ALTHOUGH MANY PEOPLE still consider “timing” the market to be sacrilege, the truth is that it’s no use to be in the right place at the wrong time. In the market, just as at a party, it’s always better not to be early, but fashionably late.
There are plenty of good ideas about what to buy, but a slim number of real opportunities in which to buy them. Things have really changed from the 1990s, when it pretty much didn’t matter whether you bought value, growth, old tech, new tech, bio-tech, high tech, low tech or no tech. In the 1990s, you wanted to be long stocks. Every dog had its day.
In a free economy, you can put your money in any number of potentially profitable places. Knowing a good opportunity for risk capital isn’t lucky — it’s smart.
As a clerk (and later, a floor trader) at both the Chicago Mercantile Exchange and the Chicago Board of Trade, I often wondered why certain pits were bustling, others empty. For example, I used to walk by the Mexican IPC pit at the Chicago Mercantile Exchange — and “pit” was actually being a little generous. The IPC pit wasn’t really a pit at all. It was more of a post — just a CPU for the market reporter who actually keys the trades into the exchange’s system. There weren’t many trades in the IPC index. Two or three contracts a day, tops.
The Board of Trade’s rough rice and minisized silver futures contracts were, by and large, empty as well. No eager floor locals. No brokers with decks thick with orders. No clerks rushing a variety of orders from all over the country. I learned very quickly that these were not the pits you wanted to stand in. (If you planned to make any money, anyway.) A major component of success, in fact, was having the smarts to stand in the right pit.
The same premise holds for off-the-floor trading. You want to be where the action is. And that’s why I’m enthusiastic about electronic futures trading right now. Generally speaking, it is “the right pit” right now. For a number of reasons, I think it represents a good opportunity for those with risk capital.
As we talked about last week, a big part of successful market making is taking advantage of your proximity to the market itself. As a market maker, you depend on public (or what the locals would still call “nonmember”) participation. You want people to trade with you. And one of the best indications that’s occurring in the futures world is open interest, which at both the Merc and Board of Trade has been rising steadily in the electronic markets for years.
A derivatives term, open interest represents the total number of future or options contracts that haven’t been exercised, expired or fulfilled by delivery. A market with rising open interest is like an unfished pond, filled with countless opportunities. It’s an indication of activity — day-trading dads, pension funds looking to hedge, arbitrageurs spreading against another product. In short, it’s one sign you’ll likely have lots of trades come in your direction.
The other major reason I’m quite enthusiastic about the prospects for electronic market making is that we’re finally starting to see an increased public interest in alternative strategies that are uncorrelated with major stock indexes.
The importance of alternative strategies is a drum we’ve been beating for quite some time. And yet now, into the fourth year of a down stock market, the notion of earning a return that’s totally uncorrelated with the major equity markets is completely foreign to many people. But it’s a great big world out there people, and there’s more to the markets than Cisco Systems (CSCO), Dell Computer (DELL) and the still-washed-up stars of the Standard & Poor’s 500.
Electronic futures trade virtually 24 hours a day, and require little more technology than a dial-up AOL account. There’s good fishing in metals markets, if you’re game enough to start trading at 7:20 a.m. Currencies are probably better trades at midnight than at noon. Even stock indexes, which we think of as being “open” only during the daytime session, offer some great trading opportunities. There’s always a bull market somewhere. This isn’t a time in which you can buy the Vanguard 500 Index fund (VFINX) and wait to get your 12% annual return.
– Originally on Feb 03, 2003 by Jonathan Hoenig
