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Re: CBOT X-Funds, who needs them.



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In a message dated 1/28/02 3:55:50 PM Central Standard Time, 
lacig@xxxxxxxxxxxxx writes:

<< John, or anyone else.
 Do you think that the world needs a product such as the X-Funds?

***** I don't know.  I don't think we know with any new contract when it is 
launched.  The CBOT has launched something like 5 different versions of the 
Ginnie Mae and still does not get it right.  Then again, it launches a bond 
contract that all the banks ignore at launch and it turns out to be the most 
actively traded futures contract this century.  Who knew?

***** I think the concept has some merit.  The CBOT might not have the specs 
just right, and may have to make some adjustments.  But with two week 
expirations that will be a lot easier to do and more immediate than any other 
futures contract.  So even if they don't have it just right, there is the 
potential to make quick adjustments.

****** I have been struggling with the question of who will want to trade 
this contract.  I know I have written about the arbs and the locals, and even 
the hedge funds.  But who will step up and get the process moving.  That 
always falls on the public, the outside trader.  So who in the public will 
want to trade this contract?

****** The answer is the 90%.  The 90% of the public that loses at futures 
trading.  They will perceive a better chance by having a veteran professional 
trader select their positions for them.  They will perceive that their risk 
is reduced because their tendency to hold onto losers and cut winners short 
will be eliminated by a contract that settles ever two weeks.  They are 
either right and make money, or they are wrong for just two weeks.  These 
traders will perceive they are being given a margin break, something that 
they care about.  They will perceive their risk is being reduced by the 
portfolio effect of having four positions on at one time.  And they will 
perceive that they can control their risk, or take partial or full profits by 
trading the component contracts against the X-Fund.  They will perceive that 
there is value in a particular manager, who has strengths in certain markets. 
 For example, one of the first X-Funds is being co-managed by two veteran 
Iowa Grain Company traders.  

 Do you really think it will fly?

****** I think we are on the cusp of a new age of trading.  We will see more 
and more index and narrow based index products to trade.  We will have new 
markets like Single Stock Futures, which will offer increased spreading 
efficiencies and what is called pairs trading.  You like the new Brittany 
Spears Pepsi commercial on during the Super Bowl, but you think Coke's was 
terrible, well then you buy Pepsi SSF and sell Coke SSF on spread.  No uptick 
rule, decreased margins and open trade equity marked to the market.  You note 
that a well know stock market bear, who manages an X-Fund has just gone long 
the S&P, the Nasdaq and the Dow.  You buy his X-Fund.  And so on.

Who needs this other than the pit brokers who need the commissions. 

**** I don't think this is about the pit brokerage.  The trend has been for 
fewer and fewer pit brokers handling more and more volume.  With the CBOT 
increasing its paperless orders, the trend is moving the wrong way to build 
this around helping floor brokers.

Once the X-Fund moves against the buyer  you'll see a lot of scrambling to
 hedge the position, not with one contract but possibly as many as
 four(or whatever number in the fund). 

**** There will be locals with the ability to arb the components, yes.  But I 
am not sure the public trader is as worried about the position moving against 
them any more than any other position.  They may have more confidence in the 
X-Fund because of the professional X-Fund manager aspect of it.

Great boon for the brokers. 

**** If it works, it will help brokers and local traders in each pit where a 
component is traded.  That is one of the truly unique aspects of these 
contracts.

It's enough that one needs to contend with the uncertainty of one futures 
contract, now you have to do it times four. 

***** This is the half empty argument.  The opposite side is that the 
portfolio effect will smooth out the performance for the X-Fund trader.  This 
effect is exemplified by the fact that X-Funds will enjoy lower margins than 
if you were to put the component trades on individually.  This is what the 
Chicago Board of Trade Clearing Corp has indicated, according to the seminar 
I attended.  There are lots of traders focusing on one market, in and out 
several times a day or week.  Perhaps the better trade is the one with the 
smoother equity curve and less volatility that you would have never gotten 
into if it had not been an X-Fund.

Only 2 weeks to expiration, it smacks of pure gambling.

****** One of the hardest aspects of trading for many people is knowing when 
to cut your losses.  This product is unique in that it forces you out of the 
trade fairly quickly.  There is no other similar contract, without getting 
into delivery situations or option expirations, which have their own 
problems.  This is a forced out in a completely different timeframe and we 
won't know the utility of that until these things get up and running.

 Someone once said that derivatives are nothing more that bets on bets, who 
needs this?

***** Well this is a standardized futures contract trading on a respected 
futures exchange with a AAA rated clearing organization.  So this is not a 
derivatives trade in the way that similar OTC trades are set up.  
 
 If you buy X-Funds you are bound to use offsetting futures positions if
 it goes against you. 

***** If you buy and X-Fund you may sell the X-Fund to liquidate the trade.  
Same thing goes if you sell one, you may buy one back to cover your short.  
Or you can negate the impact of one or all four of the components by trading 
an opposite futures contract to the components position.  There is 
flexibility, opportunity and choice in this mix.

When I trade futures I NEVER hedge with options or anything else.

****** And you are not alone.  There are lots of traders just like you.  And 
vanilla is a popular ice cream flavor.  But there are people who like 
sprinkles.  Or candy coating.  Or chocolate twisted in with the vanilla.  And 
there are lots of traders who do hedge.  The option traders for one.  Futures 
traders on the other hand tend not to use the options to hedge as much as the 
other way around.  Each and every week about 25 percent of the NYSE volume is 
program trading related.  These are not people eating vanilla ice cream 
betting on the direction of the market.  These are traders who eat all the 
flavors at one time, while also having a matching serving of vanilla.

If I'm wrong than I get out. Can't do that with xfunds.

***** Yes, you can.  You can always liquidate a futures contract and all the 
component contracts are among the industry's most liquid contracts.

Did you say these funds will have the tendency to go up? How, why? 

****** I think it is the helium.  One of the guys at the seminar at the CBOT 
did sound an awful lot like Donald Duck.  :-)  Actually, I don't know.  And I 
don't believe it.  And I won't believe it until I see some actual proof.  I 
have yet to be satisfied with any explanation I have heard to justify this 
claim.  However, I still see utility in the contracts and believe time will 
prove or disprove this aspect.

Just because they were picked by *professionals*. I am a professional and I
 have no idea where the market is going in the next 5 minutes. And I still 
make money just trading *naked* futures contracts.

***** They are not looking at the 5 minute timeframe. They are looking at the 
2 week timeframe.  Personally, I have never seen this timeframe traded 
before, so I must keep an open mind until I see the results.  Call me an open 
minded skeptic.
 
 This is Peter Steidlmeyer second try at haibrained ideas. Anyone use
 market profile? Anyone make profits CONSISTENTLY using it?

***** I use the market profile.  I can't comment on the consistent profits 
because I don't trade enough to be consistent.  But I know lots of traders 
who look at the profile as one of the tools they use.  But I will agree that 
I have never heard of a CTA who uses Market Profile exclusively.  In support 
of Peter I will say though that the Market Profile contributes over $1 
million of revenue to the CBOT (according to my sources) every year, of which 
Peter sees none.  He did not create the Market Profile to enrich himself, 
which gives it added credibility in my book.  

 He is a nice guy (met him) but...........

****** I believe he has the best interests of the CBOT at heart.  And in this 
case, has created something that could benefit all the exchanges and their 
traders.  But there must be value for the outside trader and there is intent 
for that to be built into the contracts.
 
 I would return the tie :)
 
****** I can't, there is a rainbow sherbet stain on it already.  :-)

 Peace and happy trades.
 Laci >>

****** To you as well.

Regards,

John J. Lothian

Disclosure: Futures trading involves financial risk, lots of it!  John J. 
Lothian is the President of the Electronic Trading Division of The Price 
Futures Group, Inc., an Introducing Broker.