How to find your arbitrage (from the guy who’s done it 3x) ft. Nick Kokonas

Risk and the Trader Mindset

0:00If you wake up every day feeling great, you're not taking enough risk. If you wake up every day throwing up, you're taking too much risk. You need to feel a tingle of uncomfortableness. I started with 60 grand. I can't express to you how undercapitalized that is on the trading floor. Essentially, you were looking for arbitrages. You're looking for some sort of mispricing. I am now convinced that every arb is just about timescale. How much money were you making doing this? Well, I drove to my dad's house and I showed it to him, and he was kind of like, oh shit. He's like, is what you're doing legal? I genuinely believe that geofence, meaning localized, dynamic and variable pricing for timeslotted businesses, is something that someone's going to make hundreds of billions of dollars with.

0:36How does a guy who goes from trading and no restaurant experience create the best restaurant in America? Knowing what great is, is making mostly shit 99% of the time. Is it that you're actually seeking the anxiety and fear? It's exciting to be uncomfortable in the sense of... I feel like I can rule the world. I know I could be what I want to. I put my all in it like my days off. On the road, let's travel never look.

Building Careers from Scratch

1:02All right, today we're hanging out with my friend Nick Kakonis. He is one of the most interesting founders you have never heard of. He is the guy who started off trading options and then went and started one of the best restaurants in the world, then started a software company and sold it for hundreds of millions of dollars. So an entrepreneur who's played many different games that really he had no business playing and somehow found a way to win. So I came here to hang out and find out how he does it. I'm going to read you a quote. I'm motivated by fear, fear of not living up to the possibilities. If you wake up every day feeling great, you're not taking enough risk.

1:32If you wake up every day throwing up, you're taking too much risk. You need to feel a tingle of uncomfortableness. Yeah, or nausea was the actual quote. Yeah, I have to give credit where credit's due. Keith Goggin, good friend of mine, former business partner. We were traders back in the 90s, early aughts, and we had this ridiculous short position on plug power. Still a company, weirdly, but he told me that.

2:02Like, he said that to me because I was, like, really on the verge of throwing up every morning. And he was like, perfect. That's right where we need to be. That's right where we need to be. He's like, but you haven't thrown up yet, correct? Correct. All right, then we got to position you. We're good, yeah. And so I do think that I internalized that at the time because then when I got comfortable, I was like, oh, we're not taking enough risk now. We're not learning. We're not pushing the edge of what the possibilities are. And the phrase in my own household from my wife, also someone who pushes me, is AT&A.

2:36You know what AT&A is? So I was at your house. Oh, you know, I said that. I told you. You said it, but you said it in a hilarious way. You're like, you said it like a cop. It's like, we issued an AT&A this morning. Yeah, yeah, right, right. We have an AT&A. Yeah. So explain, what does it mean? AT&A means all talk, no action. So you. But you'll do it to your kids. Well, we'll do it to each other. Yeah, right. And, you know, with this place where we're sitting right now for 30 years, this was a, like a North Star kind of thing.

3:07We came here every year since probably like 95 or 96 when we were very young. And we kept finding our way back here like a couple times a year. Why not? Like, it's beautiful. It's like a blue zone. Right. It feels amazing. The weather's great. You know, all that. And you had the dream. You were like, one day. We had the dream. We had just the dream. And the dream is useful. The dream without the credit score. Yes. Yeah. But that's really useful. You know, you do have to have goals. And in many ways, this was an unrealistic goal, I think. And then we were here three years ago and rented a house and we had friends.

3:40And this place was for sale. And I kept looking at it. And when I say I kept looking at it, I mean, I like looked at the video of this. They had like people in the pond, you know, the real estate like guy, like pretending like he lived here with a canoe. And I watched that video a thousand times. Right. And at some point, my wife just looked at me and go like, you know, are you going to pull the trigger or are you just going to be AT&A on this one? Like that it's like a slur. It is a slur. It is a very much a slur. And and I put in a super low ball bid and they called me 15 minutes later, didn't even counter.

4:13And they they hit the bid, which also gives you concern. So because, you know, it's kind of like the Persian rug sale, like where they price the rug super high and then you go low and then they go like, OK. You go, you know, here's to have more tea and we're good. And you've been like three times too high, even though you got 70 percent off kind of thing. You had buyer's remorse. Well, I don't know that I had buyer's remorse. I had fear because I didn't know how any of this worked. I know nothing of agriculture. I know very little of viticulture.

4:43I certainly didn't know how irrigation works. You know, I don't know pond management. Like these are all things that we've learned in the last couple of years. But between the acceptance of that offer and the closing on this, I lost sleep because this is a real commitment. I was 55 at the time and it was like, OK, is that that's your next three decades. Right. You can't half ass this. And I mean, there's a lot of people who do. Actually, I shouldn't say that you can half ass it.

5:14It just feels wrong, like it just feels like some people just buy a place like this. So I want to say two ideas and you tell me if these apply to you or what you think about these. The two brothers actually told me this. So the first brother is the guy who started Native Deodorant, Moyz Ali. And when he decided he was going to go start a deodorant company, his friend was like, Moyz Ali. Weird. Yeah, we're right. No offense. Yeah, yeah, right. When I think deodorant, you're not the guy that comes to mind. Like, do you know anything about the deodorant industry? Yeah, yeah. And he goes, I know nothing about the deodorant industry.

5:44But I'll tell you what, in six months, I'll know everything there is to know about the deodorant industry. Yes. And he just had this sort of like, you know, a self-belief, but also a bit of a practical approach to if I just obsess over anything for six to 18 months, I can get to the top of almost every field of knowledge just through sheer brute force. That was one brother. And the other brother has this phrase where, you know, he's been very successful. I said, well, why are you doing this new thing? And he said, you know, I think a lot of life is, it's like a Jerry Seinfeld clip, like finding the torture that you're comfortable with.

6:20Yeah, yeah. So, you know, being in a prison of my own making. Yeah. And he's just, he's like, every decade or so, I set up a new prison of my own choosing. And it's painful and weird and uncomfortable in lots of ways. But that's the only way I know how to live. Is that? I relate to that. I mean, we're done. Shut off the cameras, right? Like, that is absolutely the case. Every 10 years, I've done an entirely new career. And we should say with some of them more. So you had a finance career. You were a trader. I was a trader. On a trading floor. On a trading floor.

6:51Do the trading floor yell. Last time I was here, you were like, have you? 28, 32, 50 up. You learn how to do that. You know, like we had like a vocal coach come in. Really? And teach people how to do that. From the opera or what? Yeah. Literally, like we're right next door to the Lyric Opera in Chicago. Because now it's not like that. Now you just. I know. No. But you actually needed to communicate to a guy. Oh, yeah. Like, you know, from here, 20 yards away. And, you know, like the old, this is bid, that sell.

7:22This is price. This is quantity. This is tens. This is singles. I can still do it. Yeah, yeah, yeah. Yeah. But like, to me, that was like, I knew nothing about that. I was a philosophy major in college. I knew what I didn't want to do. And I didn't want to sit behind a desk. And I didn't want to limit my upside earnings potential. I thought that like having a salary was the wrong kind of prison. Like that was a prison of like predictability. Right. My dad's dad died when he was like 14 or 15.

7:54And my dad was what he called an entrepreneur by necessity. He got out of the Army and the Navy, drafted twice, and worked at the grocery store that he grew up working at from the time he was 12. And he bought that store when he was 28 or 29. Wow. And, you know, he was like, yeah, no one would hire me. But he didn't want me to go through that struggle. So he wanted me to go to law school or something like that. But I was looking at someone modeling behavior where he could come to my baseball games. He could come to my basketball games.

8:24Like he was one of the only dads there. If it was at a two o'clock game, he could leave work. Right. And his prison let him out there. Yeah. I mean, well, you know, look, if you own your situation, you have no one to blame. There's no boss man that's going to, you know, say, no, you don't get a bonus this year. We've had a bad year or whatever. And so I just wanted to own my own situation is the best way to phrase it. I didn't know how to articulate that at the time. I just knew that when I went in for interviews at Goldman Sachs or SockGen or any of these firms, you could get a contract and you kind of knew not what your work would be

8:57because you kind of didn't even know what that really entailed. Right. But you had, you kind of knew what you were going to make for the next five years. It was good. Like it was a lot of money in one sense. And in another sense, it was like really boring because you knew exactly what you were going to do. And to me, that felt limiting and scary in the other way. But at the time, I was just, I floundered about for years because I was, I knew what I didn't want to do, but I had no idea what I wanted to do.

9:30Right. Which seems common. I mean, I think that's the most common state. Of course. But when you're in that state, you don't think, well, this is common and normal. You feel like you're an idiot who doesn't know what to do and you feel uncertain. And everybody else around you seems like they know a little bit more about what they want to do than you. I just kind of had a little bit of a chip on my shoulder, but hadn't earned any reason to have that. Right. Which is the worst. Like that's, you know, the hubris of being like 23 years old and, you know, testosterone fueled male with nowhere to put it. Right. And so if you grew up in Chicago, you, you know, people who were traders.

10:04That was a thing. You know, New York was investment bankers. Chicago was traders. Those are not the same. Like you said, finance career. I do not consider it a finance career. It's a trading career, which is very different, especially back then. What's the difference? I think the best way to become successful is to see how other people did it, whether you're going to copy them or just use it as inspiration, because then now you know what's possible. So starting at the age of 24, I did this relentlessly and I was very methodical about it. And I created a spreadsheet where I tracked roughly 50 people who were uber successful.

10:36And I looked at the year that they were born, the year that they started their apprenticeship, and then the year that they started the first thing that made them successful, finally, the year that they broke through. And I aggregated all this data along with the stories of what they did to be an apprentice and what they did to finally break through. And I put it together in a database. And HubSpot went and found this thing that I frankly even forgot about, but it did change my life. And they resurfaced it. They made it even better. And they put it into a thing that you can download for free right now. So if you click the link in the description or click the QR code right here,

11:08you can see this database that I made when I was 24 and it changed my life. And so if you're looking to become successful or you're already successful and just want some more inspiration, check it out. In finance, like you were working for investment banks and obviously like they had trading desks, but they also, you know, do, you know, deals on companies and, and, and, you know, IPOs and all this sorts of, you know, stuff. And as a trader, you're basically, especially as an independent trader, you basically have like a core nest egg, you know, of whatever,

11:42a couple hundred thousand dollars in those days. I started with 60, which is 60 grand, like, you know, 40 from 20 from me, 40 from a backer. I can't express to you how undercapitalized that is on the trading floor. And, you know, like you would make trades all day long, just like, you know, now there's day traders, but then you would lease a seat and you'd be on a trading floor. We get one of those colorful coats and it was all written down and you'd make a trade and you'd trade futures options on commodities, currencies, you know, yield curve, whatever it may be, cattle.

12:15And just to set the table. So you have this trading career, you then start what became the best restaurant in America. At one point, you know, some people call it the best restaurant in the world. You created a software company that you sold. You've done on and on and on, right? And then each one of those, all these interesting little sub stories that we're going to go to.

The Art of the Arbitrage

12:32So if we're looking at the trading side, my understanding is you basically applied to a job that you were overqualified for. Yeah, that's right. I mean, I wanted to get on the trading floor and if you had my academic career and you went to the, like a clearing house to get a job as a runner for $5 and 25 cents an hour, they would go like, go work for Sokjan, go work for Goldman, go work for Merrill. Like they'll hire you. And so I did that. And then I looked at like the contracts and they, you know, I wanted to be a floor trader

13:06and they'd be like, no, no, no, you're going to be on a bond desk somewhere selling bond. I was like, no, no, no, it's not what I want to do. So in order to get that first job as a runner, which is exactly as described, you would take a piece of paper, someone would call, you'd call, you know, your broker, the broker would call the floor, the floor would hand the order to the runner. The runner would physically run it, walk it fast. You weren't technically allowed to run, but you'd have to walk fast. And you would hold it up in the air for a broker who would grab it, read it, call it

13:39out to the pit, trade it, write it, hand it back to you. You'd go back. I mean, there's room for arbitrage. It was like a 30 second process, 40 second process. So I had to fake my resume in the wrong direction in order to get the runner job. What'd you do? I eliminated all college, you know, like, you know, and, and, you know, they hired me for $5 and 25 cents an hour. And did you have the mentality at that point? Like, okay, I'm going to take this job. That's like, you know, sort of like I'm over educated for overqualified for, I must take

14:10this runner job, but I have my eye on the prize. Like I'm going to be here in a certain amount of time. Like, did you have, I had a goal. My goal was I want to be trading in a year. So I need access to the arena. And this, this is like, you know, something Bill Gurley says, like, you know, like move to the place where the shit's happening. Right. Right. So in this case, the arena was literally like an arena. Like, you know, it was like, it was an octagon, like 30 octagons in the trading floor, Chicago Mercantile Exchange, but they all work the same. You know, I needed access to the arena and you get down there and it's very opaque.

14:44Like you can't figure out how it doesn't matter if you're smart, you know, or dumb or what, you just don't know how it works. And then after like running for a little bit, they were like, oh, you seem sharp. Like, we'll put you on the phone. So then I became a phone clerk. Right. So now I'm the guy writing on the ticket. It is absolutely soulless, banal work. Right. Like there's no, nothing to it. And so what I started doing is taking open outcry classes from a guy at, at, after the close, just learning the hand signals and this and that, which might get you to a pit

15:16clerk position next. Right. You know, you might get $8 an hour at that point. But I was starting to meet people that were independent traders. And I was very much like, I want to find someone who can teach me how to do this. And for like six months, I didn't find anybody, you know, or I found some people, but I was like, ah, that's not the guy I need someone that can exploit the things I'm good at. Like I was a philosophy major in college. I studied philosophy of language and logic.

15:48I grew up programming, you know, and I was watching this system that I felt was going to become digital, really in an analog world at the time. And I was looking for a guy that would take me to what I call now the smallest, highest hoops. The smallest, highest hoops? Yeah. Yeah. Like, so, you know, like if you've got a big hoop on the ground, it's easy to jump in. Okay. If there's something 30 feet in the air and it's tiny, you know, and you've got to figure out how to get up there, not a lot of people are going to follow you up there.

16:19So that meant- You want what? A good prize and less competition, basically? Yeah, and also difficult to understand. Like, I felt like I was capable of understanding options and swaps and exotic options. Right. And as I was reading books, like, there is not a good option. There are like one or two, but there, all the options books that you get are academic books on like, this is the right, but not the obligation to buy by a certain time. And like, yes, you have to understand all that, but that doesn't get you anywhere in terms of actually, why do I buy this one or sell that one?

16:50That doesn't get you to making money. Or yeah, or how do they all interrelate and all that. So I read all those books and I felt no closer to understanding any of it. And I finally met a guy who was super geeky and he had like a little HP calculators that had macros in it. Like super cool, you know, 48K in it kind of thing. And he had just hired a clerk and I was like, no, no, no, no, no, no. You're the guy and he like, you are the guy. Like he went to the university of Chicago. He studied, you know, quantitative finance and he had worked for Chicago research and

17:25trading and they didn't want to put him on the floor. They thought he was a quant. They thought he was too geeky. So he quit and he, you know, put himself up on the floor, trading very small and very, you know. And as soon as I met him, I'm like, you're my guy. And he's like, oh, I just hired someone. And I was like, no, no, no. Like you're the only, like you're the only guy here that understands what I'm trying to get at and can teach it to me. And I literally said, I'll pay you to work for you. And that got his attention. Like, because he was like, that's weird. Why? And I explained it and he was like, okay, I'll pay you like 250 bucks a week.

17:55Like totally illegal, I'm sure, you know, by today's standards, right? And that was awesome. Like six months later, like I had a rudimentary understanding on how to make markets and options. And I put up $20,000. He put up $40,000 and I started trading Swiss franc options. It was almost a year to the day, which is a theme that we'll come back to. You asked at the beginning of the question, did you set a goal? And the answer was within a year, I need to be on a badge and trading. And it was, I was a week late, but I was in process. So I knew I counted it, you know, but like, it was terrifying.

18:29There's nothing harder. I mean, I taught 30, 40 people how to do that after the fact. And the rule was on your first day in the pits, you had to make one trade. I cannot express to you how useful that is because you have to go into a very zero sum, hostile, competitive environment, which was physical, loud, chaotic. And you have to open your mouth in front of all those people and risk looking like an idiot. Yeah. What is it about that day one? So I think Facebook had this too. Day one, any engineer, you will ship code to production.

19:01I didn't know that. They did this for a long time. I didn't know that, but that's wonderful. And it was like blasphemy back then. Yeah. My very first job was at a very first business idea I had. It was a sushi restaurant. I went out to LA to train with the chef. Yeah. And sushi is famous for this thing where you like spend years just mopping. Yeah, you're just having rice. Yeah, you're not going to get to the rice. That would be incredible if you got rice. You would do all this menial work before you were allowed. Yes. The chef that I was going to work under, he's like, we're going to open this restaurant up. Can't do that. So the very first day, Daryl from the office came in as a customer, sat down at the bar,

19:36and he goes, you're up. I just watched him do like, you know, for an hour I'd been watching him like try to pay attention. You know, I don't know if you know how to make sushi. You dip your hands in water first. Oh, yeah, yeah, yeah. Flap. It's hard. Then you do the seaweed, the rice, et cetera. Yeah. So I didn't understand at that time the clap.

19:54Your hands soaking. I thought it's just like a celebratory thing. Why are they clapping? I don't know. It's just a ritual. But it's to get all the water off. To leave only the perfect amount of moisture. Too little water. Rice is stuck to you. Too much water. Soggy sushi. I didn't clap. I gave Daryl from the office some soggy sushi. But it was actually very beneficial to just absolutely f**k up. Yeah, you have to. You know, right away. You have to just, you know. Break the seal. Break the seal. And, you know, there was a guy who ended up becoming a very good trader, very good friend.

20:25And he went like three weeks. Performance anxiety. Yeah. I mean, Frank, if you're out there, like, you know, I remember. And every day, like, he'd come back. And I would just be like, dude, you know, you're a capable human. Just do it. And he would freeze. He'd lock up, you know. And everything else, every 10 years, I kind of did something different. Because it didn't produce that same anxiety. Is it that you're actually seeking the anxiety and fear? Or are you seeking something else? No, I think. Anxiety and fear is like the signal to you.

20:55Correct. I found it. Yeah, the latter. What is it? What are you looking for, actually? We're here for whatever. Decades, if we're lucky. And in order to keep learning and keep young and wake up. Like, you guys were coming today. They showed up at, what, 6.30, 6.15, something like that. I get excited by that. It's exciting to be uncomfortable in the sense of, hey, we're doing something today. We're making this little thing here. And who knows what that'll lead to and all that. And if you just put yourself out to pasture, essentially, once you get good at something,

21:28it's very, very easy to fall into, well, I'm making good money and I know what I'm doing. And I'm kind of an expert in it now. And expertise is such a trap. Right? It's such a trap. And you know that a non-expert is going to come after you. Like, once you get to expert level, you're screwed. Because somebody who is younger, hungrier, more willing to break convention to find the new way through is going to kick your ass.

21:59So before your ass gets kicked, you should quit. It's really hard to do. And then go find something new. And it's really hard. The older you get, the slower you get at doing that, the less incentive you have to do it. Right. Right? Like, there's very little incentive, financially and otherwise, if you've had some success, to break it, to quit, to go do something new and lose money for a while, you know? What's the quote? You know, most men die at 25, they're buried at 75. Yeah. You know, I think Naval says as well, like, the great ones, the truly great ones,

22:32they're great because, not because they've reached the top of a mountain, it's because they are willing to go back to the bottom of the mountain and start again and find a new path. Nobody does that. One of the things my dad had on his desk was a little Sisyphus. I've got that, like, you know, always on my desk. I've had it on my desk forever. And for me, like, the Sisyphus thing is like, shit, we got to wake up and, you know, I'm building a wine bar here. Like, I got out of the restaurant, but we'll get back to that, I'm sure. But I got out of the restaurant business. I was here for, you know, half the time for two years. And all of a sudden, I'm walking by, I'm like, oh, shit, I got to rent that place.

23:05Build a new restaurant, you know? Bring out the boulder. Yeah, right, right, right. Found a new hill. Yeah, yeah, yeah. And I was very much like, you know, do I want to do this? And everything in me said, no, I don't want to do it. So that's why I should probably do it. Well, you're a philosophy guy. You might know this. The story of Sisyphus is about, like, it's the ultimate punishment, right? He's going to push the boulder up the hill. Yeah. And then somebody, I forgot who, but they were like, we must imagine Sisyphus happy. Yes. Meaning that the work is the win.

23:38And so he had this sort of alternate take on the idea that this is like the cruelest punishment. And instead, it's like, no, he's in his element. He's doing exactly what he wants to do and must be doing. And where man is kind of at its best is work is the win. The work is the win. Yeah. Hey, let's take a quick break. You know that feeling when strategy is done, the brief is written, everyone's aligned, and you realize someone still has to sit down and actually create all the content? That someone is usually you, and it's due tomorrow. Well, the Breeze assistant from HubSpot can help. It works right inside HubSpot.

24:08You can draft a campaign copy, blog posts, emails, all in your brand voice, all using your actual customer data. So you don't create just content. You create content that converts. Check out HubSpot.com, the agentic customer platform for growing businesses.

Time Scale and Market Inefficiencies

24:21So you talked about trading, how you started as a trader, and you were, my understanding is that you're, essentially, you were looking for arbitrages. You were looking for some sort of glitch in the system. You were looking for some sort of mispricing where you can come in and take advantage, and I think trading is a very pure way to do that. But even in your other businesses, I feel like in some ways you found an ARB. Can we talk about ARB? Yeah, absolutely. What excites you about an ARB? And then explain to me some ARB stories. Okay, so here's, so I've said no to every podcast for like three years until I got to this one idea, right?

24:55And I said yes to this because of you, and also because I am now convinced that every ARB is just about timescale. Like, this is not something that I've come up with or whatever, but like, it's evident, especially with AI coming in now and everything. Everything is timescale. So at the time, we started talking that like, that piece of paper took like 30 seconds to go back and forth. Right. And I was a good trader, not a genius trader. I was certainly capable. And I was quasi-decent at bringing what I called corporate refugees.

25:29So I'd meet someone like at a dinner party who was certainly bright, capable, outgoing, could probably do mental math quickly. And then I'd see that they're miserable being an attorney. Right. And I'd be like, I got a thing for you. Come with me. I'll pay you $7 an hour. And in eight months, you can trade. And I did that dozens of times. That scaled kind of linearly and made, I went from making, you know, $5 an hour to thousands of dollars an hour in five or six years.

26:00But I was looking around and there were companies making $10 million a day down there. More, you know, crazy money. And I was like, what we really need to do is figure out a way to bypass that piece of paper going. So if you're in New York trading what was then nascent ETFs, triple Qs, spiders, all that, those are just a basket of the NASDAQ 100 stocks.

26:30We know what those are and we know their ratios. So if you have a thousand triple Qs, you can figure out exactly how many shares all that is. So the natural hedge for that is the futures in Chicago, NASDAQ futures. And then it all comes down to, in the triangle, a cash position. You don't really need to understand it in detail beyond that. But what I wanted to do is, you know, the guys trading the triple Qs in New York would have to pick up a phone or be on the phone constantly with someone who would give someone a piece of paper. And if I could just talk directly to New York from inside the pit, I've got a 20-second time window on Goldman Sachs.

27:09They can't beat me. Well, what does 20 seconds actually mean? And what does that worth? What does it allow you to do? How does that work? Well, so a trade would take place in the triple Qs. And then the way, you know, if you just bought a million dollars notional and triple Qs, you would sell eight futures roughly in Chicago against it. And you'd lock in a little profit there. And you'd be left with a long position in New York and a short position there, but it's all one company. And now, that 30 seconds, if I make that trade there and I can talk to the guy who's actually in the pit bypassing that, I know the pricing information instantly.

27:49And with, like, the first day, it took me, like, a year to get this all done. So here's another thing. Okay. Read the rules. Okay. It sounds like... Most people don't read the rules. It sounds like a dumb thing, but read the rules. There are laws. And the CFTC had regulations that were, like, this thick. And all of the people on the board at the Merck and the Amex and all these institutions probably never read them. They had lawyers. Right. And lawyers probably never read them. They went on case law. They went on practice.

28:19They went on what they're used to. And I went, well, if we're on the same tax ID in New York and Chicago, same firm, why can't I talk to somebody there? Like, I don't see the rule. Like, I've read the whole damn thing. I mean, I really did. It's really long. And this is not when you can just throw it in a computer and be like, find the thing, you know? And I'm like, man, I can't find this. And so I was like, great. I need to put up a partial T1 line for a dedicated phone line between New York and Chicago.

28:52And the Merck wouldn't run, you know, underneath these pits was, like, cabling back then. It wasn't Wi-Fi. And I needed AT&T to run Fiber. And I put in permitting and they wouldn't let me do it because they kind of got that this would be bad for the broker groups. And who owned the Merck? The broker groups. So I bribed the union guys who did the work with cases of Jameson. For real. I can say that now.

29:22I'm not going to get in trouble anymore. Do you remember the day you kind of had that idea? Well, I remember the day when we turned it on the first time. And it was basically like saying, like, let's say, you know, there's apples here and there's apples on the other side of that pond. And that guy, there's someone who rolls up over there and is willing to pay $5 an apple. And this guy over here is willing to sell me apples for $3. And there's a guy about to run to the pond going, like, do that trade over there. But meanwhile, we can talk. We got, you know, the string and the tin can.

29:53So we made a trade. I went, oh, my God. And we made, I don't know, a couple hundred thousand dollars. Like, instantly. And you're taking no risk at this. Zero risk. Yeah, yeah. And I immediately. Is that feeling just orgasmic when you finally find one of these cars? No, it was terrifying. It was terrifying. And the reason it was terrifying was because it was so good that the powers that be would kill you. And I don't mean that as. It's not figurative. I don't mean that as figurative. Muffling shit. Yeah, it really was. It really was at that time.

30:24I also knew that if we picked the pockets of the big investment banks and we made $2 million that day, that'd be the last $2 million we ever made. So in one sense, I was going like, oh, my God. It is as I thought it was. You know, there's this gap here. Right. But then I went, shut it down. And everyone was like, shut it down.

30:48We've been working on this for seven months. What do you mean, shut it down? Like, we can't be so blatant. We're much better off picking their pocket a little bit for years than we are just destroying them on day one. Right. So I went back and reapplied for, hey, here's all the evidence that we're the natural hedge in Chicago, and these are growing really fast. This product class, this ETF new innovation, you're going to want to do this kind of thing. So they gave me a pilot program, thinking that it would take me six to eight months to get everything wired up.

31:22And then once they gave me the pilot program, then I could do it in the open, and I could do it in a couple different pits. And I had a partner, the guy, the nausea guy, that he was in the New York side, and we went to college together. And he was a spreadsheet guru, you know, just great math mind. And we cranked that thing up. So you started where? And at its peak, what were you doing? We were doing a couple percent of the daily volume of the American Stock Exchange within six months. What does that mean in dollars?

31:53How much money were you making doing this? Well, I think that year we made over $100 million. In a year? In a year. Back when $100 million was a lot of money. And I had, like, not— I had a small— $100 million is not a lot of money. Well, apparently not. I mean, it is for me, but it's not for the world. Yeah, it's nothing, right? You know, it's like, oh, $100 million. But, like— That's profit? That's revenue? What does that mean? Well, it's trading. It's not like a GMV. That's, like, your take. That's what you made. Yeah, it was arbitrage. Arbitrage profits. I mean, the overhead on that was relatively small.

32:24And obviously, we hired a lot of people and, you know, paid out a lot of salaries. Did you call home, like, hey, mom, dad, had a good year? I will— Need some money this year? What happened? So I had— Because you didn't grow up rich. No, no, no. So I had a minority, a tiny little percentage of that company because I needed the capital. The one thing I didn't have then was I probably had, you know, my first million probably happened when I was 28 or so. And all that money was at risk. And so what age are we talking about right now when you figure— 31, right? But all that money was at risk. Right. So I had it, but it very much felt fragile.

32:57Right. It was your bankroll to do it every day. It was the bankroll to trade, yeah. And as we grew the company, you know, my first employee became my business partner, still my best friend, Jim Hansen. And we grew the company and we hired the corporate refugees and we built to, like, 35 guys. But in order to do this arb at scale, we needed capital. So we merged our firm with a firm in New York that had some more capital. No one knew how to run a company. Like, let's just be clear. Like, I had no idea how to manage people. What were you like back then? An asshole.

33:27I don't know. I was trying to come up with a good way. You woke up every day at 530 in the morning and I, you know, got on the floor at 630 and it was game day and I was fueled by espresso and agitas. And, you know, like, I was just like, like, you found this thing. Let's f***ing go. Right? Right. And one of the things that, you know, my dad was still around then and, you know, you asked, like, you know, did you call the parents? I remember, like, whoever says rich people don't pay taxes, trust me, if people have figured it out, I have not.

33:59That year, I remember that I had, like, a giant tax bill, multimillion dollar tax bill. And had to then figure out, like, well, I need to remove money from the trading firm and pay the taxes and all that. And I remember writing a check. You know, the biggest check I had written before that was probably, like, $3,000 for, like, a down payment on a car or something. So I write this multimillion dollar IRS check. And I drove to my dad's house and I showed it to him. And he was kind of like, oh, s***. He's like, is what you're doing legal? That's okay, yeah. First question. Like, yo, Greek guy who grew up, like, yo, in a grocery store business.

34:31Fair question. Fair question. I said, of course, yes. And he went, okay, it won't last. Like, you know, he is a product of the Great Depression. And he was like, it won't last. Put it away. No boats, no women, no drugs. Like, you know, gave me that, like, little talk. And then he said, just, like, remember that this is, like, the great country that your grandparents came to. Pay that. It's your patriotic duty to pay that. That's why I sacrifice. That's why they sacrifice. And I went, shit, I was hoping for a little sympathy on the tax bill here.

35:03But I remember it vividly. Yeah, we need a name for that speech. It's like, we have the birds and the bees speech. Yeah, yeah, yeah. It taps. What's the IRS? It's the money, son. No, no, pay your taxes. Yeah. No boats, no liquors, no ladies. Yeah, yeah. I mean, really, that's what he said. And then he's like, I will allow you to take me out to dinner this time. And that was it. Like, there was no, like, hurrah, congrats. It was more just, like, a cautious tale of optimism, in a way. Right. Of, like, save it. Don't do stupid shit. Go home.

35:34And wake up the next day and do it again. Like, the other thing that my dad really taught me was, like, at the beginning, you were kind of like, oh, you have this great mind and all that stuff. And that might or might not be true. But what's really the case is that you show up. Like, my dad was just like, show up every day. On time. Early. Early. You know, the old adage, like, early is on time. On time is late. And late means get the f*** out of here. And I literally feel that way. Most people don't show up. Most people don't follow through. Yeah. Yeah. And showing up means not just showing up.

36:06Like, look, there's two kinds of showing up. There's showing up prepared. And then there's showing up unprepared but admitting that you're unprepared. Both of those count, by the way. Like, but then, like, show up late. Don't show up. Cancel. Move it. Like, when you text me, how long does it take to get a text back? Almost instantaneous. Almost instantaneous. Because if you consistently do that, it's not very hard. Right. Like, I don't need to plan something three weeks out. Like, you text me, let's get on the phone right now. Let's hash it out.

36:36And if you do that consistently, it accrues so many benefits over time. Right. So you learn that from your dad. Yeah, a thousand percent. And you have this amazing year. I assume these things don't last forever. Well, so the following year, you know, of course, any arbitrage is going to be a window that closes. And they close quickly or slowly, but they're always going to close. So the timescale of that kept getting shorter. Other people figured it out. We started adding computation onto it. What had happened is that some of the older partners in New York made so much money that year that they went,

37:10this is what I've been waiting for for 30 years. I'm out. And at that time, we were taking, like, we'd see, like, a small trading company that was distressed in Boston. It's a Boston Stock Exchange. We'd be like, how much do they need to, like, keep them in business? Okay. Next thing you know, I'm on a plane to Boston. And some 30-year-old dude with a computer is telling these guys who've been there for 40 years, like, here's how we're going to run your business now. Right. That did not go well. Like, you know what I mean? Like, so there was over-expansion, not because of anything other than, like, oh, yeah, well, we'll take what we've learned and we'll apply it to new things.

37:47But we didn't know how to build a business. We didn't know how to build a layer of management and accounting. And we were terrible at that. And some of the guys the following year made half of what they made in, call it, 2000, 2001. So 2002 comes along, trading volumes go down. We're not doing anything wrong. We're just making a lot less money. So a guy that made $2 million, you know, he was making 50 grand when I met him. And he makes $2 million. It's like athletes or something. Now a million feels poverty.

38:19Yeah. And then all of a sudden it's like they make $800,000 two years later. And they're like, this is bullshit. Right. And then you get the rock band syndrome, you know, where everyone's starting to, you know, get a little salty and all that. But we're all super fortunate. And I just got, like I've said eight times in the beginning, I was a terrible manager of people. I probably still am. And I just didn't enjoy it. Like, I got to the point where I had run really hard for 10 years. My dad died in 01. I was very close with him. 9-11 happens.

38:50We had people that worked on Wall Street. Everyone was okay. But I definitely knew people who were not. And I left that year going, what am I doing? Like, I need to dial this back. And I wasn't a good parent. I wasn't a good husband. I wasn't, I just wasn't being a good person. I go to dinner parties and I'm like, can we just move shit along, people? Like, you know, because it's like, it just felt like there's not the trading floor. Yeah. Yeah. I mean, the world felt slow. Yeah. And I grew up caddying.

39:21I'm a lifelong golfer. So all of a sudden I would find myself playing golf with ex-professional athletes who were in their 30s, who were famous, big time guys. And they were like miserable. And like, they took golf way too seriously and they played for big money. And I was like, there's no edge. Like, why are they gambling on golf? Like, you know, I don't understand what's going on. I didn't consider myself a gambler. I consider myself an arbitrageur.

39:53And I just looked at them and I got the nudge from the wife like, hey, you're not pleasant to be around and all that. It wasn't really a nudge. It was a, you know, slap, you know, slap in the face to her credit. Like, you know, right. And deserve it. Yeah. And I just remember one day going, waking up going, I think I'm out. Like, I think I need to like take a sabbatical. It sounds like I remember I called Keith and I was like, I think I need to take six months off. He's like, you don't get six months off. Like, you want to take six months off and get paid.

40:24And meanwhile, the options group that you're building is not doing as well as the, you know, XYZ. You know, I was like, man, what am I doing here? You know, like I kind of figured something out. I'm not enjoying it anymore. I should quit. And I did. I walked into like a group and they were all infighting one morning and I was like, guys, just so you know, like this is my last week here and you're all getting paid out and some of you will get some equity and I'm gone. And people are like, what are you talking about?

40:56Like, this is bizarre, you know? And in hindsight, I probably didn't do a good job of that in terms of like I was with my partners. I was super communicative. But like also like you can't go, hey, I might be leaving in the month. Right. You know, that's just not something you can do. And so I did. And, you know, we had a young son and and now there's no game to play. Right. And all of a sudden I was thinking about those athletes.

41:28Don't want to be them. And I'm going like, you know, what do they all say? I'm going to ask you, what do they all say when they retire? They say, I'm retiring to spend more time with my family. Spend more time with the family. Yeah, classic Michael Jordan retires. He's going to spend more time with the family. It's the best CEO resignation. I've decided to spend more time with the family. Yes. And the board has decided you're not the CEO anymore. That's right. Yes. Yeah. I mean, you know, when I when I left talk, like, you know, or when I sold the Alinea group, what do you the statement you put out is I'm allowing more opportunity for the people like in the organization or whatever.

42:02But the reality, of course, is that either like you sold for good reasons because something was not, you know, you were no longer a good fit or you got your ass kicked out of there. Did you ever read the Groupon CEO's letter when he did that? I don't think so. He's a Chicago guy. Lefkowski. Yeah. No, no, Mason. Andrew Mason. Oh, yeah, yeah, yeah, yeah. When he's like, I've decided to spend more time with my family. Just kidding. I got fired. I got fired. Yeah, yeah. The second line of the thing was. That sounds like it. I've met him a couple of times. Yeah. By the way, when you're you told the story to me once about how you cross paths with the early Jane Street folks.

42:37Yeah, yeah, yeah. When you were doing arbitraging and they were the smartest guy. Can you tell that story? I thought that was awesome. Yeah. I mean, in 99, we started doing ADR arbitrage, American Depository Receipts, and I was not hugely involved with it. It was out of New York, but the guys who had built the best robo box of doing that were the early Jane Street guys. And my partners were like, these guys are better, smarter, faster, you know, have these Dell boxes on a desk that are doing things.

43:11And, of course, now, like, you know, you could see the Dorkish podcast and they've got, you know, the data center. This is the public. Like, you know, I can't really say much about the great thing about Jane Street is that, you know, it's like Fight Club. And I've honored that for 30 years. You don't say much about Jane Street. But I will say that they are incredibly smart, incredibly dedicated, fiercely independent of thought, and high integrity. And I know some of people are going to watch this and they're going to go, but the India thing that's public or this or, you know, it's like, yeah, okay.

43:47Well, you know, again, read the rules. Yeah. You had an idea at the beginning, you said, three years, I haven't said yes to any podcast, but I have a new kind of like thought or idea around everything. Would you say everything's an arbitrage, but it's just a question of the time scale? Yeah. Would you say? Yeah, roughly.

Rethinking Restaurant Hospitality

44:01What do you mean by that? Once I was in the restaurant business, the slow thing became how do people make reservations? That was the equivalent of the 32nd piece of paper, right? And people still call restaurants. It's so weird. There's nothing worse experience at a restaurant than going up to host stand, hearing a phone ring and getting this. I'll be right with you. And you're the customer. And the first thing you see is. Right. Might as well be the middle finger.

44:32I'm on the phone. Right. And then they hang up and they go, essentially, who are you? And do you belong here? That's terrible hospitality, but that's every restaurant. So we got into starting to build the linea and I was like, we got to get rid of that. And then, okay, well, how do you get rid of that? How do you know who's walking in the front door without them telling you who they are? It's not that hard. Right. You know, how do you get rid of the host stand so it doesn't feel off-putting? How do you then get like, the analogy I used at the time was like, it's like going to a sweater store and you see all these different color sweaters and styles of sweaters.

45:06And you're like, hey, I want that blue cardigan cashmere sweater. Can't have it. What can I have? I don't know. Guess it. One of the other 300 sweaters. And that's what OpenTable was like in 2005. That's what the software was dismal. They wanted to intermediate the relationship between the customer and the restaurant. That's how they, that was their arbitrage. And so, you know, talk was born out of my frustration with not knowing the customer. It was a, it was a KYC thing, you know, know your customer. Then it was overlaying the value of that customer, which is different on a Tuesday night at 9 p.m. in Chicago when no one goes out to dinner than it is on a Saturday night at 7 p.m. when everyone goes out to dinner.

45:47Right. Those two things should be priced differently. And they're not. That was obvious to you, but was not obvious to the world. It's still not obvious to the world. Right. You know, I don't want to get political here, but Elizabeth Warren, a couple months ago, tweeted, we need to make a law against dynamic pricing. Everything's dynamically priced. This table is dynamically priced. It's just really slow. This is dynamically priced. This water, everything is dynamically priced. Like it's not, nothing's fixed. It's priced forever, yeah. And what she's really saying is, is that we don't want to squeeze people when bad things happen.

46:23Agreed. But the best way to do that is to dynamically price things as fast as you possibly can. Right. And so like Uber, when Uber did surge pricing, that is the dumbest way you could possibly name something. Right. And they got in a lot of trouble for it. Chose the wrong word for the right idea. Correct. And Travis tried to explain it. He was, they were like, how, you know, on New Year's Eve, you guys are going to be gouging people with this surge pricing. And he's like, we need to get more drivers onto the road to meet the demand.

46:53We need the supply to rise to meet the demand. How do you get the supply to rise? Because you give it an incentive that you're going to make more money. I will say that I was a little too autist on, like Travis was on that. Yeah. Like I remember that. And I was like, dude, just call it dynamic. Like get rid of the surge word. Like, you know, just, and, you know, my original pitches to restaurant was like, look, you're paying people to sell to your rivals. Like if you're full and you're really busy on a Wednesday, all they're going to do is say, well, you should go to this restaurant down the street.

47:25You know, which is terrible. Like you should just change your pricing. Right. But people are like, well, we print our menus once every quarter. So that time scales off. You should print your menu in some respect every day or every hour or every minute. So you still, even after talk and selling talk for hundreds of millions, you still see that this problem is like, you know, just fundamentally not solved across the economy. I genuinely believe that geofence, meaning localized, dynamic and variable pricing for time slotted businesses is something that someone's going to make hundreds of billions of dollars with.

47:58And I simply got tired of convincing people of it. Right. You know, it's like trying to convince a restaurant owner who every day is game. And I understand why. Every day is game day. That is not their core business. That is what they self-selected out of when they got into the restaurant business. They don't want to do accounting. You need a big dumb button that you hit once that says make more money. Right. And then the whole back end needs to do that. And now with AI, maybe we have that big dumb button. We do have that big dumb button. So let me ask you a question.

The Grind Behind Greatness

48:26How does a guy who goes from trading and no restaurant experience create the best restaurant in America? That's a mind-blowing sentence that that happened. Yes. What is the explanation for that? Part of it is Grant Atkins, great, great young chef who I met. Part of it is the willingness to go, man, like, it's really weird that, like, no one's seeing that, like, you know, Chicago should have the next Charlie Trotter. Trotter's was, I don't know, open 15 years at that point or whatever. He put Chicago on the map.

48:57And I was just like, that thing I said earlier, you know, every 15 years someone's going to come along and kick someone's ass. And I met Grant and I was like, ha, we have the ass kicker. We have the guy who can do it. And this is kind of the same thing you said about trading where you met that guy and you were like, you're the guy.