CBOT Dusts-off Old Trading Tool For Fresh Rollout

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CBOT Dusts-off Old Trading Tool For Fresh Rollout
by Clifton Linton
January 1997

CHICAGO (Dow Jones)--Looking for another way to gain perspective on the interest rate futures markets? Try the Liquidity Data Bank, an old trading tool that the Chicago Board of Trade plans to reintroduce to the trading community.

The CBOT, which holds the trademarks to the Liquidity Data Bank and a related tool called Market Profile, is looking to boost the revenue it can make from selling the information that makes the tool work. And so the exchange has been developing a marketing plan to be rolled out in 1997 to spur interest. These trading tools, which were initially designed for the interest rate markets, can be used for all futures trading.

"We are looking to relaunch Market Profile and Liquidity Data Banks", confirms Mark Bromley, managing director of market data services with the CBOT. He says the exchange is developing a logo for the LDB and Market Profile.

Already, the CBOT makes the data available through some quote vendors and on a subscription basis on its Internet Web page. The CBOT is also looking to advertise these products on other worldwide web pages.

Originally developed in the mid-1980's by trading guru Peter Steidlmeyer, the LDB showed traders who the market participants were at specific prices and during specific times. The LDB breaks down the users as locals, commercials (such as dealers), members filling orders for other members, and the public (which includes the large funds that now operate in the markets). The LDB can give perspective on market participant behavior not easily gleaned from other trading tools, fans say.

"It allows you to see how much actual business was done at each (price). It shows what commercials were doing in percentage of volume at each tick", says Thomas Drinka, a professor in the Department of Agriculture at Western Illinois University who teaches classes on futures trading and says the study of the markets "is a personal quest".

Unlike other trading tools, the CBOT's LDB requires more finesse and sophistication to use -- meaning that to use it properly is equal parts art and science. "It is half and half" says Steve Bianucci, director of the Specular Institute, a firm that is launching an education and advisory program focusing on the LDB.

"You are dealing with the psychology of traders, which requires a lot more finesse", Bianucci adds. "The point is, when you are dealing with human nature it is tricky to read. But there are constants of human nature that are enduring and display themselves reliably in the LDB".

Market Profile and LDB "are not easy to learn", Western Illinois University's Drinka says. "In the late 1980s, retail pulled away because the concept was too hard".

An unscientific, informal poll of a few traders and market users found a lukewarm response to the LDB. Instead, many traders regularly use Market Profile, which records how many times a day a price trades.

"It just didn't do anything for me" says Michael McGlone, a trader with Aubrey G. Lanston & Co. in New York, of the LDB. "I found it very insignificant in terms of helping me with market direction or influencing whether I would buy or sell securities...It does not tell me why people are doing things, and that makes it useless to me".

He pointed out that Lanston falls into the category as a commercial. When the firm sells, it is difficult to tell if the transaction represents setting of new short positions or liquidation of a hedge.

McGlone, though, is a user of the Market Profile tool and devotes part of his trading day developing graphs recording the price moves using multicolored pens.

Rick Santelli, vice president and trader with Rand Financial Services Inc., on the floor of the CBOT, views the LDB as a secondary, rather than primary, trading tool. "It is kind of important like volume and open interest", he says. "It is a good thing on a certain level".

Specular Institute's Bianucci brushes off those who are skeptical of LDB, saying that traders each have their own way of using and interpreting trading tools.

For those that dismiss the LDB as worthless, he says, "they haven't taken the time to really study this. The concepts are simple, but the application requires a lot of judgment and finesse".

Indeed, Donald Jones, owner of CISCO, a market research company, concurs. "We have been in the data business since 1969, and what we find over and over is that the neophyte trader does not respect the complexity of the market. He says 'give me a good trading model and I will follow it. Give me something that will automatically make me money'. If that were the case, why give it away? What the neophyte does not appreciate is that there is no such thing as an absolute lock".