Bruno Giordano started Dorset Financial Services in 1981, trading various security products as an investment advisor. In 1988, his stepson Hugh Yeakel, who had been involved in futures as a broker for Clayton Brokerage, joined Bruno and Dorset Financial Services became Dorset Futures Corporation. They launched a systematic long-term trend flowing commodity trading advisor.
“We used a trend following system from 1988-1993 and it worked, but there were a lot of pitfalls like there always are with trend following systems,” Yeakel says. “You could never count on your money until it was closed out because a lot of times it reversed.”
After the initial Dorset program was closed out Yeakel went on to buy a seat at the New York Futures Exchange, where he developed an interest in shorter-term trading and algorithms. “In 1998, I started working with algorithms and [traded a system] for four years with my own money,” he says.
By 2002, they were ready to relaunch Dorset as a systematic short-term breakout strategy trading the S&P 500 and other stock indexes. They traded the floor contracts but ran into problems as the size of the contract would not allow them to make the best use of their sizing algorithms and as liquidity drifted to the E-mini contracts.
Giordano says that with an $80,000 minimum investment, they could only trade one S&P for each of their customers, even if the account level grew significantly. “We couldn’t manage our capital risk,” Giordano says.
Yeakel adds, “The main difference between the big ones and the minis, for us, has been with the big one with every $80,000 account — which was our minimum — you would trade one lot and when it got to $160,000 you would trade two, whereas with the minis the commissions are a little higher but we have a position sizing algorithm that is based on volatility. The minis are small enough that that has a pretty big impact.”
They began trading the minis exclusively in 2006, which has allowed them to utilize the position sizing algorithm trading the mini S&P, Russell, Nasdaq and Dow indexes.
The program is still trend following but they are out of every trade at the end of the day. All trades are entered as stops based on a breakout methodology.
“It is based on breakouts from the opening price and then reversals. If we get far enough ahead during the day we have a move to breakeven where the stop goes from risking X to [breakeven].”
The system will give them a signal at the end of each trading day but it will be based on the opening price of the following day, so it is not set until markets open that day.
“My orders from last night do not tell me where to buy and sell, they tell me how much above the opening price to buy or sell. So once I get my four opening prices at 9:30 in the morning, I punch them into the software package and that is when it gives me the specifics. Last night [for example] I knew I would be buying the Nasdaq 6.75 [points] above the opening,” Yeakel says. “It doesn’t matter if that opening price is 100 higher or lower, I am buying a certain amount above or below the opening price.”
The system sets the size of the order and stop losses, which risk an equal amount on all four markets based on volatility. Once a specific profit target is hit, the system will move the stop up to break even.
While their algorithm is basically the same since launching the program in 2002, the shift to mini contracts has improved the performance and they continue to fine tune it. “We are continually researching the algorithm and improving it. This is not the same system we started trading in 2002,” Giordano says.
For example, because they will be exiting all trades on the 4:15 close, they will tighten their stops with 45 minutes left in the regular trading session. “You don’t want to give up a 20 handle day in the last 45 minutes,” Yeakel says.
That was one of the enhancements Dorset made. “I am up 16 handles in the S&P at 3:40 and I am risking 16 handles all the way back to breakeven in the last 45 minutes,” Yeakel says. “If you think that through and experience that a few times you figure there has to be a better way. Not that it happens a lot but it is very painful when it does.”
The program earned 18.44% in 2007, its first full year trading exclusively minis, and 65.63% in 2008. Dorset is up more than 10% so far in 2009 and continues to make the most of the minis.