Interview: CME Executive and Futures Trader James E. Oliff
Ever wonder what’s happening behind the scenes of the world’s most powerful futures exchanges? Join Futures Editor Marc Dupee as he engages Chicago Mercantile Exchange Executive Jim Oliff in a discussion of topics ranging from demutualization to Dojis.
Marc Dupee: Sounds like you’ve been pretty busy with — what — five-hour meetings planning strategy for the Chicago Merc’s demutualization?
Jim Oliff: Actually it went seven yesterday. And today it is supposed to go longer.
Dupee: You have a full plate. So for readers who don’t know, could you tell us what your roles are, what you do as a second vice chairman and as a member of the board of directors at the Chicago Mercantile Exchange?
Oliff: While in that capacity, I chair the strategic planning committee at the Exchange. And that’s extremely time consuming, given the rapid pace of change that’s occurring in our industry. But I’ve steered through the initial strategic plan and then the plan of demutualization and then the ultimate demutualization itself. And now it’s a question of overseeing and determining policy and direction for what CME, Inc., is going to be in the coming years. So it’s extremely enjoyable, but it involves a lot of long hours and hard work.
In addition to that, I chair a number of other committees. And I helped develop the ethics program here at the Exchange which was the first mandatory ethics program through all members and employees. I’ve previously chaired the business conduct and arbitration committee which hears member-to-member disputes. And the business conduct committee dealt with major rule violations and it was a disciplinary committee. And then I chaired the commodity representative customer complaint committee, which dealt with customer-to-member arbitration.
Dupee: That is indeed a very full plate, serving on committees in addition to your roles on the board of directors and as second vice chairman. Does that cover it?
Oliff: It covers that hat. I wear two other hats. I’ve been a trader on the floor since 1976. And I was primarily a floor booker, which meant that I executed orders on behalf of customers. I’ve focused primarily on the currency quadrant, and I was there when currencies were originally traded on wallboards. I’ve lived through the numerous expansions of the currency quadrant. For instance, I was one of the first brokers actually to accept orders by hand signal, as opposed to paper and did a lot of arbitrages on behalf of major banks and institutions.
When the merging markets opened, I became a market maker in both the Mexican peso and, subsequently, the Brazil real and Russian ruble. After I left the floor, which was the result of five operations on my throat, I went upstairs, and I became the executive director of the International Futures and Options Associates, which is an association of floor brokers here at the Chicago Mercantile Exchange.
As the executive director of International Futures and Options Associates, known as IFOA, I’m responsible for setting the strategic policy and goals of an association of 70 floor brokers and 165 clerks. I deal with relationships with our clearing members. And in terms of business developments, I deal with compliance and financial matters. I oversee almost all of that.
As we saw the threat of electronic trading occurring, we realized that we had to diversify our business. So what we and some other investors did was set up an electronic trading arcade, which is known as LaSalle Street Trading. We offer a facility which can accommodate up to 61 traders on the premises and many others remotely trading equities as well as futures contracts electronically.
Dupee: Yes. I read about that. Can we come back to that in a second? I’d like to talk a little more about demutualization. You know, I joined Lewis Borsellino on the floor of the Merc right after election day, and in what seemed like a sign of the times, an official at the doorway to the floor handed Lewis papers he had to sign, legal forms. As it turned out, these were CME’s demutualization documents. Could you explain what demutualization means and what it will mean to members and to the public?
Oliff: Well, prior to demutualization, we were a member-owned institution that was not-for-profit. The objective of the institution was to provide opportunities so that our members could reap the benefits. That worked very well a hundred years ago when all that we traded was butter, eggs and, up until 1954, onions. This is because the only people that bought memberships at the institution were people that were users of those markets.
But then we began to expand our product offerings, and we moved into foreign currencies and interest rate futures and we expanded our agricultural offerings to include live animals and their derivative products. Then with the advent of stock index futures, our membership became extremely diverse. At the same time, our older members, for tax reasons, couldn’t afford to sell their memberships without having to pay substantial premiums to Uncle Sam. So we found that we had numerous competing interests in being able to define exactly what the role of the Exchange was and whose interests we were serving became increasingly difficult and complex. And in addition to that, we found that operating as a not-for-profit institution in rapidly changing times caused us to be a little bit slower in response time in a world that was moving at Internet speed.
So it became necessary for us to be able to find one common purpose, and the only way that you could do that was by converting from a membership entity to a for-profit entity where the clear objective of the entity was to increase the value of the enterprise itself. So all that the demutualization did, then, was convert us from a not-for-profit corporation to a for-profit corporation. And then it changed membership interest, the shareholder interest. So everybody now has stock. And that stock will ultimately be publicly traded.
Dupee: The members, how do you think it will ultimately affect them other than make their current memberships convert into shares worth money?
Oliff: To the extent that our members are traders and they utilize the markets for trading opportunity, the change doesn’t affect their ability to continue to function in that manner.
Dupee: Okay. In terms of what their incentives or interests are, will those be altered?
Oliff: Our members are our largest users and customers. And any corporation, to be successful, has to be intensely customer focused. So clearly the interests of all of our members will continue to be of paramount concern to us, even in a for-profit world.
Dupee: And the public, even though they are not members and not directly your largest customer, they are the customers of the members. How do you think that the demutualization might affect them, “Joe S&Ps trader”?
Oliff: Well, once again, as users of our market and as people that rely on the integrity of our market, I think that the public interest continues to be a major concern and probably the driving motivating factor behind most of our decisions as a marketplace.
Dupee: Your cross-town rival, the Chicago Board of Trade, recently formed an alliance with the world’s largest derivative exchange by volume, Eurex, which is an exchange that has been fully electronic since its founding in 1998. Do you think the CME might join the Board of Trader Eurex on one global electronic exchange, or what direction do you think the CME will take?
Oliff: Well, the CME was the first exchange actually to offer electronic trading. We initially had the vision of the Globex Alliance in 1986, which envisioned electronic trading and markets linked worldwide. So that clearly isn’t a new thought or a new direction. But the way that we are approaching electronic trade is that we believe that if our platform is completely open so that anyone that wants to write to us has the ability to write to us and to access us, then that’s the way we will achieve the ultimate distribution. And what is happening in the world, is that people are no longer looking only to trade the products of one exchange. They are looking to trade multiple products across multiple exchanges. So what you want then are vendors that offer platforms that link all of these exchanges. As long as the CME is available for that linkage, whether or not it enters into a formal alliance with another exchange or whether it instead has just that open network, it seems to me to be the proper way to go. Whether that’s offered by the exchanges operating together or whether it’s operated by third parties that link to the various exchanges and you utilize the software and the routing mechanisms of those third parties to access the various markets, is irrelevant.
Dupee: There could be a huge cost savings in eliminating open outcry. If you didn’t have to rent the Merc, which is expensive real estate there on the loop, that could significantly enhance shareholder value and the members are the shareholders. Where do you see the future of open outcry trading going at the Merc? Do you think it will be eliminated?
Oliff: I think it’s a little bit too early to make that decision. Remember, the markets are here for the benefit of the public and the users in the marketplace, and those that don’t even directly utilize the market but, nonetheless, rely on the integrity and the transparency of the prices that are generated by those markets. What a market offers is TLC — transparency, liquidity and creditworthiness.
Dupee: Not tender loving care?
Oliff: Well, we happen to think that transparency, liquidity and creditworthiness is tender loving care.
Dupee: Of course!
Oliff: And how those prices are discovered, whether it’s electronically or by open outcry, is a decision that the users of the marketplace will ultimately decide. Clearly, there are cost savings if you go with an electronic platform. But there are hidden costs whenever you have a lack of transparency and a lack of liquidity. And we are not certain yet, and the users of our marketplace haven’t told us yet, that all markets should be traded electronically.
So as a result of that, as a for-profit institution, we have to provide the best of both platforms. We have to provide the best possible open outcry mechanism and the best possible electronic trading mechanism, and that’s what we’re committed to providing. Then we let the market decide which is the platform of choice.
Dupee: I see. Have you had any problems with transparency and liquidity on your E-mini products?
Oliff: Well, remember the E-mini product is a mini for a reason, because it is a smaller version of a much larger contract that is traded by open outcry. So what the Merc is actually offering is what our new CEO Jim McNulty refers to as the “third wave.” We have members of the Exchange that sit on computer terminals surrounding the open outcry pit. They are making markets electronically that are identical to the prices that they are receiving in the open outcry pit. And whenever the market — one of the markets gets out of line with the other, then they step in and they do a mini arbitrage. So there is very good liquidity in the E-mini. But whether that liquidity would still be there without the liquidity of the larger market to draw upon for price discovery is a question that is not yet answerable.
Dupee: I see. It has to go through the test. But do you think the electronic could succeed standing on its own without having the open outcry there backing it up?
Oliff: In my mind, I don’t think that there is an answer to that question yet. Look, if you have a piece of artwork you want to sell, you have three different ways to sell that piece of artwork. You could sell it privately through a dealer, and they’ll negotiate a one-on-one sale for you. You could sell it through a silent auction. The third way is that you could sell it is through a live auction. Ninety percent of the people that you ask this question will tell you that to them, they will get their best price through the live auction. It’s through that human interaction when you can see the fear and panic, when you can get a read and a feel for what’s going on around you, where you can utilize all five of your senses, that the best price will be discovered. And so the question becomes whether or not all markets are prepared to sacrifice a little bit in the price discovery to achieve some other cost savings elsewhere. And, you know, that’s the reason why I keep saying that I’m not certain yet that all markets will go 100% electronic. Some markets will naturally lend themselves to that, and I think that the jury is still out on others.
Dupee: That’s interesting. I was kind of surprised that E-mini contracts are being launched in the meats right now. I know those are rather illiquid markets in hogs and cattle. How are those going?
Oliff: I think that the mini products are struggling in the agricultural. But remember, they are new products, and it may be that the size of those contracts isn’t giving the user the bang for the buck they may be desiring or providing the economic purpose for hedging.
Dupee: You were the chairman of the strategic planning oversight committee going into this. What do you think would have been the greatest risks of not changing and demutualizing the CME?
Oliff: The greatest risk was one of survival and whether or not our marketplaces would continue to be providing the public with the liquidity and the price transparency that the public wants.
Dupee: Now that the CME has the currency of stocks shares, what deals might be coming down the pike for the CME that are innovative?
Oliff: We have a very firm policy here that we don’t discuss possibility. And we don’t negotiate in the press. When we have announcements to make, we make them very public. And I’m more than happy to talk to you once we have an announcement to make.
Dupee: Okay. Let’s get back to what you were talking about earlier — your role as a trader. You mentioned you have one of the 20 so-called arcades that I read about in the Wall Street Journal?
Oliff: I don’t know the exact number here, but there are numerous arcades or trading bureaus that are being developed. Ours, called LaSalle Street Trading and LST Commodities which is the futures arm of that, is unique in that we offer both equities, as well as futures contracts and cash products electronically.
Dupee: That’s excellent. These seem like they could be a steppingstone to full electronic trading for people moving off the floor.
Oliff: Well, for many of the people moving off the floor, this is the way that they trade. Many of the traders have become fully electronic. And the attraction to an arcade is, first of all, it’s providing you with connectivity to many more exchanges than just the one product that you might have been trading prior to that. Secondly, it’s providing you with a sense of community. And the third thing that I think that the arcades offer is training and education.
Dupee: I’m curious. Is there any type of a conflict of interest because of your position on the board of directors and vice chairman with running one of these arcades?
Oliff: Well, there have been occasions when I have recused myself in deliberations of items in which I had a direct financial interest. But I would think that what I have to say as a user of the market is clearly relevant in a policy role for the institution.
Dupee: I see. You are a lawyer by training. Do you think that lawyers make good traders?
Oliff: All depends what day of the week you ask me! Lawyers have a discipline in what they do and clearly, as you become a trader, discipline is the No. 1 requirement. But you can find successful traders that are lawyers; you can find unsuccessful traders that are lawyers. And I think that that’s true with every walk of life.
Dupee: Hmm, I was thinking that lawyers are trained for years to be right and that need to be right in law might be a hindrance to being able to execute their discipline of stopping themselves out of a market if they are wrong.
Oliff: Well, actually the one thing that I learned when I was going to law school was that there wasn’t any clear right or wrong; that it was always a question of interpretation. I sort of viewed law as an art and not necessarily a science.
Dupee: I understand that your father is 80 years old, and he is still trading, active from the arcades there.
Oliff: He started off initially in potatoes and eggs and moved into live hogs when they were introduced to the Exchange. He traded pork bellies. He’s traded every product that’s been offered here at the Exchange.
Dupee: Is that how you got your start, through your father?
Oliff: I got my start in 1968. I was a sophomore at Brandeis University. There was no question in my mind that I was going to be a lawyer. Brandeis was a liberal arts institution. My father was disturbed that I was not getting any business training. One summer he said, “You’re not going to be a law clerk this summer. You are going to come and work at the Exchange as a runner, and you’re going to learn something about the business world.” And that was his first mistake because once I walked on the floor, I fell in love with it. Then it became a struggle for me to go back and get the formal education. We ended up working out a deal where I would forego trading and go and get the legal education and get the licensing and practice law for a year. Then after having practiced for a year, I could freely decide whether or not I wanted to be a trader or a lawyer.
Dupee: Interesting. One more question about your father. He’s been trading for a long time. To what do you attribute his longstanding trading success?
Oliff: Buying low and selling high. He had seen his father get wiped out in 1929. He saw him come back from that. And I think that my father learned some valuable life and financial lessons as a result of all of that. I think he always had a love and an interest for markets. So after he had practiced law and owned a couple of businesses, he just decided to go do what he liked doing. That’s how he ended up at the CME.
Dupee: And that’s something that has held him in good stead to be able to succeed for many years, that love of the market?
Oliff: What my father said to me was, he said this is the only place in the world where you could come and you could say “buy them,” and you might be buying $1 million worth of product, and you didn’t need a lawyer. You didn’t need an accountant. You didn’t need to have videotape. You didn’t any of that stuff. You knew that if you said “buy them” and somebody said “sold” that you had an agreement. He said that there were very few places in the world that had that sort of integrity. And that’s what he loved about it.
Dupee: That’s a very interesting point. So in terms of your own current trading right now, which markets do you focus on? Which markets do you trade now?
Oliff: I primarily trade stock index markets around the world. So I’m trading the (German) DAX and the stocks at Eurex. I’m trading the FTSE 100 at Liffe, and I’m trading the mini S&P and the mini Nasdaq.
Dupee: Why do you trade the foreign markets?
Oliff: I can’t sleep, and I’m up at about 3:00 in the morning. But I would say that my trading is pretty equally divided between Europe and the United States.
Dupee: Do you find the DAX’s and other foreign futures markets more inefficient that the American markets? More inefficient meaning that the pattern setups that you look at work more often.
Oliff: Well, I think that right now the foreign markets have tracked a little bit better than the U.S. market. But, you know, that can change tomorrow. That’s the nature of the beast. Sometimes the U.S. markets are truer, and sometimes the European markets are truer.
Dupee: Could you tell us what makes you decide to get into a trade? What specific things you are looking at? The setup patterns?
Oliff: I’m more of a technician than I am a fundamentalist. I primarily utilize Japanese candlesticks. I’m looking at various time periods. So I trade off of a 10-minute chart, a 30-minute chart and a daily chart.
Dupee: What specific patterns do you look at that will get you into a trade?
Oliff: I’m looking more at reversal formations than I am at continuation patterns. A doji I happen to like a lot.
Dupee: Maybe you could walk us through what a recent trade was like for you.
Oliff: If you see a market that opens and goes down and makes a new low and then within that time period ends up closing flat or equal to its opening range, or a little bit higher, or on its high for that time period, that to me would be a reversal formation and that would be a time to step in and buy.
Dupee: Where would your stop go at that point?
Oliff: Below the low of the prior bar.
Dupee: Are there any other patterns that you look for before entering?
Oliff: Well, there’s a harami, and there is the engulfing pattern. There are some that I enjoy looking at more than others. The rising star is another good pattern for me.
Dupee: Say you get in on a doji or a rising star reversal and you’re going short, when will you get out of the position?
Oliff: That’s what I’m still working on.
Dupee: What’s your current thinking on setting (profit) objectives here?
Oliff: I would probably look for an equivalent pattern of reversal if I weren’t stopped out. I mean, really I’m not very good yet at knowing when to exit.
Dupee: You know, many traders complain about that, that knowing when to exit is one of the most difficult things to perfect.
Oliff: Well, I wish that I could say that I’ve been trading for a long time. Remember, I was always an order filler. So this is a transition period for me. Because the one thing that I prided myself on as an order filler was that I was not a dual trader. So as I move to the electronic screen, I’m more of a novice than anybody else. So if any of your readers are relying on any of my trading advise right now, they should have second thoughts.
Dupee: How long have you been trading for yourself rather than as an order filler?
Oliff: Approximately a year. And I figure that it takes at least a year of paying your dues before you know whether or not you have it or you don’t.
Dupee: Okay. Any favorite sentiment indicators?
Oliff: No. As I said, right now I’m very comfortable with the candlestick formations. I’m comfortable with my style and what I see. I’m not certain that I could ever teach anybody that, though.
Dupee: I see. Although you were a filling broker while you were trading on the floor and it’s a little bit different than being a proprietary trader, can you describe some of the differences in moving from the pit to the screen?
Oliff: Remember, this is an industry that’s in its infancy. And clearly the one thing that almost everybody tells you is that they want sound and that they’re used to being able to hear as well as to see. Moving to a screen has a number of advantages in that you’ve learned through the years that our markets are very interrelated. And so you have the ability to see much more in terms of what other markets are doing and what’s going on around you. But getting used to that silence is another issue.
Dupee: Shifting gears, what do you think have been some of the major corrections that you have worked on in terms of ethical violations at the CME?
Oliff: Well, you made the assumption that there were ethical violations.
Dupee: Well, how about “issues” instead of violations?
Oliff: I think that the biggest ethical issue is trying to understand your self-interest and the interest of the market and the public interest and the public good that’s being served by the market. That is the sole reason for the existence of the market, and understanding that your interests need to be subordinated to the interests of the greater good. The integrity of the marketplace is an extremely difficult series of problems and issues that one has to work through.
Dupee: Is there a specific example in terms of subjugating your own self-interest to that of the greater public good?
Oliff: Well, there has always been a debate on whether or not an order entered by hand signal is public at the time of entry or if it’s public at the time that the broker actually makes the bidder the offer in the open outcry market. And that’s a matter of considerable debate.
Dupee: Would you call that one of the major ethical issues that the CME is confronting now?
Oliff: I would say that that is an issue that’s been on the table for awhile and it has been a– it was a cornerstone issue that we discussed in the professional responsibilities class.
Dupee: Thanks you very much Jim. I’ll let you go and good luck on your strategy meeting today.