The Red Jacket

Symbol of a self funded trader

The Red Jacket is the symbol of the Norden Method™ . It was chosen for good reason. In this edition on No End to the Bull I will explain what it means and why I chose it.

Take a look at the photo above taken from LIFFE; it shows one of the (smaller) futures pits. There are probably 40-50 people in this pit plus the LIFFE officials (blue jackets, in the middle, slightly higher).

There is an array of colourful jackets and some may think that everyone who wears one is a trader. However, the large majority of those we see in this pit did not trade for their own account. In fact, they are not really traders at all. They were execution brokers whose job was to fill (execute) customer orders.

In the centre foreground are two people wearing green jackets with gold/green writing; these represented JP Morgan. But these guys did not trade for JP Morgan, they executed orders for JP Morgan’s clients and/or JP Morgan traders back in the office. Similarly, I can make out jackets from GNI, Deutsche Bank/Morgan Grenfell, Cargill, Salomon, HSBC and others. All of these should actually be classified as brokers or execution traders.

‘Locals’ - The Real Traders

Look again at the photo and now look only for the Red Jackets in the middle of the pit. Those on the outside of the pit were brokers. How many Red Jackets do you see? . I see six.¹ Even if we include the Kyte traders (see footnote) around 8 of the 40-50 people in the pit were what we called ‘locals’.

‘Locals’ was the term for self funded traders; traders who used their own capital to stand in the pit and trade for their own account.

‘Locals’ tended to be short term traders and they developed the skills to judge market sentiment and expertly trade in and out of the order flow using market making style techniques.

They paid to stand in the pit rather than sit at home and trade via their phone/computer and a broker. They did this because there was edge in standing in the pit and using their market making style skills which they couldn’t use when remote trading.

One crucial difference between ‘locals’ and the execution brokers was that the latter were employed and received a regular salary as such whereas ‘locals’ received no salary; they only got paid if they made money and could of course, also lose money.

‘Locals’ weren’t watching charts as they stood in the pit. They watched the order flow, what was happening in other markets and then applied their trading skills.

‘Locals’ were the real traders, the only real traders in those pits.

Camaraderie

While ‘locals’ were fiercely competitive in the pit, fighting (usually not literally!) for trades, outside the pit there was a kind of camaraderie among them. Only another ‘local’ knew what it meant to trade for you own account. Knowledge and skills were often shared. In fact most of what I learned as an options trader was taught to me by other ‘locals’. So a real sense of community developed among them. The key though was the Red Jacket because they knew that those who wore them were real traders.

The Transition

I am sure that most readers have heard the stories about how pit traders struggled when the pits ended and markets became computerised. You have been told that their methods no longer worked and could not be applied to screen trading. The real story is more complex.

When the pits closed, most of the people on the floor, most of the people in that picture above, lost their jobs. Those who worked for banks and brokerage firms such as JP Morgan, GNI, Cargill etc received redundancy payments and needed to find new employment or a way to earn an income. As they had worked in the futures markets for many years, many decided to try trading for themselves. They used their redundancy money and started to trade.

Remember, they had not been traders in the pit, they had executed client orders which is a totally different game.

It should not be surprising that many struggled. Their previous job did not prepare them for trading with their own money, managing risk and understanding how to use the order flow to get in and out of profitable trades quickly.

There were other issues too that affected everyone at that time including high desk fees (internet was not reliable or fast so traders had to pay for a desk at their clearer) and poor trading platforms.

I know many ‘locals’ though that actually transitioned quite well. One style of trader actually flourished in the early days of screen trading in particular, namely spread traders.

Worn with pride

Those who wore the Red Jacket wore it with pride. It was a symbol of a skilled trader who traded with his own money (partly or wholly). Someone who did not have a regular salary but who was prepared to back themselves to make money from trading. Many people wanted to become a Red Jacket-wearing ‘local’ but relatively few had the courage to take on the challenge.

My Journey

Personally, it was the toughest, most competitive trading environment that I ever encountered; far more challenging than trading for a bank. In fact, very few bank traders ever became ‘locals’ mostly because they recognised how much tougher it was. My time as a ‘local’ was not my most successful but it was the time when I learned the most.

Ironically, I was more able to successfully apply the skills of a ‘local’ to electronic markets than on the floor.

Today I am trying to keep the skills, spirit and sense of community alive among traders who want to aim high and see themselves as modern day Red Jacket ‘locals’.

Keep Grinding

Gary

1. There are also two traders wearing Kyte jackets (red, white and blue) who may have traded for their own account too. Those who were backed or cleared by Kyte tended to wear Kyte jackets rather than red ones)