John Eckstein, Pioneer of Treasury Futures Trading, Dies at 74

John F. Eckstein III, one of the first traders of Treasury bill futures contracts following their debut in 1976 and a pioneer of cash-futures arbitrage trading in the U.S. government bond market, has died. He was 74.

Eckstein died on July 24 at a nursing home in New Rochelle, New York, having never fully recovered from a heart attack he suffered in 2005, his son, John F. Eckstein IV, said in a telephone interview.

He began his career as a Treasury trader at First National City Bank -- a predecessor of Citibank NA -- and worked at Discount Corp. of New York, an independent dealer of U.S. government securities. Eckstein then founded J.F. Eckstein & Co. around 1972, according to his son, who is director of research at Astor Asset Management LLC, a division of Jersey City, New Jersey-based Knight Capital Group Inc.

Financial futures were in their infancy, and Eckstein traveled frequently from his New York office to Chicago to establish himself in the trading pits.

“From a New York perspective, he certainly was one of the pioneers of the use of the financial futures market,” said Sherwin Kite, the former co-head of Chicago-based futures brokerage United Financial Trading Co. and a member of the Chicago Mercantile Exchange’s board of governors from 1976 to 1985.

Eckstein was among the first traders involved in developing computerized trading based on chart patterns, Kite said.

Favored Strategies

He favored short-maturity Treasury securities, structuring trades based on yield curve distortions and deductions about Federal Reserve decisions, which until 1994 were not announced, his son said.

Eckstein also had a role in “When Genius Failed” (2000), Roger Lowenstein’s book about the collapse of the hedge fund Long-Term Capital Management, which lost $4 billion amid tumbling world markets in 1998.

As Lowenstein related it, “a panicked Eckstein” turned to Salomon Brothers in 1979 when his firm was struggling to meet margin calls on an arbitrage of U.S. Treasury bills and U.S. Treasury bill futures. Eckstein knew his trade would pay off when the prices of the bills and the futures converged; they were just taking longer than usual to do so.

“Eckstein had made this bet many times, typically with success,” Lowenstein wrote. “As he made more money, he gradually raised his stake.”

Riding Losses

John Meriwether, who had recently set up a bond-arbitrage group within Salomon, saw the wisdom in the trade and persuaded the firm to put up “tens of millions of its capital” to take over Eckstein’s position, according to Lowenstein. The prices eventually converged, Salomon “made a bundle,” and Meriwether, promoted to partner the following year, “had found his life’s work.”

The Eckstein trade, at a time when “hardly anyone traded financial futures,” taught Meriwether to “ride your losses until they turned into gains,” Lowenstein wrote.

As it turned out, Long-Term Capital Management, founded by Meriwether in 1994, collapsed in 1998 when its own leveraged convergence trades moved the wrong way and margin calls exhausted the fund’s capital.

Company Closes

As for Eckstein, handing over the ultimately winning hand to Salomon led to the closing of his company, his son said. He finished his career working at firms including A.G. Becker & Co., Deutsche Bank AG and Yamaichi Securities Co., until 1997.

John Francis Eckstein III was born on Oct. 1, 1937, in Jersey City and graduated from Lehigh University, in Bethlehem, Pennsylvania, in 1959.

Survivors include his wife, Alison Eckstein, and three children -- John IV, Andrew and Jacquelyn -- from two previous marriages that ended in divorce. He also had two stepdaughters, Schuyler Clemente and Blair Clemente.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE