Adapt or die. In a world of high-frequency traders, if you can’t beat ‘em, join ‘em – or at least adjust your old-school approach to trading and take advantage of big data analysis and other technological advances to try to get an edge.
Chicago's pit traders have largely failed to adapt, leaving their lucrative jobs to run restaurants or become careers coaches. Everywhere, traders over the age of 30 are trying to figure out how they can possibly use their skills outside of the large financial services organisations which no longer want to employ them.
Lewis Borsellino, the co-founder of ManOverMarket who made a name for himself as a formidable S&P 500 futures trader in the ‘80s and ‘90s, has managed to survive in the new era of e-trading. He told the Trading Show Chicago 2016 how he did this.
“In 1987 I made $4.2m and was written up in the press as the biggest single futures trader,” Borsellino said. “One time I made $1.4m in about 15 seconds – it was the biggest trade of my life.
“I had to cancel my vacation and fly back in to work on Black Monday [October 19, 1987],” he said. “In 1988, I made 90 grand – Wall Street was dismantled, and there was no more business for a time.
“After the market rebounded, I knew guys barely out of college who were making $1m or $2m a year standing on the trading floor – now they make a lot of money if they can program algorithmic trading.”
Borsellino said that while the relationship between man and market is constantly evolving, the core principles of successful trading haven’t really changed.
The notions of split-second decision-making, luck and fearless aggression in the S&P futures pit can translate to the electronic trading arena.
“The people who generate trading, the institutions, the banks the hedge funds, they drive the market,” Borsellino said. “These institutions have the advantage; they have more money than us. We smaller traders have to find ways to compete with them, because we don’t have the deep pockets they do,” he said.
Borsellino’s idea of the best prospective traders is not what you’d expect.
“Being a good trader on the floor of the exchange and now on a computer, you don’t have to be super smart,” Borsellino said. “I always looked for college athletes, or guys who barely graduated high school, joined the military and then became a trader. They were more likely to work hard, do research and stick to the plan. The guys who were really smart thought they were smarter than the market and often didn’t have the personality or the stomach to endure big trading losses.”
In 1998, the exchanges’ stated plan was to control latency. They never actually did.
“They realized if they let the high-frequency trading guys in they could double or triple the commissions,” Borsellino said.
Co-location allows trading firms to gain an unfair advantage, he said.
To compete with institutional traders, Borsellino recommends finding or developing software that can identify institutional order flow and recreate the energy and signals of a trading floor. He uses XtremeData to power his own proprietary platform.
“The last piece of the trading puzzle is recreating order flow and identifying the institutional order flow and algorithms,” he said. “Reverse engineer the order process.
“Our team can download tic data daily, down to the microseconds, and analyze order flow, including the size of match trades; order book and cancel/replace requests; the rate of change of order entry; and identifying monolithic trades – 30 transactions in 1 microsecond.”
Borsellino said that you have to use computers to help your analysis, but there’s a move back to people who are experienced in trading, “who know what they don’t know and respect the markets.”
The moment you say the market can’t do that, it does that.
“CME pit traders like me always prefer to trade from the short side,” Borsellino said. “We’re always waiting for a disaster, something to keep the markets going crazy.
“The volatility’s got me excited,” he said.
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