Bulls & Bears DVD on Sydney Futures Exchange

From 1998, a documentary entitled Bulls & Bears was filmed about the Sydney Futures Exchange and more specifically a SFE floor trader nicknamed "Rambo."  The person who uploaded it was also the film's director so I emailed about getting full copy, hopefully he responds.  The first clip below is a short intro w/good floor shots and the second clip is longer and better quality but mostly shows "Rambo" trading at home.





The SFE closed in 1999, a year after the documentary filming, and here is a Reuters story which describes the closure:  Pits silenced as exchange in Sydney enters electronic era

ISDEX futures

Living through the technology bubble in late 1999 and early 2000 was even more bizarre in retrospect as it's literally about as different as the current environment is.  For those that can't recall it or were too young, play with the Web Economy Bullshit Generator for examples of the phrases that inundated the world at the time by the internet companies which saw their stocks go parabolic.

In early 1999, the Kansas City Board of Trade received authorization to trade a futures contract on the Internet Stock Index known as the ISDEX. Obviously KC isn't the ideal place for such an index but the first stock index futures contract was actually the Value Line index which was launched before the CME's S&P 500 contract by a few months.  By 1999, the Value Line itself was barely trading so this was a way for the exchange to branch out a bit and the ISDEX shared the Value Line pit.  The ISDEX is so obscure that barely anything exists about it on the internet anymore but it launched while I was still at KCBT as a clerk just months before heading to Chicago.

For those who do recall those days, here's an early 1999 list of it's components and some old names will bring back memories, CDnow (CDNW), Broadcast.com (BCST), @Home (ATHM), Cyberian Outpost (COOL), Geocities (GCTY), Inktomi (INKT), Lycos (LCOS), USWeb (USWB), Excite (XCIT) and not included in the list they threw in Etoys later in the year.  And to think, AOL at the time had a market cap of 80+ billion and now it's worth only 1.7 billion, however Amazon was 'only' worth 18 billion then and 81 billion currently. 

To aid liquidity the KCBT issued permits which allowed trading in the ISDEX but only a small amount were ever purchased.  On the floor, the ISDEX was referred to as they "Izzie," i.e. "8 bid Izzie." When the launch occurred there was really only one deep pocketed market maker in the pit and thus it was doomed from the start without any order flow.  To use the tagline from the Roach Motel trap, you could check into the contract but couldn't check out so the only way to hedge was either in the cash market or against the CME's NASDAQ-100 contract.  That said I have a lot of respect for the one market maker who did step up and put a lot of his money on the line to try and get the contract going.  There was only one instance I can recall where outside paper really came in and it was clear they were doing an arb against the cash market.

I can't find any volume figures on the internet about the ISDEX but from what I recall it was dead shortly after launching w/out much volume as mentioned.  The index itself however had a wild ride as referenced in this academic paper:

"By March 1, 2000, Internet firms had a combined market value of $1.7 trillion, reflecting a spectacular rise in stock prices: between January 1999 and February 2000, the Internet Stock Index (ISDEX) more than tripled in value.  Perhaps more impressive, however, was the subsequent fall in valuations. By the end of 2000, the ISDEX had returned to its level on January 1, 1999. It fell another 69% over the subsequent nine months, for a total decline of nearly 90%."

Even though the futures were pretty much DOA, the ISDEX futures weren't delisted until January 2003 as the index itself was finally laid to rest and no longer calculated.  As it so happens, both actions were about as close to the bottom of the tech bubble as possible with the NASDAQ putting in the post bubble low just a few months prior.  The chart below is the NASDAQ index w/the green arrow indicating when the contract was delisted, talk about a perfect contrarian play to get long tech!

Although the contract failed to gain liquidity and the market maker lost a decent amount trying to get it going, I have a lot of respect for the effort and for me it brings to mind Teddy Roosevelt's speech from 1910:

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."

Hitler Gets Caught In The Front Month Part 2

Part 2 had me laughing as hard as part 1, absolutely brilliant stuff

Depth of market

The above photo (click to enlarge) taken in the summer of 1987 during the expansion of the CME's S&P pit shows how the trading floor is quite a bit raised above the actual building floor itself.  Beneath the trading pits are a tangle of wires that have only increased in time along w/air conditioning equipment which let cool air drift upward to help cool off all the sweaty traders in there.   

It was an ominous time to expand the S&P pit just months before the Crash of '87 and history repeated itself in expanding the NASDAQ 100 futures pit in early 2000 as the technology bubble peaked.  While I don't have the exact date of the NASDAQ expansion, my recollection from standing below it daily while at an order desk is that it happened in very early 2000.  Before expansion, in late 1999/early 2000 the NASDAQ pit often had a line of 3-8 traders who stood outside and waited until space opened up so they could fit in.  A good friend used to trade small in the NASDAQ pit and he complained that since he could only get a spot at the bottom of the pit, any trade he could get from a broker at the top of the pit was always crap.  Yet, he'd joke that he'd stand in line waiting to be the guy at the bottom of the pit getting crappy trades.   

Here's a photo also from 1987 w/the S&P trading pit covered again.  A few times in 1999, I kicked around after the close at the paper scraps for anything which might be insightful into how people traded it but the only thing that comes to mind was point and figure charts because I had an old boss who joked of that method as "caveman stuff" since it was so old.  Generally it appeared to me that beyond a few basic momentum indicators and the cash market, it was mostly order flow trading.  To this day I'm still amazed people can trade spoos well as it's a completely different market structure than I've traded.

Pit mechanics

Getting in some snorkeling today, my mind went back 14 years and 179 degrees of longitude to the first pit I worked around at KCBT as the market is as great an ecosystem as the reefs I spent the day observing.  My favorite 'market' book of all time, Education of a Speculator, has a excellent chapter on market ecology and refers to floor traders as the decomposers which is certainly apt as they break down the bigger pieces of market action.  In particular, the day brought to mind market niches and Darwinism which I first observed at KCBT and then most other trading pits on how the mechanics of the trading pits often worked.  The Charlie D. video I uploaded a while back gave the general basics of pit mechanics in terms of spreading both inter and intra contract trading but didn't explain some parts fully.

When I started at KCBT, one veteran trader stood out as a guy who was an absolute trading maniac because anytime a broker called out for a market or bid/offered, he instantly quoted the other side ready to make a market and trade.  Charlie D. referred to a lot of locals as "scalper-beggars" and whenever I hear that term it brings that one particular KC trader to mind because he even had the physical actions down of getting in the brokers face from a step below w/his hands in their face and repeating his market every time the broker opened his mouth hoping to get the broker to go up/down on price.  Here's what it sounded like:

Broker - "Five bid Red Sep"
Trader - "AT FIVE HALF!"
Broker - "Five bid"
Trader - "AT FIVE HALF!"
Broker - "Five quarter bid Red Sep"
Trader - "AT FIVE HALF!"
Broker - "Buy 'em at five half"

And the trader would do that all day everyday, while not successful every time it was enough to make it worthwhile.  All the while I had no clue what he was making his trading decisions on and my guess was that it was just gut instinct but he was just basing his decisions upon simple arbitrage. 

When I started to get trained to trade in Chicago, the first thing one of my mentors did was give me a stack of flash cards that I was to learn the basics of spreading.  The flash cards consisted of various spreads or outright contracts of the same commodity which I would have to quote the 'missing' market in.  If I knew the market in one outright contract of the two legged spread and the market of the spread then I can quote the market in the other outright contract.  For instance, a sample card (always quoting spread w/front month first) would read:

March 50 bid/50.5 offered
March/June spread 2 bid/2.5 offered
What's the market in June?

On the back the card would have the correct answer for me to check to see if I got it right.  In this instance I could be 47.5 bid in June and offered at 48.5 because (assuming all markets had decent size to lean on) if I bought 47.5s then I could buy the 2.5s in the spread and that'd get me long the 50s in March (selling out/scratching the June) and vice versa if I sold the 48.5s in June then I could sell the 2 bid in the spread (buying back/scratching the June) and be short the 50.5s in March.  That was about the most elementary flash card given as they went on to include more complex spreads but the idea remained the same, just get the math to equal.  As Charlie D. said, getting the trade is more than half the battle and this was one way to get trades.  This also feeds into a larger discussion on optionality in the market but I'm not gonna go there today.

Once I realized something this simple was all a lot of pit traders were doing, I was totally shocked.

The scale is obviously limited to do something as basic as market making based upon where spreads were trading but it's something that plenty of people did to earn a living in the pit which didn't require any deep thinking, overnight positions or even risk for the most part.  Now those days are gone when such arbitrage was possible as the computers made the market so efficient that a free tick is virtually impossible to come by.  When it was inefficient in the past, sometimes the market was so far out of line it is mind boggling by modern standards.  A former CBOT Chairman I remember was quoted in two separate interviews that he once got a grain trade back in the 1960s something like 15 cents though the spread....fifteen cents of pure arbitrage!

One funny story I remember while being a new trader in the pit was wanting to buy a spread, say 2.5s, as that was a level I came up with through my own analysis.  Looking around the pit there was a veteran trader who was screaming his lungs out to sell 2.5s so I thought to myself, "hmmmm, that guy has apparently been down here a long time and if he's 2.5 offer then it's probably not a good idea to buy those."  Well, the two legs of the spread flipped and the spread turned 2.5 bid without me buying any then rallied the rest of the day.  Even though I knew that many trader's only strategy was to attempt arbitrage, it didn't sink in until that moment and I realized that was all that veteran (and the scalp-beggar in KC) was ever doing.

Vanity books and market hubris

In thinking about the various books that exchanges have put out or guided over the years, generally it's done to celebrate a landmark anniversary such as a centennial, however two books stand out as done solely for the sake of vanity rather than to celebrate a particular achievement.  Granted I don't know the exact arrangements behind the publishing of such books and am speculating but believe they were guided, if not paid for outright, by the exchanges to be published.  I appreciate the addition to historical records of any kind but the problem of vanity books is that they tell the story as it's wished to be told from the official viewpoint rather than pure journalism which might've given divergent viewpoints. 

This post I'll note suffers from not having the actual books on me as I'm traveling and am posting from memory during some slow trading today.

The first book which comes to mind is LIFFE: A Market and it's Makers: A Market and Its Makers which was published in June 1997 just as the exchange was losing it's battle to keep German Bund liquidity.  However at the time LIFFE was riding high as the second largest derivatives exchange in the world after surpassing the CME to take the #2 spot behind CBOT, even the Economist printed an article in July 1997 entitled "Everlasting LIFFE" that gives good flavor of the sentiment enjoyed at the time.  The chart below from a recent academic paper shows how dangerous it was to be complacent (might have click on it to enlarge it) as it illustrates how the bund liquidity was in the final process from leaving LIFFE for good in mid 1997 and nearly wrecking the exchange as a result.

The other book focuses on CME with the title Past, Present & Futures: Chicago Mercantile Exchange and was published near the depths of the recent financial crisis in October 2008. For a project such as the commissioning of a book, my guess is that the approval for it was made either in late 2007 or early 2008 which coincides with a very hubristic time for the exchange.   CME stock peaked in December 2007 and within a couple weeks of that market peak, the CME's Chairman was featured on the cover of Forbes magazine and my guess is the interview for the cover story was simultaneous w/the market peak.    The slide in CME stock continued consistently throughout 2008 and was only about half way in it's course when Past, Present & Futures was published and since then CME's stock hasn't reached anywhere near that level since. 

A large part of this hubris, I believe, is rooted in the broker mentality (which the executive structure of exchanges are populated by) versus a trader mentality (most traders just trade and aren't involved in the exchanges) as the brokerage industry is driven by presenting a positive outward perception whereas traders are simply focused on self satisfaction.  It's still quite common for a trader to submit to hubris but just not as likely due to the immediate feedback of bad decisions which they have to bear.  That said, everyone can draw insight from the speech in the movie Patton:

"For over a thousand years Roman conquerors returning from the wars enjoyed the honor of triumph, a tumultuous parade. In the procession came trumpeteers, musicians and strange animals from conquered territories, together with carts laden with treasure and captured armaments. The conquerors rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children robed in white stood with him in the chariot or rode the trace horses. A slave stood behind the conqueror holding a golden crown and whispering in his ear a warning: that all glory is fleeting." - Gen. George C. Patton

Hitler caught in the front month

Taking a short break from strictly 'trading pit history,'  this video was too funny not to share as I've been there too many times myself trading.  It's one of the thousands of Hitler/Downfall meme videos and one most traders can relate to.

SIMEX liquidity vs the Chicago way

photo from wikipedia.org

Walking around Raffles Place in downtown Singapore today, I couldn't help but think about how close I was to moving to Singapore a decade ago to trade SIMEX eurodollars.  In part the reason why I didn't shows why SIMEX never developed a large amount of liquidity while the Chicago pits experienced exponential growth doing the opposite.  Life turned out as perfect as it could've so I wouldn't change a thing but no doubt it would've been a lot of fun to have traded a little while at SIMEX.

The overnight market for eurodollars used to be traded at SIMEX before liquidity shifted onto Globex full time and after clerking on the floor of the CME for a small trading group of roughly six traders, I got to work the overnight shift in a small, windowless Chicago office which involved watching positions, submitting orders, legging spreads and a little bit of trading on my own part.  It was a long shift, 14 hours from 5:30pm to 7:30am, but one that all the other guys who went ahead of me did within the group before getting to trade in the CME pit.

After a short time showing that I was competent, the idea of going over to Singapore started to creep in my mind.  Actually it was there for quite a while because from reading during high school (1996) of Leeson's rogue trades, I didn't think much of the scandal but focused on how exciting it'd be to work on a foreign trading floor.  When I asked the lead partner of the group I was with in Chicago if I could go trade at SIMEX because there weren't any Americans in that pit at the time and we'd have a slight competitive advantage he said, "sure go for it."  That response was too casual and so I asked him if he even knew where Singapore was to which he replied "near Tokyo" which of course is the right continent but a 7 hour flight between the two cities so not close at all.  It's pretty amazing how a 21 y/o employee of a few months w/no money could be backed w/low six figures to trade in a place where the backer doesn't even know where it is....but that's the type of thing that used to be done w/Chicago traders who'd back pretty much any opportunity. 

I flew into Singapore to hand in my application to the exchange and already had a few clearing firms that were interested in clearing me so figured things were all set.  A week or two later my application for SIMEX membership was denied because they required any trader who was backed by a firm, even a tiny one like I was with, to have the entire firm become a clearing member at the exchange.  Although I would've had better capitalization than most SIMEX locals with $100-200k to start trading in that pit, it didn't matter as the exchange required $500k minimum for a clearing member and at that rate, there wasn't enough opportunity to justify going to SIMEX vs staying in Chicago. 

The requirement that SIMEX had for backed traders was entirely opposite in how things were done in Chicago, NY, Minneapolis and KC exchanges.  All the US exchanges required was sufficient funds in an account and even those weren't sometimes needed if another trader vouched to cover any shortfall a new trader might have.  As a result, the liquidity at American exchanges grew exponentially as traders launched new careers on the same path as they once began on.  Because SIMEX set a higher and unnecessary bar to entry, it's pits were filled with mostly undercapitalized locals that didn't provide much liquidity and in turn helps explain why no Americans were in the eurodollar pit there. 

As previously mentioned, things turned out great and I wouldn't change a thing but squeezing in some trading in the SIMEX pit would've been a great experience.  I love Singapore and come here for at least a month each year so the experience is the same, just a little different.  Oh and the old SIMEX building in the OUB building got demolished and now has a new office tower in it's place so maybe no need for me to be sentimental. 

Bumfuzzle

I've mentioned that virtually all of those on the trading floors rarely went onto better things after leaving the pit but one who has is Patrick Schulte who used to trade soybean options then left after a few good years to sail around the world in 2004 and seemingly hasn't stopped traveling since.  Back in '98 he was the clerk at the Minneapolis Grain Exchange for the same company I clerked for simultaneously at the Kansas City Board of Trade before both of us made our way to the Chicago pits.  Obviously he did better a lot quicker than I did and remember my old boss in KC mentioning about this crazy idea him and his wife had about circumnavigating the globe. 

Even though I didn't really know Pat, occasionally I'd check their blog, bumfuzzle.com,  for some armchair travel and for a while I've been meaning to read the book he wrote about their circumnavigation named after their boat, Bumfuzzle.  Just coming off a long flight to Asia last night, I finally got around to reading the book and it's AWESOME!!!  Definitely this is a book that leads others to think about their own dreams and ultimately how it's important to be master of your own destiny by reading about how Pat and his wife followed their own whims.  Bumfuzzle is a book that'll make you want to travel and had I not had the ground moving beneath me already, would've resulted in booking a trip ASAP.

Fast market designation

One trading pit attribute which hasn't likely been seen in a long time and may never even be seen again is the 'fast market' designation.  In looking for the official exchange definition and rules of a fast market, I was unable to to find it but here is the CFTC's definition from their webpage:

Fast Market: An open outcry market situation in which transactions in the pit or ring take place in such volume and with such rapidity that price reporters fall behind with price quotations, label each quote "FAST" and show a range of prices. Also called a fast tape.

Certain rules applied during fast markets and one I remember is that the broker holding a limit order wasn't held liable for missing the trade if someone else traded through that price, i.e. Broker A has a price limit of 50 but the market prints 48 and market is now 52 bid but because it was a fast market Broker A doesn't have to guarantee a fill for the customer who was 50 bid.  Having never been a broker, I'm not entirely sure that is how it works but vaguely from what I remember. 

Another thing about fast markets is that I'm unsure as to who exactly classifies it to be one, my guess is it's the pit committee (of traders/brokers) along w/the pit reporter/supervisor.  When a fast market is designated, we'd see FAST upon the exchange wallboards (as I tried to illustrate above) and prices skipping all over the place rather than their usual linear movement. 

Globex handles orders at a sub-5 millisecond response time which makes the 'fast markets' of the past look incredibly slow by comparison. 

Kakistocracy

American Heritage Dictionary: kak·is·toc·ra·cy
n., pl., -cies.
Government by the least qualified or most unprincipled citizens.

If there was one word to sum up the MF Global bankruptcy, "kakistocracy" qualifies better than any other I can think of.  Every level and entity involved from MF Global, CME Group, the CFTC, all the way up to the Executive branch of government has all proven to be a kakistocracy of oversight and regulation.  How an industry filled with numerous brilliant minds to be overseen by a kakistocracy often left me puzzled at how it could happen and the easiest answer I can think of is that the futures industry is run with a brokerage mentality rather than a trader mentality since very few actual traders are in positions of power and are largely crowded out by those with ties to the brokerage industry.  There is a tremendous difference between the two and Ayn Rand wrote well on what defines a trader mentality:

"The symbol of all relationships among [rational] men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit—his love, his friendship, his esteem—except in payment and in trade for human virtues, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the traders and held them in contempt, while honoring the beggars and the looters, have known the secret motive of their sneers: a trader is the entity they dread—a man of justice."

To hear the CME's CEO respond to a question on the earnings call today of the exchange losing it's regulatory powers in the wake of the MF Global bankruptcy by mentioning how things have historically been managed well was hard to accept.  One of the first sayings I ever learned in a trading pit was "you're only as good as your last trade" and that last trade for CME was a disaster.