THE FLOOR AND THE HONOR SYSTEM

MrTopStep.com

The credit crisis that started in 2007 has done damage to all levels of the economy both at home and around the globe. The economic downturn continues to eat away at long-term things we never thought would change. After the record volumes and trade of  2009, things have settled down, but not exactly the way we would like them to.   Record high prices: In the past, new highs in the stock market were usually associated with a robust economy. If you're good at picking highs and lows in the stock market, you probably have a pretty good feel for the economic trade winds. That theory is probably why so many investment firms have stayed away from buying stocks for so long. Zero rates, trillions in debt, quantitative easing and the non-stop printing presses of the central banks have helped pile up trillions in debt but that has not stopped the stock market from trading into new 5- and 7-year highs.    A hard reality: The problem with the current stock market rally is the public is not getting any richer. Home prices have climbed, but after the housing beatdown few people count their house as being part of their bank account. Another reality is that there are still millions of Americans looking for jobs who cannot find work. In the beginning of the credit crisis, the trading floor of the CME Group seemed insulated, but it’s clearly not anymore. More people are leaving the floor. Some of the big firms like JPMorgan are starting to let people go, while the floor is also losing numbers through attrition.    MF Global & PFG: In addition to the effects of the credit crisis, the two main things that have adversely affected the trading floor are MF Global and PGF. When Corzine allowed customer segregated funds to be used for proprietary trading and MFG locked out all its customers, it had an overall dimming effect, but when it was reported that Russ Wasendorf of PFG had stolen over $200mil another big segment of customers decided to throw in the towel. Clearly there are fewer customers trading than there were two years ago.   The honor system: At the old Board of Trade, if you were in the bond pit filling orders and the guy next to you was filling Smith Barney’s bond business, it was highly unlikely that that guy would steal your business. There was an honor system back years ago, but that’s gone too. In fact, it’s gone in the exact opposite direction. Example: The Bear Stearns deck always used one filling broker or brokerage group to fill the desk orders. At the same time the guy filling the order had a guy on a phone not only watching the Bear Stearns desk but calling on the Bear customer at the same time, cutting out the desk employee. This same firm recently did it to the ADM desk. After years of giving the pit guy the orders of the order fills desk guy shows up at ADM, pulls the business and they close the desk. After years and years of being faithful, that’s what the ADM desk guy gets -- fired. The ADM guy goes up to the guy in the pit and says, “Hey, what's going on? I’ve been loyal to you for years!” and the guy in the pit says, “I had no idea.” Sure you didn't!   That’s not how things are supposed to work, but MF Global and PFG not only changed the direction of the customer base but also helped change the honor of the system of the entire business and the trading floor. Conclusion: Desk guys, beware of who you use in the pit, they may be getting ready to run you out of the business.    Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.    Our view: There is little reason to think the S&P is going down. As long as the printing presses have fresh ink, the spoos are going up. There are two ways to approach this as  a day trader. 1) You can sell the early rally and buy the pullback or 2) You just sit back and wait for an  8 to 12 handle pullback and “buy ’em.” Today we have a lot of reports to get past and some Fed speak. As always, keep an eye on the 10-handle rule and please use stops.    

  • It’s 7:15 a.m. and the ESH is trading 1502, down 4 handles; crude is down 1.44 at 95.20; and the euro is down 74 pips at 1.3514.
  • In Asia, 7 out of 11 markets closed higher (Shanghai Comp. +0.06%, Hang Seng +0.47%).
  • In Europe, 8 out of 11 markets are trading higher (CAC -0.64%, DAX -0.28%).
  • Today’s headline: “U.S. Stock Futures Are Little Changed; Disney, Zynga Gain”
  • Total volume: 1.74mil ESH and 6.4k SPH traded
  • Fair value: S&P -5.24, NASDAQ -11.09
  • Economic calendar: Today: MBA purchase applications, EIA (petroleum numbers); Thursday: Chain store sales, Charles Evans speaks, jobless claims, productivity and costs, consumer credit, Federal Reserve Gov. Jeremy Stein speaks on “financial stability,” EIA (nat gas numbers) 
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