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Interesting article, John, thank you for sharing it!
Which of the electronic systems are not pure first in and
first out (FIFO) at price? I seem to remember that the old A/C/E used
a modified FIFO based on order size while Globex was pure FIFO.
I think that the automated scalping systems effectively means that a
small trader is at a disadvantage trying to scalp ticks. My view is that
the small trader should not try to compete with these systems but must work
with a longer horizon.
Do you see any momentum toward electronic trading in the ag, energy, and
metal markets? I recall that the electronic grain futures never made it. I've
noticed the gold and silver emini but have no idea how well they trade or if the
b/a spreads are in line. I looked at the gas and crude emini, however trading is
limited to the front month which is useless for energy investing and
hedging.
Earl
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
John J. Lothian
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Friday, March 12, 2004 8:56
PM
Subject: [RT] The Playing Field is
leveler, but the Game is Played
The 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.html The
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!
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