From the October 2013 issue of Futures Magazine • Subscribe!

Dan Dicker: How electronic trading changed (ruined) crude oil prices

FM: When did you leave the floor? 

DD: I thought I saw sooner than most the guys around me that the electronification of the floor was going to end our exclusive access and once that was ended, we would have to find other advantages than the one we had depended on, at least for me, for 20 years. There was a time I spent first coming off-floor and trading upstairs just above the floor, trying to adjust. Rents were so high I could rent my seats out and not worry about it. I did love [pit] trading.

So in 2005 [when] I started to go off-floor, that’s when I started to view the market in  a far more macro way. And I started to do a hell of a lot more work aside from what the papers were always telling me. I started [to] get a real sense of oil production, and more than that, financial flows into the market, which were and still are the most important variable that no one talks about.

I didn’t leave the floor until after the IPO in 2007. In some ways the floor became a very unhappy place between those who had owned seats and therefore participated full scale in the IPO and the other half of the trading community. That became very acrimonious and difficult to trade because there were a lot of people who realized at that point they had made a mistake early in their career, and the waterfall was about to stop running, and they very much resented those who had a parachute.

FM: That’s very much what happened in Chicago as well.

DD: Exactly. Chicago was even more difficult because the IPO didn’t come off immediately as a success. It was only those who were smart enough or dumb enough or whatever enough to have left it alone for three years while CME stock went to $700 or whatever it was…because the first year and a half was pretty flat. 

FM: How did you change your trading once you went upstairs?

DD: When I was on-floor, I would trade scalp spreads and outrights for points, and my daily line would be 1,000s of lots a day, and I would have some positions, but they would be leverages into daily stuff and [were not] really based upon any macro idea. But as I came off the floor, what was clear to me besides not having a major edge in terms of commissions anymore, is that I definitely didn’t have an edge in doing high volume with HFT programs and black boxes. Most of the guys had to learn that the hard way but I didn’t, so the only way I could trade effectively in the oil markets, and still trade effectively in the oil markets, was to take a fairly long-term view on what I think is supposed to happen at very specific targets and stick to that, and have a very specific time periods in those. So instead of scalping spreads for 15 points,  I had to have WTI/Brent spreads and hold two months.  I will have long dated spreads back in the [curve], and I could have those for several months. I could have cross market gas oils, and have those for several months. 

I hesitate to be [at] the front end of the curve anymore. I hold further out because it gives me a little more courage to wait it out. I definitely don’t jump on markets. I wait for spots and when I don’t get them I don’t feel that badly. In general, when I have a short-term idea in mind,  instead of buying contracts and sitting on them, I tend to play options against it because as  I spent a year and a half in the options pit,  I tend to be a premium junkie; that’s just my bias. That’s my thing. I used to trade thousands of lots a day, I probably now trade 1000 lots maybe a year, which is enough.

FM: Did you start MercBloc when you left the floor?

DD: I did, it was my idea, and in some ways it worked out very well. It had little to do with futures, but had to do with the circumstance that was created where all of a sudden I was surrounded by another 70 or 80 multi-millionaires who didn’t have this kind of largesse before. The idea was to organize as a group. We would get some white shoe bank, and in MercBloc’s case it was Morgan Stanley, and get a hell of a deal on fees and get some tony wealth management services at a very reasonable price instead of these guys doing it individually. That’s how it started. 

FM: So you guys don’t invest? 

DD: No, we do not manage money. Everybody at MercBloc has an individual relationship with Morgan Stanley, but we leverage the group’s capital to deliver the kind of fee structure that they can only get if they were worth, say, $500 million apiece. Each of our guys is inside the firm with lowest fee structure that they offer. What we brought to Morgan Stanley, with our relationship, was [more than] $650 million in assets. Then the markets went south and it was difficult to sell services further. In 2008 Lehman died, and frankly at that time we didn’t know if there would be a Morgan, its [stock price] went down to $11.

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