Scott Shellady: Embracing change

May 23, 2013 07:00 PM

Scott Shellady is a second-generation trader who has worked in all aspects of the futures business on two continents for 25 years. He has been a broker, order filler, bank executive, proprietary trader and local. He made money trading European interest rates at the London International Financial Futures and Options Exchange (Liffe) and was one of the first executives at Patsystems, a firm that helped move the trading world toward electronic trading and caused Liffe to lose its lucrative German interest rate complex.  

Currently Shellady is trading and executing customer business in the corn options pit on the Chicago Board of Trade (CBOT). 

Despite his eclectic career including high level positions at large banks, Shellady enjoys the floor even though it is not as raucous as it used to be. “It is still a thrill to go downstairs every day; it is still a lot of fun,” he says. 

Shellady’s father, Ron, started out at Cargill in 1962 as a cash grain trader and would go on to help establish Cargill Investor Services (CIS). Shellady’s cow styles jacket is a tribute to his dad who wore it to remind traders of the producers who need the market to hedge their risk. He reached his goal of following in his father’s footsteps by getting hired by Prime International shortly after graduating from the University of Colorado in 1988 with a finance degree. In 1990, Prime sent Shellady to London to open up an office and become a proprietary trader on Liffe in the burgeoning German interest rate complex. 

After prop trading at Liffe for Prime, Shellady remained in London working as assistant director for floor traded options for Deutsche Bank before becoming a managing director of futures operations for the Industrial Bank of Japan. 

During that time he also befriended the handful of Chicago traders in London, including Tom Theys, founder of Patsystems. “Only 10% of the traders in London made the transition from floor to electronics,” Shellady says. “It is because of my involvement with [Theys] and Patsystems that I decided to embrace the change rather than resist. When Liffe did finally go 100% electronic as an exchange, I was able to help start the call around market in options. That trial by fire helped me.” 

After 11 years in London, and with the Industrial Bank of Japan involved in merger talks, Shellady decided to move back to Chicago and work with his father, who by that time was filling paper in the corn pit at the CBOT. 

His return was fortunate because his father would be diagnosed with Alzheimers a year later. Shellady would take over his father’s deck and fill corn orders until 2008.

Shellady estimates that over his 25 years in the business he has split his time 50/50 between brokerage and trading. From 1988-1995 he mainly traded for himself; from 1995-2001 he mainly filled customer orders and from 2001-2008 he split his time. After 2008 the market moved online and he concentrated on his own trading once again. 

He learned the cash grain fundamentals — the basis for his trading approach — from his father. His family also has owned farmland for 40 years, which has helped in his understanding of fundamentals. 

As senior vice president of Trean Group, he communicates with his customers via online chats. This method helps keep him informed of the fundamentals because the Internet has replaced the floor as the center of market information.  

Shellady says there are fewer opportunities for individual traders to make a living. “It is getting harder and harder, you take more risk more often for less return,” he says.

However, he saw an opportunity earlier this spring when a bearish quarterly U.S. Department of Agriculture stocks report caused corn to go limit down for two days. Shellady focuses on options, and while the futures were locked limit, trade moved to options and the floor where traders could put on synthetic futures positions. 

Shellady concentrates his trading on volatility as an asset class. “You are buying cheaper options to sell against more expensive [strikes] and there should be a history between the two; we call [this] relative value trading. Over time those relationships should come back into line,” he says. “I don’t pick a spot where I think the market is going to trade...I just try and take advantage of the relative value imbalance between strikes or between months and let the futures do what they want to do, waiting for the relationships of those values to come back in line. I wait for a mispriced option and try and take advantage of that.”

Shellady attributes his longevity to going through major changes and embracing those changes instead of fighting them. He uses Liffe’s bund contract demise as an example of how he witnessed how quickly markets can change. “Absolutely; how about from a Friday afternoon until a Monday morning, that is how quickly it went,” he says.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.