- 2001: Volume 10, No. 3 TechnoTrading: New Markets, New Rules, and New Technology

As technology moves forward at breakneck speed, investment markets have been forced to structurally change. Such changes mark monumental alterations in our lives. The invention of the wheel, gunpowder, railroad, automobile, aviation, telephone, television... the list of structurally altering technology has a long history with many entries.

The term, "structural change," identifies developments or events that permanently modify the way things are done. Obvious inventions like the automobile or telephone changed the way we communicate, conduct commerce, and live. Financial markets undergo structural change that is equally profound, although not as commonly recognized. The abandonment of the Gold Standard is one example. Deregulating oil and the banking industry may be viewed as others. Synthetic investments or "derivatives" changed financial market strategies and objectives.

Few structural events have had more impact upon financial or investment markets than the personal computer and Internet. Since 1980, the PC has completely altered the standards by which investment decisions are generally made. The PC has placed tremendous investigative power into the general public’s hands. Equally important, the PC combined with the Internet and television coverage, creates an entirely new environment that smashes old rules and approaches. However, we are just beginning to find replacements for the "old" and, therein lies our most exciting and potentially rewarding challenge.

New Tools For The Job
Clearly, a new market environment based upon structural changes requires new methodologies. The very developments leading to structural change like the PC, Internet, and diversified television represent tools for constructing investment strategies. Information access is being homogenized. This is to say that all information is likely to become available on the Internet and its relatives like linked cell phones, palm devices, and pagers. All information will be accessible from all brands of personal computers hooked into high-speed lines like DSL, cable modems, satellite dishes and wireless. The delivery system will be homogeneous. Hardware will adhere to a standard.

In addition to information delivery, order entry, tracking, and execution have turned electronic. Before the first decade of the new Millennium ends, open outcry pits could be dinosaurs. Investors will "trade" everything online. Central computers match the bid and ask. That’s simply the way it must be.

Since computers don’t sleep and the world rotates through a 24-hour day and a dateline, there will be no opening or closing bell. Expect full volume 24-hour trading to be commonplace. It is possible exchanges will become "global." The delineation between Chicago, New York, London, and Tokyo will blur, or even disappear. The question most individual investors will ask is, "Am I ready?"

Get Ready
The fact is that you must be ready. There simply is no choice. This is the future and wealth accumulation will depend upon a careful balance between speculation and investment—risk and exposure—short-term achievements and long-term goals. You must adapt to the new risk conscious markets. Proof lies in the damage done by the 2001 bear market continuation. Retirement accounts were decimated just as the leading edge of Baby Boomers expected to retire or pay for college education. There is a need to earn it back. But, the words of the Smith Barney commercial take on new meaning in the new market environment… "We make money the old fashioned way. We earn it!"

Earning investment returns means being prepared for opportunity. Opportunity comes in sectors, waves, and cycles. This means that sectors like computers, biotechnology, energy, mining, industrials, utilities and more become hot. Bull and bear market volatility moves in waves. The economy oscillates in cycles. Each of these market phenomenon is statistically identifiable with modern trading tools. First and foremost are the new full-featured market information systems. These include quote vendors like Quotron, Reuters, Bloomberg, Data Transmission Network (DTN) and others listed in directories for financial market services.

These systems are being offered through the homogeneous Internet as either browser-based like BridgeChannel or proprietary like FutureSource Market Professional. Software that is easily downloaded from quote vendor Internet sites can be up and operational in less than an hour. Exchange quote permission is obtained via a faxed contract and, BINGO, you’re online with live quotes, charts, and analytics.

Trade Entry
Once you have your market information resources, there are two ways to place trades. Conventionally, you would call your broker and give your buy, sell, and stop requests by phone. Your broker reduces your request to an order ticket, time stamps the ticket and calls his order desk—or, perhaps he enters the trade through his or her workstation. But, convention has changed. Now, you have the same access to electronic order entry that generally includes live quotes, bid/ask, time & sales, along with a host of other information. Examples of electronic order entry include ManTrade offered by E D & F Man International, Iowa Grain’s system, Rosenthal Collins’ system and a host of others. These systems can be previewed by visiting brokerage company Web sites.

For example, www.equidex.com provides demonstrations of several trading systems offered by futures commission merchants. EQUIDEX Brokerage Group, Inc. is a self-guaranteed introducing broker that allows customers to trade through a variety of different FCMs and electronic systems.

Moving up the ladder, there are proprietary systems that are leased for direct interface with electronic exchanges. These systems represent even more power and flexibility because you are directly linked to the trade-matching computers. These systems include names like PATS, Yes Trader, Trading Technologies, and Easy System. Many of these "front-ends" are also available for preview at www.equidex.com. The trend in electronic trading suggests that quote vendors, themselves, may add order entry/execution and tracking capability. All you’ll do is designate the clearing firm and/or introducing broker carrying your account.

Advantages range from ease, speed, accuracy, and risk management to inexpensive commissions. The elimination of middlemen saves money. The computer interface allows you to check orders against open positions and stops so that the chance of a double entry error is substantially reduced. You can sit at your home or office computer and trade futures, options, and related instruments just as the professionals do—with unbelievable power! And, these systems are not unique to commodities. Stock trading is possible on E*Trade, Datek Online, Scottrade.com, DLJ Direct, Merrill Lynch—again, just naming a few.

The Forex Market
Perhaps the most exciting for die-hard, in-your-veins traders is the introduction of cash currency trading via electronic InterBank. These systems were just being released in March 2001 and allow individual investors to trade leveraged unregulated currencies—all of them. Clearly, profit potentials in cash currencies are huge. There are rumors about currency schemes and systems that can turn $100 U.S. into millions—secret societies that covet their secret methods. Back to reality, daily swings in currency parity represent more than $1.5 trillion per day! There is no bigger market. Not stocks. Not bonds. Not commodities! However, the availability of currency futures and options makes this new investment prospect more enticing.

Among firms on the cutting edge of electronic cash currency trading is a division of REFCO. A front-end to the REFCO system is also available through a TurboSystem™ to make this new market particularly attractive. Of course, what’s a TurboSystem?

Getting In Gear
This is where technology becomes interesting for the full spectrum of traders. Certainly, an advantage to homogeneous Internet access is the ability to turn your existing home, office, or notebook PC into a trading station. Virtually every information vendor allows access through existing hardware. They’re out of the hardware business. Unquestionably, the "average" PC bought within the past two years can handle quote software and a browser-based order entry/tracking interface. However, requirements for running simultaneous quotes, analytics, order entry, news, and on-screen television generally bump up the necessary horsepower. Trading is considered "mission critical." Further, some proprietary functions require specific "static" IP addresses. Without becoming too technical, a static IP (Internet Protocol) address is set in the "network" function of Windows. If you are running multiple applications requiring unique IP addresses, you will need several network cards and a multi-port hub.

From a practical standpoint, traders who want to move into the full-featured electronic forum are discovering that it is more efficient to purchase a "trading-specific" system that can run other functions rather than try to fit trading-specific utilities onto a PC that is not uniquely configured for such a purpose. The line of TurboSystems was the first to appear in 2000 with trade-specific designs. Professional TurboSystem configurations range from multiple 60-inch plasma wall displays that service an entire trading floor to multi-screen flat panel individual workstations. Advantages are obvious.

TurboSystems are only modestly more costly than similarly configured Dells, Gateways, Microns, IBMs, and the like. The difference is that none of these standard vendors offer the same configurations. As of 2001, the "top-of-the-line" TurboSystem Black Stallion is an eye-popping three-screen monster machine based upon the AMD Athlon® giga hertz (plus) processor. A four-port custom video card with an onboard processor and 128 megabytes of ram supports up to four flat panel screens in a single seamless ground. The standard configuration sports a pitch-black 18-inch high resolution flat panel TFT centerpiece with built-in stereo speakers. An optional television function is available. Two 15-inch black monitors flank the centerpiece to provide an ergonomically comfortable panorama. Since flat panel screens emit no radiation and very little heat, they address health concerns as well as space saving efficiency and sharp design.

Why three screens? For the professional trader or the serious individual, the Black Stallion gives news, quotes, graphics, analytics, order entry and order tracking in distinct "grounds;" two background and the main foreground. Each function is appropriately separated for maximum efficiency and trading safety. There is no popping into and out of windows. All information is there all the time. Under pressure, this environment makes a noticeable difference. Those who have sampled the Black Stallion admit feeling markedly more relaxed during an active trading session.

When they invented the expression, "Black is beautiful," this TurboSystem was not in mind. But, the black screens are complimented by all black components including a DVD/CD-Rom, ZIP-drive, and battery backup. These systems also address data integrity and preservation issues with a built-in four-disk striped and mirrored RAID that permits an instant disk swap in the event of any failure.

Multiple network cards accommodate several network interfaces so that quotes, order entry, and internal networks operate independently. As long as the main line is operational, the loss of one service will not affect the other functions.

In addition to the Black Stallion, there is the Black Beauty that features the same essential horsepower without the multiple screens. If black is not "cool" enough to justify the higher price, there are standard cream-colored systems, too. Configurations go all the way to a portable notebook unit and range from approximately $15,000 for the Stallion down to a few thousand for the Workhorse and Mustang models.

Even memory is above standard. These units boast double data rate ram (DDR) to take full advantage of processor speed. Yet, with prices of high-end Dells, Compaqs, and Gateways well under $15,000, why would anyone consider such an expensive system? The answer is time, effort, and utility. First, a comparable vendor brand machine isn’t much less expensive. More importantly, the TurboSystem runs trading systems. Other systems can require endless tinkering to bring them up to speed—if you can ever get them to run smoothly.

Analyzing the Data
There are other reasons to add on horsepower. Analysis is increasingly sophisticated and complex. During the 1970s and 1980s, basic statistical analysis required large main frames or powerful mini computers to examine narrow market sectors and limited data. Data base technology and scope was limited and difficult to manipulate. The huge increase in PC power impacted analytical techniques and database management. Consider that analysis has been renamed "analytics." Implementation of market analysis is a science and process encompassed by this new term. Developments like the Commodity Research Bureau Infotech CD-Rom brings enormous historical trading data to all who sport a CD reader. This is only one example of the massive research and development resources that are available.

Multiple analytic passes of huge data require extreme speed. That’s another reason why traders opt for the "latest and greatest" hardware. Step back and consider that systems like Omega’s TradeStation can cull diverse systems from back testing this data. From moving averages to Market Profile®, no approach is beyond today’s modestly priced technology.

The real clincher is technologically advanced system implementation made possible by multi-function trading systems like the TurboSystem line of computers. These systems run "leading edge" software that actually conducts the analysis in real-time and generates "micro-trades" in time to profit. Historically, it has been difficult to take small bites from fast-moving futures markets. By the time analysis was complete, the decision made, and the trade called in, the profit potential could be gone. This is not so with the leading edge systems. Multiple traditional techniques can be calculated in "near real-time" with decisions derived at lightning speeds.

For example, quote vendor software like Barchart.com, FutureSource Professional, Quotron, ILX, Reuters, Bloomberg, and Signal® (to name a few) use Windows features called Dynamic Data Exchange and OLE to move data streams into analytical programs ranging from Excel to neural networks or custom models. With electronic order entry side-by side, the analysis is instantly fed into PATS, ManTrade, or another order entry system. Suddenly, it becomes possible for the average trader to successfully scalp! This process has become so efficient that even former local traders feel comfortable moving "upstairs."

There is no doubt that this is a trading revolution—or, more appropriately, an evolution—that defines the new century and millennium. Theoretically, this evolution should contain seeds of its own destruction. Perhaps you are familiar with the "Efficient Market Theory" postulating that markets are so prompt and accurate in conducting price discovery that scalping should not be possible. Of course, theory flies in the face of reality since hundreds (if not thousands) of scalpers earn hefty livings year after year. The concern is that increased participation will increase efficiency and lower the chance for success. Profit increments will shrink to the point where costs exceed gains.

Yet, another evolution derived from technological advances and structural change is a rapidly declining transaction cost. Using electronic markets and order entry, individual traders with modest volumes and account equity can enjoy very low execution fees. In turn, this justifies smaller and smaller profit objectives. From an historical perspective, trading is becoming microscopic. The smallest trends within trends or cycles within cycles are eyed as potential.

For those who remember the Bob Dylan song, The Times They Are A Changing, it is clear the time is now. Having been in the futures industry more than 30 years, and my father before me another 50 years, I can honestly say we are in the midst of the fastest and most profound market development and restructuring of the last century and, perhaps, this century. Looking forward, the world is challenged by "globalization" and its monetary consequences.

Change is truly breathtaking. How do I know? Watch a quote screen and trade a full spectrum portfolio on any given day. If you’re like me, you’ll be out of breath by noon—if not sooner!

Philip Gotthelf publishes the COMMODEX® System and COMMODITY FUTURES FORECAST® Service. He is also president of EQUIDEX Incorporated (registered Commodity Trading Advisor) and EQUIDEX Brokerage Group, Inc. (registered Introducing Broker). He is known for his extensive work in the futures industry and his writing has appeared in many major industry publications. He can be contacted by e-mail at phil@commodex.com. Toll-free number is 800-336-1818.