Interview #3 -- Talking With HandelStats
I want to do a third interview in this series with my good friend Rich — @HandelStats — who I have known for more than 30 years from the S&P pit on the CME floor.
Rich, can you explain what you did on the floor back then and how trading has evolved from your time on the floor?
Danny, I first started on the floor in August of 1982. I started out as a phone clerk taking orders from brokers and outside customers and sending them to the pit and then reporting back fills. That entire process of someone putting in an order sending it out to the pit by a runner and then sending the runner back out to get a fill when the market had traded through the price could take a matter of minutes. At night I would work in the back office doing balancing and night out trades. Then I started doing morning out-trades on the floor. After working on the exchange trading floor I finally got an opportunity to start trading. I started trading in the cattle options pit. The meat complex, pork bellies, live hogs, feeder cattle and cattle pits, had the shortest hours. I could do out-trades in the morning then go to the cattle options pit and trade. In 1990 I had an opportunity to trade in the S&P options pit with a group that was going to do an arbitrage between the CBOE SPX pit and the S&P options pit at the CME. It was about the time that the markets really slowed down and had little volatility. I had started trading in the pit for the group and they decided not to go ahead and set up the arbitrage operation because of the low volatility. I had been making money trading the group's group account, so they told me just to stay in there and keep trading. I traded there until 1994 and the volatility never picked up, in fact it went lower. We had weeks where the entire range of the S&P was only $2 or $3 for the week.
Globex had started in 1992 to trade electronically overnight and I had been doing a little bit of overnight trading. I was good friends with the guy who was running Globex marketing for the CME. He wanted to hire me to market to other floor traders to get them to do more electronic trading. So, for the next nine months I trained about 700 traders how to use the electronic trading system. By that time in 1995 the market had been rising and I just wanted to get back in and trade. I left Globex marketing with a lot of knowledge and experience about how the electronic trading system worked. That experience served me very well over the next few years. When I went back to the floor, I went to the NASDAQ pit. It was a smaller pit than the SP pit and was just starting to become highly active. Lots of stories from the NASDAQ pit.
In 1997 my friend from Globex came to the floor and told me they were going to start trading a new product electronically. A product that would trade during the day not just overnight. They needed some traders to trade it and since I was already actively trading on Globex, he asked me if I would support the new market. I told him I would trade it for 30 days making a two-sided market and put up $30,000 of my own money. This new product was the e-mini-S&P. It was the first electronic index product to trade side by side next to the open outcry pit during the day. That was late September of 97 right after the September contract expired so we started trading the December contract in 1997 of the e-mini.
You ask how trading has evolved since I started working on the floor; it has gone from taking minutes to getting fills to getting fills instantly. The original globex trading system used a Reuters currency trading platform. Each trading terminal was connected to a host matching engine computer by looped telephone lines and there was no Internet connection. Retail customers could send their orders over the Internet to their brokerage house, that would then send them through their terminal to the host matching engine. The system was slow, in fact it could handle something like 50 transactions per second, I think less than that in the beginning. The transaction being like an order so if you put in an order that would be one transaction, if you cancel an order that would be another transaction.
The floor was such an exciting place, the roar of the pits on the open and close and if some event took place during the day was just exciting. The floor also provided lots of information as opposed to the current electronic system. You knew who was buying and who was selling, you knew what all the players were doing. Everybody was watching everybody there was no spoofing. In fact, any of that kind of spoofing behavior you could get written up for by any trader there were lots of trading infractions that you could get written up and disciplined for. There was a lot of trading etiquette, and you did not always get the trades that you wanted because a broker filling orders might not trade with you. It was not exactly the level playing field in the pit the biggest traders always got to trade first, the top step traders were always closer to the order flow. If you were a little one lot trader or two lot trader trading in the bottom of the pit you would be the last guy to get traded with. I thought when electronic trading came that it would level the playing field if you were bidding or offering first you would get traded with first regardless of the size you were trading and for the most part that was true. And in the early days the electronic system not only would tell us that we got filled, but it would also tell us who we traded with so there was no anonymity and that was a good thing.
Open outcry is a naturally transparent type of auction system because all observers can see the bids and offers being made publicly and who is making them. Lots of eyes watching the pits kept it honest. Electronic trading, although it has the advantage of speed, in my opinion lacks all the transparency that the pits provided you get to know price and volume, but you do not know who is doing it and there are lots of games that can be played in that situation.
Rich, you know, I am a big fan of historical stats and statistics. How many hours of coding have you done to get to where your service is today? and how much do you have to do? Will it actually ever be finished?
Yeah, Danny, I know you enjoy these statistics. I do too, that is why I started making them and I have spent in the last 4.5 years over 11,000 hours (about 1 and a half years) coding. The longer I work at this the better I get, and it will never be complete work because I will always have more questions and more trading ideas. And I will continuously improve the data and the analysis I have already done.
Rich, I have seen you suggest low risk options trades when the stats line up, why not trade the ES or NQ futures?
Danny, you want to know why I suggest low risk option trades when the stats line up and why not trade the ES or NQ futures outright. Well by using options strategies I can structure trades that have defined risk that I cannot be stopped out of. When you trade futures you often get stopped out of trades only to have them reverse and work back in your favor. When I use options, I know what I am risking when I put the trade on and quite often a trade that I put on in the options will come back whereas if I had put a futures trade on, I would have been stopped out of it. There is a whole matrix of risk and reward between futures and options let me elaborate on that:
With futures whether you are long or short there is unlimited reward and unlimited risk.
With outright long options positions there is limited risk and unlimited reward.
Using option spreads, you have limited risk and limited reward, they are defined, and you know what they are.
The worst possible position in options and trading is being short a naked option, this position has limited reward and unlimited risk. It should be used only by very seasoned traders and under specific circumstances by others. I tell any new traders just do not ever do this position.
Rich, In my nearly 40 years in the business I have never seen someone so energetic and confident about their trading service. You once told me, “there is no one that has what I have!” Can you explain what you meant?
Danny we have been in the business a very long time and you are still energetic and confident about what is going on with what you do. Yes, you have a passion for it, it is apparent otherwise you would not be doing it. I am the same way. I once told you that no one can have what I have. Here is the explanation for that. I have read hundreds of books and thousands of articles and attended seminars on trading and trading systems and the markets. I have tried countless systems and all of them added to my trading experience. You have been around for a long time too. What I am saying is that guys like us and there are very few, have insights that most people would never dream of. I am able to code that experience into my databases.
A lot of algos that are run by the biggest HFTS do not do analysis like I do. They depend on advantageous trading rules, special fee deals and trading to take advantage of latency in the electronic system. They can play all sorts of games but eliminate just one of the factors that favor them, and they are out of business. They are not liquidity makers, they are liquidity takers, that is their business model.
I cannot go into everything I look at; it is just the way I view the markets. I have a unique perspective based on my experience. Since I have been doing this analysis, I have gained several insights that would have never taken place without me doing the actual coding myself and understanding what I am looking at. Unless someone has the trading experience and the ability to code, they will not have the opportunity to apply their insights gained from both places. You must do both. I really enjoy what I am doing. And every day that I do it I get better at it. So, when I say that no one has what I have it is because there are very few people that have the same trading experience and are able to code and that combination is unique. Thank you.
Again, this is my friend Rich Miller who operates HandelStats. Thank you Rich for taking some time out of your day and doing this with us.