The Basics of Floor Trading


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This pp presentation seeks to explain the basics of floor trading on commodity exchanges. It also explores the various roles in the industry and how different trading decisions are made

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The Basics of Floor Trading

  1. The Basics of Trading Understanding how trading decisions are made and how the mechanics of the pit works
  2. Futures vs. Stocks <ul><li>Held for short term </li></ul><ul><ul><li>Pit traders often hold positions for seconds or minutes </li></ul></ul><ul><li>Can easily go short or long </li></ul><ul><ul><li>Most go long stocks. In commodities you can sell before you ever own. </li></ul></ul><ul><li>Margin provides leverage </li></ul><ul><ul><li>Margin is typically a small percentage of value 2-3% this gives incredible profit or loss potential </li></ul></ul><ul><li>Price Swings are Volatile </li></ul><ul><ul><li>Commodity prices swing violently or can stagnate as well. </li></ul></ul>
  3. Understanding Minimum Tick <ul><li>Minimum fluctuation or minimum tick </li></ul><ul><ul><li>Contracts trade with the minimum tick. For example soybeans are quoted as price per bushel or say $10.40 ¼ </li></ul></ul><ul><ul><li>The minimum tick is ¼ cent on 5,000 contracts or $12.50. </li></ul></ul><ul><ul><li>If I buy a contract of beans at $10.40 ¼ and then sell it ten minutes later at $10.41 I’ve made ¾ of a cent or 3 X 12.50 or $37.50 in profits. </li></ul></ul>
  4. Margin: the power of leverage <ul><li>Nominal value of contract </li></ul><ul><ul><li>With corn at $5.56 a bushel a contract’s nominal value is (5.56 * 5,000 contract size or = $28,000) </li></ul></ul><ul><li>Margin required to trade </li></ul><ul><ul><li>Margin is 3% of this or $840 </li></ul></ul><ul><ul><li>One need only post the margin amount to control the contract </li></ul></ul><ul><li>Margin calls and forced liquidation </li></ul><ul><ul><li>To maintain the position you must always have enough money or you face a margin call. </li></ul></ul>
  5. Futures vs. Stocks <ul><li>$10,000 in futures </li></ul><ul><li>$10,000 in stock </li></ul><ul><li>With $1,000 margin per contract I can buy or sell 10 contracts </li></ul><ul><li>With a 10% increase in the price of corn $5.00 to $5.50 </li></ul><ul><li>Profit = .50 * 5000 *10 or a net gain of $25,000 </li></ul><ul><li>That is a 250% return on my investment. </li></ul><ul><li>I can buy 1,000 shares of a stock valued at $10. </li></ul><ul><li>With a 10% increase in the value of the stock $10 a share to $11 a share. </li></ul><ul><li>Profit = 1,000 * $1 or a net gain of $1,000 </li></ul><ul><li>That is a 10% return on my investment. </li></ul>
  6. Trading Styles <ul><li>Scalping </li></ul><ul><ul><li>Seek to make the minimum tick and hold as short as possible. A large percentage of floor traders. </li></ul></ul><ul><li>Position trading </li></ul><ul><ul><li>Make bets on the way the market will go </li></ul></ul><ul><li>Spread Trading </li></ul><ul><ul><li>Trade the difference between one month and the other </li></ul></ul><ul><li>Option Markets </li></ul><ul><ul><li>Using puts and calls and trading the right but not the obligation to buy or sell </li></ul></ul><ul><li>Arbitrage </li></ul><ul><ul><li>Exploit differences between two markets of like products. </li></ul></ul>
  7. Market Forecasting <ul><li>Fundamental Analysis </li></ul><ul><li>Technical Analysis </li></ul><ul><li>Quantitative </li></ul>
  8. Fundamental Analysis <ul><li>Looks at supply and demand information </li></ul><ul><li>Market fundamentals constantly shift </li></ul><ul><li>Weather for many crops </li></ul><ul><li>Political situations as well </li></ul>
  9. Technical Analysis <ul><li>Looks at trying to recognize patterns on price charts. </li></ul><ul><li>Example on next slide. </li></ul>
  10. March Coffee
  11. Quantitative Analysis <ul><li>Complex mathematical formulas to identify trends and to profit from them. </li></ul><ul><li>For those talented in math firms are demanding quantitative analysts and paying huge sums to those who have the background. </li></ul><ul><li>Many different systems to trade. </li></ul><ul><li>Reality is that market conditions are always changing. </li></ul><ul><li>Example </li></ul><ul><ul><li>Volcanic eruptions lead to an 11% increase in the price of wheat. </li></ul></ul>
  12. Mechanics of pit trading <ul><li>Every exchange a little different but most agree on generals of buy and sell. </li></ul><ul><li>Hands out = selling </li></ul><ul><li>Hands in = buying </li></ul>
  13. Voice formula <ul><li>To sell the quantity is offered first then the price </li></ul><ul><ul><li>100 at 3 </li></ul></ul><ul><li>To buy the price is first and then quantity </li></ul><ul><ul><li>3 bid for 100 </li></ul></ul>
  14. Hand signals for Quantity
  15. Recording Trades <ul><li>Badges, Jackets, and Card </li></ul>
  16. Jobs on the Floor <ul><li>With Brokerage Company </li></ul><ul><ul><li>Service Representative </li></ul></ul><ul><ul><li>Broker </li></ul></ul><ul><li>Independent </li></ul><ul><ul><li>Local trader </li></ul></ul><ul><ul><li>Local broker </li></ul></ul><ul><li>With exchange </li></ul><ul><ul><li>Pit reporter </li></ul></ul><ul><ul><li>Educational </li></ul></ul><ul><ul><li>PR and financial </li></ul></ul>
  17. Jobs off the floor <ul><li>Independent </li></ul><ul><ul><li>speculator </li></ul></ul><ul><li>Commodity Fund </li></ul><ul><ul><li>Manage or trade for a fund </li></ul></ul><ul><li>Analyst </li></ul><ul><ul><li>Share thoughts on the market </li></ul></ul><ul><li>Programmer </li></ul><ul><ul><li>Design programs and trading systems and do research </li></ul></ul><ul><li>CTAs </li></ul><ul><ul><li>Commodity Trading Advisor manage customer money </li></ul></ul><ul><li>Jobs in Actual industry </li></ul><ul><ul><li>Numerous </li></ul></ul>