The Pit vs The BOTs (Spoiler Alert: BOTS Win)

How would old floor traders do today?

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Our View

When I first started trading the SPU (the big S&P contract worth $500 a point) it took me a while to figure it out. Like today, I would buy when everyone was short and sell when everyone was long into the rally. If I started out with a losing trade, I would make the loss back over my next few trades and be up money or I would make money on my first trade and quit.

Back then the S&P’s multiplier was 500 (or $500 a point) and it was quoted in nickels. 821.05 bid at 821.10 offer, or 821.10 bid at 821.15 offer. I traded 6 lots because it was $3,000 a point and sometimes I would do 12 lots. Anything above that was when things got serious. My largest position was 96 lots which was $48,000 a point.

On that day I was up $79,000 by 10:00 a.m. and by 2:00 in the afternoon I was down $24,000 — and of course it was a jobs FRY-day.

Today I am a 1 and 2 lot trader on the ES and NQ and the one thing that is similar to back then is that when I’m trading larger, I’m usually losing. The other thing about being on the floor? You could see the desk put in orders and you could see the order fillers, but just because you saw a sell order and tried to front run it doesn’t mean the futures would always go your way. Just like when you see the ES drop 15 points in 30 seconds in today’s market, doesn’t mean you can sell it and expect to make money. Oftentimes it will reverse and go straight up.

Back then S&P index arbitrage was the thing. When the premium between the SPU was trading at a premium or a discount to the futures, my desk was doing the market-moving buy and sell programs. However, today’s futures tape is dominated by algorithmic and high-frequency bots that outgun the index arbitrage programs I used to execute for the Union Bank of Switzerland.

The trading landscape has changed so much that you can only make money two ways: The first is a quick scalp when the reader sees a short-term opportunity and gets in and out quickly. The second is learning to be extremely patient and follow the trend by buying pullbacks in strong tapes or selling strength when the markets are in a downtrend.

How would the floor traders from back then do trading in today’s markets?

Some would be okay, but the vast majority were not there to read charts and follow technical analysis. If the markets looked weak and the brokers in the pit were selling, so were the locals. Additionally, back then there were fewer “blips” like there are today.

There was a time that the S&P pit could take the other side of the order flow. Some even said they hoped Globex would go down so the orders would be rerouted back to the S&P pit, but I don’t even think if the S&P pit was full that the brokers or the locals could keep up. Back in the 80s and 90s they could, but it would be a suicide mission in today’s market.

In conclusion, what worked 20 to 30+ years ago would never work today. With over 90% of the daily trading volume coming from algorithmic and high frequency trading, the guys from the S&P pit would get run over trying to bid and offer like they used to — buying 821.05s and selling 821.10s would never work. Just one algo blip and they would be running for the exits.

It’s a brave new world out there…use stops so you can live another day.

MiM and Daily Recap

The ES traded up to 4470.75 on Globex and opened FRYdays regular session at 4468.50. After the open, the ES traded 4465 and then ripped up to 4487.50 and double topped at 10:34. From there, it dropped down to 4474.50, rallied back up to 4485.50 at 11:13, then dropped down to 4474.50 at 11:50 and traded all the way back up to four separate new highs: 4490.50 at 1:01, 4494 at 1:39, 4494.25 at 2:11, and 4496 at 2:32.

After a brief pullback, the ES traded up to another new high at 4496.50 at 3:20 and 4497.25 at 3:41. The ES traded 4493.75 as the 3:50 cash imbalance showed $414 million to sell, sold off down to 4498 and then dropped down to 4485.50 on the 4:00 cash close. After 4:00, the ES traded down to 4480.75 and traded 4482.50 on the 5:00 futures close, up 52.50 points or 1.18% on the day.

In the end, it was a hell of a quarter, month and week for the ES. In terms of the ES’s overall tone, it was firm all day with only one 14-point pullback. In terms of the ES’s overall trade, volume was on the low side at 1.6 million contracts traded.

Technical Edge

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!