S&P 500 Futures: The Pit vs. the Retail Trader

E-mini S&P 500, Our View

Over all my years on the CBOT and CME trading floors, watching customers trade, I knew there was something missing. Sure being a “pit local” was a great way to make money. The local didn’t have anyone to report to. He came and left as he pleased and best of all the locals didn’t really care which way the S&P was going because most of them scalped, meaning they tried to get an edge to get in and get out as soon as the trade started to make money. If you were fast you could make a lot of money that way…

Long before the algorithmic programs there was something called program trading, S&P 500 index arbitrage. For those of you who were not  around for the ’87 crash, program trading became the scapegoat for why the market fell so much that day. (^GSPC:SNP)

The reality of it was there were more sell orders than the computers could keep up with and the markets couldn’t take the increased volumes. In other words, the exchanges were ill-equipped and needed someone or something to blame.

A lot has changed. Most of the futures pits are empty and program and algorithmic trading now account for roughly 70% of the daily volume in the S&P futures. Buying and selling in the S&P pit is down to less than 30 locals with only a handful of customers that still trade the big S&P contract (SPU14:CME). The edge these locals used to depend on to make millions of dollars has been reduced to less than a few thousand contracts a day.

When electronic trading showed up in 1995-96, many well-known floor traders left the floor. They thought the game was over. It took several years for the public to be convinced that not only was electronic trading easier, it also gave a better market to trade off of.

Our floor desk began to shrink along with the pit. At one point we had 10 clerks answering phones and over 400 locals and order fillers in the S&P pit. Just before we moved the desk down to the S&P options the pit was down to less than 100 and the desk was down to 4 guys. All the big order flow was gone and so were most of the order fillers and pit locals. No orders? No locals!

Today’s locals will tell you they are happy to make 500 bucks a day. The days of getting in front of a big order or getting the edge are gone. The locals used to love days when the S&P rallied, sold off and rallied again, but nowadays that has been replaced with running the upside stops, then running the downside stops.

Computers have created new patterns to follow. Even when the S&P was selling off last month I stuck with the idea that once the selling receded the S&P would level off. Once I saw the price action forming, I knew that after the drop the markets would rally again. Like the trading floor, I had to evolve. I don’t get to see the big orders go in anymore, but I do know what happens when big buying and selling exhausts itself in the ES.

I have replaced some of the things I used to use on the floor with levels of stops and S&P fair value. I look at certain sentiment indicators, and most of all I pay attention to the crowd. When I see the folks on CNBC get bearish after a selloff I know that 9 out of 10 times they will be wrong and all I have to do is be patient and wait for a little back-and-fill price action. And most of all I know that the Fed zero rate borrowing policy is my ace in the hole.

Trading today is not at all like it was in the late ’80s and ’90s when a local could make $50 to $100 grand by 11:00. The days of the big order fillers and locals are gone, but trying to make money in the S&P pit isn’t.  Todays locals have no edge over the public and retail traders, who are often smarter and better prepared than the pit guys. The moral of the story is it’s not easy to make money trading but, if you’re patient you have a far better chance…

In overnight trading, the Asian markets closed mostly higher (Shanghai Comp. +1.37%), while 11 of 12 European markets are trading higher. This week’s shortened economic schedule includes 25 separate economic releases, 11 T-bill and T-bond announcements, 5 Fed bank presidents speaking and Friday’s jobs report. Today’s economic schedule includes the Gallup U.S. consumer spending measure, PMI Manufacturing Index, ISM Mfg Index, construction spending, 3- & 6-month T-bill announcement, Gallup US ECI and earnings from Conn’s (NASDAQ: CONN), Pike Electric (NYSE: PIKE), Fabrinet (NYSE: FN), and Aviat Networks (NASDAQ: AVNW).

ES 09-14 (15 Min)  9_2_2014

S&P Futures Up 7 of the Last 10 Sessions

Our view: The E-mini (ESU14:CME) was down 3 handles in Globex on Monday and closed 0.25 handles lower. It is up 4.25 handles in Globex this morning at 2005.75. Despite the shortened week there is a busy economic schedule that ends on Friday with the jobs report.

I said last Friday I thought the S&P futures could get as high as 2012 to 2018 this week. The ESU14 has closed higher 7 out of the last 10 sessions, but look at the 3 down days: Aug 22 -1.8 handles, Aug 27 -1.5 handles, Aug 28 -0.40 handles. There is no pullback and I don’t expect one until Friday.

Our view is that Friday’s MOC of $1 billion to buy could be a precursor to the first 2 or 3 trading days of September. Additionally, today is Turnaround Tuesday and with people still returning from the long weekend, Thin to Win could play its part today. There are two ways to play this: sell the early rally and buy weakness or just go with the trend and buy weakness.

Video: The Russian Soft Invasion


Video: S&P 500 2000 Back & Fill


As always, please use protective buy and sell stops when trading futures and options.

  • In Asia of 8 out of 11  markets closed higher: Shanghai Comp. +1.37%, Hang Seng -0.01%, Nikkei +1.24%.
  • In Europe 11 of 12 markets are trading higher: DAX +0.45%, FTSE -0.06%, MICEX +0.09%
  • Fair value: S&P -1.78 , Nasdaq -0.38 ,  Dow -9.97
  • Total volume: 1 mil ESU and 3.9K SPU traded
  • Economic and earnings calendar: Gallup U.S. consumer spending measure, PMI Manufacturing Index, ISM Mfg Index, construction spending, 3- & 6-month T-bill announcement, Gallup US ECI and earnings from Conn’s (NASDAQ: CONN), Pike Electric (NYSE: PIKE), Fabrinet (NYSE: FN), and Aviat Networks (NASDAQ: AVNW).
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