Sam Gaer’s Open Outcry History Was a Path To Electronic Trading

John Lothian

John Lothian

Executive Chairman and CEO

Veteran Trader and Technologist Interviewed for Open Outcry Traders History Project

Sam Gaer’s foray into the futures industry began at the age of 15 when he sought a summer job and was recruited as a runner on the COMEX. Initially hesitant to wake up at 7 a.m. and commute from his suburban New Jersey home to New York, he swiftly relented upon learning of the $5 cash hourly wage.

His first day saw him working in the COMEX gold pit, running orders to brokers. Despite not really knowing what he was doing, by the end of the summer he had figured out how to chart prices. He also knew about taking orders from phone clerks, running them where they needed to go, what types of orders there were and where the more important orders went. He said, “I just kind of took to it.”

This marked the start of a recurring pattern: Gaer spent his summers at the COMEX from age 15 through college. Over time, he took on various roles, including phone clerk and card checker, responsible for verifying brokers’ cards for discrepancies alongside other traders’ clerks.

When he graduated from school he said he went down to the trading floor, looked around and said, “Yeah, I think I can do this.”

During his junior year in school, Gaer began incorporating statistical and regression analysis into his market assessments, focusing on the volatile silver market. He achieved this by hacking into the VAX mainframe at his school using a Compushare account accessed via a modem. This occurred in April 1987, a period of high volatility in the silver market. Additionally, Gaer’s father had a brokerage account with the individual he worked for during the summer.

Gaer contacted his employer, expressing his belief that the silver market was poised for a significant rise. Acting on this insight, the broker purchased two contracts of silver for Gaer’s father’s account at a price above $4.00 per contract. After a three-day interval without communication, Gaer received confirmation that the contracts had been sold at $12.00 each, resulting in a substantial profit.

With that successful trade in silver, Gaer’s father’s account saw a remarkable increase of nearly $80,000. Gaer himself celebrated the windfall by buying a new car with a portion of the profits.

Upon graduating from college and committing to a career in trading, Gaer found approximately $10,000 available in his father’s trading account. Encouraged by his father, he sold his car, leased a seat, and ventured into trading. Gaer remained on the trading floor for about a decade, honing his skills and navigating the intricacies of the market.

Driven by a persistent desire to merge trading with technology, Gaer founded TradinGear, a software company specializing in options analysis. As the company grew busier, Gaer recognized that it was time to transition away from the trading floor.

One of the arbitrage strategies that Gaer had pioneered on the floor, trading “strips” in copper, started to dry up, he said. When that happened, Gaer said he knew it was time to leave the floor.

In 1993, when NYMEX bought COMEX, Gaer met Vinnie Viola. He and Viola remained friendly afterwards, Gaer said. When Viola became the NYMEX Chairman in 1998, Gaer said he decided to send him a text saying, “I have what you need.” Viola texted back and NYMEX decided to lease the TradinGear software and then eventually bought it.

Gaer’s software, rebranded as the ClearPort Trading System, was designed to complement the ClearPort Clearing System at NYMEX. While ClearPort Clearing initially struggled due to limitations with NYMEX’s Access trading system, regulatory requirements from the CFTC mandated that ClearPort Clearing contracts be displayed in a visible marketplace. This necessitated a solution like Gaer’s ClearPort Trading System.

Led by Joe Raia at NYMEX, ClearPort Trading eventually managed trading on 1000 new products, he said.

With the sale of TradinGear, Gaer also went to NYMEX, becoming an executive vice president and chief information officer. This was the first time he was working for someone else in his professional career.

Viola’s directive to Gaer upon assuming the role as head of technology at NYMEX was clear: “Don’t mess it up.” Gaer was tasked with rebuilding the technology infrastructure from scratch. At the time, NYMEX was grappling with seven different mainframe systems, each supported by numerous consultants. Budgets were spiraling out of control, and projects were consistently delayed. Gaer’s solution was to dismantle the existing setup and rebuild it on a new platform.

The development of NYMEX’s new technology infrastructure was characterized by an open process aimed at consensus building, resulting in several patented innovations, notably distributed architecture. The system implemented a “publish-subscribe” (pubsub) messaging pattern, enabling components to communicate by publishing messages to topics or channels, with other components subscribing to receive messages from these topics. Notably, the system was built using commodity hardware and software, eliminating the need for mainframes or consultants, according to Gaer.

A key element of the system was its ability to scale to keep up with the increased demand for message traffic, he said. Messaging traffic was increasing anywhere from two to five to ten X per year, Gaer said.

Implementing a Wi-Fi network on the trading floor was another major undertaking for Gaer. However, introducing new technology to the floor faced significant opposition due to the strong anti-technology sentiment among NYMEX floor traders. NYMEX floor staff would even face booing when they ventured onto the trading floor, reflecting the resistance to technological changes.

NYMEX faced resistance despite introducing the e-pit trading card, which rapidly recorded trades. Consequently, the exchange opted for side-by-side trading, beginning with relocating the e-mini crude oil contracts from CME’s Globex to the Clearport Trading System. The move resulted in a 200% volume increase within the first month, Gaer said.

To enable side-by-side trading, the exchange deployed tablets, but lacked a Wi-Fi network capable of handling the messaging traffic required by the preferred Trading Technologies XTrader platform used by NYMEX traders. NYMEX’s engineering team partnered with the relatively unknown company Aruba Networks to construct a high-density cellular Wi-Fi network on the trading floor. Additionally, NYMEX engaged TT to streamline their messaging to optimize performance.

As NYMEX prepared for its IPO, it needed to achieve Sarbanes-Oxley compliance, a requirement that was initially unfamiliar to many. Gaer collaborated with every department within NYMEX, ensuring that each technology component and process adhered to the regulations mandated by the newly passed law.

Gaer mentioned that following the significant increase in volume after the e-minis returned to NYMEX, Phupinder Gill from the CME approached him about relocating the e-mini crude contracts back to Globex. This initiated a series of negotiations, initially intended to be confidential but eventually becoming widely known. Eventually, an agreement was reached for all of NYMEX’s electronic trading to transition from the Clearport Trading System to Globex, Gaer said.

Gaer emphasized that the decision to transition electronic trading from the Clearport Trading System to Globex was primarily driven by business considerations rather than technological factors. He highlighted that CME’s impending launch of its own energy contracts, coupled with NYMEX’s competitive struggle with Intercontinental Exchange over the WTI contract, necessitated leveraging CME’s superior electronic trading distribution network. Additionally, the move aimed to transform a potential competitor into a strategic partner, aligning with NYMEX’s broader business objectives.

The agreement preceding NYMEX’s IPO generated significant excitement on Wall Street, signaling a closer collaboration between NYMEX and CME Group in electronic trading. This heightened synergy hinted at a potential future deal between the two entities, amplifying anticipation within the financial community.

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