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Victor Niederhoffer



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Pit Trading

Inspired by witnessing the wild activity at the breaking of a round number during my recent visit to the Chicago Merc pit, I have been reviewing some of the better descriptions of same and came across the following from The Pit by Frank Norris:

As he heard the distant striking of the gong, and the roar of the Pit as it began to get under way, with a prolonged rumbling trepidation like the advancing of a great flood, he threw his cigar away....

For from the direction of the Wheat Pit had come a sudden and vehement renewal of tumult. The traders as one man were roaring in chorus. There were cheers; hats went up into the air. On the floor by the lowest step two brokers, their hands trumpet-wise to their mouths, shouted at top voice to certain friends at a distance, while above them, on the topmost step of the Pit, a half-dozen others, their arms at fullest stretch, threw the hand signals that interpreted the fluctuations in the price, to their associates in the various parts of the building. Again and again the cheers rose, violent hip-hip-hurrahs and tigers, while from all corners and parts of the floor men and boys came scurrying up. Visitors in the gallery leaned eagerly upon the railing. Over in the provision pit, trading ceased for the moment, and all heads were turned towards the commotion of the wheat traders.

"Ah," commented Crookes, "they did get it there at last."

For the hand on the dial had suddenly jumped another degree, and not a messenger boy, not a porter not a janitor, none whose work or life brought him in touch with the Board of Trade, that did not feel the thrill. The news flashed out to the world on a hundred telegraph wires; it was called to a hundred offices across the telephone lines. From every doorway, even, as it seemed, from every window of the building, spreading thence all over the city, the State, the Northwest, the entire nation, sped the magic words, "Dollar wheat."

A few things strike and questions emerge. Wheat circa 1900 was $1.00 a bushel. Today 100 years later, it's $3.30 a bushel. That's a 1.1% annual gain, about half of the CPI. Does that shed light on a likely future price for oil? Does it explain why so many in related inflationary vehicles will turn out to be so lucky that their path to Cerberus was detoured albeit partially expedited by the unfortunate turn of events in October? When will similar cheers and hip-hip-hurrahs emerge for Dow 15,000?

Herdlike Behavior, by Victor Niederhoffer

The tendency of humans is well covered in Natural Faculty by Galton where he talks about the difficulty of finding an oxen to lead the pack in his African travels. From EdSpec

Galton learned about the herdlike tendencies of humans from his travels with oxen in Africa. The oxen all rushed into enclosures in the evening. The main problem in using them to carry packs was the difficulty of finding one to lead. If one ox was separated from the herd, it exhibited agony, until it found the herd and plunged back into the middle. This if nothing else provided comfort for the herdsman: They knew that the entire herd was safe if but one ox was sighted.

I saw a vivid double demonstration of the herdlike tendency on my visit yesterday to the scene of the battle, in the pits of the S&P. As I entered, carved in stone, a vestige from the original Chicago Merc of 1907, was the motto "Integrity is the Foundation of All Commerce," so I must admit I was in a very flexible and risible mood. What I saw seemed like complete somnolence, total lack of activity, doubtless caused in part by the year end holidays until a rush of activity at 4 PM when the market broke below 1260. Torrents of screaming, feverish activity, mad gesticulations, competitive dashes to be first on a trade, spinning and jumping like whirling dervishes in a religious dance, broke out if in a mad rush to escape a thunderstorm or fire broke out. It was all due to a pivot being broken, and a round number and a 20 day low at the same time. And this was all due to the downward draft created by the inversion of the yield curves.

How many ways can it be said that the fundamental lesson of economics these past 25 years is rational choice? That when something is widely known in advance, it is correctly acted upon by decision-makers. That people know that long-term rates are an average of current and future expected rates with a bit of a liquidity premium thrown in. That they know that when the two rates are close together that there is an expectation that the short-term rate average in the future will be less than the current rate. The current inversion is caused by the knowledge that the market has that the Fed will soon stop raising short-term rates, and when this happens the expectation will be for the next 10 or 15 qualitative moves, such as discount rates to be downward.

How many times must one tell the herds that if they follow fixed rules like selling the stock market when x is above y, that they will be prey to the flexible decision makers who will buy from them in weakness and take all their spare money, forcing them to lose so much more than they have any right to lose.

Of course, rational or not, the orgy of madness that was engendered by the break below 1260 did give one the opportunity to reflect again that standing in the way of a herd can get one crushed . It brought back vivid memories of all the oxenlike people who sold the market on October 19, 1987, and October 16, 1987, knowing that the moves in the previous months were similar to those that happened in the first 10 months of 1929. One of the most amazing things to me is that one of the most successful speculators of all time, a former colleague of mine is proud to be quoted that he felt like an idiot on October 16, 1987, because he hadn't shorted when he realized how close to the October 1929 scenario the situation looked. Charts comparing the two paths had been making the rounds for many months.

The most amazing thing to me is that people like that have not as of yet lost all their chips. One hopes that they will be encouraged by the relative stasis of the 6% or so gain in US stocks this year to continue their herdlike tendencies.


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