Vanity Story: Hanky Panky In The S&P 500 Futures
From Vanity Fair’s story regarding the “Fantastically Profitable Mystery of the Trump Chaos Trades” on VanityFair.com:
“In the last 10 minutes of trading at the Chicago Mercantile Exchange on Friday, September 13, someone got very lucky. That’s when he or she, or a group of people, sold short 120,000 “S&P e-minis”—electronically traded futures contracts linked to the Standard & Poor’s 500 stock index—when the index was trading around 3010.
The time was 3:50 p.m. in New York; it was nearing midnight in Tehran. A few hours later, drones attacked a large swath of Saudi Arabia’s oil infrastructure, choking off production in the country and sending oil prices soaring. By the time the CME next opened, for pretrading on Sunday night, the S&P index had fallen 30 points, giving that very fortunate trader, or traders, a quick $180 million profit. (William D. Cohan)”
By now, the story has gotten enough press for me to write a rebuttal. After starting on the trading floor of the Chicago Board of Trade and the Chicago Mercantile exchange when I was 18 years old, and being there for 38 years running one of the largest S&P 500 futures trading desks in the world, I feel uniquely qualified to respond to the dazzling headline story of front running the news.
Here is the link to the Vanity Fair story for those of you who didn’t read it.
Before I go into my rebuttal, I want to take you back in time to the S&P pit itself, and talk about the significance of electronic trading.
For years, every account, from the small one lot trader to the mammoth hedge funds, always thought they were getting taken advantage of when entering orders in the S&P 500 futures pit. The desk clerk would pick up the phone, get a quote from the clerk in the pit, and repeat it to the customer. We would not say hello, or how are you, or anything other than give the quote. That’s how it worked. I have always said, it didn’t matter to me if it was a big order or a small order, it was somebody’s money, and it’s our duty to make sure the customer was given the correct fill, but that’s not always how it worked.
Back in the day when the multiplier in the S&P 500 futures was $500 a handle (point), things could get very costly. Just do the math. If you bought a 1 lot at 580.00 and you sold at 581.00 you made $500. If you bought 50 lots at 580.00 and sold them at 581.00, you made $25,000. And if you bought 100 lot at 580.00 and sold it at 581.00, you made $50,000. Just think if you bought 1,000 lots (we did a lot of them) at 580.00 and sold them at 581.00, you’d made $500,000!
Try to imagine the ‘front running’ by locals in the pit when we put in the big orders. Additionally, before the multiplier was cut, the bid offer in the futures was not 580.00 at 580.25, it was 580.00 at 580.10, 580.20 at 580.30, etc…, and that would be what the clerks quoted.
There were several ways a dishonest order filler could take advantage of a customer. The two that stick out the most to me were:
- Tipping off the locals that he had a big order; one kick was buy and two kicks was sell, or blink once to buy and twice to sell. I think you get the idea.
- There was something called ‘dual trading’ that allowed the order filler in the pit to trade his personal account while filling orders. I get an order at the desk to buy 500 contracts, signal it to the pit clerk, the pit clerk tells the order filler to buy 500 lots, and the order filler buys 50 lots for himself before bidding up the market. He then only buys 450 and gets a local in the pit to cross the last 50 lot.
This went on pretty much throughout every futures pit in the industry. I should say that not all the order fillers were crooks, but many of them were, and they were a leading factor in the rise of electronic trading.
So, on to the Vanity Fair story…
My problem with the story is that I highly doubt anyone could sell 120,000 September E-mini futures contracts in the last 10 minutes of the day. If you care to check, September 13 was only one day after the S&P 500 ‘roll over’, or ‘switch day’, had started.
For those of you that don’t know what the roll over is, it’s when traders move positions from the expiring contract to the new contract, or September to December in this case. This is done by spreading, or selling the September (ESU19:CME) contract and buying the December (ESZ19:CME) contract simultaneously. It would by no means be out of character when you look at the open interest of the ESU, which was 2,341,503 contracts at the start of Friday’s open.
In most cases, anyone that trades the ES would see that type of volume trading on their screens, their ladder would show thousands of contracts trading.
I personally think it would be impossible to sell 120,000 contracts in the last ten minutes before the N.Y. 4:00 cash close, especially when total volume was only 123,000 during that time frame. Additionally, everyone knows volume in the S&P futures increase going into the close, as does NYSE volume, which generally leaps to over 350 million shares in the final minutes of the day. This is when the big ETF’s, mutual funds and institutions buy and sell stock, so naturally volume increases late in the day as MOC (market on close orders) orders are executed.
If you remember what happened during the 2010 ‘Flash Crash’ when a $27 billion Asset Strategy Fund, commonly known as Ivy Asset Strategy Fund, run by Waddell & Reed Financial Inc. set off a chain reaction using a computer algorithm to sell $4.1 billion, or 75,000, E-mini futures contracts futures… The Dow Jones dropped 700 points in seven minutes, before recouping most of the losses by the closing bell.
I know quite a bit about the ‘Flash Crash’, as our desk took a $9 million dollar hit that day when a hedge fund blew up trying to leg out of a big S&P options spread. So I don’t buy this story at all! The CME compliance department would be all over this if it were true.
So, I am sorry Vanity Fair, and the author of the story, Willam D Cohan, maybe the next time you write a story like this you should email me at email@example.com, and I will explain how this all works. After all, if the water pipes in your house break you call a plumber, and if you want to talk S&P’s you call me.
As always, please use protective buy and sell stops when trading futures and options.
Disclaimer: Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. Any decision to purchase or sell as a result of the opinions expressed in the forum will be the full responsibility of the person(s) authorizing such transaction(s). BE ADVISED TO ALWAYS USE PROTECTIVE STOP LOSSES AND ALLOW FOR SLIPPAGE TO MANAGE YOUR TRADE(S) AS AN INVESTOR COULD LOSE ALL OR MORE THAN THEIR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.