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Dear Group,
Yesterday, James Murphy mentioned Jeff Jacobsen, who started Listen Only
Systems (the Squawkbox purveyer). I'd like to share with the group a
conversation I had with Jeff, as mentioned in the following letter to a
member of this group in a post I made several months ago:
Dear xxx,
I'd like to share with you a part of a conversation I had several weeks
ago
with Jeff Jacobsen, an ex-clerk, runner, large firm broker. He now runs
a
boutique S&P brokerage and also owns and manages "Listen Only Systems",
which is an S&P and Bond Squawkbox available by phone, satellite, or
internet. He "calls" the Squawkbox on the S&P and fills orders for his
clients. If you want to talk with him, his phone is (800) 592-1296. I
was
talking with him about his 10-20 years of dealing with S&P clients, and
I
asked him what in his opinion it took to be successful daytrading the
S&P
and what degree of success had he seen among his public clients in his
10-20
years. He said that he had handled over that time period between
100-200
public clients (like you and me), and among them there had been several,
perhaps 5, who were net winners but only one who had made any
significant
money: 1 out of 100-200 in 10-20 years. I asked him to tell me about
the
guy and what he meant by significant money. Jeff said that this guy
traded
5s and 10s, would put his whole trade on at once, and consistently made
between $5K and $35K daily, like clockwork; he couldn't remember him
having
a losing day. He said the guy had absolutely remarkable confidence in
his
method. He traded his method no matter what, no matter the last trade,
the
last 5 trades, whatever. He seemed totally oblivious to the market. He
took his method's signals regardless. Jeff said that he had never seen
anyone with such discipline. Another remarkable trait about this guy
was
that he paid the market generously to trade. Jeff used the example of a
market trading 70 bid at 90 (meaning if you were on the floor, you could
sell to a local at 70 and buy from a local at 90). He asked "What do
you
think a client will do who wants to sell that market? A dumb client
will
put in an order 'Sell one at 90' thinking that he can compete with the
locals and not pay any spread. A smarter client will try to split the
spread and put in an order 'Sell one at 80.' A more experienced client
will
accept the fact that he isn't on the floor and can't compete with the
locals, so he will pay the locals their spread and put in an order 'Sell
one
at 70.' But you know what this trader did? He'd put in an order 'Sell
one
at 50.' And you know what? He always got filled, while none of the
others
would except the guy at 70, and he'd get filled only occasionally and
NEVER
if there was a substantial market move down in the making --- just when
you
absolutely, certainly want to get filled." So, Jeff said, "this guy
paid
the locals to take his order, and they would, and this guy was ALWAYS in
the
market when he wanted to be." Jeff said something else that I have felt
for
sometime but have never heard anybody of any authority say: "The floor
knows
where the market is going. What they do, for example, if they think the
market, say the 70 bid at 90 market as above, is going down is that that
they use every fakeout that they can to entice buyers in and at the same
time make it as hard as possible for sellers to have their order
executed.
Then, after their efforts no longer yield any more effect and they have
gotten all the buyers in that they think are going to come in, they drop
the
market suddenly, in such a way as to freeze out any more sellers from
entering. So, if the locals know the price is going down, it's easy to
buy,
but you've got to pay them to sell, and that was the genious of this
trader.
He figured that out and paid them to take his orders." This is what is
going on when you see the market bouncing back and forth for several
minutes
in a 20 or so point range, and then it tanks for 100-150 points, in what
on
the floor is known as a "runner", a market having no back-ticks, so that
the
Exchange rules won't require that a resting order (such as a stop along
the
way) be filled until the runner exhausts at the bottom, where the locals
repeat the process. Meanwhile, all the outside players, like you and
me,
who've had resting sell-stops in the market have just gotten our
sell-stops
filled one tick from the bottom! Guess who wins on these moves? I
firmly
believe that I can't outsmart the locals. If I want to play their game
and
have any chance at winning, and it is their game, after all, and they
make
the rules, I gotta pay them off. Pardon my cynicism, but I've come to
accept that the Exchanges are not charitable organizations - despite all
their marketing propaganda and the CFTC and the NFA etc., the Exchanges
are
in business for one purpose and one purpose only: to make money for
their
members. If something won't make money for their members, they don't do
it.
Everything, to the extent legally possible, regarding the Exchanges is
cut
in favor of their members. (OK, OK, I'll get off of my soapbox, but I
get
the impression that most home and office traders have some kind of
fantasy
that the Exchanges are some kind of Disney World that is there for their
benefit.)
Sincerely,
Richard Josslin
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