October 2012
By Iqbal Brainch
Chief Marketing Officer
Advantage Futures
Electronic trading transformed the futures industry over the past decade. The players have adapted and evolved to suit the new technological landscape. How have open outcry traders made the leap to a world of microseconds, colocation, algorithms and automation? To understand the transformation, I sat down with two of the best: John Richards, founder of Webster Capital in Chicago, and Job Spetter, a NYMEX commodities trader. It was amazing to learn the scope of responsibilities these traders manage on a daily basis. While the lay press may dismiss futures traders as glorified gamblers, they are in fact true professionals who excel at their crafts. They deal with recruiting talent, technology, programming, managing teams and business planning every day.
PIT TRADING
Examining and appreciating the differences between pit trading and electronic trading is the first step to understanding the evolution of today’s trader. Richards experienced serious disadvantages early in his trading career on the floor. He started as a clerk for a market-making group in the late 1980s, during the peak of open outcry. “In the pit, it didn’t really matter how smart you were. It depended on your position and physical presence.” Richards found that his height and position on the floor were problematic. He also recognized that brokers dealt with guys they liked and everyone seemed to hire their neighbor or friend.
While seemingly archaic behavior was the norm in the pit, newer traders had distinct advantages. As Richards pointed out, “I can learn a lot faster in the pit. I could learn from others a lot more and benefit from more sounding boards.” Additionally, Richards easily recognized the level of competition in other pits. The options pits, for example, were a relatively new development; thus, competition was less and a physical presence was not as important. After becoming an options trader, Richards started managing positions and learned how to run inventory—a skill that he believes was instrumental in his success as an electronic trader. Job Spetter began his trading career as a clerk on the NYMEX floor around 2007 and eventually saved enough money to open his own account. “At the time, there was more flow on the floor and it was busier. The decline of the floor wasn’t a gradual thing; however, people were just gone.”
Spetter echoed some of Richards’ comments in that before electronic orders, he had to “deal with and know the guys on the floor.” He noted that the move from the floor to electronic trading had passed its tipping point: “They began combining all of the rings in NY because there just weren’t enough people.” Spetter started trading electronically from the floor and quickly realized there was no longer an advantage to maintaining a physical presence. There was, however, a huge advantage to trading from an office near his home–22 miles from the NYMEX building.
TRANSITION TO ELECTRONIC TRADING
Electronic trading has been referred to as the “great equalizer” in that so many of the variables that existed with floor trading have been eliminated. The move to electronic trading, however, goes beyond the proximity, physical presence and relationships. There now exists a level of complexity that was never seen on the floor. While the learning curve was steep, traders who adapted seem to have embraced the change. Richards put it bluntly, “Change only sucks for someone who has everything.” When asked how he kept up with the change and new access to limitless information, Spetter responded emphatically, “I’m a professional and I treat my position as such.” Historically, traders have not been viewed as business professionals, but today—more than ever—that descriptor is appropriate.
On the surface, it appears that one of the most drastic changes from trading on the floor to trading in an office is the lack of camaraderie. While electronic trading doesn’t necessarily provide the same in-your-face competitive adrenaline, the day-to-day environment of today’s traders is more diverse and team-oriented. Traders who transitioned to single offices or traded alone struggled during the transition. Both Richards and Spetter surrounded themselves with other traders as well as support staff. They agree that with other people in your office, you are more likely to keep up with the steep learning curve and turn to others when things aren’t going well.
HIRING TALENT
One area where today’s trader can really make a difference in their trading success is in the hiring of talented individuals. As Webster Capital has grown over the years, Richards has spent a great deal of time thinking about hiring strategies. “It used to be that you would look to hire an Ivy League hockey player someone who was smart with a physical presence. After the transition to the screen, physical presence is no longer relevant.” He now looks for math and engineering undergrads with an affinity for gaming because they understand strategy. “Undergrads only, because graduate students think they know too much,” he noted with a smile. A poor hire can cost you a lot in a very small amount of time, so hiring is critical. While Spetter is still in the infancy of his trading business, he echoed the need for “MIT-types” to help build his business.
TECHNOLOGY
Technology is one of the more obvious challenges for today’s futures trader. Computers, software providers, connectivity and server colocation are just some of the considerations critical for the success of an electronic trader. Spetter has leaned heavily on his clearing firm, Advantage Futures, for technology support. “Advantage has provided a lot of knowledge and suggestions on what I need to be successful,” remarked Spetter. “You are only as good as your support staff.” As he transitioned his business operations to Florida, he sought out additional guidance: “We did our homework. With Advantage, we figured out the best route to go from Florida to Chicago with a minimal amount of hoops to jump through.” Technology has allowed him to easily manage his positions in multiple markets and products.
Increased trading risk is an added factor inherent with electronic trading today. Risks include fat finger mistakes, coding errors and strategy or trade design flaws, as well as software glitches if you are writing your own software. Despite these added risks, traders seem to like the tradeoffs. “I can capture and synthesize information more quickly in my market and in other markets,” suggested Richards, while Spetter added that “there are inherent pitfalls and hurdles with electronic trading; however, as long as you can mitigate those obstacles, you can be in many more places at the same time. I often trade European products vs. theirU.S.counterparts—something that physically would have been impossible if trading wasn’t electronic.”
FLEXIBITY WITH A PRICE
Better technology and 24-hour markets allow traders a greater amount of flexibility in setting up their trading operation in terms of location, opportunities and times of operation. “We’re on the job a lot more hours, but we can be on the job from almost anywhere,” Richards stated. “The physical day in the office is shorter, but the time in front of the screen is longer.” Access to global markets increases the complexity and number of trading strategies or products in play at any given moment.
For Spetter, the flexibility of electronic trading allowed him to move his entire trading operation to Florida. He proved he could trade from a remote office, and the physical location of his trading became irrelevant. In addition, he has diversified his trading products to include additional CME Group products, ICE products and other cross-exchange products.
GLOBAL COMPETITION
The competition for futures traders has gone from those in a 40-mile radius of the exchange floor to a global community of traders. Traders who moved to electronic trading early had the advantage of speed and connectivity options. But with the growth of colocation services, the playing field has become increasingly crowded and technology has become the great equalizer. There was a greater likelihood of finding trading opportunities before the migration to electronic platforms. Since the markets trade more efficiently, the skills of today’s trader are tested more than ever. Both Spetter and Richards commented on the importance of being ahead of the curve and seeing opportunities before they arise. “The guys that used to be good are still good because they can see it coming,” Spetter stated.
KEYS TO SUCCESS
Today’s futures traders exhibit a higher level of professionalism than their predecessors. They learn to manage their trading as a business. They see the global picture, as opposed to focusing on a single domestic market. Efficient infrastructure and support, along with risk management, are requirements for a successful trading operation. Traders are very concerned with costs and always looking for creative ways to share those costs when possible. The fixed costs of trading are higher now, and managing those expenses when business is slow is critical. While there isn’t the same opportunity to learn from the traders in the pit around you, clearing firms and support staff are providing an increasing level of service that can accelerate the learning curve. Spetter mentioned that he “wasted a lot of time and money not knowing enough.” Newer traders have the unique advantage of learning from others’ mistakes. In many ways, the reliance on others for successful trading has never been more important. “Be humble. Listen as much as you can. There is always something to learn,” added Spetter.
THE FUTURE
Looking ahead, the electronic futures markets can provide endless possibilities for today’s futures trader. The flexibility of trading from anywhere in the world allows traders to continue to trade for as long as they like. As he reflected on the changes and opportunities ahead, Richards remarked, “It was more fun before for the wrong reasons. These days, it’s much more interesting. Everybody can be a junior economist now.” Both Spetter and Richards talked about expanding their teams over the next few years. While they’ve experienced a great amount of change in the last decade, it’s clear that they are more excited about the future. Richards cautioned younger traders, “It’s a great job 99 percent of the time, but that means that one in a hundred happens three to four times a year. You want to hide under your bed about three times a year, and you think you’re losing it all… but I’m an adult, and I realize the path I’ve chosen.”
