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In a Changing Industry, Some Things Are Constant

This view is from Gerard Colagrossi, founder of Colagrossi Futures LLC. He's a long-time broker who has held executive positions at Fortis, UBS, ABN AMRO and MF Global.

I have been involved in the futures industry for over 30 years. I've probably  been responsible for more orders than anyone else in the business. It was a different world when I started at that time prices were written on boards with chalk! Now, of course, everything is electronic.

But the basics of what we do for clients has not changed. We're a full service introducing broker, providing clearing, execution and back office services. The clients are commodity trading advisors, hedge funds, institutions and high-net-worth customers. Our goal is to provide accurate clearing and execute according to their specifications. Yes, trades are automated, but we attempt to improve execution and make sure it is done the way clients want. 

Avoiding Slippage

Our desks have been responsible for thousands of orders a day. Many clients have multiple accounts at multiple futures commission merchants. A major concern with large trades is slippage. Nobody wants to find that the market price moved against them because of the trade they put on. 

I believe it is not the case that there is necessarily more slippage today compared to the past. At certain times a market can be thin and a big order can cause slippage, but markets in general have become more liquid. The number of contracts traded has increased tremendously and volume continues to grow from year to year.

INSERT TABLE

Futures and Options Volume

                        Percentage Change from 2009 to 2010*

Foreign Currency        142%

Ag. Commodities        41%

Non-precious metals   39%

Interest rate                 30%

Equity Indexes            16%

Precious metals           16%

*Contracts traded or cleared at 78 exchanges worldwide.

Source: Futures Industry Association.

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On the other hand, with electronic trading you can have more slippage. An electronic trading system may take the first bid/offer available. With discretion, a broker-trader would not always take the first offer but look for a better price. Whether stop-orders achieve better prices depends on market conditions.

Market volume fluctuates due to current events. You do not want to put orders, especially big orders, blindly into the market. That's where human intelligence still provides value. We execute most orders electronically but watch the market before executing to try to get our clients get the best price.

Market Knowledge

It used to be that you could only trade limited hours during the day.  Now you can trade 24 hours a day. Some overnight news events and market moves are as important as events that happened during daytime. We are open 24 hours.

It still pays to have people with deep knowledge of a market to oversee trade execution in that market. Our market specialists have been doing the same overnight shifts for years.

The markets are too complex to change people's schedules, so we do not rotate schedules. If somebody works on the Sydney market we're not going to move him to the Europe market.

One change in recent years is customers' priorities. In the past five or six years people were very price sensitive. But now they look for added services; they want value, not just low cost. We work to make it as seamless as possible.

Another major issue is confidentiality. There's a perception that prop trading desks might use customers' order flow information to make money. The 2010 Dodd-Frank Act is getting the banks out of prop trading. But clients look for brokers they can trust with their trade information. They want to sleep at night. As an  IB, our obligations to the client remain the same.