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Floored, But Back On My Feet!
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Floored, But Back On My Feet!

  #51 (permalink)
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tigertrader View Post

if I ever get to the point where I feel a sense of “ substantial completion” with regard to my methodology, I will be more than happy to present a webinar.

Never gonna happen, otherwise this would counter your system.

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  #52 (permalink)
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bluemele View Post
Never gonna happen, otherwise this would counter your system.


good point, my friend!

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  #53 (permalink)
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mattz View Post
@tigertrader Can share some stories about the superstitious floor guys? I heard some of them were wild.

When I started in the Muni pit, there was a woman named Elise G. who told me she had burned a sweater she was wearing on a bad day. She was one of maybe 4 female traders I knew out of the thousands there. A few more were brokers. She traded futures, most of the rest traded options. She traded small because both her father and brother had been wiped out (and I heard her Dad was a great trader) but she was really good and tough as nails.

"You don't need a weatherman to know which way the wind blows..."
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  #54 (permalink)
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Gary, awesome post. Clearly you spent a lot of time deciding what you wanted to say. I liked it that you didn't gloss over the huge advantage locals had over the rest of the world. Far from being master traders, a lot of guys just worked the advantages they had. It bears repeating that some of the practices you describe, such as front running and brokers disclosing orders not on the market, violated exchange rules. I'm shocked, shocked, to discover that ...

Personally, I don't believe it's possible to be a really large "trader" and just make markets. Baldwin, Charlie D., Frank Dougherty, I think those guys absolutely were traders. So were Harris and Frank Brumfeld and and Carl Boraiko (in the Ten Year pit). Once you carry positions larger than market liquidity will allow you to easily exit, you need to become a trader to survive. My basic m.o. for getting the edge in the Five Year pit essentially involved front running the cash/futures arbs. I could see the cash trading on the screens, I learned to anticipate when arb orders would be coming in, but being in the pit I could get there first. I routinely carried 500 lot positions, but most arb orders were for 50-100 contracts and the bid/ask was rarely more than 300 contracts. Without some trading ability, I never could have carried such size. And trader or market maker, what separated the survivors from the rest was the traditional psychological and money management practices we talk about so much on this forum.

About ritual: my mentor, John Baca, would not take the second elevator on the left from the 12th floor to the 4th floor. He said every time he did he lost ten grand. Half the Five Year pit wore Hawaiian shirts every Friday. I wore the same necktie every day for ten years, until it finally wore through.

"You don't need a weatherman to know which way the wind blows..."
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  #55 (permalink)
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Dreamer, Schemer, In Vain Redeemer - Putting on the O'hare Spread

Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power. P.J. O’rourke

It was rollover and I was standing close to the center of the bond pit so that I would have access to both the spread paper and 2nd month brokers, when Darrell Zimmerman walked up to me. The bond market was experiencing a brief respite from it’s usual frenzied trading activity and Darrell had taken the opportunity to come by and talk to me. He informed me that he was working with some large institutional traders in New York and overseas, and that they were going to be trading some size in the 30 year. He then asked me if I would like to fill their orders, or at least a portion of them. I explained to Darrell that although I occasionally did brokerage, it was only as an accommodation to the floor brokers I stood next to, so that they would be able take a break or have lunch.The majority of the time I functioned as a trader, and I wasn’t interested in being taken out of the market, to fill some orders. Besides, I didn’t know who these customers were. Darrell went on to tell me that there was going to be a considerable amount of business, and that if I did a good job, I could have the deck. I respectfully declined his offer and Darrell walked away. It wasn’t long before I saw Darrell talking to another broker on the other side of the pit, and then another. Little did I know, that I had just made one of the smartest decisions of my life.

I had met Darrell and his wife Lisa, who doubled as his clerk, in the lounge of my clearing firm. He was a very talkative and gregarious guy, but in a used-car-salesman kind of way. He was a perennial bust-out, kicked out of numerous clearing firms at both the Merc and the Board, but now had an account where I cleared my trades. There were a lot of Darrells that hung around the Merc and Board; ego-driven dreamers that chronically blew up their trading accounts, yet always found a way to get back in the game; hanging on a little while longer before justice was inevitably meted out. A lot of them would quietly disappear, while others would get jobs on the floor, evaporating into the milieu of floor clerks never to be seen or heard from again, yet always fantasizing about making it big one day.

Every trader did it; dreamed about the big trade; fantasized about taking a shot. Chicago’s traders had their own mythical way for making this dream come true, the O’hare spread. The idea was to put on an incredibly large position, get in a cab, and head for O’hare airport. If the trade was a winner, you either returned home or got on a plane to Hawaii - if the trade was loser, you bought a one way ticket to a country that did not have an extradition agreement with the U.S. We also had a saying, “If you are going to blow out, blow out big” If your debit was too small, your clearing firm would write off the loss, and then write you off. But in the CBOT's version of “too big to fail", if you hurt your clearing firm bad enough, they would arrange a way for you to generate the income necessary, to pay them back. Apparently, Darrell had taken these fantasies to heart having already already planned to put on an O'hare spread, before he approached me in the pit that day. While I had refused his offer, he did manage to enlist 9 unwitting brokers to assist him and his partner, Tony Catalfo, in a scheme that would bring down one of the oldest clearing firms at the CBOT.

The bell rang at 7:20 AM on a Thursday morning and Tony, who had strategically placed himself in the Bond options pit, was buying up every at-the-money put he could get his hands on. Meanwhile, Darrell was putting in huge sell orders in the bonds to the 9 brokers whose help he had enlisted earlier. Tom Baldwin was on the other side of the bulk of these orders, and when the options traders started to lay off the puts they sold to Tony, with short hedges in the bond futures, panic ensued and the market had nowhere to go but down. Darrell then entered the pit himself and began to sell more bonds. In the Bond options pit, the put options were going through the roof, and Tony was beginning to take profits on his long put position. This all took place before 7:30 AM, when an economic release came out which was negative for bond prices. In a stroke of incredible luck, the market broke even more and Tony covered the balance of his position for about a 1.5 million profit, while Darrel was now short about 12,000 bond futures, and up about 5MM on his open position. The feedback loop of selling they had created was working perfectly.

Darrell had been dismissed long ago from my clearing firm, and along with Catalfo, was now clearing Stern & Co., a family run business that was founded by Lee B. Stern. Lee had made his fortune trading grains, and owned the Chicago Sting soccer franchise, a piece of the White Sox, and was one of the most respected members of CBOT. Lee rarely came onto the floor anymore, but when he did make an appearance in one of the grain pits, his actions were highly scrutinized by other traders, as a possible clue to where the market was headed.

Bad news travels fast in the futures industry and virally fast on the floor, so it did not take long for word of Zimmerman’s and Catalfo’s involvement in the bond panic, to reach Stern’s office. Lee’s son and a few of the firm’s employees rushed to the floor and quickly enlisted the help of the security guards. Zimmerman had lost his count and was standing outside of the pit when they grabbed him, while they physically pulled Catalfo out of the Bond options pit. After witnessing this melee, traders in both pits began to piece together what had happened. Tom Baldwin , who had been unsuccessfully taking the opposite side of Zimmerman’s orders, realized the sell-off had been artificially induced, and that traders would have to cover their shorts. He quickly took advantage of the situation and began to bid up the price of bonds. Bond futures and bond options prices reversed on a dime and snapped back with a vengeance.

Meanwhile, Stern’s employees, who had wrestled the trading cards out of Tony and Darrell’s hands, were frantically trying to get a handle on what was now, Stern's position. In addition to the trades that Tony and Darrell had made, were the fills of the 9 floor brokers, which had to be collected and aggregated in order to get an accurate count. It took them 2 hours before they could figure out the position, and what had been a $5MM winner, had turned into an $8.5MM loser by the time the position was liquidated. Had they been able to figure out Zimmerman’s position quicker, and not tipped off floor to what was going down, Stern could have escaped with anywhere from a small loss to a small gain. Instead, Stern had to make good for Zimmerman’s $8.5MM loss, and as a result, lost it’s clearing status after 25 years in business, and had to lay off 20 employees.

Catalfo tried to collect on his $1.5MM profit on his options position, but received a 42 month prison sentence instead.The proceeds from his trades were awarded to Stern to help offset his losses, while Stern went after the 9 filling brokers for the balance. Zimmerman hopped in a cab to the airport and got on a plane to his parents home in Canada, completing the other leg of the O’hare spread. He was eventually extradited and sentenced to 42 months for his efforts. Darrell Zimmerman came very close to pulling off his insane plan, but he let his ego and his greed get the best of him. Had he executed his plan on a smaller scale, in a more restrained manner, he might not have aroused the suspicion of his clearing firm. He had the market right where he wanted it, and had he not lost his count and tipped his hand, he might have been able to cover his position while it was still a huge winner. Whether they would have let him keep his profits is highly dubious, because Zimmerman’s sole legacy from his lunatic scheme, is the eponymously named rule, that allows clearing firms to seize the profits of any trader that attempts to take a shot at them.


Last edited by tigertrader; October 23rd, 2011 at 11:32 PM.
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  #56 (permalink)
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Things Are Not Always What They Seem

Chicago is one of the most interesting cities one could ever hope to call home. Vibrant and sophisticated, yet friendly and very manageable. It’s ethnically diverse residents have a Midwest sensibility and a blue collar work ethic that complements the resilient economy. While it is often referred to as the city that works, it’s politicians and patronage style government have been historically corrupt. In turn, this doctrine of deceit has spawned many over-zealous and overly ambitious prosecutors, who have used the office as a springboard to higher political office.

I would imagine then, that Chicago would have seemed like the perfect setting for the producers of the “The Sting”, a caper film that involved a complicated plot by two professional grifters, Robert Redford and Paul Newman, to con a mob boss, Robert Shaw. They were shooting scenes for the movie, in Chicago’s Union Station, whose tracks ran below the Chicago Mercantile Exchange (CME) while I still worked as a clerk, during the summer of 1973. While taking a break from shooting, the cast was given a tour of the CME trading floor by the building’s management and Merc officials. Trading literally came to halt, as Paul Newman, Robert Redford, and Robert Shaw, et al, walked from pit to pit. As they walked by me, I overheard Alan Freeman, a quintessential Merc trader, remark in typical Merc-Jerk fashion, “ Well, I might not be as good looking as Newman or Redford, but I bet you I have as much money as they do.”15 years later, the same hubris on display that day, would come back to haunt many of the members of Chicago’s exchanges, as they became the target of a very similar sting operation.

Chicago had always “enjoyed” a much publicized bad reputation, which some Chicagoans felt, was still better than no reputation at all. Before Michael, Oprah, and Barak, Chicago was best known for being the home to the Mob and Al Capone, a gangster, and a cold blooded killer. If you screwed the wrong people they would get back at you one way or another - either physically, or if they were powerful and had friends in the government, they would find a way to prosecute you. Duane Andreas was the chairman of Archer Daniels Midland, one of the largest food processors in the world. He was also one of the largest and most prominent campaign donors in the country, contributing millions of dollars to both parties. ADM had been investigated for price-fixing and would eventually be assessed the largest antitrust fine in United States history. Nevertheless, it was Andreas who complained to Federal prosecutors, that the Chicago futures exchanges were ripping him off and ripping the public off for millions of dollars.

The Federal governments response was to launch an undercover probe of floor trading practices at both the CME and the CBOT. The sting operation would not be easy to pull off. The floors of both exchanges were like a boy’s club. Guided by a set unwritten rules and a bond of trust, traders were able to make complex financial transactions with each other, sometimes risking millions of dollars, on nothing more than their word. The FBI agents would have to infiltrate this tight- knit group, and then fool these street-smart traders, into becoming their trusted friends. The best way to break into this fraternity, they reasoned, was to become one of them.The FBI sting was to become as grand in scale as the 1973 movie. Four FBI agents, 2 at the CME and 2 at the CBOT, posed as traders, and taped conversations, both on and off the floor, with real floor traders and brokers. They created lives for the agents that duplicated the typical trader lifestyle. The agents dressed like the other traders, lived in luxury apartments, drove exotic cars, ate at the same restaurants, joined the same prestigious health clubs, and bought memberships on the 2 exchanges. Each agent traded in a different pit. At the CBOT, one agent was trading Beans and another was in the bond pit, and at the Merc, it was the yen pit and the S&P’s. Over a two year period, the agents befriended traders and brokers, going out for meals with them, playing basketball at the East Bank Club, and throwing parties for them. At all times, however, the agents were wired; recording every word of every conversation they had with the real traders.

By the time the sting operation was terminated, the FBI had spent millions of dollars. The agent/traders lost an undisclosed amount of money attempting to trade, but were alleged to have made a profit when they sold back their memberships. In all there were 47 indictments; a small fraction of that number actually resulted in convictions.The alleged millions of dollars in customer losses, turned out to be in the thousands, and some of the “laws” that were broken were entirely victimless. One trader was indicted for trading after the closing bell and another for changing the price on an order, which turned out to be only $62.50 to the detriment of the customer. Of course, the government response was no infraction or loss is too small when it comes to protecting the public. The message had to be sent, that these kinds of actions will not be tolerated, and in the final analysis, operations like these save customers millions of dollars. In an blatant example of hyperbolic hypocrisy and an outrageous misuse of power and influence, Duane Andreas had gotten what he wanted. He convinced a politically ambitious prosecutor to spend millions of taxpayer dollars to investigate Chicago’s “corrupt” futures exchanges, while at the same time, he manipulated the markets on unimaginably large scale.

In some ways, the feds were correct. In order for the exchanges to maintain their self-regulatory status, the exchanges tightened up their audit trail and increased the penalties for breaking the rules. But, nothing changed, as far as the way business was transacted on daily basis in the pits; traders were just more careful about whom they trusted.


Last edited by tigertrader; October 24th, 2011 at 02:28 PM.
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  #57 (permalink)
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Hey @tigertrader, do you happen to know Danny Riley "danny boy"? He's been around a long time. Here is a video.

[yt]http://www.youtube.com/watch?v=ZOzR9Ox4nNw&feature=context-cha[/yt]

He will be on futures.io (formerly BMT) next Saturday the 8th:

https://futures.io/elite-circle/22550-webinar-danny-riley-mrtopstep.html

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

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  #58 (permalink)
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No Mike, never had the pleasure.

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  #59 (permalink)
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Awesome reading, keep sharing!

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  #60 (permalink)
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Wow, amazing story. Makes ya rememebr that the world really is pretty small sometimes

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