borrowerto repay his loan and the associated interest. Such manifested caution orhoarding will in fairly short order tend to increase the number of loan de-
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faults as the profits generated from business activity decline. Over time, andsometimes not very much time at that, the increase in defaults will increaseresentment and distrust of banks, at minimum among the ranks of thosewhose loans have been foreclosed. At some point, someone will decide thathis money will be really much, much safer under the mattress than languishing in the banker’s vault. He’ll tell a neighbor how clever he’s been, and thenhe’ll tell the barber, and others. And they’ll do the same. And then the runon the bank begins.Fanciful, you say? Gloom, doom, and Chicken Little? Hardly. This is exactly how many bank runs proceeded in American history, particularly inrural areas. Nor did all bank runs result from monetary imbalance or citizenparanoia; some were deliberately instigated by shortsighted competitors,by spreading rumors or gossip in order to destroy a rival bank. Frank Capra’sfilm, It’s a Wonderful Life, may have been fiction, but there probably wasn’tanyone in the theatres’ audience for whom the bank run scene didn’t ringabsolutely, and perhaps very painfully, true.The Federal Reserve System was created for a variety of reasons. Oneof these was an attempt to diminish the occasional blips and dips in regionalmoney supply by providing a framework within which money, or more precisely liquidity, could be quickly transferred to areas where an imbalanceexisted. The reappearance of fiat money in the 1930s and the stunning advances in electronics, information processing, and data transmission from1952 through the present day have greatly assisted the Fed in this mission.Old-fashioned panics are probably a thing of the past, and bankers needspend few sleepless nights worrying about this external event risk.There is still the little matter of self-induced event risk, though, and thisturns out to be the approximate equivalent of bubonic plague for the bankingindustry. Bubonic plague is the handiwork of a bacterium named Yersiniapestis. Most of the time, it’s a benign little critter, passing its time in the gutsof several species of fleas, doing whatever it is bacteria do from day to day.Every so often, under certain conditions that medical science is as yet, sadly,unable to describe, one of Y. pestis’ genes, the hemin storage gene, switcheson and causes something not unlike a Jekyll–Hyde transformation. The formerly placid bacterium becomes incredibly virulent and the flea, frenzied,begins energetically biting anything with warm blood, generously spreadingY. pestis far and wide. The result is a plague epidemic.This sequence of events is akin to what happens every so often in theworld of banking. Most of the time, bankers are prudent folks who conscientiously go about their business, always on the watch for new opportunities. As these opportunities arise, especially if the profitability appears to bevery high and the risk of default very low, more and more bankers pile intothese newly discovered putative profit generators. Occasionally, the bankers’native prudence and caution becomes overpowered by optimism, and later
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on by greed. Some number of times, about once a decade or so, the seeming opportunity turns out to have unseen or underanalyzed or misunderstoodinherent risk. When these two events converge, the result is what amountsto a banking epidemic.Examples of this phenomenon abound. Did you ever hear of sovereignloans? These were very popular in the 1970s and 1980s at certain large banks.The premise behind the strategy of making such loans was that nations donot voluntarily declare bankruptcy. Walter Wriston, the chairman ofCitibank, put this sentiment even more baldly, “Countries don’t go broke.”With interest rates rising in the mid-1970s and banks looking around furiously for safe, high-interest loans, this style of lending rapidly gained a following, first at international money-center banks, then at large regionalbanks. The banking industry moved a major chunk of capital into loans tothese nations, sometimes even in preference to lending to current corporateand individual customers. The perception was that it was almost entirelyrisk-free to make huge high-interest loans to these governments, unsecuredby anything except the full faith and credit of the borrower. For the typical nation under consideration at the time, the former part of this allegedsecurity was mostly imaginary and the latter nonexistent. No matter. Thebankers collected whopping loan origination fees, expecting to earn lots ofinterest and enjoy the Nirvana of years of high profits. After all, since theborrowing nation wouldn’t ever declare formal bankruptcy, then, short of arevolution, what could go wrong?What could go wrong became evident quickly. The borrowing nationsin many cases simply decided not to pay. Ouch! The bankers were left without any recourse. There was no collateral to liquidate. There was no one tosue, or, at least, there was no court with jurisdiction. The bankers were justplain stuck until such time as they could get the taxpayers to bail them outor write these funky loans down or off the books. This entire little dramawas a platinum-plated example of self-induced event risk throughout.Other instances of this unfortunate and ugly phenomenon include theMexican Tesobonos bond mess in 1995, the savings and loan fiasco-cum-fraudin the 1980s, and, waiting in the wings yet to be discovered, the exposureof banks to the dot.com/New Economy bomb of 2000–2001. In all these instances, the pattern of first incautiousness, then greed, then fear, then desperation, then—invariably over the last half-century—bailout has beenremarkably consistent.
Grist for Our MillWhile all this information may be fascinating, we as traders are still moreinterested in the practical benefit we can derive from this examination of
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the other methods of making money with money. From the dealings of gamblers, bookmakers, and bankers, we can recognize several principles that wevery much want to incorporate in our approach to markets. Successful bookmakers and bankers expect to win in the vast majority of their selections ofprofit possibilities because they have arranged their affairs so that eachselection has a high probability of success and positive expectation ofprofit. We must determinedly seek out strategies offering identical features. Bankers, while generally conservative in outlook, are neverthelessready to embrace a new opportunity provided that it meets their criteria forprofitability and risk. Similarly, we must keep open minds regarding trading. It’s likely enough that the trading strategies seemingly everyone usesare not superior in either the short or the long run, and it’s a dead certaintythat there are many more highly profitable opportunities in trading thanthose to be found at the NYSE and on NASDAQ.Further, we should note that those who succeed at making money withmoney do not try to win by hitting financial home runs, choosing instead totry to earn a profit steadily and keep their expectation of return positive atall times. We must do so, too, and disdain the false lure of trying for the bigscore. Successful high-skill gamblers and bankers have an ability to seekout profitable opportunities (bookmakers, as a rule, have these opportunities pre-defined by the nature of their particular business). We must attemptto develop this ability.We can also clearly see certain actions to be avoided. Unlike the lowskill gambler, we must avoid playing games (in our case, using strategies)that have a demonstrable statistical bias against us. To avoid the most serious fate that can befall the bookmaker, we must attempt to recognize external event risk and to stay as far away from it as possible. When some eventrisk is unavoidable, the typical situation in trading, we must both diversifyaway from it and lay off as much we can to other parties. To avoid the selfinflicted damages occasionally suffered by the banker, we must always beaware of the possibilities of encountering a gold brick masquerading as anopportunity. To avoid willful self-destruction in the fashion of the fictionalFast Eddie Felson, we must design and adhere to a discipline.We now have in hand some ideas about which principles to incorporateinto a method of making money with money via trading. It’s time to examine the nature of trading and organize our thoughts about the types of riskinvolved therein. For traders, risk is a paradoxical beast—it must be presentin order for us to have the opportunity to profit, yet if we embrace it tooclosely we may cut our own throats. Fortunately for us, there are a largenumber of ways to avoid or minimize the danger of excessive risk to ourjugular vein . . . and to our pocketbooks.
CHAPTER 2
On the Trailof a MethodRisk, Leverage, and Markets
I’ll take my chances . . . I’ll risk it all.—Bob Seger, “You’ll Accomp’ny Me”What a maroon!—Bugs Bunny
rading and investing, as we know from experience, are enterprises inwhich we attempt to forecast a change in the price of something oversome period of time, and buy or sell that something accordingly. Onereasonable view of the primary difference between investing and trading isthe time frame over which we commit our capital to a position in the markets. From this condition, we might, as many do, consider Warren Buffett tobe the ultimate investor, for his time frame seems to be nearly infinite. In thesame fashion, we might look at Marty Schwartz as an example of the ultimate trader—his time frame for any given commitment of capital, by his owntestimony, may well be measured in minutes. What amount of time distinguishes a trade from an investment? Any dividing line is likely arbitrary, sowe’ll just be arbitrary here and define a trade as a commitment of capitalhaving duration of less than one year. If this isn’t your favorite definition,feel perfectly free to boo, hiss, or throw a brickbat.
T
Risks Peculiar to TradingHaving examined the other ways of making money with money, our nextlogical step on the road to developing a successful methodology for tradingmust be to examine its comparative risk profile. The trader encounters thesame types of risk as do the banker, the bookie, and the gambler, but risk op22
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erates rather differently for the trader. Certain types of risk are present intrading that are only sometimes or not at all to be found in the other worldsof making money with money. The first of these, which every trader encounters, is contest risk. When you or I enter a trade, we must expend a bitof capital in the form of a brokerage commission, much as the poker playermust ante up before contesting the next hand. Commission costs, though,are only a portion of contest risk, and not infrequently the least portion.There is a good deal more to the notion of contest risk.In terms of pricing, the trader’s markets aren’t like retail markets suchas Armani, Bloomingdale’s, Wal-Mart, or McDonald’s. If the price tag atBloomie’s reads $399.50, then that’s what we’ll have to pay for the jacket orthe chair or whatever (at least, that’s what we’ll pay today—the item mightbe on sale tomorrow), no choice and no haggling. In retail America, the sellerquotes a single price. If we want the goods, we pay the stated figure, andthat’s the end of the discussion almost all the time.Historically, this state of affairs is very unusual, because single-priceretail markets have not been the norm for pricing in the bulk of the worldover the centuries. The bazaars of the Middle East, for example, even todaytreat the stated price as only the starting point for negotiation betweenbuyer and seller. The folks at McDonald’s, by contrast, would frown ratherdarkly if we were to walk in and bid only $0.79 for a Big Mac.The trader’s markets, even though they are also retail markets in onesense, are never single-price markets. The price of any asset, whether IBMshares, Inco’s 7.75% bonds of 2016, or November soybeans is always statedas current bid/current offer. The NYSE specialist might quote IBM at 107.05bid/107.07 offered, just two pennies differential, but the trader who trades “atthe market” will pay all or most of this spread. This is the exchange bookmaker’s profit margin. When trading “at the market,” we will pay the offerprice in most cases, and the bid/ask spread or a large fraction thereof becomes part of our contest risk. This form of contest risk varies directly withthe liquidity of the market in which we’re trading. IBM shares are exceptionally liquid and trade in large volume most days and the bid/ask spread istiny, but there is no practical upper limit to how large this spread can be inless liquid markets.There’s one other form of contest risk that occasionally dents our wallets, called slippage. If we buy or sell an asset at the market or use a stoporder to enter or exit a position, some number of times we will experiencethe thrill of being “skidded.” While our market order is making its way tothe trading floor, the market may move suddenly and sharply, and whoops,here comes our order, and WHAM! it’s filled at the now-current marketconditions, which are rarely favorable to us. The difference between our intended entry or exit price and the price we ultimately obtain is the slippage,and we must include this amount in our contest risk.
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We can readily limit contest risk by negotiating a lower commission ratewith the brokerage or by shopping among brokerages for a lower rate. Inaddition, we can reduce the bid/ask and slippage forms of this risk by trading only in highly liquid markets, or by avoiding the use of market and stoporders except in the most liquid markets. At first glance, it would seem thatwe should apply these tactics at every chance, because, unlike the penaltyexacted by other types of risk, when we incur contest risk, those dollars aregone forever. Paradoxically though, and unlike with other types of risk, itmay not be to our advantage to be ruthless about minimizing contest risk.If we receive excellent service, good executions of our orders, accurate accounting, and prompt and fair resolution of the occasional account problemsfrom a brokerage, we may quite reasonably decide that these advantagesare easily worth a few extra commission dollars per trade. Regarding markets, a decision on our part to participate in only the most liquid marketsmay (and almost surely will, over time) conjure up other costs in the formof lost opportunity in the less liquid markets.
Information and Knowledge RiskMathematicians many times view trading in the context of game theory. Ifwe examine trading from this perspective, then, because trading involvesprediction and prediction requires information, we quickly come to the realization that trading is at bottom a game in which information would seemto be the most significant variable factor. Nothing ever happens in marketsuntil and unless someone changes his mind. What is the principal cause ofa trader changing his mind? The acquisition of new information, undoubtedly. If you do not own Microsoft shares or T-Bills or July corn at 10:00 A.M.,but do own one or more of these at 1:00 P.M., then obviously something hasoccurred that changed your mind about the desirability of owning these assets. I’ll lay heavy odds that this something was your acquisition of somesort of information concerning the asset(s) you subsequently bought.Information comes complete with its own built-in risks, and these posea serious difficulty for us. If a new piece of information comes into our possession, we must answer several questions correctly, and on occasion wemust do this immediately or almost so. First, is the information relevant toour position in the market, and how immediately relevant is it? Fortunately,this question tends to be pretty easy to answer. If we’re trading IBM shares,we recognize instantly that a screeching headline about, say, soybeans hasno relevance to our situation. If the President proposes a new health careplan, this might be relevant. IBM might, down the road a piece, obtain a fatcontract for the computers needed to manage the patient database or something similar, but the immediate effect of such an announcement on IBM’s
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share price is likely nil. If IBM and Cisco Systems announce that they’re exploring some sort of joint venture, however, it’s a dead cinch that this newswill affect our position materially right this minute, and for some little timeto come. Unfortunately, not all information is as unequivocal as these examples may imply.More important and less easily decided, is this new information accurate? Is the source reliable, has the information been confirmed, can it beconfirmed? Might it be an honest error, for instance a simple typo in anewswire story? Even more problematically, might this putative new information turn out to be instead deliberate disinformation being spread aroundby another market participant? Naahh, that would never happen, would it?As if these questions aren’t sufficiently difficult, on obtaining a new pieceof information we must ask ourselves whether this information is timely.Do most or all the other market participants already have it, too? Certainlywe must assume that, if a large majority of participants in a market havehad this information in hand for some time before we obtain it, they’ve already made their decisions and this market has already changed price toreflect any changes in the collective market view. When this is the case, wemust as a rule discard this information as being useless for our subsequentmarket decisions. Here the difficulty is obvious: how can we possibly figureout how many other traders have already acted on our purportedly new bitof information?This problem of evaluation becomes still more complex when we askourselves the remaining question, specifically, is this new information complete? Do we have the whole story, or is there more information pertinentto this information shortly to come? Is the source of the information playing the “good news/bad news” game by releasing a piece of mildly favorablenews about a company, a company’s debt, or a futures market, with some absolutely rotten news soon to follow? How can traders resolve all these questions about and vagaries of information?We can’t. At least, I freely admit that I can’t. If you can, that’s terrific andwould you please send me a detailed how-to commentary! In the meantime,I’ve accepted as an axiom that I, as a trader, am at or near the bottom of theinformation chain. I firmly believe that I will never have information that issimultaneously relevant, accurate, timely and complete, and I trade according to this premise.This viewpoint directly implies that I must stay away generally fromvery short-term trades, day trades, and scalping, and I do, with rare and veryspecific exceptions. Why? The shorter the term of the trade—any trade, anymarket—the more seriously the result of the trade will be affected by the indifferent quality of the information I have, and by the introduction of newinformation into the marketplace during the term of the trade. The arrivalof new information relevant to a market is not predictable, except when its
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introduction occurs on a previously published schedule. Taken anotherway, the short-term trade has less time, hence less opportunity, to recoverfrom the appearance of adverse information. I assume that the informationI have in hand isn’t topflight to start with, reasonably so because it almostnever is. If I’ll suffer losses when new information appears, then I would betaking much the short end of the odds to attempt a trade based on this information in the affected market over the very short term.Perhaps you’re saying to yourself, “Hey, new information can work infavor of your trade, too!” True enough, but this is a gambler’s reasoning.When trading to win, we traders must continually work to minimize risk, andthere’s no long-term success to be had by employing trading strategieswhose success depends on what is, to all intents, the toss of a coin. Will acompany’s earnings exceed market expectations in the quarterly report dueout today? Moody’s is about to announce new bond ratings; will the company’s debt be downgraded? The USDA will release the Cattle On Feed report later in the week; will the numbers be down 3% or up 2%? I don’t knowthe answers to any of those questions, and I don’t give a hoot because Iguarantee you that I won’t be initiating a trade in that company’s stock or inits bonds, or in cattle futures either, under these assumed conditions. Theseare instances of the purest form of information risk, and I want no part ofthat risk. Neither do you.This is not to say that we should (or could) avoid the introduction ofnew information into the markets we trade, that we should stumble aroundin ignorant bliss. What a silly notion. It is, however, to say that we can in somelarge majority of cases substantially reduce information risk in our trading.There are at least three practical ways to do this.First, if a news event is pending in a market in which we’re consideringa trade, we have the very obvious option of waiting until after the event toenter the trade. Not enough traders use this simple tactic, in my experience.Any number of traders I know will plunge right ahead, with the attitude“How bad can the bad news be?”, to which I always respond, “Why wouldyou ever consider paying to find out?”Next, we can deliberately select trades of a longer term, two weeks instead of a day, a month instead of a week, five months instead of one. This adjustment allows normal market forces, however you prefer to define them,time to operate in our favor. After all, we buy something because we expect“the market,” by which term we of course mean the participants in that market, to bid the price higher. Similarly, we sell because we expect other market participants to be selling in the future and drive the price lower. Ah, butneither process is instant for the most part. Both ordinarily require someamount of time in order to operate, and we are shortsighted indeed if we donot allow the other market participants a convenient amount of time to putdollars into our pockets.
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The remaining way to cut information risk down to size involves ourchoice of broad markets in which to trade, and we look into this selectionprocess in some detail later in this chapter. We can’t do so just yet becausethere are still a number of types of risk in trading we need to examine.Another structural feature of our set of broad markets generates an offbeat form of information risk. The more popular the market in terms of itstotal participants, the more information is generated. The more informationwe have (I’m tempted here to call the bulk of it “pseudo-information”), themore difficult it is to separate the wheat from the chaff, particularly whenconsidering the financial press. Which media sources, which journalists reliably report fact untainted by opinion, and which are little or nothing morethan gossipmongers with straight teeth and more hairspray than the law allows? How can we traders tell the difference? Should we even bother trying?Notwithstanding the huge volume of indiscriminate bilge passing for information that is belched out by the financial media, we can for the most partdodge the risk it represents to our capital. Look, five zillion other people,some of them traders, are reading, hearing, or watching this same information at the same time we are, and the reporter had to learn it from anothersource well before we acquire it. Likely enough, the source who gave the information to the reporter had, in turn, received it from a prior source. Now,these prior sources didn’t only tell one person, did they? Very unlikely. Inshort, far too many people already are aware of this information for it to beof any practical use to us in the short term. If we want to avoid being penalized by information risk here, the proper thing to do is to take no short-termaction whatever based on information broadcast in the media.There is one class of exceptions to this policy, involving what might becalled “hard data.” When a company reports quarterly earnings, when theFederal Reserve releases money supply figures, when the USDA publishescrop estimates or the DOE provides current petroleum storage levels, theseare—usually—hard data. Most participants in markets affected by these presumably definitive data accept them as accurate and act on them as wouldseem to be warranted. Unless we happen to possess accurate and reliablecontrary information, we should join the majority here and at least considertaking action based on these data, especially if the market reaction to thedata threatens or might threaten our capital. Sure, we’ll still be late, relatively, in our reaction but, as I’m certain you agree, in these cases protectionof our capital must take priority over any doubts we may harbor regardingthe quality or the source of the information. First things first, after all.Stock markets being by far the most popular market in the United States,this phenomenon of what should likely be called pseudo-information risk ismost dangerous to stock traders. Futures traders, I’d say, are next most atrisk, followed by those who deal in bonds.
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With a little care, the conscientious trader can effectively erase certainrisks from consideration. One of these is knowledge risk, the occasionalrisk that a trader, for some reason, will not be aware of an existing condition in some market, will trade in that market, and will be adversely affected by this lack of knowledge. Examples of this type of risk are fairlyinfrequent, except for the crapshooter who is impersonating a trader, butwhen they occur they can be heartstopping.In late 1999, I had sold several January 2000 NYBOT coffee put options.This trade was based on, among other things, the historically valid premisethat the coffee market tends to have finished its harvest selloff by that pointin the year, and prices typically do not proceed much lower through the expiration date of the options. At the time, I had believed the options’ expiration date was the first Friday in the month preceding the named month,which had been the case for many years. With these January 2000 options,expiration was presumably the first Friday in December 1999. (I have absolutely no idea why this is, by the way. Listed stock options expire, reasonably, in their named month. Why not futures options too? A few markets’options do, but most don’t. It’s an enduring mystery.)Whoa, not so fast. It became evident shortly, much later than I’d haveliked, that the exchange had changed the expiration date to the second Friday in the preceding month, beginning with these very January 2000 options.In fact, they’d notified the exchange members of this change more than ayear earlier. The trading calendar my brokerage sent out did not mention thischange. The exchange websites themselves (both of them, www.csce.comand www.nybot.com) did not mention this change. Rats and double rats! Allof a sudden, the conditions of the trade were different than I’d thought. Theexchange kindly sent me a dated fax confirming the announcement of thischange, which I keep as a reminder of direct experience with knowledgerisk. Because I didn’t have the facts in hand, I gave myself the rare privilegeof sitting a week longer than intended in a time-based trade, thus acceptingmore market risk without any compensation for it. This is no way to profitin trading, I guarantee.The trade had a happy, if highly annoying, outcome. During the term ofthe trade, coffee prices moved much higher, far, far away from the strikingprices of the puts I’d written. In that extra week, the coffee market was completely berserk, trading over an enormous range, but luckily nowhere nearmy short puts. The options I’d sold expired worthless and a Merry Christmas was had by all. It didn’t have to be that way, though, didn’t have to benearly that pleasant. And sitting through that extra week wasn’t at allpleasant . . . but having to do so was my fault, no one else’s.This form of knowledge risk can be almost completely eliminated by following this maxim: “When in doubt, find out. When not in doubt, check it outanyway.” Nothing but naivete or laziness can really expose us to knowledge
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risk, except when legal issues intrude on one of our trading positions. Brokers are fine; they’ll certainly try to give you straight information when youask, but you cannot rely on them to inform you of situations such as occurred in this nerve-wracking coffee trade. They simply may not be aware ofsuch changes themselves, as here. Pick up the telephone, call the exchange,e-mail them, fax them, whatever you find convenient. It is entirely to the exchanges’ advantage to see to it that the trading public has accurate information about the products traded on their floors, and most exchanges’personnel in my experience give a sincere good-faith effort to provide this.
Risk Me Once and Risk Me Twice and Risk MeOnce AgainWhen we enter a trade, we become subject to yet another type of risk unknown to the gambler and the bookmaker, although our banking friendssee a form of it from time to time. Being sensible people, we attempt to limitthe dollar or percentage loss that an adverse market movement might causeus. To this end we set a loss limit either by placing a stop-loss order withour brokerage or by carefully watching our new trade and preparing to exitat a (presumably predetermined) point if the trade moves against us. Therisk that may accompany these pragmatic tactics, called wiggle risk, occurswhen we are consistently too conservative in setting our loss limit.You and I both know from long experience that some markets’ pricesfluctuate more over time than other markets’ prices do. If we would try toset our loss limits, therefore, at the same dollar or percentage level for everymarket in which we trade, it’s unfortunate but unavoidable that in someconsiderable percentage of trades our fixed loss limit will end up being eithertoo generous or too cautious. Now, no one in his right mind would advocateaccepting, except infrequently and in very specific instances, “too much”risk in any trade, but demanding “too little” risk is often a worse poison.If we systemically insist on too little risk, we will be taken out of ourtrades with a loss far too frequently, simply due to the ordinary price fluctuations of the market. We must expend some effort, then, to devise ameans through which we can set acceptable and realistic risk levels marketby market. If we don’t, if we attempt to trade IBM shares with a 3% risk, orthe wheat markets with a 7-cent stop, we will accomplish nothing except theloss of our capital and possibly becoming poster children for the WiggleRisk Prevention League. I suppose it might be interesting to be on such aposter, but, on the whole, I’d rather be in Philadelphia.Our unfriendly acquaintance, counterparty risk, is definitely present inthe world of trading. Actually, this risk causes more headaches for the incautious trader than it does for the other parties who attempt to make moneywith money. First off, we have more total parties involved in our enterprise
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than have the banker, the bookie, and the gambler, and the very presenceof these extra parties increases the likelihood of encountering one form ofcounterparty risk. We usually place our order with a trading desk, or witha broker who relays it to a trading desk, which in turn passes it along to atrader on the exchange floor. When our order is executed, both we andwhoever has taken the opposite side of our trade must be informed, the twoorders matched up and cleared, and the books of the brokerage(s) adjustedto reflect both our and the other trader’s new position(s).Simple mechanical errors in clearing our trade are rather common, butare easily fixed up after the fact with no threat to our capital. We call ourbroker and point out that we bought 800 shares of General Electric, not 300as the confirmation slip says, or that we sold 10 December crude oil at 21.92,not 21.82. In the great majority of cases, our broker agrees straightawaywith our viewpoint, sets to work putting matters to rights, and that’s theend of it. We should, of course, facilitate this process, because both we andthe broker will make inadvertent verbal or typographical errors once in awhile. We’ll just insist that the broker repeat our order before sending it offto the exchange floor, and we should without doubt maintain a writtenrecord of the orders we place. These practices will avoid all or almost all instances of misunderstanding, or what might be called accidental counterparty risk.