Pat Arbor has served as chairman of the Chicago Board of Trade since 1992, which is the world's largest and oldest futures and options exchange. Before assuming the position of chairman, Pat Arbor served as a director of the Chicago Board of Trade from 1990 to 1993; from 1987 to 1990, he served as a vice-chairman. Since 1965, he has been a member of the Chicago Board of Trade. He is also the chairman of the board of directors of the US-China Commodity Exchange.

"You have to take a step forward, take certain actions, you have to grit your teeth and take risks."

Discussion topics:

Nature of risk and risk management
Step by step transactions
The quality of top traders

Why take risks?

Risk-taking activities existed in prehistoric times. As far back as 3500 BC, the Hindu classics recorded the gambling game of craps. Therefore, Bit Bernstein mentioned in the book "Confrontation with the Sky," "The modern concept of risk comes from the Indian-Arab digital system, which was introduced to the West seven or eight hundred years ago." Take the risk. Not only is it an ancient game and profit-making method, but this mentality is also the foundation of all economic development. If people are unwilling to take risks, there will never be any form of action. Without people who take risks, there will be no commercial contracts or sales transactions and no services at all. In other words, if no one is willing to take risks, the entire civilization will inevitably come to a halt.

"If you don't do anything, nothing can be achieved. You have to take a step forward, take certain actions, and grit your teeth and take risks. A good trader has to engage in certain behaviors that are considered high-risk. We took risks and worked hard to obtain the Dow Jones contract. We won, and the Chicago Mercantile Exchange lost. Of course, we are delighted that the final result is like this. We also take risks in the contract connection of the London International Financial Futures Exchange. Many members. They all oppose this connection. Their concept is very narrow. They always think that the contract started in Chicago and should end in Chicago."

"Regarding our new transaction building, I also take the risk-the latest technology building worth 182 million US dollars, an area of ​​60,000 square feet of trading center. The former chairman thinks that the risk is too high and the controversy is too high, but I believe this is our win The main reason for the Dow Jones contract. Regarding this, the members put me under a lot of pressure. They think that the investment is too much and the debt is too heavy. I think the same is true for the transaction. You have to take a step forward and take the risk."

Risk Management

As long as there is risk-taking behavior, there is a need for risk management, and there is a need to measure risks. Although risk represents the probability of uncertainty and adverse events, insurance represents the benefits of adverse events. Thanks to insurance, the risk can be reduced to the extent that we feel acceptable, making us willing to engage in risky behaviors. In principle, the benefits provided by risk-bearing behavior do not come entirely from the risk initially assumed but also include the risk management benefits offered by insurance means so that the risk is not too high to prevent us from engaging in a specific behavior. The product guarantee is insurance. Observing the overview of second-hand cars is also insurance. The salesperson’s verbal promise is also insurance. Without insurance, people are willing to take less risk, making progress and development more difficult.

Next, Pat Arbor explains how top traders take risks and manage risks. "I think that top traders must have a preference for stability, but this stability cannot be too high because trading inevitably involves a certain degree of risk. A trader must have an ideal psychological structure, take risks, and Courage, and psychological stability. I think that good traders should have a higher risk appetite than normal traders. Therefore, the question is how to manage risk and how to cultivate self-discipline in risk management."

"Traders must be able to manage risk. I think this is also related to self-discipline. A top trader once told me,' The key to winning or losing is not how to establish a deal initially, whether it is buying or shorting'; establishment After the position, assuming other conditions remain unchanged, there are only three possible developments for the market: rising, falling or staying unchanged. The key is how you manage the position after the position is established. If your judgment is wrong, is there a strategy to exit the market? If the market is heading, What do you do if you develop in an unfavorable direction? In most cases, traders always take the wrong actions."

The risk management decision that Pat Arbor discussed is how to reduce the risk of further development of adverse events and increase the probability of favorable circumstances. He offers a few different ways to deal with it.

"Of course, you have no way to pre-arrange every coping strategy, but as long as the market starts to develop in an unfavorable direction, it is best to consider appearances or alternative strategies immediately. You usually don’t have much reaction time, and the action must be fast. You can establish a Reverse option position-this as a countermeasure. You can use options or futures to neutralize the existing position. You can also end the position. However, there is one thing that you absolutely cannot do: overweight and flatten. Once the position has suffered a loss, the first principle is "cannot increase the size." Your judgment has been wrong. Only when the market reverses and returns to the original entry price and the position has already made a profit can you consider increasing the size. Never let the loss-making position sink deeper and deeper."

Pat Arbor manages risk through offsetting, usually through spread or hedging strategies. The spread or hedging strategy consists of at least two parts. When one side makes a profit, the other side loses. In other words, this is an insured risk position.

"In most cases, the risks are balanced. I try to engage in spread trading or arbitrage trading. If I go long soybeans in one month, I usually sell soybeans in another month. I mostly work in soybeans. Or the spread of public debt. If you are in long-term public debt, then short the 10-year medium-term public debt. In some cases, I will go long for a certain commodity, but I will still achieve some balance, such as long corn/short soybeans, Or make more soybeans/shorten corn."

"As far as possible, try to use apples against apples, but you can also consider apples against oranges when necessary, but never use apples against elephants, and don't try to establish a hedge position on two completely unrelated products because of their Profits and losses cannot be offset by each other. Let me give you an example. I just got on the line with the Australian Wheat Chamber of Commerce, which often uses our market. Australian wheat is hard red winter wheat, and its quality is higher than the soft winter wheat traded on the Chicago Futures Exchange. Soft red winter wheat is not very good for edible wheat (a high-grade feed), but the market depth and liquidity are ideal. Although the Australian Wheat Chamber of Commerce is engaged in exporting but trying to avoid risks outside Australia, they use soft red winter wheat Even though the basis of the two types of wheat is often different. Even so, the prices of the two types of wheat will still trend in the same direction, and the relationship between each other is sufficient for hedging. This situation is probably similar to that of orange versus a lemon. If necessary, the haven can accept any haven. Where you need shelter from the wind, you need to manage the risk. So, if a ship encounters a storm at sea, it needs to enter the harbor to shelter from the wind—any port is fine.”

“The same is true for large international hedging. Although the products are not the same, they are close enough. Take the Chicago Futures Exchange’s bond market as an example. Real estate mortgage debt dealers often use our 10-year contract, although they hope to hedge against the 7-year risk position. They use a 10-year contract, and after some adjustments, it is sufficient to avoid the 7-year risk of the underlying product."

"After trading every day, if you ask a pure spread trader:'Is today's market going up or down?' He may have no idea. However, if you ask him what the closing price difference of soybeans from November to July is, He can tell you exactly: '158-168'. He knows the precise ratio spread between corn and soybeans or long-term bonds and 10-year mid-term bonds and the distance between the S&P index and the Nasdaq index or the S&P 100 spot index. Therefore, spread or arbitrage traders may not know or care about the rise and fall of the market. As long as the market or price fluctuates, they will find a way to make money. As long as there is confusion, they can come up with ideas."

"I remember a transaction that occurred in the 1970s when a large grain trader placed an order to buy soybeans. On the same day, due to some bad news, the price of soybeans fell by a limit. The important thing is that the November price determined the soybean price difference between November and January. The 34 cents higher fell to 17 cents higher. However, there were still transactions in November and January contracts, and the contract price in November was 34 cents higher than the contract in January. For example, the contract price in January was $7, the contract for November is $7.34."

"A certain world's largest trader placed an order to buy November soybeans. They planned to buy $500,000 bushels of November soybeans, and I sold them 100. At that time, I was not a veteran. I entered the market at 7 dollars. I bought 100 lots of January soybeans, shorted November soybeans at $7.34, and then asked the spread trader on the floor, "How much is the price from January to November?" He replied: "I will sell you for 17 cents in November. 17 cents higher.' He and I completed a 100-lot transaction at 17 cents and made $17,000. This grain trader bought a contract of 500 lots, so they wasted 5*17,000 dollars, equivalent to 85,000. U.S. dollars. I ran to the counter and told the person who took the order about the whole situation. He said: "If someone tells me to buy November soybeans, I will buy November soybeans." I told him: "But you can buy January soybeans. , And then trade spreads, you can save $85,000.'Yes, they make mistakes."

"So, spread traders must grasp these opportunities. People sometimes make mistakes, and sometimes the market is out of order. In the 1970s, Hunter Brothers were active in the silver market, and they began to buy in large quantities on the Chicago Futures Exchange and the Chicago Mercantile Exchange. When entering silver, the prices in these two markets are often out of order. If the price of silver in Chicago is higher than that in New York, arbitrage traders will enter the market, making the out-of-order phenomenon return to normal. This is why the market is an important mechanism for determining prices because it Will adjust by itself. The market may be out of order, but the market can correct itself."

"As far as the silver above speculation is concerned, the Hunter brothers were destroyed by the United States. When the Americans saw that the price of silver had risen to $50 per ounce, they began to move out of the silverware in the dining cabinet. The melting silver factories in the United States also The establishment has sprung up like bamboo shoots after a rain, and a large amount of silverware is melted into silver bullion and shipped to the exchange for delivery."

"Sometimes there will be out-of-order phenomena, but the market will quickly adjust itself, whether it is the business hall of the Chicago Futures Exchange or the speculative trading outside the market. Seeing Hunter Brothers staged an open market all over the country, Silver has run out, and silver supply has skyrocketed. The truth is the same. As long as there is a disorder, you must seize the opportunity."

"Not long ago, I also saw a similar situation with the German bond contract. The Chicago Futures Exchange also provided the German bond contract, and it was quite successful. The daily parity transaction volume was about 8,000 to 9,000. Because Chicago's offer is two times higher than the ATP. , Third gear, I think everyone is very excited, arbitrageurs began to buy in ATP, short on the Chicago floor. Now, we have many markets for trading, providing many ways to balance risks."

"You are engaged in spread trading, or it may be because you are unwilling to continue to accept the risk of a simple position. You may be optimistic about a certain market and go long in a certain position, but the progress is not going well. You want to continue to hold positions, but consider establishing some Hedge positions to reduce risks. If you establish a pure long position of soybeans, you may be able to short some soybean cakes or soybean oil, or even short corn, to offset some risks. If the development of the S&P index position does not go well, you can short some bonds. Although continue to Keep the position, but reduce the risk while also reducing the profit potential. Of course, you can claim compensation, but if you think your opinion is correct, you may be able to adjust the original position to a spread transaction. So, you may let The whole situation is a little more neutral and reduces the risk of loss. I don’t think this is a very clever strategy. As I said, the initial loss is often the smallest, and the correct approach may be to go straight out."

The use of spreads or hedging strategies as a means of risk control may not suit everyone. Pat Arbor discusses this next.
Proper style

"You have to decide what type of trader you are: speculator, spread trader, or short-term trader. It would help if you found a suitable trading style. I am a spread trader. To find the right trader Style, look at where you are more profitable. Some people came to my office, and said:'I am an outstanding trader.' I replied:'Yes.' They said:'I know how to proceed. Trading.' I still answered:'Yes.' They said:'I can predict the rise and fall of the market.' I still answered:'Yes, but the key is whether you can make money.'"

"Our industry is different from other industries. You may be an excellent writer, but there is no absolute objective judgment standard. Even if you make a lot of money, you may still be the worst writer in the world. Although you can make money by writing, It does not represent your success in the field of writing. However, in our industry, making money is the key, representing your level of excellence. You may be a good lawyer, but no one knows. You may win some reputation, but there is a direct measurement standard in our industry, and this is the key. So, I will say:'You are not a good trader because you are not making money.'"

Therefore, although hedging is an ideal way to manage risk, whether you should become a safe-haven trader depends entirely on whether your personality can make money through this method.