I know that this may make me sound old. Maybe I am. I started on the Chicago Board of Trade trading floor over 37 years ago. There were still chalkboards on the walls and antiquated phone equipment. The trading floors have evolved and the industry has, too.
When I began as a runner a customer would call the grain desk and a member or phone clerk would pick it up and take the order, writing it on an order slip. The desk clerk would hand the order to a runner like me, who would quickly deliver it to the pit the customer was trading. Back then it was the grain room, where corn, wheat and soybeans were traded. If it was a market order I would stand on the side of the pit and wait for the broker to execute the order and hand it back to me. From there I would run back to the desk so the order could be reported back to the customer.
All sorts of things could happen to a customer order back then and most of them were bad. If an order filler had hundreds of orders or a “deck” he and his clerks could see where all the big bids and offers and all the buy and sell stops were. If he was honest— and most were— he would just fill his orders. But if he wanted he could reveal where those stops were to his friends in the pit so they could front-run those orders and benefit.
For example, if there were a lot of sell stops the locals could sell in front of the stop levels and then elect to buy back at the sell stops, which they knew would soon see orders. Then the broker would start offering his deck and at some point sell to the locals who had front-run the stops. They would then cover their positions by buying what he offered, making a quick profit. That is what you called front-running.
But in today’s world where algorithmic and program trading make up 80% of the daily volume it’s not the floor trader you have to worry about. It’s the HFT systems that jump in front of your bid or offer when you go to buy or sell. Despite trying to make it harder on these types of trading systems, it’s hard for the exchanges to turn down the customers that make up the bulk of their daily volume. I am sure the small customers don’t like to hear this, but at the end of the day it’s all dollars and cents to the exchange. Additionally, the algos and program traders are flat at the end of the day. The firms don’t have to chase the system traders down for margin calls, either. To an exchange, they’re the ideal customer.
Prior to electronic trading being introduced in 1996, our trading desk in the S&Ps (ESH15:CME) was one of the largest on the floor. We did business for many of the big hedge funds and banks, and the desk was constantly flooded with large and small orders. It was chaos, but with rules that didn’t always work in favor of the customer. When I was brought up, my dad ran a company in Chicago called Riley Printing Company. He had one rule, the customer always came first. On the trading floors in the late 70s, 80s, and through the mid-90s, it was a different story. Back then there was something called dual trading where the broker who was filling your order could trade his own account. He literally could purchase 50 contracts for himself and then bid the market up with a customer order. That’s banned today, but now the exchanges allow computer programs to jump in front of our customer orders and you can see it all day long. That is why I think trading has become so hard.
Over 38 years I believe I’ve seen it all. For me it did not matter if it was a little order that was getting ripped off or a big one; it was someone’s money and for that I felt it was my duty to fight for the customer. While I hated to see the dwindling of the trading floor as electronic trading took over, I knew that it was the right direction. Still, I never thought we would be fighting robots to make money. That is why I believe that in today’s trading environment you have to have some rules. Some type of risk management, some type of plan. You also have to own your trade and be responsible whether it’s a winner or loser.
As we go into today’s ECB meeting it feels like the S&P 500 (^GSPC:SNP) is trying to firm up, but we also feel any prolonged rally in the S&P will need the cooperation of the energy sector, i.e. crude oil. Over the last three weeks the S&P has gone into a tailspin every time crude oil dropped. As the weighting in the S&P changes and more oil companies are beat down, that money will be rotated to other sectors, and what will be left will be a very oversold S&P. I’m not sure how 2015 is going to play out, but I do know and expect the year to be filled with large ups and downs and increased volatility. Can the S&P go higher? Should the S&P go higher? Or will macro global macroeconomics rain down on the US markets? Please email me your opinion at danny@mrtopstep.com Your opinion matters…
In Asia 9 of 11 markets closed higher and in Europe 9 out of 12 markets are trading modestly higher this morning. Today’s economic calendar includes jobless claims, the FHFA house price index, EIA natural gas and petroleum reports, 2- and 5-year note auction, 10-year TIPS announcement, Fed balance sheet, money supply and earnings from Southwest Airlines (NYSE: LUV), Verizon (NYSE: VZ), Johnson Controls (NYSE: JCI), and Starbucks (NASDAQ: SBUX).
S&P / Per-ECB Squeeze Job
Our view: Today is the long-awaited ECB meeting. For over two years I’ve pointed out that the global trade has been buy US / sell Europe and I don’t think that’s going to change anytime soon. Despite Mario Draghi’s push for a bond buying program, there remain many cracks in the European system, including some that will not be fixed anytime soon.
Everyone thinks you have to sell the ECB news. Over the last three days the S&P has been squeezing some shorts out. We are not big fans of trading the news. What everyone thinks and what the price action shows are often at odds. While we won’t be surprised to see some reflexive selling on the ECB announcement, we think the substance of the QE and the acknowledgement of the euro’s challenges were priced in long ago.
Mario Draghi has made his wishes known to the ECB’s Governing Council and his press conference will be at 2:30 PM Thursday in Frankfurt, 8:30 AM Eastern time. Our advice this week to sell early rallies and buy weakness has worked, but volatility has made it tough for traders who aren’t careful with their timing. Our view today is to avoid the immediate chop at the open and buy weakness once the market finds support. Keep your stops tight and prepare to get out if your entry timing is off.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 9 of 11 markets closed higher: Shanghai Comp. +0.59%, Hang Seng +0.70%, Nikkei +0.28%
- Earlier in Europe 9 of 12 markets were trading higher : DAX -0.30%, FTSE +0.47%, MICEX +3.05%%, GD.AT +0.12% / Currently in Europe: Dax +0.57, FTSE +0.70, MICEX +2.94, GD.AT +0.90
- Fair value: S&P -6.14 , NASDAQ -6.93, Dow -67.68
- Total volume: 1.63mil ESH and 4.6k SPH traded
- Economic schedule: Jobless claims, FHFA house price index, EIA natural gas and petroleum reports, 2- and 5-year note auction, 10-year TIPS announcement, Fed balance sheet, money supply and earnings from Southwest Airlines (NYSE: LUV), Verizon (NYSE: VZ), Johnson Controls (NYSE: JCI), and Starbucks (NASDAQ: SBUX).
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