Monday, January 16, 2012

14: Changes

I was ready for a change.  I got one.

I was offered an entry level job as a clerk to a "local", or independent, floor trader at the Chicago Mercantile Exchange.  It was a world I knew very little about and much different from everything else I done previously.  I remember the first time I walked on the floor feeling overwhelmed and wondering how anyone could find order, much less make money, in all the chaos.

The man I worked for, Dean N., was an accomplished pit trader who was hard on his clerks--later I learned that most lasted less than a month--but who had also put, or financially backed, several of his previous clerks into trading pits.  The main requirements were height, so the clerk could see Dean over the mass of bodies in the pit, and an ability to add and subtract numbers quickly.  I met both, and so went to work for Dean in November, 1992.

After learning the basic hand signals and how to make sense of what at first glance seemed like arbitrary screaming and yelling, I went about becoming a good clerk.  From there I began to watch Dean and other traders with the idea of doing it for myself.  The problem was in getting backed.  It took about $75,000, preferably $100,000, in cash just to trade at the lowest level.  I, as we've already gone over, was broke.  In 1995 one of Dean's friends noticed that I was a good candidate to become a local floor trader and offered to back me.   This in itself was an accomplishment; of the roughly 40 clerks that started out at the same time I did, eight of us made it into the pits. And as far as I could tell, only two of us ever made any money while pit trading.

It was a standard deal:  I would start out trading in a pit, LIBOR, that had low volume and volatility.  If I could handle that I could move up to the big leagues, the Eurodollar Pit, where I had been a clerk.

If I made any money it would be split as follows:
  • First year: 50% to me, 50% to backer
  • Second year: 60% to me, 40% to backer
  • Third year: 70% to me, 30% to backer
If I had a large loss, the backer was on the hook for the entire amount, but would clawback what he could from me.  In all likelihood I wouldn't be able to cover my portion of the loss and so would be out of the trading business. 

My goal for those three years was to make, and save, enough money to break free from the backer and go out on my own.  In 1999 I did just that.

As an aside, while my backer could have been worse, he did end up taking advantage of my ignorance of tax law as it pertains to futures traders.  Above and beyond what he was entitled to per our agreement, he pocketed an estimated $80,000 that was due to me.  Spend some time googling "Section 1256 Income" if you want more info.


Things were looking up.  However, Virginia and I, despite a great deal of effort, were unable to make our marriage work.  In 1996 the divorce was final. It took me a long time to be at peace with what happened.


I was trading to make money, and I did.  Over time I became a good trader. Some days I made a lot, some days I lost--a new kind of stress.  On the whole, I made enough to pay off the debts incurred while building the house and to otherwise enjoy myself.  I never fit in with the other traders; actually couldn't stand most of them.   Also, I knew my style of trading was ending, and having no desire to learn to trade online, made a point of saving as much money as possible.  By 2005 it was time to go.

I caught the tail end of an era in the futures industry.  Open outcry, as it's know, was fading out, to be replaced by electronic trading.  While I was at the Merc a documentary film maker made a movie about the transition.  I made a brief appearance in the middle of the film, though it doesn't have a trailer online.  I'll lend you my copy if you want to watch it.

In 2009, another movie was made about the change from pit to electronic trading.  It's little melodramatic--and like most of the publicity concerning trading makes it seem like a trillion dollar industry revolves around nothing more than the outsized exploits of a handful of characters--but it covers the same ground.  More to the point there's a youtube trailer.

As was said in the clip, "It's a very dirty business".

I'm grateful for the economic lifeline and experience provided by the pits. However, that world is not for me. I don't want to live my life as a predator for fear of being prey.  It's a dead end.

The most important thing I took away from my time there might be this: While I need money to survive, I'm no longer driven to get my hands on it.  If anything I've taken the opposite approach.

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