As President of Sterling Commodities, part of our risk management for the Clearinghouse was to go over all of the traders accounts every night. We needed to watch and analyze their trading patterns so that we could tell when it was time to talk to a trader and tell them to pull back or even take a few days off to regroup. We were able to tell when traders were about to move to the next level of trading – both in size of positions and risk tolerance – and then give them guidance. We helped them move to the next level.
The ability to see how everyone trades and their styles had its drawbacks mentally. Being a medium size trader myself, I had to deal with the issue. While I might have made 25k on a good day, there were traders that made 50k, 75k, and a few that would make 100′s of thousands of dollars on a big event day. Events such as a major OPEC statement, a hurricane, or other world events. I remember how, at first, I would question my own trading while comparing myself to some of the biggest crude oil traders in the world who cleared through Sterling. I quickly learned that all traders need to trade within the parameters of their comfortable levels. I remember the first time I made the cardinal mistake in the pit. It was one of those crazy days when the action was high and my pulse rate was higher. News had just come out and the market was flying! We loved trading in days like that. I saw a paper broker get an order from his clerk and he quickly tuned in to the pit and ask for a quote in November/December spread. I pushed my way through a few people to be first and I screamed ’68 bid’ He looked right at me and he screamed as loud as he could ‘SOLD!!!!!!!!!!!’ As I was wiping his spit off my face I realize I screwed up. (As a floor traders, we are taught to always say the amount your willing to take. For example, 68 bids for 50.) However, stupidly I screamed ‘BUY EM!!!!‘ I saw there were bids that came in to other brokers around the pit and felt like a big shot. He screamed ’400!!!!!’ Well, I could have said ‘No, I’ll take 75-100 contracts’, which was my normal self-imposed limit and looked like an ass and have him shove up my butt screaming ‘Don’t ever [email protected] say buy em to me.’ or I could just take them. So, I took them. There was also the ten-lot rule in the pit. If you didn’t put a number on your bid or offer, you were held to 10 contracts. However, most traders didn’t take just ten. Do that enough times and no one will ever trade with you or trust your bid or offer again.
What many traders need to realize is that, at times, you end up in positions you didn’t always plan on. Sometimes, someone bigger, smarter and with more money wanted you in and fooled you into taking more than you wanted. This could be done in many ways. However, the way it happened that day was there was a flood of bids in the spread that hit the pit. Orders were put in different areas of the pits to the largest paper brokers. Large companies often used multiple brokers around the ring to help disguise what they were doing – with the flood of orders hitting the pit, I felt I was safe to take em all. Well, once the broker got off the rest of the 1000 lot order to a few locals (traders who trade their own accounts), all the bids in the spread got pulled and the spread collapsed.
YES, THERE WAS ORDER STUFFING BACK IN THE OLD DAYS OF PIT TRADING.
The lesson learned is to stay within your own comfort levels. Only stepping up your size when you feel you’re ready and not because someone you went out of dinner with the night before told you how much he or she made. What I was able to learn by knowing everyone’s positioning in the clearing house was that many traders (ok, almost all traders) exaggerate what they make. So this is the rule of listening to others when it comes to money – whatever they tell you they make, cut it in 1/2 and take some more off. Remember the fish was THAT big!!!! There are two things that most men lie about. The size of their position, and, well, you know the rest.
Case in point, one day the CEO of Sterling was in the elevator with one of the largest metals traders, who will remain unnamed. Gold was up $25 on the morning call, due to world events. In the mid 80′s a $20-$30 gold move didn’t happen often. This trader was telling everyone how he was long 300 contracts. When everyone left the elevator the CEO said hey “——”, you can say what you want, but I saw your position in your account and I know your long only 30 contracts. He Laughed and then walked out. But, at Sterling, we made sure no one knew anyone else’s positions and, more importantly, about what others made.
So, stay in the size level you feel that you will not lose sleep over and realize that many medium and small traders ended up making more money than the traders who had the need to trade huge every trade. Medium to small traders can stay light on their feet. They tend to be able to change positions faster with less emotional attachment.
In the end it all adds up.
Another case in point. Trader 2 was what I called an ego trader. He had to trade big. Every day he would be up and down. Up 20,000 on Monday and down 30,000 on Tuesday. Down 20,000 on Wednesday and up 35,000 on Thursday. Friday he’d be up 10,000. He paid huge commission and had emotional swings all week to end up making 15k for the week. I, on the other hand, chipped out about 2,500 a day, and after commission I made more than him. I once went over to him saying ‘If you traded 20 – 30 contracts at a time and chipped it out could you 4000 a day.’ He answered with ‘Of course I could’. I said ‘That’s over 800k a year with less stress, less commission and less mood swings.’ I saw many traders do like I did. Trading smaller. Chipping it out and making a very good living, with much less risk then most traders.
So, my main point of Trading Rule Number 1 is this: Don’t try being a hero – they often wind up getting blown up and blown out. Stay within yourself and, at times, test trading larger position – when and if the time and the markets are right.
For more trading tips, watch the video below or contact me.
ICE vs. NYSE-
As a former Board member of the New York Mercantile exchange, and after dealing with the ICE while at NYMEX, I find the news today very interesting.
In 2000 the ICE made an offer to NMYEX. Or should I say more of a demand. The demand was that if NYMEX didn’t invest 10% into ICE, then they would go after all of NYMEX’s products .
This started a war between NYMEX and ICE that continued for years. ICE was founded by members of Goldman Sachs and other of NYMEX’s largest customers. The NYMEX Board under estimated ICE and it continued to grow and take over more market share.
There was a time I felt a merger between the two companies would enhance the company’s bottom line and stock price. If the two exchanges could cross margin their energy products, it would open up a tremendous amount of equity which, in turn, would enhance volumes and help both exchanges grow.
After the NYMEX IPO, NYMEX and New York Stock Exchange were in talks to merge, but these talks fell apart over pricing and management issues.
If the New York Stock Exchange is smart and understands that the world of trading has changed drastically in the last 10 years, and they are considered old school as well as losing market share by the year, they will need to consider this possibility of merging or being taken over by the ICE very seriously.
The staff and board of ICE are on the cutting edge and could rebrand the NYSE, which has been left behind on the exchange front. The way that the New York Stock Exchange handle the closing of the exchange for two days during super storm Sandy, that they could’ve easily open the exchange while not opening up the building, shows me they are concerned about their brand and didn’t want the public to realize that without anybody in the building trading could have continued without issue.
After September 11, 2001, all the exchanges made contingency plans that if New York City was closed down for an extensive period of time the exchanges could still open the next day without issue.
Once again, looking at this deal between ICE and the NYSE, the real question is – is there a way to cross margin products -stocks, futures, and derivatives to free up even more equity which will enhance volumes on both exchanges?
As someone who traded, was President of a Clearinghouse, and was a Board member of a major exchange for seven years as well as an Executive Committee member, I feel ICE taking over the New York Stock Exchange would be very beneficial.
It will be interesting to see how regulators look into this deal. The CFTC had no issue allowing ICE, which is a foreign exchange based in Atlanta, to create and put on their platform a WTI crude look-alike product and settle it on NYMEX settlements while having no authority to look at positions because ICE was regulated by the FSA in London.
NYMEX still holds the record of any exchanges value on their IPO and the sale of the exchange to the CME.
The debate of this merger will be enjoyable to watch from my perspective. Please feel free to leave comments I look forward to hearing your views.
Electronic trading volumes are down. They got want they asked for – killing open out cry – all the exchanges are done with their IPO”s and people have cashed out. What’s next for the markets?
Now what is next . . .
Exchange Weekly Volume Tracker as of 11/30
CME volumes were down -16% y/y (+12% m/m) in November; with IR -22%, Equity Index -16%, Energy -17%, FX -5%, Comm & Alt Invst -2% and Metals +11%.
ICE Futures volumes were down -8% y/y (-4% m/m). Swap Futures volumes were down -4% y/y (-9% m/m). CDS weekly cleared volumes were down -29% y/y (-48% m/m) in the US and -40% y/y (-31% m/m) in Europe.
US Cash Equity volumes were down -17% y/y (+2% m/m); with Tape A -17%, Tape B -31% and Tape C -7%. US Options volumes were down -21% y/y (+3% m/m).
European Cash Equity volumes were down -23% y/y (+1% m/m) at DB1, -22% y/y (-11% m/m) at Euronext and -6% y/y (-4% m/m) at LSE. Derivatives volumes were down -31% y/y (-5% m/m) at Eurex and -1% y/y (+24% m/m) at LIFFE.
Asian Cash Equity volumes were down -9% y/y (+4% m/m) at HKEx, but up +7% y/y (+12% m/m) at SGX. Derivatives were down -8% y/y (-3% m/m) at HKEx, but up +22% y/y (+8% m/m) at SGX.
Latin American Cash volumes were up +12% y/y (+3% m/m) at Bovespa and +12% y/y (-4% m/m) at BMV. Derivatives were down -2% y/y (-11% m/m) at BM&F and -51% y/y (-34% m/m) at MexDer.
CME Group IR through Nov 30
MTD ADV: 4,573,645 (21 days)
QTD ADV: 4,379,664 (44 days)
CME Group Equity Index through Nov 30
MTD ADV: 2,685,385 (21 days)
QTD ADV: 2,516,519 (44 days)
CME Group Energy through Nov 30
MTD ADV: 1,504,996 (21 days)
QTD ADV: 1,587,969 (44 days)
CME Group Others through Nov 30
MTD ADV: 2,281,271 (21 days)