Volatility Slowly Expands

Commentary, News


Hot Topics To Start The Week

The S&P 500 futures (ESZ19:CME) closed at 2986.20 Friday, ten points below its opening print of 2996.84, and in the middle of its trading range for the third consecutive day (2976.31 – 3000.00).

With respect to volatility, minimal as it was, there was a slight expansion of about five points, but nothing to really write home about.

There are a few topics to start the week off with. Most of the “usual” topics (Brexit, China and macroeconomic developments) are behaving as expected from prior discussions. 

Brexit, voted on years ago, comes before Parliament (everyone needs to get in on the act) on Tuesday. This was expected, as was the final target date being the end of the year. China, subtle exclusion of the primary traded goods (agriculture), helped the soybean markets. Farmers, despite the government supporting prices, planted less acreage with soybeans, so normal pricing models are emerging.

Trump will more than likely reduce the amounts and effective dates of additional tariffs as an act of good faith to continue negotiations. Reduced tariffs and the need to flood the market with money goes away; rates stop declining. In short, although there have been a few changes, nothing is really new here.

Politics

The topic I want to introduce today is “politics”. No, I’m not taking a position where discussions about who to vote for come into play. Rather, I’m going to look at the basic dysfunctionality of government, its effect on global economics, and what would happen if something was actually accomplished.

There has to be a starting point in discussions of this nature. Perhaps it’s best to compare two politicians; President Donald Trump and Canada’s Green Party Leader Elizabeth May. The overlap of all of their positions is about 10%. That’s not what counts though. Each was voted in based upon the voters’ belief that they would discharge their duties consistent with what they stood for. 

Trump, subject to the wrath of those who oppose him, has done what he said he would. May has done the same representing a “tree hugging” environmental bastion known as Vancouver Island. Two elected officials with totally different views doing what they said they would.

Dysfunction, abnormal/unhealthy interpersonal behavior or interaction within a group, does kind of define Congress. I doubt those who voted for individuals who oppose Trump voted for their representatives because they promised to remove a duly elected President from office. More than likely the electoral trail was more inclusive of health care, immigration, abortion and other local issues within their congressional fiefdom. 

The Senate is prepared to take up legislation on all of these issues, but the House seems hell bent on taking up impeachment, where it will die. So, let me get this straight, what the House can vote on to make the United States a better place they balk at, but removing a duly elected President, one who has discharged his duties as he said he would, floats their boat.

A picture is worth 1,000 words. I understand that a picture of the House will soon be found next to the definition of “dysfunction” in Merriam-Webster.

Charts

Keep reading the Opening Print where we’ll discuss the effect a dysfunctional government has on global economics and what would happen if something was actually accomplished to obviate the politics inherent in our system.

It’s time to start watching the “widow maker”: natural gas.  Bottoms that can be used to generate signals are now in place. It makes sense trading natural gas around this time of year because this is when the big boys always come out and play. A long term deal with China would be nice as well.

The first two charts are from MarketProfile, one a couple months long and the other a couple weeks. In the second, a cross of the twenty (20) day moving average would be nice, especially with the contract price heading towards a low volume node above where it is currently trading.

We are going to be watching natural gas this week. Of all of the commodities we looked at over the weekend, NG exhibits the most promising opportunities.


MrTopStep.com Rebuttal to @VanityFair

Vanity Story: Hanky Panky In The S&P 500 Futures

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-mini contracts—electronically traded futures contracts linked to the Standard & Poor’s 500 stock index—when the index was trading around 3010.00. 

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 reopened for pre-trading on Sunday night, the S&P index had fallen 30 points, giving that very fortunate trader, or traders, a quick $180 million profit.

By now the Vanity Fair 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. 

Read: https://www.vanityfair.com/news/2019/10/the-mystery-of-the-trump-chaos-trades

Before I go into my rebuttal, I want to take you back in time to the S&P pit itself, and talk about the importance 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 it 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 made $500,000. 

Try to imagine the ‘front running’ by locals in the pit when 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, and that would be what the clerks quoted. 

There were several ways a dishonest order filler could take advantage of a customer, and the two that stick out the most were: 

  1. 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. 
  2. 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.

So, on to the Vanity Fair story…

My first 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, its when traders move from the expiring contract to the new contract, or September to December in this case. This is done by spreading, or buying the September (ESU19:CME) contract and selling the December (ESZ19:CME) contract simultaneously. 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 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 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 ‘on the close’, 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 danny@mrtopstep.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. 


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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.

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Danny Riley (3257 Posts)

Danny Riley has worked in the futures and options industry for 38 years, including the CBOT’s bond room, where he worked for several of the Market Wizards. He went on to build the largest volume desk in the S&P 500 Index Futures, serving some of the largest banks and hedge funds, the UBS program trading business, and some of the world's top individual traders. As a leader and co-creator of the MrTopStep IM-Pro Trading Room, he shares trading ideas and breaking market news live from the floor with our other professional traders and new traders eager to experience the power of collective intelligence. Join us today and get the edge only social trading can give you.


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