Tuesday, November 18, 2014

Who's your daddy?

image credit: wikipedia

When it comes to financial futures, it is appropriate to ask who's your daddy, because two men are credited with paternity.  As a product of spending most of my time at the CME, I had always figured that Leo Melamed was widely regarded as the "father of financial futures" but upon reading Dr. Richard Sandor's book Good Derivatives, it's not as straightforward as I assumed. 

In the preface of Good Derivatives, Dr. Sandor writes of "universal recognition afforded to me as the 'father of financial futures" and footnotes that title as being declared by "Resolution by the City of Chicago, honoring Richard L. Sandor, August 12, 1992."  A google search of "father of financial futures" also corresponds to Dr. Sandor's recognition as he is credited in 18 of the first 20 search results. 

I'm not trying to direct credit either way or reduce credit to either men who were both essential in developing the expansive derivatives markets we have today, it was just something that struck me as notable.  Nor do I have any understanding of how competitively sought this title is between the two, if at all but it's my assumption that it is.  However, it struck me as interesting that in Melamed's 1996 book Escape to the Futures he makes a handful of respectful mentions of Sandor and none in his more recent book For Crying Out Loud, but in Good Derivatives, Melamed is only mentioned a few times only in reference to his "political skills" which is conspicuous because Sandor devotes more writing in his 600 page book to M.C. Hammer. 

Clearly this needs paternity issue needs to be resolved the Chicago way.....on the Jerry Springer Show!
imagecredit: theblaze.com

Unfortunately as of 2009, Springer no longer tapes at the NBC building in Chicago and that's too bad because I went to a couple tapings and it was something else. 



image credit: futurespastfilm.com

To shift gears a bit, I also just discovered that Melamed's son Jordan has created a film documenting their relationship and the decline of open outcry trading entitled Futures Past.  It appears that the film has been screened briefly at some film festivals a couple years ago but it hasn't been released beyond that.  An additional surprise about the film as well is that the Executive Producer is Vincent Viola, the head of HFT trading firm Virtu Financial

The Hollywood Reporter reviewed the film at the following link in 2012 and a brief snippet follows:
Futures Past: IDFA Review


"As the film begins this method is being phased out in favor of a much quieter, more sedate electronic alternative known as Globex, championed by the CME's septuagenarian chairman emeritus, Leo Melamed. Leo doesn't hide his long-burning disgruntlement at Jordan's mid-life volte-face: "my career didn't take off," admits Melamed junior, who, short of cash, returns to the pits for one last stint of trading before the final bell tolls for the old ways. Clearly in his element, Jordan Melamed proves an excellent guide to this disorientingly chaotic environment, eliciting salty testimony from the battle-hardened traders whose philosophy is "you kill or be killed."

"But it's in his conversations and confrontations with Leo that Jordan strikes documentary-film gold. Both of them articulate, conflict-hungry men with personal scores to settle, which they proceed to chew over on camera for our delectation. It's intrusive, perhaps even exploitative stuff, this very publuc display of one clan's dirty laundry. But the three credited editors ensures fairness to both sides and Melamed jr gamely includes several sequences in which his father effectively takes control of directing duties. And the process seems to prove as therapeutic for the Melamed men -- Leo's wife Betty is a serene presence, fleetingly glimpsed on the sidelines -- as it is entertaining and illuminating for the audience."

Sunday, November 9, 2014

Comedy webseries of ex-NYMEX pit trader

I was debating on whether to put this up and figure to go for it because it's ultimately part of the trading pit culture for many.  As various pit traders left the trading pit and ultimately the trading industry, a new search for their identity begins yet they always have a hard time letting go of their old identity as traders who could generally speak without filter.  For most from what I've seen, the first stop on this journey is a period of idleness and while it's often pretty sad, a comedy webseries, entitled The Stay At Home Dad, was made by some ex-NYMEX guys about this transition period.  Here is the synyopis:

"He’s just lost his job at the Mercantile Exchange to a software program. Adios to fifteen years on the trading floor with other alpha males in a testosterone-fueled financial mosh pit. His wife’s become the sole breadwinner--which means no more nanny. Now Brandon will be responsible for the daily childcare for their 9 month-old and 3 year-old boys. The SAHD explores Brandon’s hilarious inability to censor himself in these new interpersonal situations as he navigates this maternally-dominated landscape. Brandon is delightfully offensive to everyone he meets, he can’t help it."

The webseries is very original and hilarious but be warned that each episode of a couple minutes can be lewd and NSFW.  Generally I don't like things which reinforce all the negative stereotypes of traders but the SAHD is an exception as they cast and scripted characters that aren't too removed from reality. 

A couple 2 minute episodes to give an example:

Ass from the Past


Eat My Meat


The full listing of episodes can be seen on the homepage of the project

Thursday, November 6, 2014

Ginnie Mae futures launch and it's legacy


One of the rarest pieces in my collection is an original button celebrating the launch of GNMA "Ginne Mae" bond futures at the CBOT in 1975.  The Ginnie Mae contract was the first interest rate futures listing ever traded and established a lot of standards with which financial futures continue to use today.  For a complete history behind the efforts to create the Ginnie Mae contract, there is no better source than to read Dr. Richard Sandor's excellent book, Good Derivatives, as he shares his experience having been the primary developer of the contract and hence interest rate futures.

Here is a brief summation from Good Derivatives regarding the practical origin of certain aspects which continue to be used in financial futures:

- The tick size of $31.25 or 1/32nd was established as a happy medium because the end users of these bond futures needed a bigger tick size than the grains, yet this increment also was smaller than the spot and forward markets at the time.  One benefit of the increased tick size (relative to the $12.50 in grains) was that it was more attractive for market makers to trade which also increased liquidity.

- Quarterly contracts were established to maintain a similar synch w/company financial quarterly reports. The quarterly calendar differed from grain expirations which revolved around the growing cycle. 

- Trading hours were initially established to be 8:35am to 2pm in hopes that grain traders would be attracted to trade it before and after regular grain hours of 9:30am to 1:15pm.  Sandor noted that if the GNMA hours would've been the same as grains, then noone would've left their profitable trading in the grains to trade Ginnie Mae's so by adding a little extra time onto the grain hours, the Ginnie Mae would get additional liquidity on the open and close.

- Contract size of $100,000 was established because it was the rough equivalent to the volatility in a standard grain contract and could have the same margins.

- The cheapest-to-deliver concept was established with these Ginnie Mae futures.

Sandor also came up with the advertising campaign seen in the button and ad below from Time Magazine's October 27, 1975 issue.  He writes of the concept, "we should have ads with a pretty cartoon faced girl named Ginnie Mae --- the personification of GNMA --- winking and smiling with her name under her face.  The ad marketing campaign was controversial and at odds with the staid manner of the exchange....  Following the launch of the new contract, buttons were handed out to the members to pin on their trading jackets."

As far as I know, this is also the earliest contract launch button the exchanges handed out. 

Monday, November 3, 2014

Trading for "devout cowards"

click to enlarge

In another example of how the CME used to run relatively edgy advertisements, the above ad from the mid/late 1970s offers a paper trading Scorecard if the coupon is clipped and mailed in.  This particular ad ran in Playboy (!) and takes a dig at a man's masculinity by stating "How to trade commodity futures while remaining a devout coward" above a photo of a chicken costume speaking to a man sitting in a brokerage office.

Monday, October 20, 2014

How come there's no Peking Duck Exchange, Moscow Mercantile Exchange, or Havana Cigar Exchange?

It will come as a surprise to most that a company so stiff and humorless as CME Group currently is, once used to run an aggressive and somewhat jingoistic ad campaign in the mid 1970s for the purpose of celebrating free markets.  As I recently obtained a second set of these somewhat rare prints from a retired former CME marketing employee, it's worth taking a deeper look into the story behind them.

I've always been fascinated by the ad campaign because my travels allowed me to see the stark difference firsthand between free markets and controlled economies.  Among the places I've visited are the mausoleums of Lenin, Mao, Ho Chi Minh, Kim Il-Sung (took a second trip to DPRK as Americans weren't allowed inside in 2005 but in 2008 we were), Ayatolla Khomeini, a couple days in Cuba which doesn't have a mausoleum planned to Fidel...yet, Zimbabwe in the midst of their collapse last decade and Turkmenistan months before Turkmenbashi died.  Although the citizens of each country showed a lot of warm hospitality to this American, I couldn't escape feeling pity towards how they were born into a system which didn't allow them to be masters of their own destiny.

Capturing a similar sentiment, the inspiration for the CME to create these prints came from a speech which Leo Melamed gave to a Senate committee hearing on legislation that created the CFTC as an independent agency in 1974.

"Mr. Chairman, there are no commodity exchanges in Moscow; there is no Peking Duck Exchange in China; there is no Havana Cigar Exchange.  The farmers of those countries have no need for a mechanism that offers risk transference, price projection, or price protection.  In those countries, the governments establish the prices at which farmers can sell their products.  Consequently, the farmers' primary risk is entirely removed.  Alas, by removing the risk, that system also removes the incentive.  The sorry history of such systems is that they have been abysmal failures.

In contrast, during the past 100 years, our nation with its agriculture has proved to be the only one in the world that could continue to produce more food products than we could consume---and of a higher quality and at a lower cost than any other nation.  Mr. Chairman, there are many reasons for this remarkable fact.  But the central and primary reason is that we have, for the most part, maintained a free enterprise system.  This is the pivotal difference between us and them.  This is the secret of our success and their failure."

CME advertising executive Martin Cohen was the creator of these ads and deserves credit for the tremendous detail of each.

click photo to enlarge

How come there's no Moscow Mercantile Exchange?

"Millions of tons of potatoes, cabbage and other commodities change hands in the U.S.S.R. every year, but not a ruble's worth is traded on any futures market.  In a regualted economy, the price of a head of cabbage is exactly what the government says it is---no more, no less. Does their system work?  Apparently.  Does it work as well as ours?  You've got to be kidding."

Starting from the back, a babuska chalkboard operator is marking quote board entitled (according to Google translate) Moscow Commodity Exchange with the y-axis listing the 12 months and the x-axis listing cabbage, vodka, caviar, potatoes, (unknown), goats, and soybeans (?).  To the right of the quote board is a portrait of Lenin under which a KGB agent stands, or perhaps this gentleman is just a typical market regulation official, lol.  I can't find the translation for the banner.  Within the pit is a crowd of traders in jackboots and wearing Red Army uniforms, a civilian holding his shoe a la Khrushchev, a Red Army babushka with a head of cabbage and a matryoshka doll in her bag, another babuska sweeping up, and various items including heads of cabbage, bottles of Stoli, a duck, a goat, bag of potatoes, trading cards and a newspaper which I can't identify

click photo to enlarge"

How come there's no Havana Cigar Exchange?

"It just wouldn't work.  A commodity futures market such as those that flourish in the United States and other free economies simply can't operate in a highly regulated economy.  Free markets---or controlled?  When you get right down to it, that's probably the single biggest difference between their way and ours.  Except, of course, for the standard of living."

Starting again with the quote board entitled Havana Cigar Exchange, the y-axis lists the 12 months and the x-axis is comprised of the following cigar brands:  Larranaga, H. Upmann, Monte Cristo, Partagas, Hoyo de Monterrey, Rey del Mundo, Romeo y Julieta, and again Rey del Mundo.  Both Cohiba and Trinidad weren't listed because at that time those brands were reserved as Cuban diplomatic gifts and not for sale. Directly in front of the chalkboard operator in the decrepit building is a rifle stack and beside the door is a posted sentry but tough to say if he'd prevent people from entering or traders from leaving before their out trades were settled, certainly a way for firms to avoid O'hare trades.  On the wall is graffiti stating "Viva Fidel" above one of the many spare tires in the set.  Within the pit are various traders wearing the standard fatigues of Cuban Revolutionaries along with 26 de Julio armbands.  One of the traders is wearing a beret, a la Che Guevara, along w/a bandolier and holstered pistol (open carry in the pit!).  Strewn about the pit are chickens, bits of hay, drying tobacco along with boxes of Partagas, H. Upmann and Hoyo de Monterey cigars.  On the right is a sad looking peasant and a sadder looking burro, perhaps he is a former pit trader who blew out and is left to be simply an observer. 

click photo to enlarge

How come there's no Peking Duck Exchange?

"Difference of opinion --- openly aired --- is as essential to a free economy as it is to a free society.  That's why great commodity exchange can flourish in this country and not in the People's Republic of China.  you can't have free markets in a regimented society.  And you can't have regimented markets in a free society."

The exchange hall is draped in red banners and lanterns with two portraits of Chairman Mao looking on approvingly.  Centered between the portraits is a painting of various Chicoms, one holding a firecracker and another holding a duck by it's neck.  In the midground on the left is a large abacus in front of which the child board operator is using the slow trading day to read through Mao's Little Red Book.  The quoteboard on the right midground is titled (according to an old Chinese lady who translated) Peking Duck Commodities with an incomplete listing of rice, duck, eggs and congee.  If you can translate further then email me.  Within the pit are various traders wearing the uniform of the Red Guards which look like they wouldn't be out of place on the rack at Shanghai Tang now.  Multiple traders are clinging to their Red Books and the trader at the center holds a smaller abacus.  Looking on is a young child but I don't know what the book he's holding translates to.  Also included in the picture are various ducks, some in cages and others out.  The only disappointing aspect is that Chinese number gestures weren't involved. 

click photo to enlarge

When the fall of the USSR occurred, CME reprinted these these ads in a single poster to crow about the triumph of free markets.

"That was then; this is now...Some fifteen years ago, back in the days of Chairman Mao and Brezhnev, back when Beijing was Peking and financial futures were in their infancy, the Chicago Mercantile Exchange launched an award-winning ad campaign contrasting the gridlock of controlled economies with our free markets.  Today, the Chicago Mercantile Exchange is the world's leading financial futures exchange.  More important, free markets are sweeping away the old order.  The Moscow Mercantile Exchange?  Well, right idea, wrong name.  It's up and running --- only they've named it the Moscow Commodities Exchange.   And, we're told, the Chinese aren't far behind.  Now, about that Havana Cigar Exchange..."

I'm not sure what CME traders in the mid 1970s would've found more farfetched, the use of microwave networks to trade or that the CME's marquee marketing sponsorship would be in women's professional golf, probably the latter. 

As I mentioned, I've got a double set of these original three prints and would offer them up as tradebait in the unlikely scenario someone has other memorabilia to trade, the bar is high of course.  

Thursday, October 9, 2014

Small ball

It's been great to watch the Kansas City Royals get into the MLB playoffs and utilize the small ball strategy to win games via that methodical and incremental approach.  As I don't get back to KC more than once a year it seems, there remains a nostalgia whenever something good comes out of the region and of course it brings me back to my time at the KCBT where a small ball approach was used by many traders in those markets as well out of necessity. 

Being a smaller market, traders at the KCBT always had to develop good instincts because the opportunities weren't anywhere near as prevalent as the larger Chicago or New York exchanges.  As a result, KCBT traders had to adhere even more so to the poster which was taped on the end of a desk near the Value Line pit: RISK NOT THY WHOLE WAD.


Old timers at the KCBT used to say that the Value Line pit was rockin' until the crash of '87 caused a lot of desks such as Goldman to pack up shop.  I never believed them, as it was desolate when I got there in '98, but here is photo proof of that pit in 1983 that surely looks busy to me. 

The King of small ball trading actually overlapped a bit w/my time at the KCBT and I was shocked to learn how far he'd progressed from sitting around the quiet Value Line pit with a frustrated look on his face in a dark green O'Connor jacket.  I never spoke with him, but from observing it was clear that he always had the gears working in his mind about trading and wasn't the usual floor joker.  Dave Cummings went on to create early HFT prop shop Tradebot which according to Scott Patterson's excellent book Dark Pools, scaled quickly to trading over 10% of NASDAQ volume in 2002.  Furthermore, in the same book it notes he wrote GETCO's source code (!!!) and later went on to launch BATS which, besides being a Royals sponsor, handles over 10% of stock market volume in the US today.  In the late '90s, Timber Hill had a broker at the KCBT ("Meat") who held a computer box from which he'd quote Value Line markets and I wonder if that was a driving force behind what Cummings created.

Simultaneously, just down the hallway from the KCBT entrance was a equities propshop which a handful of former floor traders gravitated to.  Their Level 2 symbol was appropriately KCMO for those who traded back then and might recall it. 

Be it baseball or markets, KC is a place where small ball is a great path to success but the town certainly doesn't play small ball when it comes to bbq!

Monday, October 6, 2014

Social media

Now that there's the truest form of open outcry in my life w/a precious infant girl, it's going to be tough to knock out posts as I'd like going forward.  However, a few are in the queue so thanks for your patience. 

Regarding social media, I've had some friends ask about why there isn't a social media presence for the site and book.  Lots of reasons why I'm against it and opt for correspondence via email only, but there is a social media approach which I agree with and saw in Soho recently which was illustrated by a street artist:


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