Photographs By Daymon Gardner
Joe LeBlanc was a 25-year energy trading veteran with experience trading and hedging in both the physical and futures markets when he was cajoled by a former colleague to teach a course in energy trading at Tulane University's A. B. Freeman School of Business. The next year, he became a full-time professor and went about transforming the program and facility into something appropriate for a high-end hedge fund or institutional energy trading desk. It's no surprise, as LeBlanc's experience was forged during the apex of modern energy trading following the deregulation of energy markets in the early 1990s. As commodity risk manager for The Louisiana Land and Exploration Company he integrated trading and hedging principles into every aspect of the company at a time when the market was moving from 30-year fixed price contracts to numbing volatility and deregulated utilities as well as markets.
He went on to trade for Shell and most recently Energy Partners Ltd. LeBlanc now is associate director of the Tulane Energy Trading Institute and director of its trading center. He helped forge partnerships within the industry, creating a state-of-the-art trade simulator with which students can trade live markets or a critical point in history with Reuters' news feeds and analytics, Trading Technologies' software and CME Group's price feeds. We talk to LeBlanc about energy markets and preparing students for tomorrow's trading challenges.
Futures Magazine: Joe, you have worked as a trader for 25 years; how difficult of a transition was it into academia?
Joe LeBlanc: The biggest part was the recognition that all of my friends of 25 years in the industry would challenge me by the fact that they were interested in the students that were coming out. That being somewhat of a reflection on me put a different burden on me to make sure that [the students] are ready. The worst thing that could happen would be that you develop a product, basically a student, that is not ready to work. A good friend of mine said, "Joe, you are going to teach; hell, I will hire anyone you give an 'A' to." That really made [me] think; this is not just something [I am] doing in a classroom, this is something [on which my] reputation is at stake. Once they get out there in the work place, they are a reflection on [me]. That is a burden that most people in academia don't carry. It is a reflection of the school and not necessarily them. I wish every academic was responsible for placing five kids because it would change the way they teach.
LeBlanc broke it down to the following objectives:
- Developing a program that has value to the market (energy companies)
- Creating an academic program that has a measurable and challenging academic objectives and goals
- Avoid any cook-book approach to the subject matter – Let the students find their "edge" in the trading space
- Push the school to provide the "bleeding-edge" of new technology because we are developing the "NEXT generation" of energy traders
- Integrate this technology in a manner that such products, which are not designed for an academic setting, into the most real-world environment found anywhere
- Biggest Unexpected Challenge: Your 25 years of industry relations were interested in recruiting from your program and that the product from the program (students) would become a direct reflection of you!
FM: Is it important that you had experience both in speculating and hedging?
JL: Direct and extensive experience in the combination of energy planning, mergers, acquisitions, finance, derivatives trading, hedging and marketing have been tremendous experiences that the students really enjoy. I never know what level of experience I will get in a student. I have had students with countless years of energy marketing, engineering, finance and banking experience.
One thing that you can count on when you walk into a classroom of students interested in this space [is] they want [to know my] level of actual experience [because] they tell me regularly that very few, if any, professors ever actually have worked in their field of study and have only a theoretical knowledge of the information they are providing.
A lot of the things I did at Louisiana Land [and Exploration Company] — a major independent [oil company], we had a refinery, we had all the operations and it was important for us to take a position and manage acquisitions, planning etc. — had to be creative. Independent oil companies are probably more creative in their hedging and trading than most majors because they need to be. Every merger, every acquisition, every financial decision we were considering all of the commodity market implications and doing creative things to provide us with an edge or reduce risk. It was that experience in integrating all of the financial ramifications into the commodity markets that probably was more beneficial than things that occurred at majors.
FM: Is the energy trading program you helped to build at Tulane different than how you first envisioned it?
JL: When I was first asked to "help" with the program, the beautiful $3 million facility had 28 stations with no commercial software and no trading platform. Now we have two trading rooms with a combined seating capacity of 84 stations with the world's leading commercial software: Thomson Reuters, Trading Technologies and Logical Information Machines (LIM) and [more than] 22 live feeds into the facility with a special direct data feed from the Chicago Mercantile Exchange.
What makes this environment unique is that we have worked extensively with our technology and data partners to develop both a live and simulated integrated environment that allows students to trade commercial products as if they were actually transacting in live markets. This took some proprietary coding on our part as well as the creative and incredibly supportive and talented Thomson Reuters and Trading Technologies folks (and at every level in their respective firms — including the support and vision of the presidents of their companies).
FM: What skills do you want your students to get from the program?
JL: They have to be prepared for the way energy companies used to trade because a lot of firms are at different places in their evolution. Some still are doing things the way [they] were done 20 years ago, so they have to know the way things were. Then they have to know the way things are done today, and that involves a whole host of skills and techniques. And they have to be prepared for the things that are coming in the future. That is why you see things like algo trading and being able to do high-frequency trading, because they have to be prepared for it.
In the basic energy trading class (undergraduate and graduate):
- Understand energy fundamentals, including exploration, production, transportation, storage and marketing information and inter-relationships.
- Understand energy market contracts, forward curves, liquidity, margin requirements and how to trade such contracts in both an open outcry and electronic trading environment.
- Research, analyze and develop fundamental and technical energy trading strategies presented in a concise written and verbal format.
- Use Reuters 3000xtra, Trading Technologies X_Trader®, LIM and related excel modeling tools.
- Develop trading and position mark-to-market models.
- Trade natural gas, crude oil, heating oil and gasoline from the perspective of a broker, consumer, producer, refiner and speculator using integrated trading models, time spreads and crack spreads while trading illiquid periods using hedge ratios.
- Develop product price research and forecasts.
- Understand the use of derivatives and risk management tools.
- Understand from first-hand experience of the various roles of trading personnel, including research, trading and position monitoring/tracking, as part of the trading team simulations undertaken.
In the Advanced Energy Trading Class (graduate-level only):
- Understand energy derivative market-making, valuation and advanced energy financial engineering techniques and requirements.
- Understand exchange and over-the-counter energy option contracts and their related valuation, trading, liquidity and arbitrage, as well as how to trade such contracts in a highly-technical and fast-paced environment.
- Research, analyze and develop energy risk management and valuation strategies presented in a concise, professional written and verbal format.
- Develop oil & gas planning and field valuation models, related credit and financing models and derivative trading and valuation models.
- Trade natural gas, crude oil, heating oil and gasoline options from the perspective of a producer, consumer and refiner, as well as a derivative trader and/or market maker using integrated trading models.
- Re-value public energy company derivative portfolios based on independent energy market data sources.
- Develop Algorithmic Delta hedging models and use these models while trading OTC derivatives portfolios interacting with current and former major Wall Street managing directors participating in the class.
- Develop Algorithmic trading models where their grade is based upon the results of how the model performs against the live markets!
But we didn't stop there. We created a new one-year Masters in Energy Finance and Trading degree in which the above two courses are only two of 14 in energy that the students will be exposed to.
FM: If they aren't doing high-frequency trading, they will be competing against it.
JL: That's right. That is really what we were trying to address. What are the skills, if you were recruiting today for that next generation, [you would want]? What do you want them to know and what attributes do you want them to come away with? That is why we developed a new one-year masters degree, because it was more than we could do in the one-to-three energy classes that the kids normally were getting. So we created 14 courses in a one-year program that said this is the combination of everything we think you should know, and put it in a specialized masters degree in energy finance and trading.
FM: Talk about the annual trading competition. How did the idea come about and how has it evolved?
JL: It was watching the students participate in other trading competitions. They had a negative reaction to the way other competitions were being offered. They recognized that the only thing that they were going to be judged by was their P/L…. they would see that other schools were using game theory, which was 'Hey, I have two teams in the competition, one team go long the maximum contracts and the other go short the maximum contracts," and at the end of the day, one will be at the top and the other at the bottom. It went from managing a portfolio or making good solid trading decisions and bringing them forth, to really what looked like a bar fight. It had no comparison to the types of skills and traits that recruiters would want to have in their company. And that was the reaction I was getting from the recruiters: "This isn't the kind of behavior we want to encourage in our firms."
I sat down with my technology partners and said we want to do something different, and [we] strategized on the best way to go about [it]. What are the skills and traits of the best traders? We clearly wanted to see who could perform in a risk-adjusted environment.
So that became Round 1. Providing people with the Thomson Reuters platform and Trading Technologies platform on their own laptops for two weeks and all the training that came behind it was a huge investment by those firms. It became interesting to see where and how you were able to be effective in conducting a true competition because the level of knowledge of the other schools was relatively low in terms of energy fundamentals and what was going on in the markets. A lot of students were very resourceful in that they were making calls to the trading desks of all these firms and asking them to provide guidance to them during the trading competition. It was funny because one of the traders on one of the big energy bank desks was a good friend of mine and he said, "Joe I wanted to let you know I have been contacted by three schools to see if I would help them in their trading competition by giving them advice as to what to do, and I wanted to call you first to see how you feel about that." I said the first thing they have to learn is who not to listen to. After about 15 minutes of laughing he said, "That is a good point." I said, "Help them all you want and if it helps them, then great — they will come back to you later for advice; if it doesn't help them, they know not to call you back."
I have a pretty strong approach to trading, [which] is identifying the best traders a lot more than identifying who can make the most money in one day. Each firm has their own recipe of what makes the best trader so we decided [to have] the students present their strategy and [describe] it in a minute or less, to [say] "here is what I am going to do."
The judges were so engaged that they walked up to every trader while they were trading and remembered their strategy and asked them to tell them: "What are you looking at, what are you thinking about? You are up, you are down, what happened? You missed this move, what were you thinking at that time?" And [they would] listen to how the students respond. And then at the end to have all the results of all the different metrics that you could possibly look at and have you have to tell the judges what was your comparison of the strategy from what the results were. They pinged them with questions and then ranked the students. Based on that, you had the collected opinion of [at least] 30 top-ranked managing directors, senior vice presidents, real traders [to] decide who they thought would be the overall best trader coming out of the competition. It was never the person who just made the most money. The feedback to the students was tremendous. They learned that in order to get capital to be able to trade and be effective you have to have more than just being lucky.
The real characteristic that most people are looking for and we try and encourage at the school is that I don't want to create a breed of student that think that they need to be smarter than the market. I need them to be prepared to be wrong two-thirds of the time and it is how they manage being wrong and how they manage being right that makes them effective.
Once you start thinking you are smarter than the market, you put pride in your trade, then you won't get out of a bad trade. It takes time for them to recognize that that is what they were doing. They start praying, rubbing the head of a troll doll, and we try to break them of it. You can do that only with experience.
Our students started participating in other university-based trading competitions where [they] were rewarded only for having made the most money, regardless of the risk they exposed themselves to. Recruiters that sponsored these events were not pleased with the "winners" as they did not possess the skills and attributes of their view of a "successful" trader.
In fact, energy companies are trading to reduce the commodity price risk that their respective firms have exposed their long-lived capital investments to. At the same time, energy investment banks and proprietary trading firms run their trading operations based upon risk/return metrics and have developed keen methods of defining the attributes of a successful trader.
So, we set out to develop a university-based trading competition that:
- Was risk-adjusted
- Had live/simulated trading
- Featured a combination of methods of determining the "Best Traders"
As such, we created the Tulane Energy Trading Competition which was structured as follows:
- Remote Round — Open to 100 2-person teams from major universities. This round:
a. Real market tools & live markets
i. Thomson Reuters & Trading Technology licenses & training provided to each team
ii. Trade Live Crude & Natural Gas futures markets
b.Risk-adjusted returns used to rank results
i. We used the Peter Martin Ulcer-index as a start and ultimately created the Tulane Energy Index that effectively penalizes students for a combination of position drawdowns AS WELL AS for significant market moves that the traders DID NOT participate in
- Final Round — Top 14 teams (28 students) from Remote Round invited. This round:
a. Simulated trading rounds
b. 30+ executive judges to decide (vote) on top traders based on:
i. Pre-trading 1-minute presentations by students on their strategies
ii. Trading results — however the judges decide these results helps decide the traders' [overall] skills
iii. Post-trading 1-minute presentations that reconcile their strategies vs. performance
iv. Judges interact with the students all day while trading
- Students are provided with direct feedback on the true skills and attributes [that] the market is looking for.
- Judges get the opportunity to meet the students and often recruit them.
- Tulane gets tremendous feedback on items/concepts from the judges on how to keep the program cutting-edge.
- Winners receive more than $400,000 in software, data and cash.
- Everyone has fun.
FM: Traders are very competitive. Is the competition also a good way to keep track of what other schools are doing?
JL: As we would expect, there are some outstanding university programs and each school has specific learning objectives they hope to accomplish by developing a trading center. We learned that most programs do not have experienced trading professionals participating, so the vast majority of the other programs have trading rooms that are used as research and analysis labs rather than trading programs.
Every trader knows that you don't approach any trade without an extensive amount of research and analysis, but it's not until you actually make a trade that your assessment of what information was relevant, how you processed the information while the market is moving at 300 ticks / second and what you wished you had looked at before the trade. And this thought process never stops as long as you are on the trading desk!
My program is offered to students at the end of their academic career as an opportunity to learn from applying their extensive toolkit of academic skills [to] the marketplace in order to find their "edge." In order to do this, you must allow them to develop their own approach to analyzing the data, develop a strategy, employ the strategy and incorporate such results back into their thought process. [This allows them] to begin to learn more about themselves and where their strengths and weaknesses are in an environment that is designed to help them develop their strengths and attempt to correct their weaknesses.
Feedback from recruiters has been that our students approach trading like 10-year veterans with a level of market maturity that rivals the students coming from most other programs. The secret: The students have been provided with an opportunity to learn how they make decisions and where their edge is rather than trying to guess the answer in the back of the instructor's book.
FM: Your new venture with CME Group and Energy Management Institute (EMI) is more aimed at professionals in the industry. Why is this program important, and why is now the time for it?
JL: With the merger of the CME and the NYMEX and the migration of trading to the electronic exchanges, we have found that many firms are looking at the challenges of how to migrate their firms either to learn more about the energy markets or learn more about the electronic markets as the two worlds have collided. In addition, energy firms are attempting to learn how the world of algorithmic trading has moved from the back labs of investment banks to the desktops of traders and how this development, if at all, needs to be incorporated into their risk-reducing, physical-trading-focused shops.
As such, we identified a need to provide non-credit energy executive education to the market and we felt that the combination of EMI, the CME and Tulane would provide the marketplace with a unique opportunity to get "hands-on" experience like no other program, period.
The program is different than the Tulane curriculum in that we are needing to compress a lot of information and experiences into a relatively short time, [whereas] our students are immersed in the markets and environment for 14 weeks, rather than two days.
FM: How important was it for you to create an environment as close as possible to a real trading floor, or at least a trading desk?
JL: You can't replace the heart-pounding, palm-sweating, troll-doll-petting, God-pleading prayer reaction of trading by reading a book, and until you have skin in the game, it's all theory. We make them put their grade on the line and that changes their thought processes and decision-making. Every student tells me after a trading event that they wished we could repeat that class hundreds of times as they would do it differently each time, because they didn't realize all that's involved until you actually get the chance to do it.
FM: Is this more important in today's environment?
JL: There are a number of reasons it is important. I enjoy watching bright students come in, some of [whom] may have had experience, and are getting ready to trade for the first time. I give them assignments where they take on different roles: They may be a broker, consumer, producer, speculator, etc. They all have different positions they are about to encounter with respect to their role on their trading team. They have to present their strategy and they are analyzing the hell out of a lot of stuff. They are coming into it with this [very] meticulous approach.
The minute I start the simulation, they are going to forget about all of this stuff and change completely. (They are trading in an OTC environment as well as on the computer with bids and offers being announced.) They start losing it; people are screaming, pushing each other out of the way. It is fun to watch. That environment changes the way they think. The next time they come back to it they are approaching the market differently. …They recognize where their weaknesses are and you will see books start to stack up on their desks of all the things that they are exposing themselves to. That is amazing. The academics involved in the energy institute are blown away by that process. They come in and see students with every trading book that they can dream of.
Students approach a class with their filters on. The filter is "What do I need to know to get an A in this class? Everything else I am going to throw away." They are focused on what is going to be on the exam. And now, they see there are five recruiters at the door that want to know if [they] want to join them because [they are] in this program. Here is an opportunity for [them] actually to learn something that [they are] going to use, and they turn the filters off. That's exciting.
FM: What skills or lessons do you include in the program that you wish you had when you started out in the business?
JL: All of them. And that's what every energy professional has said when they learn about our program. We had to learn on the job with no safety net. We believe that our trading environment here would be an ideal place for energy company to come and try out new strategies as this environment truly could stress-test new techniques, ideas, software, etc., that would be almost impossible to replicate in a commercial environment. Our environment is so realistic that major companies wish they had this for their strategy, control and development programs.
FM: Are students more focused on fundamentals or technicals?
JL: Inexperienced energy traders want to run to use the technical trading tools early [because] they really don't need to know much about the markets to use price-only momentum tools to think they are ready to trade. They ask, "Do I really need to know the fundamentals to trade?" I say, "No, don't learn them, get a job and call me, I will be glad to take your lunch money." Energy is a fundamentally driven market. Most senior energy traders are not big fans of technical trading but use it to understand what the masses are thinking. I spend the first 40% of the course not letting them use a single technical.
FM: How important is the energy trading simulator to the program?
JL: Its important in that it provides a demand by the students to want to know more about statistics, Excel, math, visual basic and C++ programming, etc., etc. Once they experience the environment, they immediately want to know about books, courses, information that they can learn to become better prepared for the environment.
FM: We can't let you go without your take on the energy markets. Some analysts believe that crude oil prices are not being driven by traditional supply/demand fundamentals but as a store of value, similar to gold. What is your opinion?
JL: A flight to commodities, including the energy products, always has been a factor in global market products such as crude oil. However, unlike gold, crude oil is burned once it's produced and the vast majority of where people want to invest in with respect to crude oil futures is dependent upon an energy company to produce it. With a 40% to 70% decline rate in energy well production (on existing wells), we need to realize that the forward curve of crude highly depends upon the ability of energy firms to drill and replace their current reserves, which then returns the discussion back to a fundamental market assessment. Also, because U.S. natural gas is primarily a domestic pipeline-restricted market, there is no flight to natural gas that provides protection like gold would.
FM: What is your opinion on the notion that speculators are driving the price of crude?
JL: Short-term speculation always has been a factor in every market — always has and always will be a factor. Once we get six months out, we are back to the fundamentals because it's the time horizon that begins the investment window of energy companies to make decisions to either drill more or less, thereby affecting the fundamentals of the supply/demand balance of the market.
FM: Where do you think the price of crude and natural gas are heading in the near-term? Long-term?
JL: In the short-term with the election year coming, high commodity prices will not be favorable to the current administration (so they will) attempt to provide some near-term policy/permit concessions so that it doesn't become a platform for any opponent.
Natural gas depends on the weather this winter. There is plenty of supply. Drilling is supported by finding more oily-based gas discoveries. Most shale plays are underwater economically and are driven by public equity incentives and lease requirements rather than pure natural gas market economics. Overall sentiment is bullish with a cap of $6.00
WTI: Pure U.S. pipeline constraint issue between Cushing and the Gulf coast. Not a Brent/WTI issue, but a WTI/LLS spread [issue]. It is amazing to see a five-year forward spread differential in a 1,000-mile pipeline challenge yielding $20+ per barrel differentials. [My] sentiment is bearish the WTI/LLS and WTI/Brent spread; bearish on the LLS and Brent markets overall.
The long term outlook depends on energy policy and economics. I'm bullish natural gas, bearish shale gas investments, bullish Gulf of Mexico Investments and bearish crude oil overall.
FM: Where do you see the Tulane program five years from now?
JL: You can't let it sit still because a lot of schools are on our tails trying to replicate what we have. North Dakota State University came down and [announced] that they are trying to duplicate what we have. I didn't care because they are in Fargo, North Dakota. That is fine with me. My dream program five years from now is [to have] a really heavy involvement from the University's math department and engineering school in working with developing the skill sets of all the future desk top algos. That is where the school is going to go. I can tell you that our energy club, which has 100 kids in it right now, that is all they want to do. They want to learn the skills and techniques of what it takes to build those models, which is where they are going. It is the recognition of the other schools — and we started that process — as they become more aware of the power that we brought into the room and the level of interest and how quickly the students of the math department are getting picked up. Oh my God, a kid that comes through the program with a math background [is highly recruited]. They are just super strong.