| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
CRT: The Trading Machine. You guys make money every day, said the floor broker to Mark Ritchie in a reference to CRT (Chicago Research and Trading)The Money Machines CRT: The Trading Machine You guys make money every day, said the floor broker to Mark Ritchie in a reference to CRT (Chicago Research and Trading). His voice was a mixture of envy, disgust, and admiration. He was holding a long position, and the market had moved locked limit-down against him, in one of the periodic painful setbacks that are a bane to even successful traders. The amazing thing is that the exasperated broker was exaggerating only slighdy. CRT may not make money every day, but it is profitable virtually every month, if not every week. Think about that! The story of CRT is one of the most incredible in the investment world. A mere fifteen years ago, Joe Ritchie (Marks brother), the firms founder and leading force, was so broke that he had to borrow his brothers wholesale suit to visit the Chicago Board of Trade. Today, Joe is the helmsman of a trading company of eight hundred employees, including a primary dealer of government securities, that has been estimated to have garnered close to $1 billion in trading profits. To generate that profit, Joe Ritchie estimates that the firm has done over $10 trillion in transactions. (Thats trillion like the figures used to describe the total U.S. debt-were talking big numbers here.) CRT doesnt go for home mns. It is in the business of extracting the many modest profit opportunities that are continually created by the small inefficiencies in the marketplace. Are options on one exchange slightly higher priced than equivalent options on another exchange? If so, CRT uses its state-of-the-art information and execution capabilities to buy the option that is low and sell the one that is dear. Do options in a given market provide a better risk/reward profile than the underlying market? Or vice versa? If such a discrepancy exists, CRT trades one position against the other. There are literally hundreds, if not thousands, of variations on this theme. CRT is constantly tracking approximately seventy-five different markets, traded on nineteen worldwide exchanges, with sophisticated trading models instantaneously signaling which financial instruments are relatively underpriced and which are overpriced. Other models continuously evaluate the net risk of all the firms positions, with the goal being to reduce net exposure as close to zero as possible. In taking advantage of these small profit opportunities and keeping net risk to a minimum, CRT has come as close as any firm to creating a successful trading machine. How does CRT operate? Floor brokers have sheets generated by the firms proprietary computer models, telling them what price they can bid or offer for each option at any given market price level. The calculated figures take into account not only the matter of determining the options value but also how that option interrelates with the firms overall position. For example, if a given option position helps bring the firms net risk exposure closer to zero, the indicated bid price for that option might be skewed upward. The floor traders are supported by teams of upstairs traders, who use the firms computer models to monitor the impact of fluctuating prices and the firms constantly changing portfolio on option values. The upstairs traders feed the floor traders a constant stream of updated information. On very volatile trading sessions, runners may bring the floor traders revised computer valuation sheets as often as twenty times in one day. When the floor trader implements an option trade, he or she immediately offsets the positions with an equivalent opposite trade in the outright market. For example, if a trader sells T-bond 98 calls, he will buy the equivalent amount of T-bond futures to counterbalance the position. This hedge is implemented instantaneously. As soon as the floor trader posts the option trade, he hand signals an arbitrage clerk standing on the top step of the bond futures pit fifty feet away. Within a second or two, a futures trader has placed the offsetting order, and the transaction is complete. The initial hedge placed m the outright market virtually eliminates any significant near-term risk on the position. However, as the market moves, the position will become unbalanced. Once the initial trade and offsetting hedge are booked, the responsibility for managing the position is transferred to an upstairs position manager. The job of this manager is to keep the risk exposure of the firms constantly changing portfolio as close to zero as possible. CRT is so rigid about risk control that it even has a backup risk control group. The backup group assures that the firm is always ready to handle even the most extraordinary trading events (e.g., the October 1987 stock market crash and huge price moves triggered by the outbreak of the Persian Gulf War). The complexity of monitoring the positions placed by hundreds of traders, reevaluating thousands of interrelationships between different market instruments traded worldwide, and tracking the firms portfolio risk balance continuously, all while prices and positions are changing every second, requires enormous computer support. CRT has nearly an entire floor in its office building devoted to computers. There are departments for developing new proprietary software, and the firm even has its own on-site hardware repair unit. CRTs computer software programs are highly sophisticated. Bvery effort has been made to translate data into graphic displays, reflecting the belief that the human mind can draw information much more readily if it is in visual form. A new generation of CRT software, which was in an advanced stage of development when I visited the company, provides three-dimensional displays. These computer images will allow the traders to view the firms real-time position for an option market across both a range of strike prices and a range of expiration dates in one picture, with different colors used to represent different concentrations of positions. All the high tech aside, ask anyone at CRT about the firms success, and they will tell you that teamwork is the key. It may sound corny, but it is obviously an absolutely essential element of CRTs philosophy. You either buy into that philosophy or you are in the wrong place. Self-centered maverick traders, no matter how talented, need not apply. Here is how one former CRT floor trader (who now handles a variety of other roles) describes the advantages of CRTs teamwork approach versus the situation at most other firms: If you have the confidence that the person upstairs is not going to blame you, it makes life so much easier. When I worked on the floor, I often saw screaming matches between people trying to make sure the blame didnt get laid on them. The broker would blame the clerk; the clerk would blame the person on the other side of the phone: and the person on the phone would blame the customer. That never happened to me. When a five-hundred-lot order came into the pit, I knew I could use discretion to act on it right away, whereas many of the other traders at competing firms would have to first call upstairs to get permission to do anything more than a fifty-lot. Another CRT trader echoed a similar theme: Our competition has traders in the pit who on expiration day will hand the clerk a $100 bill to give them special attention. I dont have to hand my clerk a $100 bill. I let him know that I believe in him and the . company values him. I get better service from my clerk by making him feel that way than that other broker does by handing his clerk a $100 bill. The teamwork philosophy also extends to compensation. As one employee describes it: Joe is absolutely committed to sharing the wealth. Instead of thinking about how little he can pay people and get away with it, he seems to be more concerned about how he can split up the profits fairly. Mark Ritchie gave me my first perfunctory tour of CRT, walking me through the main trading floor. The workspaces appeared very attractive and comfortable. However, something seemed out of place. I thought of those childhood puzzles with the caption Whats wrong with this picture? When we walked past the receptionist area, Mark was told that he had a phone call holding. While he was on the phone, the nature of the oddity finally struck me. The trading floor was quiet! I mean, you might have thought we had toured the offices of a university or law firm. The shouting, turmoil, activity, anxiety, stress, cheering, swearing, and other assorted noises and emotions that normally permeate a trading floor were all missing. CRT is a laid-back firm in many ways that go beyond the extraordinary calm in which trades are planned, monitored, and executed. No suits and ties here, unless of course thats your preference. Jeans and sport shirts are the common attire. There is a cafeteria in the center of the trading floor, which is available to all employees-and the food is home-cooked, not the typical cafeteria variety. There is even a lounge area on the floor. Again, not your typical trading operation. The following two chapters contain interviews with two of CRTs initial four founding members: Mark Ritchie and Joe Ritchie. Mark actually drifted away from CRT years ago, preferring to trade on his own, unencumbered by additional managerial obligations. Joes involvement with CRT, however, remains strong. He is still the firms primary visionary and guiding force, albeit the responsibilities for the day-to-day operation of the firm have been transferred to a senior management team. Although Mark is no longer actively involved with CRT, his interview is placed first, maintaining the order in which the conversations actually Transpired. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |