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:


Thursday, September 25, 2014

Board of Trade Daily Reporter 1861


click to enlarge

Early traders at the CBOT had an enormous amount of external factors to deal with and some of the difficulties were reflected in the above Board of Trade Daily Reporter from May 23rd, 1861 in my collection.  To begin it states, "Business is brought to a dead halt on account of the want of funds wherewith to operate."  Not exactly an indication of market confidence!  Liquidity events are a common occurrence in commodity markets but this end of day quote sheet indicates the severity of how the burgeoning American Civil War affected trading.  Just over a month prior was the Battle of Fort Sumter and as one would expect, it created tremendous upheaval in money markets. 

Many Illinois banks had their capital base backed with securities issued by what would eventually become Confederate states.  The value of such Confederate securities were in decline since the election of Abraham Lincoln but due to the first skirmish of the war, liquidity became severely impacted as different premiums differentiated into the method by which payment would be made.  The issues weren't limited to Illinois banks (of which over 80% eventually failed) as the quote sheet indicates that a couple larger banks "threw out eleven of the Union list, and holders refuse to sell for anything but gold or eastern exchange."  Drawing a check upon certain solvent banks could also demand a 10-12% premium which indicates the level of panic.  The CBOT decided to take drastic measures in maintaining benchmark pricing and passed the following resolution on this day:

"WHEREAS, The recent events in the monied affairs of Chicago have culminated in a return to a standard of Gold and Silver.  Therefore
Resolved, That in the opinion of the Board of Trade of Chicago, all sales of property, and daily quotations thereof should hereafter be made in funds equal to specie."

While this was a disaster for the nation and almost everyone, it's a goldbugs dream.  Let me veer off for a little editorial comment that modern day goldbugs envision a similar wish because they're some of the most miserable people imaginable.  The best summation of what I've generally observed w/goldbugs is that they've failed in how the world is so they wish for the destruction of it so they can finally come out on top as that's the only way for them to succeed. 

Back on topic, if you look at the transaction list on the quote sheet you can see it not only indicates price but also method of payment which includes preferred check, union currency, stump-tail check, sight exchange, and gold.  It's apparent that gold receives the largest premium followed by preferred check and then union currency.  For anyone with a further interest in grain trading during the Civil War and early CBOT history, I highly suggest William Ferris' excellent book The Grain Traders.

Just over a year after that day, the CBOT raised $15,000 and 180 volunteers to create the CBOT Battery which served as a horse artillery battery for the Union.  Following the war, the CBOT also established centralized clearing to ensure market efficiency and eliminate the problems which this quotation sheet described.  

Gnomes of South Wacker Drive

Starting with the launch of the IMM currency futures at CME in 1972, the Gnomes of Zurich had to match wits with the Gnomes of (first on West Jackson and then later on) South Wacker Drive when it came to trading Swiss Franc futures. A few pictures below show an active currency quadrant in the early 1990s, click to enlarge the photos. 

Above is the currency quadrant during the opening of the upper trading floor in 1993.  By the time I got to the Merc in 1999, the crowd was much thinner than in this photo as volumes were beginning to shift to electronic trading by that point. 


This is of the Swiss Franc pit during heavy trading and the gentleman in the center of the photo in the light blue jacket showing a 7 offer isn't trading but is a pit reporter who was relaying quotes to another pit reporter at the top of the pit who would then enter them into the electronic system. 


Also of the same Swiss pit, the photo shows how chaotic is could get in there.  To me it appears that the broker in top center is trying to get the attention and sell to the local who is 9 bid at the bottom even though another broker is 0 even bid behind him on the far right, LOL.

Opium futures

Taking a slight deviation from strictly 'trading pit' history, the origins of any futures trading I find interesting and recently obtained these telegraph orders regarding Indian opium futures from 1869 and 1870.  Now it might be a slight stretch to refer to these as 'futures contracts' because ultimately there was no clearinghouse but there was standardization in terms of delivery month, quality grade, delivery location and quantity.  Opium was traded in chests which weighed to a standard, historically estimated at 140 lbs and that came about to be what two men could carry at a time.  According to records of the British East India Company, there were distinctive grades of opium which had varying prices due to quality differences such as Turkish, Malwa, and Patna.

photosource: mit.edu

The two telegraphs below are on behalf of the Buchraj/Buchraz family who were prominent opium traders in the city of Indore, modern day Rajasthan but was then known as Malwa

click photo to enlarge

"Purchased (29000) July (25) annas (3 1/2) now (25 7/8)+"

I'm not going to dip into the history of the Indian exchange rates but 29000 sounds like an awful lot to have been purchased.  FYI, annas were an Indian currency unit and this trade was done in that denomination.  Appears to simply be a trade confirmation from Indore to Mandsaur, the city which served as the center of the Malwa opium trade.  


click photo to enlarge

"Fourth (1373) hearing new crop short buy 4 bales opium at (58) four annas less +"

The principles of supply and demand are no different for any crop and this telegram is using information from the growing area to purchase opium at the primary trading center of Calcutta.

For an excellent and illustrated background on the opium industry during the late 19th century in India, I highly suggest looking through this link from MIT (yes that MIT) Visualizing Cultures.

In addition while on the topic of opium, I can't recommend highly enough Nick Tosches' article "Confessions of an Opium-Seeker" which was first published in Vanity Fair and then expanded as a book The Last Opium Den.  Tosches is an amazing author and this piece remains one of my all time favorite pieces of writing. 

Best of

Tuesday, September 16, 2014

Back to the blog...if I don't have a diaper to change


photo credit: USAtoday (not my kid in pic)

Once again I'd like to give thanks to all the dads and others who wrote to wish my wife, baby and I well as it was very kind of you all!  I'm happy to report that my wife gave birth to our perfectly healthy daughter a few weeks back in the most perfect place in the world today, Palo Alto, and slowly everyone is getting into a routine.  Having a kid is THE GREATEST so I can understand all the enthusiasm from the dads who wrote in and I will be sure to extend the same wishes to other expecting parents.

I'm looking forward to sharing with my daughter children's stories from my own youth and reading her kids books. As a "push gift" to myself, I bought a copy of Sled Driver and it's followup book The Untouchables, amazing books that are highly recommended and well worth the cost!

Although the Family Medical Leave Act of 1993 still covers another 8 weeks of unpaid leave to unpaid bloggers at an unpaid blog, I'm about ready to get back a little earlier than I thought to rambling in this space.  Even though he's not my guy, I still don't want to disappoint the President when he visits this blog for new content, LOL


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