing … and games of three-card Monte. That's what we call Tuesday.

Here are six of the oldest tricks in Wall Street's book:



Pitch & ditch

The Ruse: A trader will pitch an idea to a peer and convince that person to buy the stock that he wants to sell. It creates instant liquidity for him.

The Tell: An overly-aggressive pitch. It feels like a plea. And the trading idea is never brought up again after the initial pitch.

The Guilty: Buy-side traders are the usual suspects, but it happens at sell-side boutiques — they'll secretly release a research note to a few select customers before flooding the street with it days later.

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The secret sauce

The Ruse: A trader will make people believe there's a secret sauce. She won't ever answer the questions being asked. She'll hide and deny, hide and deny … dangling money and performance as the bait.

The Tell: Your gut will tell you everything you need to know. If something doesn't make sense and you can't get an explanation, then you shouldn't mail the check.

The Guilty: People use to ask Bernie Madoff all the time how he was so successful in the market. He refused to respond. He made grandmothers, charities and sophisticated investors believe his surreptitious formula was legitimate.


You got pants’d!

The Ruse: When trading an illiquid stock (Let's call it XYZ) a trader will simultaneously call multiple brokers on the sell side and ask them to stop him out (meaning: guarantee a price at which he can own it). Essentially he has three buy orders in XYZ with three different brokers. So now the customer is long and the three brokers are short the stock. Since it's an illiquid name, the three brokers will have to scramble to cover their shorts as the stock ticks up; creating immediate profits for the guy pulling the pants down.

The Tell: If the stock instantly goes against you on a capital intensive order then chances are something shady is going on.

The Guilty: Fast money likes to pull the sell side's pants down. They'll run you over again and again until you won't let them anymore. And then they look for the next guy who's willing to get his pants pulled down a few times.

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Red Sox fan

The Ruse: A sell sider will give you a wink-wink, telling you they have a large buyer of XYZ and then say, "The buyer is a huge Red Sox fan." This indicates the account buying the stock is Fidelity, Wellington or one of the other big Boston mutual funds. The reason this is valuable information is because it means it's a large order and the ticket probably reads 10 million shares to buy—the stock isn't going down in the near term.

The Tell: It may seem counter-intuitive because the sales trader gives valuable information. But it also means the sales trader will do anything to get an order. Watch people—see what they do—because they'll eventually do it to you.

The Guilty: Sales traders. Also known as parrots. Squawk! The buyer's a Sox fan. Squawk! The buyer's a Sox fan …


Macaw Parrot
Jaim Simoes Oliveira | Getty Images



Secret stash

The Ruse: A trader will convince unsuspecting buyers to purchase a stock on a clean-up (i.e., the rest of the shares). The idea is: An account has sold 14.5 million shares of XYZ and there are only 500k shares left on the ticket. So, once this seller is out of the way, the stock should pop. But secretly, the seller has another 15 million shares for sale.

The Tell: The stock price will tell you everything you need to know. Sometimes the seller takes a break and the stock moves up a tiny bit, but soon thereafter she's back dropping the hammer.

The Guilty: The mutual funds and the sell side position traders who hide their cards.



Cancel & correct

The Ruse: A day or two after trade date, the trader calls up the broker and says he needs to cancel and correct a trade into a different account. And the stock in question has had a significant move. It appears that the hedge fund has built a time machine and magically changed the beneficial owner, which is illegal.

The Tell: If this happens more than once a quarter, then either something's going on or they need to hire a new back-office kid to book the trades.

The Guilty: When I was at the Galleon Group, there was a secret fund called The Admirals Fund and I was instructed to do twice as many cancel and corrects for it than any other fund. You do the math.

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Bad behavior isn't always illegal, but it ensures that no one will be making you a friendship bracelet either: There's a code by which, we traders, live. It seems almost ludicrous that in the cold-blooded, cutthroat world of Wall Street such gentlemanly agreements exist, but they do. They have to exist, to keep us from descending into total anarchy. People who break these codes are labeled "bad guys."

As the head trader of billion dollar hedge funds, I knew I couldn't trade scared. If I was paranoid and constantly worried about getting ripped off from the "bad guys," I'd never formulate great relationships to help me advance. So, I operated within the guidelines of one simple proverb: Give someone enough rope to hang themselves. And it worked perfectly. Immediately, I'd wipe out the people who couldn't be trusted.

Sure maybe they got one over on me the first time, but never again.

Commentary by Turney Duff, a former trader at the hedge fund Galleon Group. Duff chronicled the spectacular rise and fall of his career on Wall Street in the book, "The Buy Side," and is currently working on his second book, a Wall Street novel. He is also featured on the CNBC show, "The Filthy Rich Guide." Follow him on Twitter @turneyduff.

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