S&P 500 Futures: A Hell of a Week

Some weeks are quiet, with a low level of news, and some are not. Last week was the latter. I have said many times that I have been part of every major stock market event since 1985. Black Monday (October 19th 1987), at the time, was the largest one-day market crash in history. On that fabled day, the Dow lost 22.6% of its value, or $500 billion dollars of it’s value. As most of you know my S&P desk on the floor of the CME Group lost $9 million dollars in less than 10 minutes during the the May 6, 2010 Flash Crash. On the day of the Flash Crash the Dow Jones Industrial Average plunged about 1,000 points, or 9%, within minutes, and then recovered a large part of the loss.

From the Donald Trump Tuesday night high of 2152.50 to the ‘limit down’ price, the S&P 500 futures moved a total of 124 handles in under four hours. From Tuesdays nights limit down to Thursday’s high, the emini futures rallied a total of 152 handles in just over 24 hours. The Dow Jones futures (YMZ16:CBT) capped off the election week with its largest weekly gain in 5 years, and pushed the future to another record high. The Dow Jones futures closed 1,019 points higher, or +5.5%, to 18833. The 5.5% gain was the biggest since December 2011. For the week (ESZ16:CME) gained nearly 4%, and fell 11.25 points shy of its all time high. The Nasdaq futures (NQZ16:CME) also gained about 4% on the week.

After two days of extremely high volume Friday’s trade was a lot more calm. I talked to several traders on Friday, and most said they were happy the election was over, and that it was a ‘hell of a week.’ Just think, the (ESZ16:CME) was down 5% at the limits, and closed up 3.8% on the week, that’s a nearly 9% move in less 3 days. The big winners in the Trump victory? The banks, industrial companies and high frequency trading. While I could do all the twist and turns of the week, but I would really prefer to talk about the ‘New World Trading Order,’ and about the increased frequency of what we call the ‘mini flash crashes.’ People have gotten so used to seeing them that they barely talk about it.

Robots Rule

I really have seen a lot during my career on the trading floor. From doing all the UBS program trading business in the S&P’s, to taking orders from the largest investment firm in the world, ADIA (Abu Dhabi Investment Authority), to doing the AIG business during the credit crisis. These are just a few examples and does not include all the big banks and hedge funds that used the desk. While there were some big crashes, none of what we see today looks at all like 1987, or the 1999-2000 tech bubble. We knew when the S&P emini made traded 6.69 million contracts in one day, back in October 2009, that is was going to be an all-time volume high. We also fully understood that the record volume was not a good sign that is was the largest liquidation in the history of the markets.

No one can tell me that the exchanges did not know what they were doing when they allowed high frequency trading (HFT) firms that use sophisticated computer programs to execute thousands of trades in a microseconds, or one-millionth. Most retail traders argue that high frequency trading creates an unfair advantages, while proponents say that HFT provides much needed liquidity. I disagree! While no one can stop the advancement of technology, the practice has destroyed the ‘market place’ for the everyday investor / retail trader. This was proven on May 6, 2010 when the Dow Jones Industrial Average dropped 700 points within minutes and then quickly recovered.

That was the first wake up call that things had gotten out of control. The idea that British trader Navinder Singh Sarao is responsible for causing the ‘Flash Crash’ is absurd. How is it that one man can be singled out when there are hundreds of high frequency trading firms out there that have billions of dollars under management like Citadel, KCG, GETCO, Jump Trading, Optiver,Tower Research Capital, Sun Trading, (Spire Europe), Hudson River Trading, Virtu Financial, Spot Trading, DRW, Renaissance, Tradebot Systems, or Global Statistical Arbitrage Group, one of Europe’s largest HFT trading firm.

It’s funny, somehow people forget about how Knight Trading and Infinium blew up, and the market disturbances that caused. Clearly, big money is harder to take down than a Navinder Singh Sarao.

A Fading Industry

There were over 550 clearing firms between the CBOT and the CME when I first started on the trading floor as a runner. Over my 38 years on the floor I saw it all, and part of seeing it all was watching how hundreds of firms closed. Yes, many were taken over or merged, but 90% of those firms are gone. The reason they are gone, in most cases, is they didn’t open enough clearing accounts to keep their doors open. One by one they disappeared.

I bet if you went back to the owners of these firms they would say retail futures trading was very popular in the 1980’s to the 90’s, but something changed. Sure, stock market sell offs or crashes cause losses. When you lose money trading futures, and your stock retirement account is down, you probably can’t wire more money over to your futures account. Or after the 1897 Crash how the customer base in the S&Ps and bonds disappeared. Or how the 1999-2000 tech bubble caused so much financial pain that want on for years. I can add a lot of of the crashes, but along the way, something did change.

The introduction of electronic trading was what changed. Forget the big trading firms, its was the big technology companies that took over. Many of these ‘coders’ had never even hard of futures trading, but the more they piled in, the more the exchanged allowed them to take advantage of the system. In essence, knocking out the retail trader.

In the end, it is what is is. I know MF Global and PFG did their damage, but I also fully understand the daily damage algorithmic and HFT trading do to the markets and to the small amount of retail traders that is left. Today there are less than 25 full clearing firms left of which only 4 or 5 of those firms will open a retail futures trading account. I think you can take it from here.

Nice Job by the ALGO’s

Below is a list showing the volume in the (ESZ16CME)) over the last 10 trading days. You can see how volume increased leading up to the US presidential election and the three days after. An average day’s volume is around 1.1 to 1.3 mil a day. There is no doubt the election caused a pickup in volatility and volume.

As the retail volume disappeared, the exchange knew they had to do something, so they offered direct access to the exchanges data feeds, and sold speed. Thus, introducing the markets to algorithmic and high frequency trading programs that have blown up how the markets trade. This means that the robots are controlling the markets and make up 70% of the volume._{Last 10 days over 23 million volume = 10 day ave. of 2.3 million contracts a day.}

On Wednesday the S&P futures did 5.3 million contracts. I don’t care what anyone says, algorithmic and high frequency trading is not just from the opening bell to the 3:00 close, it’s going 24 hrs a day.

Overnight stock markets around the world were mixed to lower. The S&P futures gapped higher on the globex open, and traded up to 2173.75, up 13.25 handles from Friday’s last print. From there they broke back down to 2158, a 15.75 handle swing, and have since traded back up. The last print in the ES is at 2163.00, up 1.50 handles, with just over 203k contracts traded at 6:18 cst.

Federal Reserve Bank President Sepak Everyday This Week

Dallas Fed President Kaplan (FOMC non-voter) speaks: Kaplan will speak on the economy without written text. He has tilted toward the hawkish side of the committee in recent comments, and we expect him to call for a rate hike by year-end.

Richmond Fed President Lacker (FOMC non-voter) speaks: Lacker is a consistently hawkish member of the FOMC, and we expect him to reiterate his point that policy needs to be normalized gradually.

San Francisco Fed President Williams (FOMC non-voter) speaks: Williams will attend a business briefing panel discussion on leveraging regional strengths to increase Chinese trade. We expect no substantive monetary policy content.”

On TAP

In Asia, 7 out of 10 open markets closed lower (Nikkei +1.71%), and in Europe 6 out of 11 markets are trading lower this morning (DAX +0.30%). This week’s economic calendar includes 22 reports, 13 Fed speakers and and 14 U.S. Treasury events. Today’s economic reports includes a 4-Week Bill Announcement, a 3-Month Bill Auction, a 6-Month Bill Auction, Robert Kaplan Speaks, Jeffrey Lacker Speaks, and John Williams Speaks.

November Options Expiration Week

Our View: I woke up at 3:30 am and the ESZ had traded up 2174.50. I fell back asleep and at 6:30 the ES had sold off 2158.00, a 16 handle sell off. Like the paragraph says above, the algos have gone 24-7. I am going to say it like it is. I do not doubt that the ES will eventually trade above 2200.00, but I also think that after the ES has rallied 155 handles in less than 3 days, and with the S&P up against big resistance, that you have to be careful.

Over the last few weeks the big institutions and hedge funds have been lightening up and hedging positions, and over 72 hours last week got railroaded. There were margin calls on the downside and margin calls on the upside.

Our view, the ES has already rallied, and sold off, before the 8:30 CT futures open. I think the ES can still go up, but I also think the lions share of this move may be over. I do not want to get overly bullish after a 155 handle 3 day rally. Ideally, the ES needs to sell off, and back and fill a bit. Below is a link to the S&P cash study for the November options expiration. As you can see, the numbers are weak Monday and Tuesday.

Download all of the November expiration stats here

Good luck this week traders.

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

• In Asia 7 out of 10 open markets closed lower: Shanghai Comp +0.45%, Hang Seng -1.37%, Nikkei +1.71%
• In Europe 6 out of 11 markets are trading lower: CAC +0.30%, DAX +0.30%, FTSE +0.23% at 6:00am ET
• Fair Value: S&P -3.45, NASDAQ -4.40, Dow -55.13
• Total Volume: 1.88m ESZ and 2.9k SPZ traded