Growing up in Chicago and getting a job as a teenager at the one of the futures or options exchanges, was like growing up in L.A. and getting a job at one of the movie studios in Hollywood, or perhaps like a kid coming of age in Brooklyn and finding work on Wall Street. When I started my trading career in 1971 at the Chicago Mercantile Exchange, working at the exchanges wasn’t quite as in vogue, as it would be a decade later. Of course now, the floors of the CME and CBOT are one in the same, and ironically, trading is primarily done electronically.
One would think that having spent my entire adult life either working at the world’s largest futures exchanges, or being an independent trader in the world’s largest futures pit, that I would have been adequately prepared for screen based electronic trading when I retired from the floor. In part, my previous experience was beneficial, and in part it, my years at the exchanges inhibited my transition to screen based trading and prohibited my potential future success.
A popular misconception is that floor traders, were exactly that...traders. In fact, the majority of us were not. Some of the guys in the bond pit didn’t even know what treasuries were, or didn’t know a head-and-shoulders, from a double bottom. Most of the locals on the floor, were market makers. Our job was to make a two sided market for the brokers, taking the other side of both retail and institutional orders. Without the local independent trader, there would not be sufficient liquidity to facilitate the customer order flow.
For taking the risk of providing liquidity, and aiding in the process of price discovery and risk transference, the local was afforded privileges, that non members of the exchanges were not so lucky to enjoy. Of course, this created an extreme advantage for the local trader and created a very unlevel playing field for outside customers..
There were certain perks that were shared universally by all members, such as a very favorable commission structure, with a yearly cap that was usually reached within the first few months of the year. For those who “demanded the edge” and didn’t step out on trades, they got to buy on the bid, and sell on the offer, and to varying degrees everyone had a “look” at the order flow. In essence we were making the market and the market information flowed out from the exchange; not the other way around.
Where you stood, whom you stood next to, and which pit you traded in, in most instances had more to do, with how much much money you made, than how good of trader or market maker you were. I stood next to a couple large “order fillers” with retail decks, but I also knew who the brokers were that were filling Goldman’s, PIMCO’s, and other institutional orders.
Obviously, you didn’t want to be on the other side of one of those big institutional orders, you wanted to be in front of them. Conversely, you did want to be on the other side of the retail orders, as they were more likely to be wrong, and more likely to place their stops at bad levels. The advantages and edges that were intrinsic to being a member of the exchange and a floor trader did lead to some questionable practices, at times. Ironically, most of the toxic algorithmic techniques you see today, were first manually practiced by local traders in the pits.
Standing next to a broker meant you had “something to lean on”. If the broker was bidding for size at a certain price, and you could buy it elsewhere in the pit, you could then lean on his bid. If the market started to trade heavily on the bid, you could hit the broker’s bid and scratch your trade, and if the market turned you could easily flip.
Irrespective of all these advantages and various other edges, if you were not disciplined and practiced good money and trade management, you would still get your ass handed to you, just like anyone else. It still boiled down to limiting your losses, and milking and adding to your winners. If you traded a large enough sample, let’s say a 100 a side and you scratched half of them, lost a tic on 15 of them and made 1-3 tics on the remaining 35, you could easily make $1500.00 after commissions and exchange fees. If you were disciplined you could do this 5 days a week 50 weeks a year, and if you wanted to take more risk, you could increase your size to scale, and make multiples of this amount.
So naturally, one would think that after having been a pretty successful trader for all those years, the transition to electronic trading would be easy and natural. Well it was and it wasn’t. Luckily, I had always been a student of the markets and technical analysis, and not only made a market in the bond pit, but position traded, and traded options. I understood the markets, I knew how to interpret charts, and I was even one of the first locals to try Pete’s funny looking Market Profile. Nevertheless, the transition was very difficult, and when I first left the floor I spent the first year trading Steve Schonfeld’s money and not mine.
Discipline, trade management, and money management were not the issues affecting my progression to a successful screen based trader. However, over trading and interpreting the price action, sans all the feedback I had taken for granted over the years, were 2 of the biggest problems.
While trading on the floor, commissions and execution slippage were not issues, so you could trade as much as you liked. In addition, you could “feel” and see what was happening. I could easily tell if the pit was long or short, and I could clearly determine what the commission houses were doing, and if there was any institutional buying or selling. It was all there for me to see. With electronic trading, it was all gone.
After quite a period of “ deliberate practice” I am starting to feel that I have reached the level of expertise I enjoyed on the floor, albeit not the consistency. I had so many edges on the floor that I think it is virtually impossible to achieve that kind of consistency trading electronically. That’s not to say that I don’t make as much or more money, than I used to make while trading on the floor. But, I am taking more risk and experiencing much bigger swings now.
In the final analysis, electronic trading has made me a smarter and better trader. No longer playing with the "house edge", it has forced me to relearn my craft, adapt, and re-invent myself. And, it is in the ways, in which we adapt to change, that ultimately defines our success.
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