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The a/c/e technology has always had the ability to run a pro rata
functionality, the same algorithm used today by Eurex for its STIR
futures. It was the CBOT's decision not to use it or anything.
Regards
DanG
John J. Lothian wrote:
Earl:
Both the new eCBOT matching engine and Globex have the ability to
use different algorithms than pure FIFO. A/c/e did not have
anything but FIFO, which to some CBOT traders who were used to the
pro rata algorith of Project A was always a sore point. This is one
major reason the CBOT picked Liffe Connect, the ability to be
flexible with algorithms and spreading functionality across products
with different needs.
There is a list of of the markets at the CBOT and what alorithms
they use at http://www.cbot.com/cbot/docs/42429.pdf.
Mostly the CBOT is using the pro rata for lower volume contracts.
OneChicago also has a market maker alorithm.
At the CME, the list of alorithms and price bands can be found
here:http://www.cme.com/files/PriceBanding02.pdf.
Also, a description of each of the alorithms is listed here:
http://www.cme.com/get/abtglx/matalgorit965.html.
There are some new products that will be coming online in the grains
in the coming months, or so I am told. FOW reported this week that
the CBOT is signing up KCBT, MGE and Winnepeg to list their
contracts on eCBOT. This would probably only be night time, like
the CBOT, who knows. It would be up to each exchange. And this is
just the tip of the iceberg for that deal. There is more there that
will be announced.
The London Clearing House is working on clearing U.S. products,
which is largely expected to be the Liffe's Eurodollars. But the
IPE/Intercontinental Exchange may well lauch a U.S. futures contract
as well.
Don't expect to see more electronic trading out of Comex in the
metals anytime soon. The CBOT's mini metals continue to show some
life, but are still best for longer term time frames.
Hope this helps.
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it!
--- In realtraders@xxxxxxxxxxxxxxx, "EarlA" <earl.a@xxxx> wrote:
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
----- Original Message -----
From: John J. Lothian
To: 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 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:
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. Lothian
Disclosure: Futures trading involves risk, lots of it!
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