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`Steidlmayer on Markets
`Trading with Market Profile
`
`Second Edition
`
`J. Peter Steidlmayer
`
`Steven B. Hawkins
`
`~
`
`John Wiley & Sons, Inc.
`Hoboken • Chichester • Weinheim • Brisbane • Singapo~ • Toronto
`
`TT v. CQG (05-4811)
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`Page 1 of 8
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`TRADING TECH EXHIBIT 2226
`IBG ET AL. v. TRADING TECH
`CBM2015-00181
`
`

`
`Copyright@ 2003 by]. Peter Steidlmayer &. Steven B. Hawkins. All rights reserved.
`
`Published by Tobn Wiley &. Sons, Inc., Hoboken, New Jersey
`Published simultaneously in Canada.
`
`No part of this publication may be reproduced, stored in a retrieval system, or trans(cid:173)
`mitted in any form or by any means, electronic, mechanical, photocopying, recording,
`scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976
`United States Copyright Act, without either the prior written permission of the Pub~
`lisher, or authorization through payment of the appropriate per-copy fee to the Copy(cid:173)
`right Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400,
`fax 978-750·4470, or on the web at www.copyright.com. Requests to the Publisher for
`permission should be addressed to the Permissions Department, John Wiley &. Sons,
`Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail:
`permcoordinatoi@w.iley .com.
`
`Limit of Liability/Disclaimer of Warranty: While the publisher and author have used
`their best efforts in preparing this book, they make no representations or warranties
`with respect to the accuracy or completeness of the contents of this book and specifi(cid:173)
`cally disclaim any implied warranties of merchantability or fitness for a particular pur(cid:173)
`pose. No warranty may be created or extended by sales representatives or written sales
`materials. The advice and strategies contained herein may not be suitable for your situ(cid:173)
`ation. You should consult with a professional where appropriate. Neither the publisher
`nor author shall be liable for any loss of profit or any other commercial damages, in(cid:173)
`cluding but not limited to special, incidental, consequential, or other damages.
`
`For general information on our other products and services, or technical support, please
`contact our Customer Care Department within the United States at 800-762-2.974, out~
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`Wiley also publishes its books in a variety of electronic formats. Some content that ap(cid:173)
`pears in print may not be available in electronic books.
`
`Library of Congress Cataloging-in-Publication DatDf
`
`ISBN 0·471-2.1556-2
`
`Printed in the United States of America
`
`10987654321
`
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`FOREWORD
`
`A chart is a communication vehicle. lts purpose is to com(cid:173)
`municate what is transpiring at point A (trading pit) to an ob(cid:173)
`server at point B (some distant location). One can look at any
`charting system (e.g., bar, point and figure, candlestick) as alan(cid:173)
`·guage. Each was developed to communicate market condition to
`an ·observer. The language of trading has its own vernacular. Ex(cid:173)
`amples include: "it feels heavy here," or 11it feels like we have
`more to go." Market Profile is the product of a professional floor
`trader's ability to communicate the pit trading experience sym(cid:173)
`bolically in chart form. Here is how this is accomplished.
`The standard 30-minute bar chart automatically moves to
`the right to start a new bar every 30 minutes. The horizontal di(cid:173)
`mension in this chart is automatic-dictated by chronological
`time, not market activity. The involuntary nature of this action
`inhibits the ability of the bar chart to communicate market ac(cid:173)
`tivity in the horizontal. This limitation is analogous to trying to
`communicate detail or nuance using only nouns and verbs but
`no adjectives or adverbs-less than adequate communication.
`Market Profile has no chronological restriction. It expands
`horizontally only when prices repeat. Horizontal expansion of
`the chart reflects only market activity, never chronological ac(cid:173)
`tivity (the passage of time). Market Profile more clearly illus(cid:173)
`trates to the trader a new directional move beginning in a dead
`market or a directional move losing momentum. The feel of the
`market is objectively illustrated using the horizontal dimension.
`Visual focus = Accurate communication = Better trade identification
`Jim Mayer-President
`Mayer Investments
`
`v
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`02
`
`The Hawkins Interpretati~n
`
`Trading, Technology, and the Future
`
`2U3
`
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`
`Figure 13-10 Market activity display of AT&T with directional arrow.
`T<>Vided by Steidlmayer Software Inc.
`
`.bird page2 mark back. Moving onto volume, any of the volume
`itudies covered in Chapter 7 can be built into a system and
`raded. Volume is the "footprint" the market leaves in its wake;
`,icking up on heavy volume, light volume, and volume excesses
`:ommunicates a great deal of information to the trader. Once
`Lgain, this short list of applications is not meant to be e:xhausM
`ive; its purpose is to give the reader a flavor of what is available
`md can be automated in Capflow32.
`Remember the two ways to make money in trading are rec(cid:173)
`Jgnizing opportunities and getting the edge. Up to this point, our
`mtire focus has been on understanding and applying the Market
`?rofile methodology to finding trading opportunities. It is a nec(cid:173)
`~ssary process one needs to go through to become successful.
`{ ou need to go to school and pay your tuition and study your
`.essons before you can go out into the real world and attempt to
`nake a living.
`The second way to make money in trading is .a bit more
`:::J~traightforward, is more inter~ctive, and has a shorter 'learning
`
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`curve. It is a function of using the latest technology and best
`product. This is the model used by a well-known options trading
`group to make Chicago synonymous with options and put the
`city on the trading map. Their name was Chicago Research and
`Trading (CRT). They attempted to be part of every trade with
`their cutting edge technology and traders populating every pit
`(access). They were looking for the edge. They were creating a
`low-margin business, the grocery store model of high-volume,
`low-markup. They were the first to commit to this model in
`such a grand scale, and as in anything in life, it pays to be first
`with a good idea .
`
`What is Access?
`
`Access means different things to different people. At its core, it
`is getting an order to the exchange. This can be accomplished by
`talking to your broker, being on the floor, or using electronic or(cid:173)
`der entry. In the investment world, technology has probably afM
`fected access more than any other facet of the business.
`This revolution has taken place over the last 10 years and
`really came to a head over the past 2 years. Let us use the access
`flow chart pyramid in Figure 13-11 to illustrate this point.
`At the base of the pyramid, we see raw price data at the ex(cid:173)
`change level followed by connectivity to exchange. Earlier, we
`listed raw price data and the broadcast of that information as a
`commodity just as electronic access would have been considered
`a commodity early in its existence. By saying electronic access is
`a commodity I mean all front-end providers offered essentially
`the same utility with the same limitations. In the access flow
`chart pyramid, the next level is "price display on front-end."
`This price display, which we call the first generation of elecM
`tronic order entry, was keyboard~driven, clumsy, and unique to
`each exchange. The next generation brought front-end providers
`that accessed multiple ·exchanges with point and click techno!~
`ogy. During the time of commoditization of order routing, the
`only thing that set the order routing firms apart was their logo
`on the splash screen. However, during the last 2 years, these
`providers have attempted to differentiate themselves by offering
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`204
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`The Hawldns Interi>retation
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`Trading, Technology, and the Future
`
`205
`
`cus on another screen to get some relevant information, the trade
`could be gone or the trade price could be significantly different.
`
`.li
`
`MD_Trader
`
`Trading Technologies' (TT's) X_ TRADER® with the MD_ Trader™
`display presents prices with accumulated volume traded at
`a price in a patent pending static vertical price display.
`(X_TRADER® is a registered trademark and MD_Trader™ is a
`trademark of Trading Technologies International, Inc., of
`Chicago, illinois). In the display, consecutive prices in a price ar~
`ray are displayed in a static vertical format, with changing bids
`and offers denoted in columns to the left and right, respectively,
`of the static vertical price column. Figure 13-12 is an
`
`Figure 13-12 MD _Trader™ display of the Mini Nasdaq.
`
`Price display on
`front end
`
`j Connectivity to exchange
`
`-~
`
`I
`
`~rice data at exchange 1,W~1------J
`
`Figure B-11 Access flow chart pyramid.
`
`different bells and whistles, creating the "x" generation of elec(cid:173)
`tronic order routing.
`Looking at front-end providers, the common denominators to
`use for comparison purposes are speed of access and reliability.
`How long does it take to get an order from your desktop to the ex(cid:173)
`change? How much downtime does the system experience? In re(cid:173)
`ality, speed is a function of the desktop layout, coding, technology,
`and routing. A person looking intently at the order routing screen
`takes between 80 and 130 milliseconds to react to price change,
`volwne info, news blips, and so on. The big attraction to trade elec(cid:173)
`tronic exchanges lies in the level playing field offered to all partic(cid:173)
`ipants. By that I mean once the order reaches the exchange, it is
`processed and queued by the standard accounting practice of fifo
`(first in, first out). It does not matter who you are or who you know,
`if your order is first to the exchange you will get filled first. There(cid:173)
`fore, if a trader hesitates for an instance because she or he is not
`confident, her or his mouse is positioned over the correct price,
`volume num~ers need to be accumulated, or she or he needs to fo-
`
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`206
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`The Hawkins Interpretation
`
`Trading, Technology, and the Future
`
`2.07
`
`MD_ Trader™ display of the Mini Nasdaq. On the left-most side
`of the display are the components needed to enter trade size, ac(cid:173)
`count number, and other relevant information. In the next col(cid:173)
`umn to the right, all your working orders are denoted. Farther to
`the right is the price array for the underlying instrument with
`the book (existing bids below and offers above). The last colwnn
`lists the price and quantity for the last trade. This superior for(cid:173)
`mat-and we know it is superior because all the competitors are
`attempting to copy it-has a consolidation feature that allows
`for more or fewer prices to be displayed in the MD_ Trader™ dis(cid:173)
`play. This feature comes in handy during periods of extreme
`volatility (e.g., release of economic numbers, news events}.
`Combining all these features elevat~ your confide11:ce level in
`responding and clicking the price you want to be trading. An(cid:173)
`other feature of the MD_Trader™ is center clicking, which posi(cid:173)
`tions the currently traded price to the center of the MD_ Trader™
`display window. Therefore, from a pure speed perspective, TT's
`X_TRADER® front end with the MD_ Trader™ display provides·
`what you are looking for, the fastest access to the market.
`
`··~'
`
`Two satisfied customers have had this to say about
`the product: D.J. Martin, independent trader with an
`MBA from New York University (NYU}, whose dream
`was to move to Chicago and strike it rich as a trader. He
`moved to Chicago during the summer of 1997. Over the
`next 4 years, D.J. came close to losing his nest egg more
`times than he cares to remember; however, he always
`managed to fight back and make enough to live on. He
`realized there was something missing in his trading, so
`he· made the change to TT during the summer of 2001.
`Since switching to 'IT, he has not had a losing week,
`has had 6 straight winning months, and has strung to(cid:173)
`gether 94 winning days in a row. "Since I started using
`TI, my income ha.s increased by almost $600,000 a
`year. My trading approach has remained the same;
`therefore, I must conclude my recent success is directly
`related to using MD _Trader™ and <?ther innovative tools
`and cutting edge technology offered at TT." This from
`Chuck McElveen, owner/operator Kingstree Trading, a
`
`large Chicago~based proprietary trading firm that ac(cid:173)
`counts for the largest percentage of daily mini volume
`traded at the Chicago Mercantile Exchange (CME).
`"Since opening our doors, TT has been our company(cid:173)
`wide solution for trading software. Without question,
`we could not have achieved the same success or traded
`as much volume without MD_Trader™. No other appli(cid:173)
`cation allows you to fully capture the flow of the mar(cid:173)
`ket and to capitalize on that flow with speed and preci(cid:173)
`sion. Our relationship with TT goes back to the
`company's inception, so it's difficult to assign a dollar
`amount or percentage by which they have contributed
`to the bottom line. I can say, however, that having my
`traders use TT front-end has positively impacted prof~
`itability at Kingstree Trading." With speed being our ba(cid:173)
`sis of comparison, TT has the others beat hands-down.
`The process is faster and more reliable.
`
`The next layer of comparison is looking at what front-end
`providers have done to differentiate themselves from a value(cid:173)
`added perspective. This is where IT has really distinguished
`themselves. They have created automated order execution and
`management tools. At this point in time, the application that re(cid:173)
`ally sets IT apart from the rest of the competition is the Au(cid:173)
`tospreader. The Autospreader allows for the entry of two-legged
`spreads with a high degree of reliability. The key word here is re(cid:173)
`liability; it is one thing to offer the functionality, yet another to
`deliver. There is no worse feeling than entering a spread order,
`getting hit on one leg, and subsequently watching the market
`move sharply against you. The Autospreader allows the trader to
`set up a spread and enter spread orders in an MD_Trader™ dis(cid:173)
`play. After an order is entered, the tool automatically enters or(cid:173)
`ders into the outright legs and manages those orders. The Au(cid:173)
`tospreader automatically sends offset orders into the other leg
`once an order in one leg has been filled.
`Figure 13-13 is a screen capture of the Autospreader with the
`corresponding underlying futures contracts. The Autospreader is
`the leftmost MD_Trader™ display, and the futures contracts are
`the right two MD_Trader™ displays. In setting up the spread rna-
`
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`208
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`The Hawkins Interpretation
`
`Tnding, Technology, and the Future
`
`209
`
`can be used by systems traders to trade their black box. For ex(cid:173)
`ample, any single indicator or group of contingency signals can
`be routed through a TT front-end and executed. Multiple ac·
`count management and embedded formulas are accepted by the
`system, making this feature useful for the managed funds indus(cid:173)
`try. Autotrader will be a utility within X_ TRADER® allowing for
`system-generated signals to be executed via an Excel or Visual
`Basic {VB) link. Autotrader will list contracts traded within the
`system, account numbers, open positions, current bid/ask mar(cid:173)
`ket, and working orders. As the mix of contracts traded in your
`system becomes larger or smaller, the Autotrader window can be
`sized accordingly.
`Recall the apex of the Market Profile flow chart pyramid is
`automated signal generation and execution of those signals. The
`apex of the access flow chart pyramid is point and click technol(cid:173)
`ogy in order entry, which we has been automated with tools such
`as IT's Autospreader and Autotrader. The apex of our pyramid
`(the traders) is moving our energies to management of trades and
`away from being an observer. Make the computer the observer,
`let it process information based on our ideas, systematize those
`ideas, and then objectively generate signals off those ideas.
`An Excel application can be used by third-party vendors to
`display their proprietary indicators in the MD_Trader™ display.
`Proprietary indicators such as volume excesses, page2 marks,
`bias indicators, and directional arrows generated by the likes of
`Capflow32 can be color coded and displayed as markers in the
`MD_Trader7M display in dynamic indicator columns to the left or
`right of the static price array. This focused output is the result of
`a system running in the background and updating the order rout(cid:173)
`ing system with relevant processed data. Figure 13-14 is an
`MD_Trader™ display of the Mini Nasdaq with that additional
`coluiiUl to the left or right of the book bid and offer columns, re(cid:173)
`spectively. We have created our markers in this example off a
`link to Capflow32 referencing page2 marks and directional ar(cid:173)
`rows. For display purposes, we have color-coded the markers
`white and off-white. Copying levels or signals into the dynamic
`indicator columns of the MD_Trader™ display serves two purw
`poses: getting information to you in a timely fashion and elimi(cid:173)
`nating the need to jockey back and forth between systems.
`
`~igure 13-13 Autospreader with corresponding underlying futures contracts.
`
`trix, the creator inputs the bias, weighting, price display prefer(cid:173)
`ence, fudge factor, and a number of other user-defined para.me·
`ters $at control how the spread order is entered and managed. In
`setting up your spread template, ea~h spread is color-coded and
`that color is used to enter orders in the MD_ Trader™ display so
`the trader can differentiate between outright and spread orders.
`Once the spread order is entered into the Autospreader, the com(cid:173)
`ponents are entered and modified with the changes in the un(cid:173)
`derlying to maintain the inputted spread relationship. You can
`see the spread order in the Autospreader and the corresponding
`bid and offer in the Mini S&.P and Mini Nasdaq.
`TT is also working on another automated order execu(cid:173)
`tion/management tool that is due to be available shortly after
`the publication of this book. This automated order execution
`tool, to be called Autotrader, is an order routing application that
`
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`210
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`The Hawkins Interpretation
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`Trading, 'I'echnology, and the Future
`
`211
`
`:i
`J
`;I
`
`the end result was MD_Trader™. By the time this came to
`fruition, Harris was the largest shareholder in the privately held
`company. In addition to the MD_Trader™, Harris is credited
`with developing the one-sided trading card, which is used on
`many open outcry exchanges. Owing to these innovations and
`. others, his peers have called him a visionary. Rest assured that
`this creative genius will continue to hone his wares, keeping TT
`at the head of the pack in electronic order entry.
`By running Capflow32 parallel to the TI front-end, the trader
`has turned his or her desktop into a virtual exchange. With a
`desktop exchange, the limitations fall squarely on the shoulders
`of the user and his or her creativity or lack thereof. Your business
`resides on your desktop and consists of connectivity, order rout(cid:173)
`ing, and content. From there an empire can be built.
`
`Other Access Options
`
`Now let us try to determine what is the best form of access.
`Remember, there are basically three forms of access: floor, elec(cid:173)
`tronic, and phone. Phone imlnediately falls to the bottom of
`the list owing to cost, delays in getting orders entered, delays
`in fill confirmation, and communication errors. On an elec(cid:173)
`tronic platform, the cost of trading is substantially less than
`the standard phone access but more costly than trading directly
`on the floor. On the flip side on the coin, cost of floor access
`(owning or leasing a seat) is more costly than licensing a front(cid:173)
`end. In fact, the expense of a clerk is more than the licensing
`fee of the front-end. The advantage is really shifted to elec(cid:173)
`tronic order entry when you look at diversity of access offered
`by the electronic platform versus the limitations of trading on
`the floor and narrowing your focus to trading in just one pit.
`When markets are mov:ing with liquidity, there is not a better
`place to be than on the floor; however, when volatility comes
`in and volume dries up, floor traders do things solely for finan~
`cial reasons-in other words, trading a larger and larger unit to
`make the daily nut. Our double-edged sword cuts once again
`because trading with leverage (larger and larger unit) is great
`when you are right but can be a killer when you are wrong.
`
`Figure 13-14 MD_Tra.derTM display of Mini Nasdaq with additional column for markers.
`.
`.
`
`The innovation pipeline at IT is always open, working on
`making a better product for the professional trader. And who
`will be helping to stoke that pipeline? None other than Harris
`Brumfield-trader, innovator, and visionary. Whether it be in ·
`the controlled chaos of the Treasury bond pit at the CBOT or sit(cid:173)
`ting behind a screen trading electronically, Harris Brumfield has
`always been a force to reckon with. While he was still one of the
`largest locals trading on the floor, Harris began his transition to
`upstairs trading in 1998. Why make the change? Because the
`screen could accommodate his size better than the floor. His ex(cid:173)
`periences and success on the floor soon made him realize some(cid:173)
`thing was missing in the existing screen-based displays. That
`started a relationship with TT that still exists today. First, he
`contracted with TT to develop some of his ideas concerning
`screen display. The process went through many iterations and
`
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`Trading, Technology, and the Future
`
`213
`
`out railcars with holes), spoilage, and pilferage along the way.
`Russia has the content (grains) but not the access (delivery
`mechanism).
`Now let us look at a country like Japan, which also imports
`grains. Japan is technologically advanced and modem and has a
`good infrastructure in place. There is a large population to feed
`and no acreage to produce the needed foodstuff. fapan has access
`(delivery mechanism) but no content (grains).
`Lastly, let us look at the United States, which is a net ex(cid:173)
`porter of grains. This may be a bit of an exaggeration, but it has
`been said that the United States feeds the world. There is acreage
`to plant, a climate for growing, technology, and infrastructure
`needed to produce and deliver the goods. The United States has
`access and content. Should we as traders not be doing the same
`thing, looking for a blend of the two (access and content) to make
`ourselves as self-sufficient as possible?
`
`The last word: I would like to leave you with a quote from
`Calvin Coolidge ( 18 72-1933 ).
`
`Press on: nothing in the world can take the place of per(cid:173)
`severance. Talent will not; nothing is more common
`than unsuccessful men·with talent. Genius will not; un(cid:173)
`rewarded genius is almost a proverb. Education will not;
`the world is full of educated derelicts. Persistence and
`determination alone are omnipotent.
`
`212
`
`The Hawkins Interpretation
`
`Contrast that with trading multiple exchanges, looking over a
`spectrum of markets, finding the best opportunity, and the
`choice should be simple. Th~ clear choice is trading opportuni(cid:173)
`ties off the floor with electronic access.
`Earlier, we touched on a hedge fund going belly up and the
`possible causes of this. Whether it is lack of discipline, operator
`error (incorrectly entering quantity or direction I, or miscalculat(cid:173)
`ing position or risk of position, all of these potential problems
`are addressed with the risk management software offered by TT
`called x_ruSK7M. This should be a comforting thought for all par(cid:173)
`ties involved: the investor, the clearinghouse, and the trader.
`Open positions are tracked mark to market with a running profit
`and loss. The clearinghouse sets limits (.quantity traded and cur(cid:173)
`rency loss amounts) for all accounts. This controls the potential
`for career-ending mistakes and also the effect a rogue trader can
`have on a firm.
`In this chapter, titled Trading, Technology, and the Future,
`we have addressed the ways to make money in trading: via con(cid:173)
`tent and via access. To close out this chapter, I would like to
`make an agricultural analogy. In trading, we have defined con(cid:173)
`tent as.finding an opportWlity. From an agricultural standpoint,
`could we not equate finding a trading opporturiity to producing
`a crop? Second, in trading, we have defined access as the order
`routing process. From an agricultural standpoint, could we not
`equate the order routing process to the delivery mechanism for
`the crop? By that ·we mean harvesting the crop and getting it to
`the end-user. Did you know that over the past 10 years, Russia
`has been a buyer of grains from the United States, South Anler(cid:173)
`ica, and at times, China? This was necessary to support their dis(cid:173)
`tressed population. Did you also know.that over that same time
`horizon, Russia has produced some bumper crops. You might
`ask how could this be, why would they still need to import? The
`answer is, they might be able to produce the grains but they can(cid:173)
`not deliver it to where it is needed. It might be sitting out there
`in the field, but they do not have the modem machinery needed
`to harvest the crop in a timely and efficient manner nor do they
`have the infrastructure to deliver the goods. In fact, when they
`do get the grains out of the field and loaded into railcars, as much
`as half the crop is lqst owing to an outdated rail system (rusted-
`
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`PTX 0814.0008
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`Page 8 of 8