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In a message dated 12/29/01 11:54:51 PM Central Standard Time,
kentr@xxxxxxxxxxxxxx writes:
<< Stipulating that I know little about the futures industry or the more
nuanced mechanics of something like this. John, I'm not trying to be harsh
here. I just honestly think this is a really, really bad idea. Swaps and
spreads have obvious benefits for anyone who trades the underlying. This
contract has no obvious customers except one.
***** I think you are being harsh, but that is ok. Different opinions make
for markets. There is more than one natural client here. The most natural
client would be the public investor. They are able to buy (or sell) a short
term managed portfolio. Thus, you have a professionally managed portfolio,
in a completely different time frame, and the wins and losses a quickly
determined. This contract has benefit if only because it will get the trader
out of a losing trade quickly. You know the definition of a position trade,
right? That is a day trade that was a loser at the end of the day. Some
people have trouble pulling the plug on losers. This contract actually
addresses that.
Kent says:
Up 90% of the time? Really? I don't have to know much about the industry
to know that this would be a nice trick if it were possible. But let's say
that it is. Let's say that on average, one of these Xcontracts will end
it's life up an average of $750 from where it starts. Everyone knows what
will happen next. That gets arbed away on the open of the contract. From
there on, it's a craps shoot. So now let's say I'm a "member of the
public". What's my angle? If I think corn is going up, do I want to
complicate a position and dilute my margin with S&P, oil, and lumber? Nope.
And the argument about being able to neutralize portions of the position
using the underlying? If I wanted to get into pork bellies and gold
positions, why would I complicate my analysis with copper and 2-year notes?
Jesus, getting one market right is tough enough.
****** I don't agree with this part either, as I said. However, we won't
really know the answer to this until we get enough actual data. As for
trading multiple markets, if that is not your cup of tea so be it. Then this
is not your deal. But a Commodity Trading Advisor who buys or sells the
Xfund may be able to use their own analysis of the underlyings to maximize
the utility of the product. And there are actually members of the public who
do trade more than one product. I think there are a lot of traders who only
trade one product too, which is commonly an equity index and one of the most
difficult to trade.
Kent says:
Now we're getting to the point. This allows the CBOT to trade other
exchange's stuff and "offers tremendous opportunities" for the CBOT pit
traders.
***** We have lots of examples of exchanges trading other exchanges "stuff,"
and that is certainly the trend into the future. Options exchanges with
multiple listings, the new Single Stock Futures exchanges, Brokertec and the
foreign exchanges are all listing contracts that are traded on other
exchanges or some derivative of it. So the CBOT is just being creative in
presenting a new product that I believe will bring new liquidity pools to
some of those existing exchange's contracts. Yes, the CBOT wants to create
member opportunity. Yes, it creates opportunity for floor traders, but also
for the public. It all depends on what you bring to the dance.
Kent says:
Isn't this the real kernel of inspiration behind the new contract? Benefit
the floor traders? An attempt to create a product that is easy for floor
traders to arb? Then the only people who will want to trade it will be
floor traders who benefit. Shouldn't the CBOT be creating products that
everyone wants to trade?
***** I believe the Xfund concept presents lots of alternatives that will
appeal to lots of different people. We are limited only by our lack of
imagination. The floor trader arb component is an attempt to create instant
liquidity in this product. Just like the emini S&P benefited from the
liquidity of the big S&P, these contracts will find the ultimate risk being
deposited into the underlying futures contracts. For example, the S&P 100
options are often priced and hedged off of the emini S&P. The market makers
in the 100s know they can lean on the emini to lay off their risk. That is
what many floor traders do, they manage a portfolio of positions that are
interrelated to each other. They have the transaction costs to do that most
efficiently. So I don't see anything wrong with this design, other than I
believe in listing things both in the pit and on the screen. In fact, I see
this design as a tremendous asset to the product.
Here's some ideas. An Anthrax contract: that way, if you think you're gonna
get Anthrax, you could short one of these puppies and you'd be safe. A Spam
contract: got too much Spam in your inbox? Short one of these and hope the
guy on the other end takes delivery. An A/C/E Volume contract: if you're a
floor trader, you could go long one of these and you'd benefit as the rest
of the world goes electronic.
***** Well now you are getting silly. Actually though, you are right on the
money on the a/c/e volume contract. That is why the CBOT and the other
exchanges are going for-profit. The value of owning the class of shares tied
to the exchange, and not trading rights, is directly related to the volume of
the exchange.
This contract reminds me of that episode of 60 Minutes where they did a
segment on the derivatives industry shortly after Barrings and Orange County
went down. They held up a flash card filled with symbols that defined some
derivatives contract. It looked confusing as crap to me and I know PERL.
****** I can be easily confused too. You should try reading the Futures
Industry Journal (not the name, but close) published by Wiley. It would make
your head spin. But the latest edition did have an interesting piece on
arbitrage. Even excluding all the formulas included, it was an interesting
read.
Rule 1 of customer service: service the customer. Unfortunately, this is
open to interpretation.
***** Here is my suggestion for you. Read a book called the Innovator's
Dilemma by Clayton Christensen. It suggests that sometimes innovative new
products don't have an audience in your existing customers, but rather you
have build the product first and then find the customers for it. There were
not clients who wanted slower smaller disk drives among the mainframe
computer users. But the guys who developed the slower smaller disk drives
went out and developed a new client base for them. And that was the start of
the Personal Computer business. So you are right, this is open to
interpretation.
Kent
>>
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it! Past
performance is not necessarily indicative of future results. John J. Lothian
is the President of the Electronic Trading Division of The Price Futures
Group, Inc., an Introducing Broker.
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