Open Outcry, from Jeff Watson

January 6, 2008 |

NYMEXI read an amusing recount of that $100 oil trade in the paper the other day at the NYMEX. They said that it was a local trader that bid $100 for a one lot in the pit, and was immediately speared in the trade. The article further said that the local pitched his long position with a $0.60 loss. I was shocked to read that they were saying that this trade would be investigated by the NYMEX because the electronic trading (which trades most of the volume) was at a lower price and this local must have been engaging in some kind of market manipulation, wanted bragging rights, or whatever. The article then editorialized about how the electronic markets are so much more efficient, and that the open outcry method is destined to the dustbin of history. They might be right about the dustbin part, but the writers haven't a clue about locals and their purpose in the food chain. One of the jobs of a local, besides providing liquidity, is to see what price the market will trade. If wheat is trading at the top of the daily range, a local will bid the price up a quarter cent just to see what kind of orders might be up there. The local will also sell the market at a new low just to see what's down below. Good locals get a feel for where the stops might be, and try to steer the market toward the stops. In my experience as a local, I bought the top of the daily range and sold the bottom almost every day. In fact, if I didn't buy at the top and sell at the bottom, I felt I wasn't doing my job with 100% efficiency. Although I lost money on those trades, I made sure they were only one contract, and it usually cost me only $25 to see where the edges of the market were. To me, it was worth $50 a day, which is a small price to see the market range. Those losing trades represented good value to me, and the strategy of pushing the market in that manner was very profitable in the long run. In the 1980s, I sold one contract of oil at the NYMEX at the all time low, and didn't feel a bit stupid about it.

Victor Niederhoffer remarks:

Many exotic options might have been triggered at $100 in oil and the trade might have created massive fictitious losses or gains for interested parties.

Larry Williams offers:

Larry WilliamsJeff stikes a nerve with me on electronic vs open out cry.  I'd love to go back to open outcry or one session markets. If there were one session, electronic or pits, with defined time zones it would be a much easier game. Now, thanks the electronic wizadry we have three sessions; 1) the twilight zone after the pits close, no liqudity, lots of false moves — and lots of real moves, massive slippage; 2) volume picks up 1-3 hours before the pits, still erratic but trades better, a little less sloppage (I mean slippage); 3) the real deal hours, better fills, moves are for real.

Anatoly Veltman recounts:

In open outcry Gold futures trading at the Comex in 1989, my volume equaled 10% of the total exchange volume on quiet days — although I was not in the pit, and didn't own a seat at the time. Contrary to popular belief, floor brokers and locals were not raping every customer order going into the pit. Things got progressively worse, as seat prices skyrocketed at the start of this century; it eventually cost $1,000/day for floor rights alone, not to mention all kinds of overhead and error risks! And that's how demand destruction for floor trading took hold. Current electronic execution is much more disadvantageous, from where I stand. Black boxes at a handful of firms scan the exchange order books every millisecond and automatically execute algorithmic trades, ripping any conceivable advantage away from participating public. They are the casino, with structurally embedded multi-billion annual profits — leaving everyone else on the other side of the zero-sum game. Question is: what evolution event will lead to eventual demise of their empire?





Speak your mind

5 Comments so far

  1. manuel ochoa on January 7, 2008 12:12 am

    Anatoly, Can you elaborate on what type of tricks the algos of these firms use?

  2. Anatoly Veltman on January 7, 2008 11:38 am

    Like counting cards. The electronic exchange “book of orders” has “depth”. It lists all orders stacked above and below, with size - which is critical. Black box sizes up the status of path of least resistance - and executes odds-on trades. No human can compete at that rate of speed, literally milliseconds. High-frequency black box execution has become the ultimate insider game in history of financial markets. Macroeconomic direction trades will only matter once in a while; black boxes skim the intra-day cream off, day-in and day-out. Each fund that owns the proprietary techniques has posted billions of profits each year, since electronic exchanges took over the volume. To limit disclosure, a handful of funds don’t even accept customers into those programs any more; they just trade proprietary capital.

  3. Acetrader on January 8, 2008 2:43 pm

    I don't know if it is that simple…the Level 2 "book" is famous for: A. not showing true size (you can show 100 shares but really have 100,000 to sell or buy, it just refreshes)…and B. isn't true institution volume never shown..ie. dark pools? Algo's do work and they do scalp…but I think there is more to it than just bid/ask swiping of the order book.

  4. George Parkanyi on January 16, 2008 10:15 pm

    With all these sessions, how can you place stops and not worry about getting mugged during the quiet hours? Do stops work for all sessions, or can you automatically limit them to the daytime sessions?

    For example in my stock accounts, my NASDAQ stops don’t work during after-hours sessions.

    Talking about selling at the lowest contract price - my buy was the highest split-adjusted trade ever in the old Comsat before the 1982 bear market (I’m proud of that one), and once I sold at the contract high of one of the platinum months (in an after-hours session actually; that price never showed on the charts for that reason) - flukes both.

  5. Stephen Boyland on September 1, 2010 9:07 pm

    If someone,(a Member) is paying the Fee to be a Member,which at one time was over $20,000. a month, so be it. The person holding orders to sell in front of $ 100.00, was not doing their job.

    The rules have changed dramatically in the last few years. It used to be illegal to disclose any order that was not the immediate Bid or Offer, now you can see depth. The bigger player you are, the more depth you can see. This is BS. It is ok’d by the exchange to bring in the big guns and therein creating more volume.

    Open outcry was not by any means perfect,but was less manipulated than the electronic platform.


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