Floor trader comes full circle

May 18, 2018 02:00 PM

Bob  Moss had not even turned 21 when he began trading on the MidAmerica Exchange (Midam), and it wasn’t his first career choice. Moss was taking pre-med classes at Knox College but secretly wanted to be a professional race car driver. 

Moss left school in the early 1970s after his father fell ill to help him with his real-estate development business. By the time he helped complete all of the remaining building projects, he missed the start of the next school year and was looking for work. His father mentioned that the son of a friend of his was making good money in live cattle. Moss was perplexed. “I said I am studying to be a doctor, I don’t want to be slaughtering livestock. I [assumed] that his son was carving up cattle at the stockyards.”

When he mentioned his plans to become a race car driver, his dad simply said, “Good luck with that.” 

However, he had friends who worked at a Lamborghini dealership on the North Shore of Chicago and he had a plan. “I got a job at the dealership that was putting together Formula One racing cars,” Moss says. “I had my plan. After about six to seven weeks I am still sweeping floors out there and I was getting frustrated.”

He did notice a lot of young guys coming in with beautiful girlfriends and spectacular cars. “I asked, ‘What do those guys do? Who is that guy?’ Someone said, ‘That is Barry Lind.’”  

Lind came in driving a Lamborghini. Moss asked his friend what Lind did for work and his friend responded, that he was involved in live cattle. Another guy came in and Moss asked what he did for a living, and he was told he was involved in pork bellies. “I thought, maybe I ought to go back and talk to my father about this.” 

He did, and his father set up a meeting with his friend at the Chicago Mercantile Exchange. 

“The elevator doors opened up to the trading floor, and it is wild; it is spectacular. Colorful boards, high-intensity lighting; I thought this is really cool,” Moss says about his first trip to the floor. 

He saw what was going on and said, “I can do this.” He got a job as a runner for $50 a week. After three months, he began clerking for a broker and thought he was ready to trade. However, a membership was $75,000.

“I went to my dad and said I am ready to go. I want to get a membership, I know these guys are good but I am really good,” Moss says. “My father asked, did you see your buddy who took you down to the floor? He lost all the money he made, and another $500,000!” 

Moss said, “I would never lose money like that,” but his father offered a different game plan. “Did you hear of the Chicago Open Board of Trade (the precursor to the MidAmerica Commodity exchange)?” his dad asked. 

Moss visited the Midam and was unimpressed. “The entire exchange was 30 X 60 feet. There were no pretty girls, there were no bright lights, there were 10 guys under 30 years old and a few people 65 or older. A guy with only one tooth was marking the board. I thought I am not going there.”

Moss returned to clerking at the Merc. One day his boss asked him to take some visitors from the MidAm around the floor. He met the two guests; a heavy-set gentleman and a smaller guy. They were older than I was, maybe 23 or 24. 

“I asked them if you could make any money [at the MidAm]. The shorter guy asked the bigger guy to tell me how much money he had made this year. He said a shade under seven figures.”

Moss’ opinion of the MidAm changed. The larger fellow was Richard Dennis and the shorter fellow was Tom Willis, and this chance meeting with two future trading legends would alter the trajectory of Moss’ life. 

 “We became very close friends,” Moss says. “The insight that those guys had was phenomenal. During the next six or seven months, I needed to shut up and just try and learn.”

It didn’t quite work out that way as Moss had a few blow-ups before seeking their help. After Moss had several frustrating days, Willis invited Moss to a trading seminar Dennis was holding at his apartment. “All you had to do was bring a six pack of beer,” Moss says. “I go out there and Rich starts talking about the edge theory and statistics and what a true edge is. After an hour we broke into small groups.”

Moss, who up to this point had been toying with technical trading methods, became a pure edge trader, looking to scalp one-lot orders. His first day following Dennis’ methods was his best day up to that point and he was on his way.  

“I traded nothing but one-lots and made 60 trades. At the end of the day I made $800 just trading one-lots with very little exposure,” Moss says. 

He would go on to trade at the Chicago Board of Trade and then became a market maker at the Chicago Board Options Exchange (CBOE). 

Simultaneously, Dennis’ trading business, C&D Commodities, was growing rapidly. He wanted to expand to options at the CBOE, so he asked Moss to execute his stock options. “I traded his options book,” he says. 

C&D Commodities was growing and its co-founders, Dennis and Bill Eckhardt were launching an interesting experiment in training traders, who they dubbed “Turtles.” The experiment — which legend has was spawned from a nature/nurture argument between Dennis and Eckhardt over trading expertise — launched many professional trading and money management careers. 

At the time, Moss already knew how to trade. “Dennis said I was much more valuable trading his strategies than as a Turtle,” Moss says. He did participate as an instructor at one of the seminars teaching the Turtles about large order execution. 

Dennis had bigger plans for Moss. He asked him to move to New York to execute his trend trades on the various New York futures markets. Moss traded Dennis’ New York book from 1984 to 1988. “That was the heyday, he was making million and millions of bucks and the Turtles were involved,” Moss says. “I was doing half of all the order flow that came through the C&D Commodities desk in New York. I filled about 1.6 million contracts a year.”

He was filling orders in sugar, gold, heating oil and crude oil. All the New York futures markets were traded at the World Trade Center at the time and he would go from pit to pit fill Dennis’ orders. 

Anyone who spent time on a futures exchange at that time learned the drill of spotting the Richard Dennis broker. No one was close to trading the size Dennis was, so traders on the floor would identify those brokers and try to see what direction they were looking to trade. 

“Everyone was watching us. We really were 10 times larger than anybody else that was down there,” Moss says. “We had positions of 10,000 to 15,000 (contracts) in gold, and the same in crude oil. Remember, there were 24 Turtles that were trading along with Rich and Bill Eckhardt and Tom Willis (Willis & Jenkins).” 

It got so big that Moss would only execute Dennis’ positions. “Everything that I did down there was discretionary. I could buy 6,000 [contracts] and sell 1,000 just to be able to make a market and not let people run in front of me,” Moss says. “They would see us buy 10,000 gold and know we are long gold. I had overflow brokers that I would use to disguise our positons. Sometimes I would walk in there and the market would go bid or offered depending on what they thought I would do.” 

Managing money

In 1988, Moss left Dennis’ operation to develop his own proprietary strategy. After several years of development and trading, Moss launched RAM Management Group, Ltd; a pattern recognition-based systematic commodity trading advisor that used both trend and countertrend trading methods. 

While at times the RAM programs resembled trend followers, they produced solid returns in some of the worst performing years for the Barclay CTA Index (see “Walking the walk,” page 79). RAM had a 0.4 correlation to the Barclay CTA Index. It produced strong returns in 2008 along with the broader CTA universe, and managed to retain those gains in 2009, which was one of the worst performing years in the index. In fact, it produced solid returns from 2009 through 2012, which included three negative years for the index. Its run from 2007 through 2012 was arguably the best for any CTA during that period. 

That run came to an end in 2013, and after several years of underperformance, Moss believed something fundamentally had changed in the markets. He closed down the RAM program in 2016 and began researching ways to improve it. 

After extensive back-testing over six years, Moss and his team developed the Alpha Macro Technology (AMT) trading system. The AMT is a medium-term, 100% systematic, quantitative trading system containing trend/countertrend, momentum and pattern recognition components. 

The strategy is similar to RAM, but has been modified to trade 24 hours a day. Moss identified a lot of the execution problems RAM experienced as a consequence of the move to electronic trading and 24-hour markets. 

Even after the market went electronic, the majority of trading occurred during regular trading hours and most systems were based on the traditional open/high/low/close metrics. As markets expanded to 24 hours, some of the opportunities could not be exploited because they occurred after hours without sufficient liquidity. 

“Five years ago when I really wanted to trade overnight markets the volume wasn’t there to put the positions on,” Moss says. “It was a dilemma, but now it is much different. There are a lot more high-frequency systems that are creating volume. If you had to do 1,000 contracts in heating oil, for example, you couldn’t do it. [Now there] is more liquidity overnight,” Moss says. 

And the large traders aren’t moving the market; the high-frequency algorithms are. 

“We actually depend on the fact that the high-frequency guys are there,” Moss says. “The fact that the algorithms are there and there is dependable trading volume helps in our execution.”

In a sense, Moss’ trading has come full circle. His new system reads the market the way he would read the trading pit. “It is not that different from what we did on the floor,” Moss says. “With these algorithms, you’ve got the front-running algorithms and you got the algos that want to be the first to sell it back on a mean reversion after the big order ends. It is one or the other. That is the same thing that used to happen on the floor.”

Moss identifies and exploits these tendencies through his algorithm. “The psychology of what we are doing is integrated in what we have designed. To understand the logistics of these new high-frequency systems, you have to figure out what they are trying to do,” Moss says. 

He is reading the HFT algorithms the same way he would read floor traders. They are trying to anticipate what the market is doing and be in position to take advantage of that. He has designed a system to take advantage of those algos and to recognize the patterns those algos create. 

The system provides a signal based on patterns and volatility.

Moss has backtested his system back to 2012 and it is showing promising results. But he does not plan to launch a new CTA. Moss and his partners plan on offering the AMT as a software package and are looking for a portfolio manager to partner with. 

As an order filler for Richard Dennis, Moss faced the dilemma of having to execute huge orders without tipping off the market of his intentions. He was constantly being watched and had to develop strategies to get his position on with limited slippage. In navigating these market minefields over the years, he has learned how markets work and what levels to be wary of. In short, he learned the tells of the various players in the market and has now created a strategy that exploits all the lessons he has learned over the years.  

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.