The months and weeks leading up to the 1987 Crash were a big deal for our desk in the S&P 500 futures. The Saudi Royal family’s investment arm had over 4,000 big S&P futures on and were buying and selling like mad. I came over to the Merc from the Chicago Board of Trade’s bond pit, where I worked for a guy by the name of Rick Barnes (Ricky the Rocket), after he purchased two clearing firms and sent me over to the CME to run his S&P desk. He traded everything in ‘size’, buying and selling 10,000 or 15,000 bond options, or selling a few thousand beans or wheat were nothing to him. After he bought LIT and Hennessy Grain, Rick told me to take over the S&P desk because…the execution sucked.
Back then the Chicago Board of Trade was the Irish Catholic exchange, and the Chicago Mercantile Exchange was the Jewish exchange, and needless to say it was not a friendly cross town rivalry. Anyway, after I got to the S&P desk, I knew there was something wrong. An order would go into the S&P pit to buy 50 lots, or contracts, and the prices that the desk paid never matched up to the quotes that the desk was given after the order went in. The clerk in the pit would be yelling out 70 bid at 80, 80 bid at 90, and even bid at 10 and the fill would come out ‘paid even on 10, and 10 on 10, and 20 for 30 lots.’ The actual fill was simply not what we were quoted. When a newcomer like myself stepped up or told the broker that the fill did not reflect what the desk was quoted, we were told not to fight over it, just move on. I could not do that, nor could Paul Jones from Tudor. Eventually Tudor had his own desk and a guy in the pit watching brokers fill orders. I am not kidding, Jones had a local in the S&P pit reporting back to the Tudor trading desk which brokers were front running his orders.
The weeks leading up to the 1987 Crash saw the futures moving up almost everyday. Our desk had several big accounts and Tudor was one of them, as was Moore Capital, AIG, Banker Trust, Soros, Bruce Kovner and so many others. They came to us because we fought for the customers, and that was a no no on back then. To me its was not something I couldn’t over look. Sometimes the fills were so bad I had no choice but to go to bat for the customer. As I have said hundred of times, it didn’t matter to me if it was a 1 lot or a 500 lot, it was someone’s money. The bad fills and the crappy service were a financial insult to the customer, and while most big accounts found other desks to use, Paul Jones went another route https://archive.org/details/TraderTheDocumentaryPaulTudorJones; he opened his own operation. He was a great trader but he was not going to sit by and let millions float away because some broker way ‘laying off’.
Paul Jones, otherwise known as Tudor, was well known, and his real claim to fame was not only predicting the 1987 Crash, but the millions he made in the process. Jones, Louis Bacon, Bruce Kovner, Soros, Michael Steinhardt, those guys were the talk of the trading floors back then. The day of the big hedge funds running billions and moving around the futures markets was a very profitable business back then. The clearing firms, the introducing brokers (IBs) and the order fillers made millions, but over the years, more HFT and algorithmic trading programs hit the markets, and then came the credit crisis. It not only became harder to find good traders, it became even harder to produce profits. Most of the big hedge funds back then made what they called 2 and 20, meaning the fund would make 20% of the profits and take a 2% management fee. All you really have to do is do the math. If a fund ran $20 billion dollars and trading profits are flat or didn’t beat the markets the management fees continue to pile up. Like Ackerman, his fund is down over 50%, yet he still receives management fees. In order to make the 20%, the fund would have to get back to the high water mark and produce profits above that, but with the fund down so much it’s highly unlikely that will ever happen. What used to be a very lucrative business based on trading profits has many wondering if it’s still viable. Yesterday, on Bloomberg, a story came out about Tudor Investment Corp. and how during the strong U.S. equity rally over the course of the last three years, Tudor’s firm experienced subpar returns leading. Many of his investors collectively pulled over $1 billion dollars from his fund. Many of these redemption requests came from clients who had been with Tudor for multiple decades, and even some of his long time staff have departed lately. According to Hedge Fund Research Inc, Tudor’s macro fund has not matched the S&P 500 performance since 2009, meanwhile other Tudor funds have only seen gains once out of the last five years (http://www.bloomberg.com/news/articles/2016-04-14/tudor-investors-ask-to-pull-more-than-1-billion-from-firm).
The problem is industry wide. Last year over 550 hedge funds opened and over 520 closed. It’s a shrinking business with shrinking profits. Like retail traders the big and small hedge funds have learned that it’s not as easy as it used to be to rack up big returns. It is all part of the new world order of investing and it’s just not working for the investors. On top of the Tudor story is another story out by bloomberg that New York City’s pension for civil employees voted to exit its $1.5 billion portfolio of hedge funds and shift the money to other assets classes (http://www.bloomberg.com/news/articles/2016-04-14/nyc-pension-votes-to-liquidate-1-5-billion-hedge-fund-portfolio).
As we have always said; there was a party on Wall Street and we were not invited. It was a speculative class that was demolished by the credit crisis and new regulation. We live in a new world trading order. Things that used to work don’t, things that do work do not last for long. As the markets and traders evolve we are not sure where it’s going to end up, but what we can say for sure is, it’s not getting any easier…You have to get in, get out and never fall in love with your positions.
In Asia, 7 out of 11 markets closed higher (Shanghai Comp -0.14%), and In Europe, 9 out of 12 markets are trading lower this morning (DAX -0.58%). Today’s economic calendar includes the Empire State Mfg Survey, Industrial Production, Consumer Sentiment, Charles Evans Speaks, Baker-Hughes Rig Count, and Treasury International Capital.
Our View: To say the S&P is overdue for a pull back is an understatement. It’s 6:30 am CT and the S&P is down 4.5 handles at 2072.00. According to the S&P cash study for the Friday of the April options expiration, today has been up 16 / down 10 of the last 26 occasions. For the last two weeks just about everyone has called for a high or a pull back that has never come, and now traders are starting to say the ES will pull back next week after today’s expiration. I said early this week that I thought the ESM was going to 2075-2080, and 2080 is last nights Globex high. Our view, buy the early weakness and sell rallies.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 7 out of 11 markets closed higher: Shanghai Comp -0.14%, Hang Seng -0.10%, Nikkei -0.37%
- In Europe 9 out of 12 markets are trading lower: CAC -0.57%, DAX -0.58%, FTSE -0.48% at 6:30am CT
- Fair Value: S&P -6.43, NASDAQ -8.15, Dow -85.48
- Total Volume: LOW 1.36mil ESM and 2.4k SPM traded
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