Sunday, March 1, 2009

The Weekend Trader - Style Points

Some thoughts on this 300th post of the journey.

Negotiate those Commissions! - Ever walk into a hotel and pay their rack rate before checking discounts offered by AAA, Travelocity, etc.? Ever do so thinking you're "just staying for one night" and as such the hotel doesn't care to negotiate with the "little guy"? Ever wonder if the hotel wants to fill what would otherwise be a vacant room for a lesser price or simply lose the revenue? Yes, you know where I'm going, and this is another area where I'll remain an outspoken advocate for all types of traders.

First, let's try to put the commission discussion to rest once and for all by recapping a few key excerpts from the past while adding some final thoughts on the topic. To start, here are some recent relevant re-posts, portions of which I've bolded for further emphasis.

A follow-up thought is that one of the mistakes I made early in my career was not pursuing a Merc seat lease. One reason is that many brokers have vested interests in keeping their commissions high (arguably another one of the industry's dirty little secrets that puts money in other people's pockets), and thus there's very little published material out there on cost/benefit analysis. Plus, some vendors have relationships with brokers which further compounds the issue.

Even for traders who can't justify a lease, I would argue that many retail rates out there, including some referenced in the clip, are far too high and there are better deals around. Like any consumer, I encourage folks to shop around and let the market -- not brokers -- set the rates. Some brokers for example will decrease rates as volume grows. Mine even gave me a grace period at one time in terms of keeping rates affordable before my volume grew to recent levels with the hope of future business.
Given the current economic woes, it's a buyer's market, and we should use that to our advantage when we're "buying" the necessary infrastructure for a successful business.

I would make an analogy to running a store where cost control is paramount in generating the strongest margins. Ensuring one pays wholesale costs and overall cost control are critical. The more both retail and wholesale traders push for reduced broker costs (the non-CME component of the fee), the more we'll hopefully see continued reductions in industry commission costs for both types of traders. And yes, we do have a voice with our wallets and choice of brokers in a competitive broker marketplace. [Even when I was "retail", I was able to pursue lower fees, although certainly higher volumes provide a stronger negotiating position.]

One interesting sidebar is that in a past life many years ago, I used to testify before legislative bodies on public utility rate setting. As a result, rate setting and cost management have always been in the front of my mind and is one helpful attribute that carried over from my long-ago pre-trading life. Plus, as traders, we know rates should always be set by the market.

My dad also once told me as a young child you'll never get what you don't ask for.

And yes, before my inbox is flooded with messages from brokers, many brokers do provide value-added services such as charting which are worth a higher price and that are passed onto traders in the form of higher commissions. No doubt about that. At that point, it's of course up to the trader to consider the value of the overall service being provided.

Trading Style - A related concept is that of my trading style. And since there seems to be renewed interest in both my volumes and approach -- especially among new onlookers -- here's a brief Q&A to help clarify:

Why is my volume so high? Largely because I provide both market liquidity and pursue speculative trades. Here's an excerpt from last night's response.

Keep in mind the my volume reflects both liquidity-providing trades (which reflect the largest volume and cost but smaller per-win profit) AND speculative trades (lesser volume, greater per-win profit). Yet I don't track the specific results as they blend into the overall day's trade.

What's the difference between my terms "liquidity-providing" and "speculative" trades? "Liquidity providing" is just that ... joining others to ensure there's a market on the other side of the trade (i.e. often posting on both the bid and ask). "Speculative" refers to trades which have greater potential for movement, and which I would categorize similar to what "retail" traders pursue.

What would my results look like if I had less volume and simply pursued "speculative" trades? (This likely gets to the crux of many of the questions from smaller volume traders, so let's just put it out there.)
While per above the two types blend together and I don't track them, there's absolutely no doubt in my mind that the speculative trades reflect larger-sized wins on far less volume, and that there's a large number of liquidity-providing trades that lose or break even. No doubt at all. So at times, liquidity providing trades reduce my bottom line, just as non-winning (stopped, scratched, etc.) speculative trades would.

So while I have no data to back up a definitive conclusion, having a strong sense for my own trading, some of it is likely a wash. And lest we forget that many businesses use strategies where they sell a lot of high-volume, low-margin (or loss-leader) to "get customers in the door" so they can sell fewer items with much higher markups, which is where they make most of their money.

Both strategies of course likely contribute to the bottom line, otherwise one wouldn't pursue them (although I do sometimes trade just to keep in the flow, not expecting to earn anything from the immediate sequence as I've stated in the past. Remember I can sometimes feel the current better if swimming in it vs. watching from the shore, and am willing to incur the cost for a longer-term benefit). And while it wouldn't shock me if data ultimately proved that providing liquidity during unspeculative times detracted from the bottom line, their exact respective contributions remain uncertain as I only care about the overall package. Again, just one person's approach. Rick Barry shot free throws underhanded, and if I recall, was pretty good at it.

Lastly, I fully recognize that many of the volume, rate, and style questions are coming from newer onlookers. So to reinforce, my only intent in babbling here is to share what I do and what I've learned, not to say "Gee, trade this way and make a million dollars".
Ummm, I'm not selling anything, remember? I've also added this post to the key post link menu in the lower left margin under "Providing Liquidity vs. Speculating".

Trading is a business, and we must treat it as such. And if sharing today's post simply results in one trader becoming proactive to successfully negotiate a reduced commission or shop for a better deal, it will reinforce why this silly diary is open the the public.

For it's always and only about strengthening each other.

Enjoy the rest of your weekend.

15 comments:

lee said...

Hi Don

As new viewer to your site could you explain a little about the headings in the scorecard, as I think it is brilliant and want to include it my daily scoring. The ones I dont really understandd are, pattern conviction, pace conviction, matching the markets pulse and adjusting to changing expectations.

Many thanks
Matt

Don Miller said...

Hi Matt and welcome to the journey.

See if this helps:

Pattern Conviction - How strongly I feel about seeing a particular intraday pattern that provides a high-probability trade sequence opportunity. And while it reflects patterns presented over the course of a day, it often reflects my conviction heading into the morning trade based on prior day activity (e.g. expected early oscillations on the day after a strong trend).

Pace Conviction - Probably best to do a blog search of "pace", but it's primarily the ease of "feeling" the markets rhythm as the result of a steady and rhythmic order flow, versus lots of starts and stops.

Matching the market's pulse - My ability to "dance" or flow with the market's moves. i.e. if the pattern is there, but I hesitate, I'd score it low.

Adjusting to changing expectations - My ability to deal with situations where I expect one thing and the market does the opposite. It's largely a score of the mental flexibility aspect of adjusting on the fly, and is closely related to "staying out of trouble" which should be self-explanatory.

It still remains an experiment, but I'm continuing with it for now and may tweak it over time.

Hope that helps and again, welcome.

Don

Winace said...

Don,
Great post, this is something I attempt driving home very frequently. It is like shopping insurance, you can almost always negotiate a better rate. The added "perks", such as charting packages, are marketing incentives in my opinion. They are deisigned to get you into that broker, the commissions should be competitive regardless. I manage a couple of accounts and have always negotiated better rates on behalf of my clients. One individual stated he worked extremely hard to get the rates he was recieving, so I logged commissions for one month using my trading techniques. That month exceeded the last six month in commissions. Typically people can get a fixed rate on unlimited contracts/shares, or a per contract/share rate. I would recommend anyone to examine their trading style and negotiate the type that best suites their needs. As you, I trade both, for liquidity and for speculation (of sorts). I have a somewhat different approach, but, knowiing the flow of the market, there are a few different ways to approach it profitably. My "more speculative" (god, hate the term speculation) are similiarly based as my liquidity trades, yet, they are delta adjusted for less risk/higher reward. Keep up the good work Don, some people have to help the little guy!

Don Miller said...

Hi Winace -

I very much like your definition ... perhaps better than mine as it's often tough to describe in words.

Nicely said.

Don

E-Mini Player said...

Hi Don,

From my own experience, even retail/low-volume traders can get $4.00 round-turn or even a bit lower if they just look around and ASK for a lower commission. I'm a low-volume retail trader and enjoy a very competitive rate.

Don Miller said...

E-Mini -

Absolutely. As in life, one makes his/her own breaks in this business.

Folks can complain about others getting better rates, or simply GO AFTER THEM!

I think I'd choose the latter.

Don

E said...

Don, what a great forum.

I used the same "negotiating" process buying my last trading computer.

This site has done outstanding research: http://www.tradingcomputer.com/index.html

Then I went online and found a discounter. Same specs as I wanted; $2500 computer purchased for $1100. (gaming style computer).

Real estate career tends to help build up some negotiating habits.

The philosophy of "Let the market come to you" really works.

Thanks all for helping us little guys.

E.

ps. "The stilt" also shot underhand from the free throw line, but with much less success as I recall.

Severino said...

Hello Don,

Do you believe the range, ATR (Average True Range) has any variance on your trading? Well, I should say the speculative trading part. The 14 day is running just a little under last year.

Thanks,

Severino

Ps Had a little trouble getting the blog to come up. Had to go to key post which comes up, body didn't. Re-booted with same effect. JFYI

Don Miller said...

Serverino -

It very well could have, as I had far more speculative profits last fall when emotion was running rampant and ranges incredible.

In fact, that's a good example where the majority of my earnings last fall DIDN'T come from providing liquidity, as almost 50% of my annual '08 earnings were generated in the 3 month Sep-Nov window, which had a large number of speculative opportunities on a daily basis.

Don

Don Miller said...

Try it now Sev -- I've noticed the same thing when I post on occasion, where I have to go back and post another edit before the main blog reappears.

Seems to be a bug in the system.

Don

Adam said...

Hey Don,

I know you have said in the past, that you stopped mentoring traders because most people will fail no matter what. Why do you think most people fail at trading? Is it discipline, lack of a true edge, or something else? Thanks, for sharing all you do on this blog.

Adam

Don Miller said...

Hi Adam -

Well, that's not the sole reason, but it was certainly frustrating at times.

I'm not sure there's a common theme, and the reasons may very well align with those related to why most small businesses fail ... lack of capital, planning, patience, objectivity, tenacity, cost control, insurance, focus, etc.

Yet I suppose the ones you mention, along with ego, impatience, and an inability to master the ability to make decisions quickly (and adjust if necessary) with far less than 100% certainty rank pretty high on the failing radar in this biz.

Don

estrader said...

Don,

You mentioned your monthly CME membership was $1,883.33. Is there a tier system for contracts traded to get different level pricing on membership fees? Also, can anyone become a member of the CME to capitalize on the reduced commissions, is there a minimum qualification that has to be met? Typically how long does the approval process take and where can I get the proper information to start the application process. Thank You again for all the info!

Don Miller said...

es -

All the membership info is at:

http://www.cmegroup.com/company/membership/index.html

Keep in mind the $1,883 was an average for '08 as rates frequently change during the year.

Don

bradley said...

Hi Don,

Thank you for the reply yesterday. It has really helped and encouraged me.

Keep Well
Brad