Thursday, May 31, 2012

Lucky or Good?

This is a bit off topic but somewhat related as I was doing some bigger picture thinking about the US employment report tomorrow, how the employment rates have fluctuated over my lifetime and skill vs. luck in both life and the markets.

My general overview is that most people are lucky fools, particularly those in the financial markets and especially those in the US financial markets the past decades.  The whole luck vs. skill debate was marvelously presented in Taleb's Fooled by Randomness and recently I was thinking about what aspects in my life/career were rooted in fortune rather than skill.  Quite often I do think of the luck and good fortune to have been born a first generation American, grown up in Kansas where it's easy to make then learn from mistakes, be mentored by great traders with strong ethics and meeting my wife in an unlikely way on a flight to North Korea, all which I can easily attribute to unquantifiable luck. 

One quantifiable piece of luck was the unemployment rate when I came out of high school and decided against college (before it was fashionable which people are actually encouraging now) to do what I really wanted and work in the trading pits.  I pulled some charts to illustrate off the St. Louis Fed's research website which is an amazing resource for any economic data.

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The first chart is the unemployment rate from 1968 to the present day as that is the extent of their data set.  As you can see, the lowest unemployment rate in a generation after the late 60s was the very late 90s and I can recall that my first day at the KCBT was July 1, 1998 so while not the bottom, it was close. 

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The second chart is the unemployment rate during my lifetime and the important thing to note is that leaving high school and getting my first 'real' job coincided w/roughly 4% unemployment rate.  It's often noted that the first job is very important to start moving up the career ladder and is imperative to get on as high a rung as possible so graduating into a tremendous job market was amazing fortune. 

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The third chart shows the unemployment rate from 1998 to late 2001, generally as close to full employment as economists agree can be had.   I left working for an options local at the KCBT in November 1999 to work on an order desk at the CME/CBOT and the unemployment rate was 3.9%.  It wasn't well accepted by a lot of coworkers that the managing director hired a 19 year old on the desk but it's clear in retrospect how tight the labor market was.  After about nine months working for that institutional desk I got on with a small trading group of locals in October 2000 and the unemployment rate was 3.8%, just 0.1% off the generational low achieved earlier in the year.  

No doubt it was tremendous luck to get to the right place at the right time and I'll happily admit it.  Not squandering any luck that comes one's way and making the most of it is also just as important.  

With the LA Kings back in the Stanley Cup Final, the thought of luck brings to mind the song they played when 'Lucky' Luc Robatille's number was retired a few years ago, "Lucky Man." 

Tuesday, May 29, 2012

"Trader Confessions"

Have to admit I LOL'd at this.  Decades from now, kids will look on the internet to learn what the trading pits were like and this will come up for them.

Monday, May 28, 2012

LIFFE video from the '80s

Thanks to an Englishman in Singapore for passing along this LIFFE video from the '80s which has a lot of vintage trading pit footage and shows the exchange before volumes really took off.  The video can be a little dry but does a good explanation of the purpose and function of the futures markets.

As a sidenote, some LIFFE alumni are organizing a reunion in London referred to as the Jacketsball

Tuesday, May 22, 2012

Board of Trade Scalpers

Seeing that one of the guys who helped make possible plays in a very cool vintage baseball league based upon 1886 rules along with vintage equipment, uniforms and terminology I remembered some old CBOT related baseball stuff to put up here.

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The above photo is a 1907 newspaper article which describes a game that will be played for charity between the CBOT vs Minneapolis Grain Exchange and it appears that the exchange had a ball team many years before.  A recent SEC comment letter (which is worth reading as well regarding post-flash crash implications) makes reference to the Board of Trade Scalpers and a game in 1870:

On a cloudy autumn afternoon in 1870, the Chicago White Stockings, a team that would evolve into the present day hapless Chicago Cubs, played an exhibition baseball game against a hastily assembled gang of amateurs calling itself the Board of Trade Scalpers. It was a rout. In nine innings of play at Dexter Park, next door to Chicago's new stockyards, the White Stockings crushed the Scalpers by a score of 30 to 2, likely the only time scalpers on the Chicago futures exchanges were so convincingly restrained.

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The above photo from the Library of Congress shows a 1907 Cubs game and if you click to enlarge, the section in back of home plate is named and reserved for the Board of Trade Rooters which was a fan club for the team.  One thing that hasn't changed in over 100 years is that the traders are junkies for good seats at sporting events and occupy a good portion of the supply. 

Friday, May 18, 2012

Trader monthly toptick

Although it wasn't the top tick in terms of volumes or profits, the launch of Trader Monthly magazine in 2004 debuted at the height of sentiment in the trading community as US trading pits were making the transition to electronic trading.  The magazine, which was founded/funded by an ex-LIFFE pit trader, reflected industry swagger by featuring expensive watches, real estate, meals, boats, etc... and initially featured a male trader on each cover looked upon dreamily by a beautiful woman.  Encouragingly the publication's motto was "See it, Make It, Spend It."

From a liquidity standpoint most US traders were still flush at the time from their years of profits in the trading pits, proceeds from exchange demutualizations, and the first of what was a significant rise in trading volumes.  In Europe all the floors had closed by then and new trading arcades continued to emerge rapidly to supplement the many successful ones which were already in existence.  The US trading arcades were just beginning to hit their strides around 2004 and it was reminiscent of the dotcom boom in that almost anyone could get a trainee spot in one.  Additionally, well established pit traders were also investing heavily for their own electronic trading operations off the floor.

The 2004 markets were incredibly inefficient compared to current trading as algorithmic strategies weren't significantly rooted in the futures market yet. Geopolitical concerns including war, terrorism fears, and the rise of China's heavy resource consumption fueled volatility which prompted an increase of hedgers to utilize futures to lay off risk.  The US financials in particular had the rapidly emerging real estate bubble drive uninterrupted growth until the markets turned lower in 2007/08 and all this combined for big, juicy trading flows for Trader Monthly's audience. 

Even though the trading related articles were a bit shallow and the magazine seemed to celebrate material douchbaggery (sorry foreign readers, google translate won't get that translation right), I have to admit that reading every issue of Trader Monthly was a guilty pleasure for me.  Initially the focus was was on pit traders and proprietary trading arcades but the magazine took a similar path as Intermarket Magazine did two decades earlier by moving to a more institutional focus as the big money was advertising to bulge bracket and hedge fund employees.

As a sidenote, I had an interesting conversation w/someone who related how Trader Monthly tried to get advertising from a top tier luxury company and the company wouldn't even take free advertising because it wasn't an established publication and they couldn't risk their reputation by being in such a magazine.  Most of the advertisers were second tier luxury companies and it's a good lesson on how top tier reputations stay intact.

When the markets collapsed so the did the magazine and eventually shuttered in early 2009.  Afterwards the co-founding editor, Randall Lane, wrote an excellent book entitled The Zeros which I highly recommend to get an honest sense of how the magazine operated and of what a exuberant yet tragic era it was for the financial industry.  What amazed me about The Zeros is the tight budget Trader Monthly operated on and  it's flirtations with missing payroll but the most entertaining part of the book is the joint venture they struck w/narcissistic baseball player Lenny Dykstra to create a similar magazine for pro athletes.

I actually kept every issue of the magazine but threw them all away when I moved condos in 2008.  If anyone still has the entire collection, I'd be a low bid just to break them out many years from now for some laughs at the era that was.

Thursday, May 17, 2012

New blog

photo credit Craig Damrauer

One thing that's been on my mind for quite a while is to share a collection of severe market moves, generally in futures, which serve as a reminder of how extreme various markets can move.  I continually look upon the market w/awe just as Mother Nature occasionally reminds us of her power through a massive show of force.  Generally these highlights will be liquidity squeezes but also scandals, geopolitical events, black swans, participant blowups, etc... and I'll post very clean charts.

The name of the new blog is and it's simply the market's point of view based on (p)rice, (o)pen interest and (v)olume which the charts will illustrate.  Pretty snappy, eh?  Actually came up w/that without even thinking hard. 

At the moment there are probably twenty markets off the top of my head I wanted to showcase and little by little I'll roll them out.  The vast majority of these moves I didn't trade and admit to not knowing the complete story but any insight is welcomed in the comments on there to get a better picture of the story. 

I'll still keep posting here as well but just wanted to create a new outlet of market history.  What certainly won't be on either blog is a discussion of current market moves, how to make money trading, etc... and both blogs are intended to be pretty much for historical reference....along w/the purpose of amusing myself and learning what I can as well.

Thursday, May 10, 2012

Voice from the Tomb

photo credit wikipedia (Cyrus the Great's tomb in Iran which I visited a while back)

When I first got to the KCBT floor, there was often a mention in a humorous way about a legend called the Voice from the Tomb.  Although I wonder about it's validity of origins and have yet to see a proper vetting of long term results, it's worth mentioning as really the only floor trading legend of it's kind.  (Although KC guys might still believe in the 12:20 rally)

The story is based upon a successful CBOT grain trader who died and left instructions in his will on when to buy and sell grains for his wife and kids.  Different versions exist that he donated his money to charity and the only inheritance his dependents got were these buy/sell dates or what I feel is more likely that he just wanted to keep a winning strategy going after he died.  The dates are basically a seasonal pattern which used to be a lot more popular in the commodities markets but aren't as key a strategy anymore. 

FWIW, here are the widely known dates which the Voice is based upon and I found it pretty funny that a grain guy at the KCBT even had them printed on the back of his business card.

January 10 - Sell March wheat
February 22 – Buy May wheat
May 10 - Sell July wheat
July 1 - Buy September wheat
September 10 – Sell December wheat
November 28 – Buy March wheat

March 1 - Buy May corn
May 10 - Sell July corn
June 25 - Buy September corn
August 10 - Sell December corn

Open Outcry documentary

Another great film, probably my favorite overall regarding trading floor documentaries, is Open Outcry which was filmed at the CME in late 1999 and early 2000.  I mentioned it years ago on the blog but noticed that the studio put up the trailer within the past few months so thought to repost it.  Buying the DVD is the only way to watch it as far as I know because it's not streaming anywhere at the moment.

It's a favorite because it was filmed when I first got to the Merc and a clip shows a group of new clerks I was part of learning hand signals during filming on the second week of November 1999.  That aside, Open Outcry is also great for the wide, lingering shots so it's like you're standing on the trading floor while watching the movie.

Wednesday, May 9, 2012

The Pit - movie

Last night I watched The Pit which was filmed at the NYBOT and focused on the coffee pit from around 2006 to the closure in the floor in 2008.  The hour long movie isn't out on distribution beyond Netflix so streaming it off of that is the only way to see it beyond the occasional PBS or film festival screening.

Overall it was a great movie and showed a lot of angles of how the pit operated and also how difficult the impact of the trading floor closure was for a lot of participants, specifically the brokers.  The characters in the film were well picked and made it entertaining for viewers to understand the broad cross section of flamboyant personalities which were not just on the NYBOT but every trading floor.  However I was really surprised the film featured an openly gay floor trader because I've never heard of one anywhere else.  What I felt was missing was the high rolling local traders because knowing their personality, they're the types to keep quiet and wouldn't open up their lives like the film's characters did (although the gay guy seemed to be trading well).

I'm also glad that The Pit featured a few characters who drifted in and out of the floor after giving it a shot as in reality that was incredibly common..  A couple characters worked part time jobs at night while they were trading during the day and I've never seen that work out for a trader.  The great irony is that entry level traders/clerks looking to trade were usually paid to the bare minimum to survive and the 'payout' was getting a chance to trade down the line which, in Chicago terms, usually meant the backer would stomach a 50-100k drawdown in the process if necessary.  I remember when I spent a week at NYMEX that the clerk I 'worked' with was paid $2000/month which meant he had to live in a Jersey City ghetto and was incredibly stretched to even buy food.  Similarly to get on track to trade w/a small group of locals, my pay went from $3000/month as a phone clerk to $1800/month but luckily I was 20 at the time so it wasn't a problem.

A point which really came across in the film is how many people go into trading just to make money and only tolerate their discomfort in hopes of achieving that goal.  The pursuit of money turns people miserable and it's clear why a lot of characters didn't stay in the game when the money dried up.  It takes a love of the process, continually seeking knowledge, matching wits against the market and building a life as a sovereign individual to hand the ups and downs while those in it solely for the money leave to chase another dream if it's not immediately monetarily rewarding. 

Although I'm a fan of The Pit, my opinion is that Floored is a better overall movie but both do a great job capturing the trading pits on film.  Hopefully wider distribution comes for The Pit but for me it was worth signing back up to Netflix just to watch it until it comes on DVD as well. 
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