trading_pit

Most of you already know that I didn’t go to college. I wanted to, but after having 10 kids and paying for colleges and weddings, my dad, as hard as he tried, could not keep up. When it was my turn to go, I did not want to add any more financial burden on my mom and dad. So like a lot of guys out of high school and college that grew up on the West Side of Chicago (Oak Park and River Forest) I ended up on the floor of Chicago Board of Trade as a runner in the grain room. From the minute I put on my runner’s jacket I knew I had found my calling.

I grew up in Crystal Lake, Illinois. It was a small town, and as much as I hated to move, I look back now and wonder what would have happened had I not gotten out of the small town and gone to the big city? I was a tough kid, and liked to lip off, and while that was ok in Crystal Lake, that didn’t work real well in Chicago. But on the Board of Trade floor it was ok to yell and scream and jump up and down, and not only that, there were other kids my age working at different trading desk on the floor.

Soon I got to know how to work the phones. My next step was to learn the hand signals. While all my “buddies” worked in the grain room, there was another trading room, and that was where the bond pit was. After a few years in the grain room, I set a goal to be in the bond pit, and that’s where I ended up. I have to be honest, my buddies moved to the bond pit too, but they had good ‘gigs.’ One roommate inherited a membership when he turned 21 and became the head order filler for the Goldman prop desk. The other guy ended up filling orders in the pit and doing out trades at Goldberg for Tom Baldwin.

Everything was going ok for me, but I had not found my spot yet. That came when a guy by the name of Rick Barnes, a very well known desk trader (who I worked for in the bonds), sent me over to run his S&P operation on the CME floor. I liked the Board of Trade because of its Irish Catholic heritage, but the CME had several financial futures pits, which was exactly what I was looking for. Gold pit, currency pits, euro dollar and options pits, and best of all, the S&P 500 futures pit. Unlike the bonds and the grains that would go through long slow periods, the S&P was never slow. From the open to the close it was busy, and it was unpredictable. But the main thing about the S&P pit, unlike the bonds, it was a financial ‘mosh pit.’ While the S&P didn’t have as many traders and clerks, it was much more unruly, and the money came faster. You could sell 50 big SPUs and be up $50,000 in the first 20 minutes. It was high flying and most of all it was fast.

As I built the S&P desk up, I came across a lot of things I disagreed with, and as I made changes, the brokers and clerks in the pit started to attack me for not going along with their crooked ways. Over a period of 2 or 3 years, the desk started to pick up some of the largest customers in the S&Ps. It grew for one reason, and that was we fought for our customers fills. The PitBull has no problem talking about what I used to do, and so would hundreds of other customers that knew me. When I look back on this experience, and all the ups and downs, I have to say.. I probably would not change any of it.

Trend Day 60 (1)

As time went by, I got my seat and started trading. This is another thing I have to be honest about. I knew nothing about trading. I didn’t follow charts, I didn’t know how to read them, and no one in the pit would tell you a thing about the ins and outs of pit trading. Remember, I had fought with almost every broker in the pit, so there were no “freebies” coming my way. I had to teach myself.

I also had to split time between the desk and the pit. That part wasn’t so hard; making money trading in the pit was. I would make a little then lose more. It was an uphill battle that I knew was going to be hard to win, so I got out of the pit and traded from the desk. I did all the UBS program arbitrage business from there. I could follow the programs on my screens. At the same time, I could see 100% of the pit action because our desk was so high up. Remember, our name is MrTopStep because we literally were on the top step, overlooking everyone else in the S&P pit.

Over time, I noticed that after 3 or 4 index arb sell programs, you had to buy the S&P. That simple insight was the first of today’s MrTopStep Trading Rules. (https://mrtopstep.com/mts-trading-rules/) . I learned to follow where the stops were from all the customer orders we put in, and then i started to notice how some customers would move around the pit using different desks and brokers. I started to notice patterns, and when I found a guy who was good at picking levels, I learned to read the boards on the floor. My street smarts started to kick in. I knew i could do it without being part of the old boys’ club. That’s something I never wanted to be.  

quote board

Everything was fine until 1996 when the CME introduced GLOBEX, and a few years later the order flow in the pit started to disappear, and so did that ‘feel’ I had for order flow and volume. It was more electronic than open outcry, and all the program business I did for UBS went online. Bam … everything I had learned was disappearing. The floor was converting from an open outcry futures exchange to an options exchange. It was time to learn some new tricks, or like many of the old floor guard… just walk away.

CL 8

I didnt want to do that. I loved the business, and trading was in my soul. I was not going to give up on something that has been part of me for almost 38 years. So what was I going to do? I dove straight into the MarketDelta volume imbalance charts. Like the quote boards on the floor, I could recognise patterns the longer I stared at the imbalance charts. I paid attention to the premium levels between the S&P cash and futures, and started to understand how the algos think. I managed to rebuild my feeling for how to read the S&P off floor. It was a transition I was not sure I could make, and even today when people ask me how I do it, I actually have a hard time explaining it. I look at the news, overbought, oversold, I try and distinguish the trend and I use my MD charts and dig into the MrTopStep trading room for levels and some trade ideas. I miss the floor but I have achieved a level of higher learning I never would have gotten on the floor, and most of all… Its kept me in the game.

Remember traders, nothing stays the same. Things that used to work don’t, and the things that do, do not last long. If you want to know more about my charts, email me at danny@mrtopstep.com.

In Asia, 11 out of 11 markets closed lower , and in Europe 7 out of 10 markets are trading modestly lower this morning. Today’s economic calendar starts with PMI Manufacturing Index, New Home Sales and earnings from AAL, BIIB, JCI, XRX, ABBV, VFC, WBC, SAVE, COL, DTE, MCO, STT, SPG, AAN, LEA, B, VTR, COG, and OCR.

Our View: This is from one of our our favorite technicians:

  • Most recent pullback followed a touch of the overbought levels on breadth and momentum.
  • These measures are now approaching oversold levels
  • Correction may be nearing an end
  • Want to see improvement in demand to suggest uptrend is resuming

This is pretty much what I have been saying, and pretty much what I am thinking. As far as today, there should be some type of early sell, and then rally. I am going to leave it like that and remind everyone that it’s the dog days of summer and the S&P is not going up or down sharply. You can take it from there…

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

    In Asia 11 out of 11 markets closed lower : Shanghai Comp. -1.29%, Hang Seng -1.06%, Nikkei -0.67%

  • In Europe 6 out of 10 markets quoted are trading lower : DAX -0.02%, FTSE +0.12%, CAC +0.37%, MICEX -0.36%, GD.AT CLOSED at 6:45 am CT
  • Fair Value: S&P -6.69 , NASDAQ -8.53 , Dow -79.81
  • Total Volume: 1.43mil ESU and 2.5k SPU traded
  • Economic calendar: PMI Manufacturing Index and New Home Sales.
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