English transcript

someone who would sell. Because the whole idea

is sell high, buy low, buy low, sell high. So

the higher the price goes, the theory would

be the more attractive it would be for someone

to come into the pit and take the other side

of my trade. Are you guys with me on this?

So what it all boils down to is that price movement

is simply an imbalance between the number of

buys and number of sells flowing into the exchange.

That's it. That is it. But it has major implications.

For example, when I, uh, you know, I started

trading, I think it was in 1978, and I was working

in the commercial casualty business, uh, as

a matter of fact I was managing a commercial

casualty agency. Just before I moved... pretty

much just before I moved to Chicago, I signed

a three-year contract with this agency for $360,000.

100,000 the first year, and 120 in the second,

and 140 in the third. So I mean I was kind of

financially, I was... I was doing good, especially

I was in my early 30s. And, uh, but shortly

thereafter, something happened. I also didn't

like managing... I didn't really like being

in the insurance business. And I certainly didn't

like... I thought I'd like management, I did

not like management at all. I was a horrible

manager. Yeah, anyway, just... just not something...

just not something my brain was into. But in

any case, um, something happened to me where...

where I felt compelled to move to Chicago. Because

I was... I got a call from a Shearson broker

in the building we were in, and, uh, I opened

up a commodities account and started trading

gold and silver right off the bat. And, uh,

lost, you know, my first couple of stakes, you

know, whatever, I think I started with a $10,000

account, lost that. You know, did another five

or six thousand dollars, lost that. Changed

my broker, went to a different broker at Shearson

thinking, you know, he would do a better job.

Had no idea... remember, this is in 1978, 1979.

What we understand about the markets and what's

available to us were virtually, today, were

non-existent back then. We didn't even have

computers. We didn't even have personal computers.

The only way to even know what was going on

was to call your broker ten times a day or whatever.

And also we didn't have instant execution. You

know, what you had is a situation where you

want to execute a trade, you gotta call your

broker, you gotta dial the phone, he has to

answer the phone. If he's on the other line

with another customer, you had to wait. And

then once he answered the phone, of course,

he had to write out a ticket. The ticket had

to be wired down to the exchange. Once it got

to the exchange, it got to the phone clerk at

the exchange. The phone clerk wrote out another

ticket and gave it to a runner. The runner then

gave it to the appropriate broker executing

trades for that particular firm in the pit.

And then the broker would, based on supposedly

open outcry, actually, you know, say, "Hey,

I've got... I've got five to buy or five to

sell at this price." And then if someone else,

whatever, another brokerage firm or just a local,

some guy trading for his own account standing

in the pit, hit the order, hit the bid or the

offer, whatever the price was, and then the

floor broker would, you know, record the trade,

give it back to the runner. The runner would

then go back to the phone clerk. The phone clerk

would go call up, uh, or wire it back to the

brokerage house, and then the broker had to

get back to you with a fill. Okay?

And all this cost on average with the big firms

like Merrill Lynch and Hutton and Shearson,

like a hundred... between 130 and 140 dollars

a round turn. One contract. One contract trade

between 130, 140 bucks. Now, I can't tell you

how many times I put in an order... later on,

I mean just... just to give you an example,

if I put in an order, you know, to buy silver

at... at, you know, nine bucks an ounce or whatever,

okay?

That, you know, I'm buying at nine dollars an

ounce and the market comes down and hits my

price, but I am not guaranteed a fill unless

it goes one tick through my price. So if it

hits my price and goes back up, I don't even

know if I'm in a trade. My broker doesn't even

know if I'm in a trade if the floor broker hasn't

gotten back to him yet. If the floor broker

is busy, it might take 20 minutes, a half an

hour. If... if it's what the exchange classified

as a fast market, he wasn't even obligated to

get back to me until maybe an hour, I don't

remember what it was. So I could be in a winning

trade and not know it. I could be wanting to

take my profits and not even know if I'm in

a winning trade. If I go ahead and just assume

that I got filled, and, you know, and sold...

I could end up being net short, you know, the

market's going up, and not even know it... you

know, I mean I could end up being net short

and not know it. The old-timers... Tony, you

know what I'm talking about, right?

This was a rough way to trade, people. Yeah.

This was a rough way to trade. Because not only

that, to even check on... we didn't have prices

available. We didn't have any prices available.

We had to call our broker, you know, 20 times

a day. Where is it now?

Where is it now?

Basically what you did was trade off daily bar

charts from the Wall Street Journal. You know,

you get the Wall Street Journal in the morning

and you do your... go ahead, Tony. Yes, a commodity

perspective, right, right. Yeah, it gave you

like three or four months of bars, daily bars,

and it gave you some room on the right there

to add your own bars in. Yes.

So yeah, it was... it's like you know, there's

things that you learn that, you know, you sort

of take for granted about the way you develop

as a result of it. But anyway, this was really

a tough way to trade. And so what happened...

what happened with me... So you do understand

the concept that it's simply an imbalance in

order flow, right?

Everybody with me on this?

If there's more buy orders than sell orders...

So why did the market go up today?

More buy orders than sell orders. Why did the

market go down today?

More sell orders than buy orders. Now, the reason

why there were more buy orders and sell orders...

Well, how do we know why?

In other words, every one of us in the room

has a reason... everybody contributes to...

everyone contributes to the order flow, which

means that everyone contributes to the up and

the down ticks. Everyone contributes to the

up and the down ticks. So why did the market

tick up?

Well, you basically... the reasons exist in

the minds of everyone who put on a trade that

contributed to the imbalance between the buys

and the sells in that moment. And since the

exchange... since when we put a buy or a sell

order in, since you are not required to attach

your reason for putting... you are not required

to attach your reason for doing it... What?

That's how the what?

Oh yeah, make everybody give a reason. Yeah,

right. Yeah, since we are not required to attach

our reasons... and neither is anybody else,

then we don't know why other people are doing

it. And what's interesting is that as technical

screen-based traders, we are strictly dependent

on what other traders do after we get into a

trade. Since we are not... we don't have the

financial or emotional resources to be able

to move the market ourselves... I'll talk more

about that a little bit... since we do not have

these resources, then we are strictly dependent

on what other traders decide to do after we

get into a trade. And the reality is, we don't

have the slightest idea why... what they're

going to do or why they're going to do it. In

other words, orders are going to flow into the

exchange after we get into a position. We don't

know what the volume... we don't know what the

imbalance is going to be. In other words, there

could be a huge order that hits the market in

our favor, but there happens to be enough of

a huge buy order... we just got in, there's

a huge buy order that hits the market a few

minutes after we get into a trade, but there's

enough sell order inventory in that moment,

in that moment, to absorb all that buy volume,

price goes nowhere.