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Reading the Tape: Excerpt from the Upcoming Book

• "You can't read the tape anymore."

• "Reading the tape is extinct."

• "I can see everything that I need to from the charts." Hmmm.

• "Reading the tape is for scalpers. It is for hyperactive, overly caffeinated, nicotine addicted day traders exclusively."
Hmmm.

• "I can't make much money reading the tape."

• "I need to find plays that I can hold to make real money." Hmmmm.

I meet too many new intraday traders who think trading is just about learning technical analysis, reading charts and loading
up. Some cannot read the tape. Others may not even know what reading the tape is. These intraday traders are like that guy
you see at your local driving range who only hits Driver. There are a dozen other clubs in his bag, yet he falls in love with
Driver. As a intraday trader there are also a dozen other skills that you must develop. One of the most important is reading
the tape. With this skill you will gain an edge over your trading competitors. Without it you are like a golfer you cannot put.
You are like a Broadway talent who can't dance.

What is this Reading the Tape you talk about Mike? Reading the Tape is a skill that enables the intraday trader to predict
more times than not whether a stock will trade higher or lower from a given price based on just examining the bid, offer, and
prints. Some call it reading the Level 2. The prints tell us where a stock is printing at a given moment and whether this action
is on the bid or the offer. You will not always be able to tell a stock's next direction, but you will identify patterns where you
can 70+ percent of the time. Ok enough with the definitions and let's share some anecdotes and explain further the value of
learning this skill.

Let me share a story with you. Back in the day I went to our first firm party held to announce the big producers for the month
and build comradeship amongst our traders. The party was held at SPQR, a legendary Italian restaurant in Little Italy, where
the firm provided everything on the menu and booze. I do not know what it is about traders but give them something free
and you earn their loyalty for months. Ever seen a trader after their firm buys them free pizza? These traders act like they
have won the lottery. Like these traders cannot afford to buy their own pizza? Anyway, after eating too much pasta, and
talking to a bunch of rich twenty something traders (I myself was twenty something and unrich), I was ready to hear who
were the top traders at the firm. I had some idea. But it is like American Idol. You think you know who is going to win but you
still might be surprised (Taylor Hicks beat Chris Daughtry?). And it always fun to see people recognized and happy to earn
the spotlight.

So at my first firm party the numbers were announced.

"At 512k for the month......." It was some Russian dude whose name was unpronouncable even considering he was a top
ten trader.
"At 535k for the month........." I had never seen this guy. But man was he tanked.

"At number 8, Steve Spencer.........."

Steve Spencer? Strange.. that names sounds awfully familiar to my best friend from home. The firm has two Steve
Spencers?

And then Steve, sitting next to me rose from his seat and lined up with other big producers. How much did he just make?
Holy cow! My best friend, who taught me how to play tick tack toe at sleep away camp when we were 7, had just made over
500k for the month. This was a very different world than our Merlin days. And this was before the Internet explosion people.

To make the top ten at our firm for most months you had to make over 500k. Our holiday parties were held in the Grand
Ballroom of the Waldorf Astoria Hotel. Now that is a palace. And it was hysterical seeing some of the short, unattractive,
young kids really walking around with tall, blonde, fashion model looking, eastern European women. I wonder how that
happened? (I will let you figure that out) For fun Steve bought one of the first Plasma TV's, 50'', for near 20k. And that was
on discount. JToma bought a Porche, and a few apartments (smart!).

And we were all just reading the tape. There were no charts. CNBC was not broadcast on on our trading floor. In fact I am
not sure if we even had TV's anywhere on the floor. Interestingly during a meeting with management Steve asked for CNBC
to be broadcast on the floor. At times, there were funny moves in stocks that came out of nowhere. Only later would we
learn the news on stocks causing these strange moves. Steve was dismissed without much comment.

"Just play the momentum. We don't need to know the news."

And you know what. We really didn't. Because we could read the tape so well that charts, news, were not really necessary.

JToma took a few years off from trading, started a private equity fund, and gave bonds a shot to round out his trading. When
he returned from the dark side, bond trading or anything other than equity trading for that matter, to SMB in his first month
he made more than anyone on our desk. Why? His skills to read the tape.

In a recent blog Dr. Steenbarger talked about a vital skill for the intraday trader, reading the tape. Dr. Steenbarger, aka the
godfather of modern trading psychology, wrote: “My experience is that an understanding of (and ability to read) order flow is
one important factor that separates the older, successful generation of daytraders from the newbies who only know simple
chart patterns and indicator readings.” I am one from this older generation of intraday traders (not sure why you had to
remind me of my advanced age Dr. Steenbarger). And I thought this old-timer could share his thoughts on reading the tape
and how it impacts the developing intraday trader.

In the past I have disappointingly heard developing traders state,"I am just going to focus on the charts going forward. I can’t
read the tape.” I have heard this uttered on numerous occasions. Not one of these individuals became successful intraday
traders.

Recently, our newest class has moved from the first part of our training to the second part, Trader Development. After the
Close we answered their questions and discussed what was important on Day 6 of their live trading career. (Oh to be young
again. What was I doing on Day 6 of my trading career?) And one of our promising traders discussed a trailing stop for a MS
trade today. Trailing stop? Red flag here. My impression was this talented new trader had trouble reading the tape so was
experimenting with these trailing stops to minimize this weakness. Experienced traders trading multiple positions can enter
trailing stops, but new traders trade with "both hands on the wheel" and enter limit orders. This was not the right approach. I
counseled this new trader to continue working on the skill of reading the tape and to sell the stock on the offer when the tape
showed weakness. And I did so because this is what an older generation intraday trader, like myself, does.

And I offered an analogy about not learning how to read the tape. To me not learning this skill is like a basketball player not
working on their free throws. This baller just decides to keep clanging their free throws and give up some easy points. This
same new trader offered a better analogy. (Hey we hire smart new traders. Obviously this analogy was much better than
mine. In the future I will take creative license to just use his idea as my own. After all what is the point of being a partner if
you can’t steal the analogies from your trainees?) Back to this better analogy from the youngster who just started trading.
Not developing this skill is like the amateur golfer hitting only irons during his round because he never learns to hit driver.
I like that.

Still not convinced? Let’s bring is some famous market players for further persuasion.

FIND from where

Exhibit A: Steve Cohen of SAC Capital: “…everything I do today has its roots in those early tape-reading experiences.”

Exhibit B: Jesse Livermore: ”A battle goes on in the stock market and the tape is your telescope. You can depend upon it
seven out of ten cases.”

Exhibit C: Linda Rascheke: “If you can learn to follow the price action, you will be two steps ahead of the game….”

Exhibit D: Paul Tudor Jones: “…..at the end of the day, I am a slave to the tape and proud of it.”

After my first blog on Reading the Tape I was left with these questions from loyal readers.

Chad Says:
July 22nd, 2009 at 9:09 pm e

Could you explain what you mean when you say “read the tape”? Watching price action? Could you give me an example of
something you would watch for? I watch price action a lot and I’ve learned some things from watching but I’m not sure if
that’s what you mean (not familiar with the lingo). Thanks.

John Says:
July 22nd, 2009 at 6:15 pm e

This is probably an amateur question, but what do you look at to watch the order flow? A level 2 screen?

Thanks

invNin Says:
July 23rd, 2009 at 7:02 am e

reading the tape is kind of tricky because of the lack of good material to study. Without knowing what to look for we end up
just looking for dancing number on the screen.

Also, even in your blog I sometimes get confused about what is reading the tape and what is watching the order flow…

John Says:
July 25th, 2009 at 11:44 am e

Tom- May i ask? What do you use to read the tape? Is there a specific platform you use or is it the level 2 screen?

And I sat down to write, wrote some stuff, wrote some more stuff, wrote some more stuff, and then stopped. Can I explain
how to read the tape in a blog? No. Can I explain how to read the tape in a written chapter? Nope. Alan Farley of
TheStreet.com wrote, "Reading the tape must be learned through personal experience and long observation." It is too
difficult with just the written word, with too many variables, and too much to share to accurately teach how to Read the
Tape.

So Bella why is this a chapter in your book then? Because there are still too many who I meet who do not seek to learn how
to Read the Tape. Traders whose trading suffers because they have not learned this skill. Traders who are looking at end-
of-the-month trading results that are meaningless because they do not represent this trader's ability with fully developed
trading skills. Adding this skill of reading the tape is like adding LeBron James to your favorite NBA team. Videos, written
materials, individual questions, more videos, and practice are required to teach this important skill. And the developing
trader ought to be told this.
Just to give you an example of the complexity of this topic, we created this Reading the Tape training program. And I was
swamped with work so I asked GMan to develop the curriculum. He sent me back a rough draft with 15 plus written lectures,
and 30 plus videos. And after a brainstorming session I sent him off with more videos to create and lectures to write to best
teach this skill. Over many weekends, after he shook off the effects of a drinking night on the town in NYC, he locked himself
into our offices and cut tape after tape to partially develop this training program. But he did it.

So without any further delay, buckle up and enjoy the ride. You are about to learn the ins and outs of reading the tape.