Storied Cotton - WSJ article

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LeapFrog
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Storied Cotton - WSJ article

Post by LeapFrog » Thu Aug 14, 2008 8:44 am

If you haven't read it yet, grab a copy of the WSJ for Wed, 8/13/08 and read the front page article about the cotton market...very interesting...especially the setting of margin requirements based on the "synthetic futures" price that was traded in the options market. That price was 4 times higher than the daily limit price (3 cents) and caused huge margin calls within the industry. The ICE has since rescinded that rule, but, who knew - I sure missed that one (whew).

(sorry, don't think I can obtain/copy the article itself.)

http://online.wsj.com/article/SB1218577 ... whats_news

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Post by sluggo » Thu Aug 14, 2008 9:05 am

Here is the full article (in .pdf form -- aside to LeapFrog: "Print" the article to your Adobe PDF printer, wallah!) and an image of the first few paragraphs.
Attachments
wsj_article.pdf
The article
(370.7 KiB) Downloaded 672 times
wsj.png
First paragraphs
wsj.png (105.31 KiB) Viewed 10915 times

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Post by LeapFrog » Thu Aug 14, 2008 10:33 am

I was thinking more about the copyright issue - but I see you're more fearless than me :) - thank U!

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Post by stamo » Thu Aug 14, 2008 12:26 pm

Just goes to show:

(1) You've got to know all the rules. The rule setting closing pricing off synthetic futures created a move 4X the daily 3 cent limit.

(2) When the floor traders disappeared, it was a 'new' market. How you got information changed significantly:

"The next Monday, March 3, it switched to all-electronic trading,
which then began at 1:30 a.m. Eastern time. Between 1:30 and 4:33
a.m., May cotton shot up three cents a pound -- the limit the futures
contract could rise that day under ICE rules."

"When U.S. traders awoke, phone lines were soon abuzz between New
York and the cotton-trading hub of Memphis, Tenn. Frantic investors
wondered where the price pressure was coming from. But with no more
floor traders to consult for scuttlebutt, they were in the dark."

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Post by RedRock » Thu Aug 14, 2008 1:44 pm

Electronic markets may have some advantages, But... I personally dont feel they are superior to the human "pit engine" which had pre existed, from the time of curb trading on the streets of Chicago, where they finally built the beautiful landmark CBOT building. Ive noticed lots of weirdness in price action when a smaller market transitions to platform trading. Rice, was one example. Lumber cattle and Hogs may well be the next (and last?) to go. The old school members at CME are being very hesitant to give up their traditional rolls as information and price facilitators and yes, rational thought modulators. I suspect ranchers and cattlemen would feel a loss at being unable to pick up the phone and access the information clearinghouse which is the pit in chicago. Lumber especially, will be an unpleasant transition, if it transits at all... The robots will have fun with that contract when humans have left the building...

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Post by sluggo » Thu Aug 14, 2008 2:32 pm

Suppose computers and electronic data networks and wireless technology were available for 30 years before the CBOT was founded. Suppose the tech was as good or better than what we have today.

Question: would they have designed the CBOT for Pit Trading if they had current technology computers & comms, at the time?

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Post by RedRock » Thu Aug 14, 2008 3:02 pm

sluggo wrote:Suppose computers and electronic data networks and wireless technology were available for 30 years before the CBOT was founded. Suppose the tech was as good or better than what we have today.

Question: would they have designed the CBOT for Pit Trading if they had current technology computers & comms, at the time?
I understand your point, all to well. In fact I felt a bit dinosaur-like writing it.

Its just having been there at its peak, in the flesh, I cant help my perspective. The next generation of traders will know no other way of doing business, and they will not have to adapt as some of us have.

In fact, when things were slow around the bean pit (82-84?), I'd sit outside the ring and "dream" about how I could someday have data access off the floor and some Flash Gordon method of transmitting orders.

I later had an account with a broker which was very cutting edge. After stocks had electronic BBS entry for some time, this shop finally brought it to the futures world. It was called LEO and the firm was Linco I think. One would type in the order on a DOS screen interface. It would then dial in directly to the brokers computer via modem and eventually transmit the order, usually. (to the pit) After a year or two, they switched to internet transmission. Others followed. Point is, when I hit the send button, I could envision the route my order would take, and even the faces of the people who would hold it in their dry cold hands. It was real in the most human sense.

Reminiscing over for now, back to doing things that wouldn't even be possible without Globex et all. When one door closes, another usually opens. Its the transitions we need to stay on top of as they come at light speed now! CT, and perhaps LB LC LH etc... Ah, heres my lesson from this post... watch the volumes of these contracts even more closely than in the past, so less chance of a surprise... Anyone notice the down spike on Globex Hogs the other day? Pit didn't 'go there'...

We do live in interesting times...

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Post by zacharyoxman » Fri Aug 15, 2008 3:22 pm

Ah LEO-WEB

My first online trading platform....how far we've come.

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Post by 7432 » Fri Aug 15, 2008 4:41 pm

82-84 redrock?
are you old enough to remember Norm Singer and Marvin Wenger?

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Post by RedRock » Fri Aug 15, 2008 11:48 pm

7432 wrote:82-84 redrock?
are you old enough to remember Norm Singer and Marvin Wenger?
I was a clerk just starting out... So, though I wouldn't have met them I do remember the names though. They had a clearing firm Singer/Wenger Correct? I worked for Stern and was in the MMI pit a few years later thru 87.

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Post by BARLI » Mon Aug 18, 2008 6:00 am

RedRock wrote: watch the volumes of these contracts even more closely than in the past, so less chance of a surprise... Anyone notice the down spike on Globex Hogs the other day? Pit didn't 'go there'...

We do live in interesting times...
RR, do you mean that the volumes will go up? I've noticed some time ago that all business is being done through electronic contract at CBOT futures like beans, bean oil, corn, wheat..

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Post by 7432 » Mon Aug 18, 2008 10:53 am

yes, they started the clearing firm Singer/Wenger and then started teaching people to be market makers. they were launching 2-3 classes of 5 people per year into the pits from 85 to 88 or so then mellowed out to just a few people per year.
similar to the article, option traders on the floor at NYMEX have been complaining about lack of liquidity in all markets since going electronic. my guess is that the payout to market makers was big enough for most of them to walk away leaving nobody to provide liquid markets.
but I figure soon enough someone(like Singer/Wenger) will figure a way to day trade futures online, make a bunch of money and start teaching and backing people to trade online. then we will once again have liquid markets.

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Post by RedRock » Mon Aug 18, 2008 11:21 am

BARLI wrote:
RedRock wrote: watch the volumes of these contracts even more closely than in the past, so less chance of a surprise... Anyone notice the down spike on Globex Hogs the other day? Pit didn't 'go there'...

We do live in interesting times...
RR, do you mean that the volumes will go up? I've noticed some time ago that all business is being done through electronic contract at CBOT futures like beans, bean oil, corn, wheat..
Opposite. Pit still has liquidity lead in LC LH LB. LE HE are gaining though. Its a two market scenario at the moment. Like most markets were as they transitioned.

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Post by RedRock » Mon Aug 18, 2008 11:27 am

7432 wrote:yes, they started the clearing firm Singer/Wenger and then started teaching people to be market makers. they were launching 2-3 classes of 5 people per year into the pits from 85 to 88 or so then mellowed out to just a few people per year.
similar to the article, option traders on the floor at NYMEX have been complaining about lack of liquidity in all markets since going electronic. my guess is that the payout to market makers was big enough for most of them to walk away leaving nobody to provide liquid markets.
but I figure soon enough someone(like Singer/Wenger) will figure a way to day trade futures online, make a bunch of money and start teaching and backing people to trade online. then we will once again have liquid markets.
Were you part of that group 7432? I'm sure my life's path would have been different if I'd had that kind of mentoring.

I fear with the E platforms, its the robots and programers which have won the day. I prefer your version though.

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Post by 7432 » Mon Aug 18, 2008 1:20 pm

second group, I started trading in the s&p futures pit in november of '85.
it was a great program. they had meetings twice a week in which experienced traders talked about their trades for our benefit and then mock tradings sessions almost every day.
I saw similar things going on during 1999. the floor my office was on in the NYMEX building was being filled up by people trading tech stocks. looked like they were training and adding a handfull of traders every month.
I would think the same thing would happen with electronic futures and options, especially as the software gets better. even if its robots and programmers we still get liquidity.

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Post by BARLI » Tue Aug 19, 2008 3:27 am

7432 wrote:yes, they started the clearing firm Singer/Wenger and then started teaching people to be market makers. they were launching 2-3 classes of 5 people per year into the pits from 85 to 88 or so then mellowed out to just a few people per year.
similar to the article, option traders on the floor at NYMEX have been complaining about lack of liquidity in all markets since going electronic. my guess is that the payout to market makers was big enough for most of them to walk away leaving nobody to provide liquid markets.
but I figure soon enough someone(like Singer/Wenger) will figure a way to day trade futures online, make a bunch of money and start teaching and backing people to trade online. then we will once again have liquid markets.

7432, were the market makers get payed to provide liquidity for the options? I'm a market maker for israeli stocks and bonds and our firm gets payed for making markets (from the customers: those companies whose stocks we trade) cos it's not profitable, the volumes are very low in those stocks I trade (3-5 k $ a day, sometimes as low as 200$ a day) its mostly OTC market that I do. Another company that I know of they do make market for Tel Aviv 25 options(its like Dow Jones in US) by arbitraging mostly, volumes there are much higher (between 5 to 10 mil$ a day at in the money options). Were you ever thinking about getting into market making of those NYMEX, NYBOT options ? I dont know US regulations much but it seems like there's quite a few opportunities to reap, there are a lot of them with 0 daily volume.

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Post by 7432 » Tue Aug 19, 2008 12:01 pm

I've never heard of anyone being paid to provide liquidity in futures and futures options, but some exchanges did give exchange fee kick backs to promote volume in the early '90's.
trading futures options, even the illiquid markets, is profitable enough that there is always someone willing to step in and make markets.
I traded futures options in NY until I retired in 2000 and I don't have any interest in a daily job like being a market maker.
but I was in NY 2 weeks ago and the option market makers on the floor are still making great money because the volume is huge due to hedge fund activity. so there is still time to move to NY and be a floor trader if anyone has ever wanter to do that.
in the energies and metals the volume is starting to move upstairs and to the electronic platforms, but the software isn't ready for option spread quotes just yet which is slowing the transition down.
ICE just moved the softs to its electronic platform in march and there hasn't been any volume yet.

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Post by BARLI » Tue Aug 19, 2008 3:30 pm

I was in NYMEX in April and then in Utah too on my US trip(I was living in Sandy on the boarder with Draper)... the only pit that was crowded and even had one female was Natural Gas options pit..Crude Oil was dead with like 3 guys trading there. So do you mean that making market for softs on electronic platforms is one of the opportunities? What if I wanna make market for the options on the floor in NY, what company should I look to join?

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Post by 7432 » Wed Aug 20, 2008 2:48 pm

the fast track to floor trading would be to find a local that is looking to back someone, they would teach you how to trade their way and then back you trading. I've been told that is happening less and less with the risk levels people have to take in order to make money. the local NY clearing house(Stone or Gelderman) would be the place to call and ask about locals looking to hire people.

the best bet might be Susquehanna(SIG), they are huge now and still have people on the floors making markets.
http://www.sig.com/index.html

almost all options except softs are traded upstairs now, even some sugar and cotton trades are floated by the desks before they hit the floor. the reason is that a customer wants a huge trade done at what they consider a fair price. straight to the floor it could take hours to fill and have dozens of different prices. at a desk they get one fill right away, then the upstairs guys spend the time laying off risk on the floor.
SIG has people upstairs making markets in everything, and they also have people on the floors trading so both sides are covered. plus a SIG trader can trade multiple markets at once, a regular floor local can cover only 1 or 2.

as far as the Sandy-Draper boarder goes, you found the best place in the world to live. :D
I live above the HVCC golf course on the boarder, 12 miles from Snowbird, awesome.

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Post by BARLI » Wed Aug 20, 2008 5:04 pm

my older brother just recently moved to SLC ...I loved entire state of Utah, even Fillmore! Gorgeous views on the valley where the new Draper temple is built...
So I should check out SIG.. I've already checked NYMEX guys, MBF corp, you've heard of them? They clear every 4-th Crude Oil contract, but the guy who runs it, Mark Fisher told me they stopped hiring people right after the pit trading died...

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