|
PureBytes Links
Trading Reference Links
|
Thanks
for an interesting article John.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Adrian
<BLOCKQUOTE
>
<FONT
face=Tahoma size=2>-----Original Message-----From: John J. Lothian
[mailto:I4Lothian@xxxxxxx] Sent: Saturday, 13 March 2004 2:57
PMTo: realtraders@xxxxxxxxxxxxxxxSubject: [RT] The
Playing Field is leveler, but the Game is PlayedThe
following is an essay I wrote for my newsletter today:There are
certain tenets of electronic trading that are often recited by brokers,
traders and exchanges. One of them is that electronic trading levels
the playing field for all traders. You no longer have to be over six
foot tall, a Type A personality with an above average dose of testosterone
and standing in a trading pit to have access to the best prices and
quantities, they say. Now anyone in front of a keyboard has equal
access to the market, they claim.While that is correct theoretically,
in practice not every trader is created equal. Some traders are just
plain faster to the market due to computer power, bandwidth or automated
price injection models they are using. They utilize the latest
technology and bandwidth to pump orders in and out of the markets faster
than most humans can respond. They have sophisticated algorithms
that calculate their bids and offers on multiple systems all at the same
time. A market maker in the Mini Dow, who I mentioned in my last
FutureSource Fastbreak commentary, can run up to 10 different trading
systems, each with distinct algorithms, all at the same time.
The market maker's orders in and out of the Mini Dow are typically
logged/timed at about .25 of a second. His automated option model
scans the market for juicy opportunities and snaps them up without him
even having to touch a mouse or toggle a switch. His option model
will also automatically hedge his option deltas in the futures as
well. There is still a human override factor used when his market
making software get the wrong way in a market, but most of the trading is
automated.The market-making firm has developed its own front end
trading software, after trying systems from various vendors, to give them
a competitive advantage. They have built stripped down software that
gives them just the functionality and speed they need. What
these electronic market makers are doing is providing tremendous liquidity
to the markets and interlinking pools of liquidity as never before.
They lean on the deep pools of liquidity with high correlations and
translate that liquidity into other markets. For example, the Mini
Dow market maker might lay off a trade he takes in the Mini Dows in the
Emini S&Ps because the relationship is out of line relative to his
correlations. For the average trader, there is no competing with
this trader on a speed basis. However, positioning is
everything. Most of today's electronic markets use a first in first
out algorithm. That means that if your order was in first, you get
the first trade that matches up at that price level. Be careful of
markets where some market makers are given trade allocation preferences
based on joining the best bid or offer and providing continuous two sided
markets. You may be first, but that does not mean you get all of an
order filled even if you were first. Another tenet of
electronic trading is that trading is that it is transparent. This
normally means that as an electronic trader you can see the bids and
offers that make up a market. Take a look at <A
href="">http://eaglei.cme.com:443/index.html
to see the transparency now available to those wanting to trade the CME's
Eurodollar contract.Even in the trading pit, where there is a
transparency to who is bidding or offering, traders don't get to see the
aggregation of bids and offers below and above the market. However,
even with this apparent transparency there are differences for traders to
consider. For example, Eurex's trading platform offers snap shots
of the bids and offers in the match engine every 1 second or less.
What this means is that you are not seeing every bid and offer roll
by, but a snap shot of the book of bids and offers.The match
engine at Euronext.liffe that is now being used by the Chicago Board of
Trade and the Tokyo International Financial Futures Exchange, Liffe
Connect, offers dynamic streaming prices. What these streaming dynamic
prices mean to sophisticated electronic traders is that they can read the
bid and offer size and strategically interact with the market based on the
sizes displayed. For example, some traders may take a look at the
size of the bid or an offer before releasing a stop whose price level has
been elected. The trader may have his trading platform to not send
a stop if the order size is greater than a certain quantity. Rather
than just banging out the stop because the stop price is hit, the
streaming prices and transparent order book allows traders to inject
nuances like this into their trading strategies.Despite all this
automation that some traders are using, it is not necessary to be a
successful electronic trader. It just means you need to have a slightly
different trading style, time frame focus or skill set. The Chicago
Mercantile Exchange's new Globex Learning Center was built to help
transition current traders from the trading floor, but also to help
develop the next generation of traders. For a virtual tour of the GLC,
click here: <A
href="">http://www.cme.com/edu/etc/glcvirtual6466.htmlThe
traders that will train in the GLC will be able to practice trading in
what looks like a real trading room you would find at a brokerage firm,
hedge fund or trading arcade. There are live quotes and charts to
interact with as well as new feeds blaring. Traders in training will
have their choice of 13 different Independent Software Vendors trading
platforms to choose from. They will be able to find the system they
like the best and then practice with it with real time prices, but play
money.Another tenet of electronic trading is that it will force
traditional open outcry exchanges to close their trading floors.
Certainly the recent news that the Chicago Board of Trade had leased
its 1930s trading floor, at the foot of LaSalle Street, was an
indication that beckoning future had arrived. But the CBOT was not
using that antiquated trading floor anymore. The now shuttered
MidAmerica Commodity Exchange last used the 1930 trading room.
There is nothing for sure about closing down the trading floors,
despite what I might think or other commenter on the subject. In
fact, today's trading floors are evolving into exchange run trading
arcades where just as much electronic trade may originate as open
outcry trade. The slow migration of futures options trading to
electronic trading in the U.S., is an indication the trading floors
still have a role. The evolution of the trading floor, and
electronic trading, has never been better represented than by the new
ground floor Visitor's Center at the Chicago Mercantile Exchange.
The new interactive, multi-media attraction tells the story of the CME's
development from a butter and egg exchange on a street corner to the
U.S.'s largest futures exchange today.Just last Friday the CME
traded over 5 million futures contracts for the first time, excluding on
days when they launched their unique TRAKR contracts. They traded
over 2 million contracts on Globex for the first time on that same
day. Yesterday they traded over 2 million on Globex again, setting
another new Globex daily volume record.In the CME's new Visitor's
Center, they have a picture of the exchange's trading floor from some
years back when they traded 5,000 contracts on a particular day.
That was described in the photo legend as a particularly busy day.
Yesterday, late in the day, as the CME was setting a new Globex volume
record with every trade, the volume was growing by some 5,000 contracts
per minute. What was once a busy day is now a busy minute.
The playing field is leveler, the trading tools are more powerful and
readily available, the trading is faster and the growth potential for
futures trading continues to be substantial.Regards,John
J. LothianDisclosure: Futures trading involves risk, lots of
it!
Yahoo! Groups Links
To visit your group on the web, go to:http://groups.yahoo.com/group/realtraders/
To unsubscribe from this group, send an email to:realtraders-unsubscribe@xxxxxxxxxxxxxxx
Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.
|