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Perhaps due to being hypotized by your new tie, did you forget to give a
basic description of what the X-Fund and O-Fund vehicles are? Your note is
the first I have heard of this.
Thanks,
Norman
P.S. Please let us know if the CBOT announces plans for a CBOT-Victoria's
Secret party. Nothing better than some strategically place bushels of beans
or
Victoria's Secret Bonds.
----- Original Message -----
From: <I4Lothian@xxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Saturday, January 26, 2002 12:31 AM
Subject: [RT] CBOT X-Funds and Short Tie Syndrome
> I attended the X-Fund seminar the CBOT put on yesterday in their 5th floor
> auditorium. Therefore, before I go any further I must disclose that I was
> the recipient of an X-Fund tie (a $15 value), as were all the other
> attendees. Now you might think that a $15 tie is not a big deal and will
> not sway my opinion of the CBOT and their new product to be launched on
Feb.
> 1. However this is not the first gift I have received from the CBOT. I am
> also the proud owner of a small leather portfolio (which comes in very
handy
> for taking notes at seminars), which I think I received for criticizing
the
> CBOT in a previous email. Is that positive or negative reinforcement?
> Anyway, the real value is the X-Fund tie.
>
> As a tie challenged individual with a chronic case of STS, or Short Tie
> Syndrome, I find it important to wear silly or funny ties that attract
> attention by their silliness or their funniness. Therefore that fact that
my
> tie is consistently 2 buttons short of my belt is overlooked because, hey,
> that is a funny tie. The idea is that the tie is supposed to elicit a
> response and deflect attention from the STS. Being a tall person with a
> long waist, I believe STS is genetic in nature. I had gone so far as to
> construct several web pages on the Price Group Electronic Trading Division
> web site about an UGLY tie contest. The idea behind the contest was that
as
> electronic trading took over from open outcry, one of the industries most
> apt to be impacted was the distributors of the ugly ties worn on the
trading
> floor.
>
> This led to months of people asking me if the ties I had one was one of
the
> ones from the ugly tie contest despite the fact they were fairly normal
> ties. Thus the attention was deflected from the STS. So yes, I received a
> free tie from the CBOT and I will cherish it always, or until it stops
> deflecting attention away from the STS. On to the seminar.
>
> *******
>
> If the success of the X-Fund contract was correlated to the confident,
> intelligent, pointed and thought provoking manner in which CBOT marketing
> staff member Bob Hutchings presented the case for the X-Fund, then this
> product will be a huge success. I can't tell you how impressed I was with
> the case that Bob made, but of course I will anyway.
>
> The X-Funds represent a new type of futures contract which borrows
liquidity
> from existing liquid futures contracts, therefore giving it deep and
> persistent liquidity due to the arbitrageurs in place. The X-Fund
> represents a futures contract which is not a competitive threat with other
> exchanges' products or confrontational, but rather will attract trading
> volume to those pits or matching engines.
>
> The X-Funds represent a product which could benefit every pit broker
working
> in the pit or ring of one of the 35 contracts which qualify for selection
> for the X-Fund components. The X-Fund also represents a contract that
could
> benefit every trader in the pits of those same contracts. And, the X-Fund
> represents a contract that could benefit each and every brokerage firm in
> the industry.
>
> THERE IS SIMPLY NO OTHER FUTURES CONTRACT OR FUTURES PRODUCT WHICH DOES
ALL
> THIS.
>
> The combinations of ways to trade X-Funds is extensive and already some of
> the proprietary trading firms are constructing models to take advantage of
> the underlying movements of the X-Funds and the built in arbitrage
potential
> for the contract.
>
> The CBOT has been running a trading simulation for the X-Funds and has 100
> traders participating. This is a tremendous turnout. Firms are putting in
> electronic order routing capabilities to just be able to manage the
> arbitrage trades for the X-Funds, according to a CBOT staff member. The
> interest is there and the infrastructure is being put in place to make
this
> work.
>
> Without sounding too much like a hometown fan, this is just the type of
> innovation, creativity and deep liquid local participation that makes the
> Chicago futures community the unique cradle of market innovation that it
is.
> The fact that the X-Funds will be pit traded, in the face of the trend
> towards electronic trading, speaks to the strength of that innovation and
> creativity. This is a new market that will have instant liquidity because
it
> takes advantage of what many local traders do best; lay off trades on
> other bidders or sellers, spread trades against related markets and scalp
> the markets. There will be plenty of trading opportunities for the local
> traders, not because of a huge buzz of trading activity in the X-Fund pit,
> but rather because of the trading and price movement in the underlying
> component contracts.
>
> The CBOT has also been running some simulated X-Funds prior to launch,
just
> as my newsletter has been monitoring a group of shadow X-Fund managers.
> Despite expectations for positive cash flow and market appreciation for
the
> first two simulated X-Funds, both settled with losses.
>
> As many of you know who have been following my X-Fund writing, I have a
> problem with the concept that these X-Funds can somehow be designed to
have
> consistent expiration by expiration price appreciation. The regulatory
> mantra of the managed money industry is that past performance is not
> necessarily indicative of future results. Thus, I can't sell the idea that
> these X-Funds have a tendency to appreciate over time because I have no
way
> of proving that until I have a statistically significant sample of X-Fund
> performances. That will take at least a year of 2 week expiration X-Funds
> before that is possible.
>
> That is one reason I proposed the shadow X-Fund/O-Fund exercise, to
measure
> the performance of the X-Fund managers versus the O-Fund managers,
including
> my own random O-Fund picks. If the X-Funds will have a positive cash flow
> record, they should outshine the O-Funds. If there is some special skill
or
> tool that can be used to derive consistently profitable X-Funds, then that
> will be represented in the X-Fund traders and not the O-Fund traders.
>
> The O-Funds are also meant to make money for the CBOT and the X-Fund
> managers. There is a standard $1.00 per round turn exchange fee on the
> X-Fund trades, but there is also a $7.00 per side surcharge for
non-members
> trading X-Fund contracts. Although this seems like a lot of money in fees,
> this is actually a savings versus trading 26 weeks of the four component
> contracts, according to the CBOT examples. The X-Fund managers participate
> in the surcharge in some manner.
>
> There are a couple other aspects of the X-Funds that I think could be
> improved, which I have written about in the past. First is the accumulated
> appreciation or depreciation of the $100,000 starting value with each
week's
> expiration. There is very little chance that any trader will consistently
> return the same amount as the implied return of the X-Fund. The reason for
> this is the 2 week expiration schedule and the fact that no one can buy
and
> hold the contracts over time, because the contracts components change and
> they cash settle.
>
> Thus, I believe that referencing the price of a particular X-Fund over
time
> is somewhat misleading if it is used to imply some implicit return on
> investment. It would make far more practical sense to me to reset the
X-Fund
> to $100,000 for each 2 week expiration. The net bi-weekly movement could
> still be reported by the CBOT, along with the composite and individual
> component movements.
>
> If it is not expectations of upward sloping price movements that attracts
> traders to X-Funds, then what will it be? Volatility, capital efficiency
> and the inherent arbitrage opportunities is my answer. One CBOT staff
member
> said that any X-Fund will be shut down if it expires below a value of
> $50,000. This is related to the fact that quote vendors don't have the
broad
> based capability to trade negative prices. But I anticipate that should an
> X-Fund fall below that amount, but is the most actively traded X-Fund
> series, then the CBOT will simply adjust or reset the underlying index to
> allow for continued trading by the manager.
>
> There is no economic impact to any traders, investors or arbitrageurs to
> resetting the X-Funds to $100,000 each two week expiration and re-launch.
> Thus, the value of the index should not be the overriding consideration
for
> what X-Fund managers to continue using. The consideration should be the
> volume the X-Fund managers attract and the results achieved by the
> individual exchange members trading those X-Fund managers portfolios.
>
> There are many unknowns about the X-Funds simply because nothing like this
> has been offered before in the futures industry. I could be dead wrong
about
> my conclusions. The CBOT could be wrong about the retail public's
acceptance
> of a $100 tick size. Market tendencies highlighted by X-Fund performance
> could be identified by large quantitative oriented firms trading firms and
> the opportunities and tendencies could be crowded out. Expiration related
> volatility in component contracts, as arbitraged X-Fund positions were
> unwound, could create market movement and market noise which could affect
> the analysis of the markets for future X-Fund picks.
>
> I think the CBOT has something very special here in the X-Fund. If the
CBOT
> were publicly traded I would have gone out and bought some shares in the
> exchange the first chance I had after the seminar. And that is despite my
> misgivings about the ability of the X-Fund managers to create these
baskets
> to go up more than they go down.
>
> Actually, I think the key to attempting this neat trick is to pick markets
> which are severely overbought or oversold and bunch them together in a
fund.
> The proponents of the X-Funds have repeatedly said that the X-Funds will
> either go up or they will go down. If the go down right off the launch,
> don't buy them we are told. To me this indicates the the
> overbought/oversold conditions will be persisting in an even more dramatic
> fashion. Thus, it is best to not buy the X-Funds in such cases.
>
> However, markets don't just go up or down, sometimes they go
up-down-up-down
> and so on. It is called chop. It is called noise. It can happen any
time.
> Never say never. Never say the market can't or won't do that. Because
> sometimes they will and do.
>
> The CBOT may think they bought my favoritism with the $15 tie, but that is
> not true. I was an X-Fund enthusiast before I walked in the door. And I
> have publicly proclaimed that if you want to buy my good will, all it
takes
> is Chicago Cubs World Series tickets. That is my price.
>
> Actually, I am thinking of giving out free O-Fund boxer shorts to the
shadow
> O-Fund traders, including myself. But I will be wearing my O-Fund boxers
on
> the outside. I bet no one will notice or mention my Short Tie problem
then.
> :-)
>
> Regards,
>
> John J. Lothian
>
> Disclosure: Futures trading involves financial risk, lots of it! John J.
> Lothian is the President of the Electronic Trading Division of The Price
> Futures Group, Inc., an Introducing Broker.
>
>
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>
>
>
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>
>
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