The prodigy of the stock market: How Jesse Livermore beat the bucket shops

Jesse Livermore ran away from home to pursue his dream of trading in the stock market, making his first profits by betting at bucket shops, before eventually making it to New York and becoming a renowned trader, despite initial struggles.

Kirit Manral, MintGenie Team
First Published17 Apr 2023, 11:34 AM IST
FILE PHOTO: The Wall Street entrance to the New York Stock Exchange (NYSE) is seen in New York City, U.S., November 15, 2022. REUTERS/Brendan McDermid/File Photo
FILE PHOTO: The Wall Street entrance to the New York Stock Exchange (NYSE) is seen in New York City, U.S., November 15, 2022. REUTERS/Brendan McDermid/File Photo(REUTERS)

Jesse Livermore’s father wanted him to be a farmer, his mother wanted him to follow his dreams. He would run away from home to follow his dreams. And in that running away from home, that decision to go away from what seemed to be an inexorable fate written for him, we have the legend of Jesse Livermore.

He was a precocious child, good with numbers, a wizard at mental maths. In fact, so good with numbers that he went through three years of mathematics in school in a single year. He knew where his heart lay, it lay with numbers. Livermore was barely out of school when he joined a stock broking house as a quotation board boy. As far as jobs go, this was perhaps the bottom of the barrel, but what could a boy with the minimal formal education get.

But he enjoyed what he did. What did his work entail? Posting numbers on the big board in the customers’ room. A person sat by the ticker and called out the prices as they moved, he had no trouble noting them down no matter how fast they came.

With his sharp mind for numbers, he began spotting the trends and making a note of the stock movements, noting down the patterns. Where the buying was only a bit better than the selling, for instance. He began predicting the advances and declines in the active stocks in his little book where he jotted down his observations.

A kind of record of his own hits and misses, a harkener to probable movements. He wrote down the stock and the price on Monday, and what he would think the stock would do on Tuesday and Wednesday. He would then check the transcriptions from what the price did on the following days. This was how he built his skills.

One fine day, a boy at the office he was at asked the young Livermore if he had money. The boy had a tip on a share called Burlington and was going to play it, if he could find someone to put up the money.

At the time, Jesse didn’t even realise that he could play the stock market. He thought that the stock market was only for those who were really rich, folk who wore silk top hats and had their own carriages. Jesse had five dollars to his name, and he pulled out his little notebook. His jottings assured him the share was behaving the manner it did before it went up, however he had never ever put his money into shares so far, despite following the market. It was time to take a punt.

The boy told Jesse that he planned to buy all the Burlington shares the bucket shop would let him if he put up the margin money. He was sure they would more than double their money. It wasn’t the possibility of doubling his money that fascinated Livermore, it was the joy of seeing whether his predictions worked and whether he could actually gamble with his money, and make a killing. It occurred to him that if his theories didn’t work in practice, there was nothing to make it of interest to anybody.

But on the other hand, if it did work out, then he was sitting on a goldmine and he would be a fool to not use it to his advantage. The two of them pooled their resources and went to one of the nearest bucket shops and bought Burlington, they cashed in a couple of days later. He made a profit of $3.12 on his five dollars. Soon enough, he was making more money from the bucket shops than he was from writing the quotations, so he quit his job. He was still a kid at the time, and his wages were not very high.

The bucket shops though, didn’t take kindly to him for beating the system. He would walk in, put down his margin money and they wouldn’t take it. They’d tell him he wasn’t welcome because he was wiping them clean. He got the nickname the Boy plunger around this time. He was changing brokers all the time, finding one bucket shop and then the next. He got himself a fake name. He’d always start low, only fifteen or twenty shares at a time. To deflect suspicion, he’d initially lose deliberately before making a killing. They would eventually wise up to him, and tell him to find another place to make his money.

He was barely 15 when he made his first thousand and gave the money to his mother. She was, like most mothers would be, totally aghast. It was more money than she had ever heard a young boy of 15 make at the time and she wanted him to put it in the bank. Livermore, his youth belying, had other plans for himself and the security of money in the bank for not for him. He had tasted blood and he intended to continue playing the stock market.

It was all that he had made in the few months that he’d been frequenting bucket shops.He knew that his destiny lay in New York and staying back, he would be compelled to work the farm with his father. The bucket shops were no longer entertaining him, he was persona non grata everywhere. He couldn’t trade there, not under his own name, not under an alias because they recognized his style of trading.

He wanted to go to New York and trade in the office of someone who was a member of the New York Stock Exchange. Boston wasn’t good enough, the stock quotes needed to be telegraphed to Boston, he wanted to be in the thick of the action. So, when he was 21, with dollar signs in his eyes and the world his oyster, Jesse Livermore landed in New York one fine morning, with $2,500 in his pocket.

He went to A.R. Fullerton & Co. His reputation precedes him and he was called the Boy Trader there, and he wasn’t helped by the fact that he did look very young. One advantage though was that his boyish looks led many to underestimate him, thinking he was a kid, and he could then beat them at their game. He gained quite a reputation as a trader. Unfortunately, though, he went broke in six months. The boy terror of the bucket shops was now broken.

He had been a careful trader but he lost because he was used to betting on the fluctuations in a bucket shop. His system, honed in the vagaries of the bucket shop, didn’t work in the environment of a trading house. Here he was actually buying and selling stocks, and the difference between the real time price on the floor of the Exchange and the price being printed on the tap, and the time lag between his order and its execution was what was the problem.

While a similar deal would have raked in the big bucks for him at a bucket shop, it made no money for him at a proper broking house. He didn’t realise then that if he himself placed a big order or sold a huge quantity of a stock, it would further affect the price. It was a completely different game that he played in New York. He had to relearn his skills at the trade.

The people in the office were kind to Livermore, even when he’d lost all he had brought with him, but also borrowed from some in the office. He was now flat broke, away from home, a young kid who had come to New York in a dream.

Undaunted, he went to Fullerton and asked him for $500. He took the money and went to the bucket shops in St Louis. After checking into the hotel at St Louis, he went to find the bucket shops. He founded the J.G. Dolan Company and the H.S. Teller & Company, and traded at Dolan’s shop for two days before they wised up on him, and made a profit of $2,800.

Later, he went to the other shop where they recognized him and didn’t let him trade. He took his $2,800, went back to New York, returned Fullerton his $500 and began trading again.

(To be continued in the next column.)

Kirit Manral is a professional trader, and has been running a mentorship program in trading since 2019, with mentees from around the globe. He can be found on Twitter at @KiritManral

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First Published:17 Apr 2023, 11:34 AM IST
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