Jurassic Market

According to Andrew Lo, who has written extensively on the nature of modern finance, global financial markets today are characterized by an unusually high degree of competitiveness for outsize rewards that accrue disproportionally to the fittest traders via a truly Darwinian competition.

 

This is especially true in the futures markets, where most mom and pop traders are entirely unprepared to deal with this sort of dog eat dog environment. 

 

That’s because most traders start their trading journey swing trading or position trading equities. The 8-buck discount equity trade commission combined with 24/7 financial media coverage on at least three networks positioned the equity market appear as a yellow brick road to the American Dream for millions of mom and pop investors in the 90’s and 2000’s.

 

Over the last 15 years a small stream of these Main Street traders migrated to the futures markets, as electronic trading began to dominate order flow. By the summer of 2015 only 1% of futures trading volume was transacted in the open outcry pits of the Chicago Mercantile Exchange, which led to the closing of most of these rooms last July.

 

This was a watershed event for futures trading because it ‘anonymized’ the order flow. Whereas previously a trader in the pit could see who was taking the other side of his/her trade, today that is impossible. It could be an amateur, a professional, or a robot.

 

As a result, modern futures markets are a starkly different trading environment compared to equities. The high leverage and volatility create time compression, the imperative to make decisions quickly. By the time a trend is ready to let you in, it’s often about to end and leave you holding the bag.

 

The markets transition hour by hour through a series of unpredictable mood swings seemingly choreographed to fool/punish as many people as possible. Only in rare moments does the market take a direct route to its final destination. Persistent countertrend reactions eradicate fixed stops and severely punish those who trade not to lose.

 

With such a high degree of randomness, many frustrated traders eventually choose to rely on intuition, which keeps them thrashing around on the lower levels of the food chain.

 

A few eventually realize that adaptation within a well-defined technical framework, and managed with a high level of discipline, is the only path to sustainable success in a ‘Jurassic’ market environment.  

 

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