S&P FUTURES: NEW HIGHS AND THE CME’S S&P OPTIONS

MrTopStep.com

After the CME went electronic, most futures traders just drifted away. The pits once dominated by open outcry futures traders are now dominated by open outcry options traders. With the exception of the S&P futures pit, where 50 to 60 locals show up every day, the rest of the futures pits are pretty much empty. From the CME’s NYMEX crude pit to Chicago's wheat pit, there are just a few floor traders still standing. The once high and mighty Eurodollar futures pit that held over 500 locals and clerks is down to 8 traders and order fillers. None of this is anything new, but we do see some changes under way.

Futures vs. Options Rivalry
There really isn't any rivalry between the two anymore. In the old days the futures traders used to laugh at the options traders, but not anymore. Futures traders have known for a long time that their time on the floor is limited and pretty much accept that fact, but for the past several years the option pits have been the mainstay of the trading floor -- that's where all the open outcry buying and selling is done. But that’s starting to change.

Our Desk
Things are evolving fast on the floor. It’s not just the level of program or algorithmic trading bearing down on the trading business and the trading floor. It’s something no one on the floor wants to hear, and it’s called electronic options. On Wednesday it showed up in the CME’s S&P 500 options, where 330,000 mini options traded in one day. We all knew this was coming but no one wants to talk about it. Things have really never been the same after the collapse of MF Global and PFG. The two caused a floor-wide slowdown that has affected the entire industry and is still with us today. The current push looks like the beginning of what could eventually be the end of using humans to execute option orders by hand signal.

The Future
We think this summer is going to be a pivotal period for the trading floor. The grain room had some big moves last summer and recently, but the volumes and trade are down considerably. When the grains are dead the meats tend to follow, and even the Eurodollar options are starting to slowly evaporate. Yes, there are still a couple of hundred order fillers, traders and clerks, but that’s way down from the over 600 it once had. The CBOT’s interest rate options are still doing OK, but there are also long periods of no trade. With so many people not making money, our concern is that if the markets don't pick up over the summer, which we consider unlikely, many people will just pack up and leave -- it’s called attrition.

Rick Santelli told me he thought the Merc would strike a deal to move the CBOE over on the CME floor, which would repopulate the floor, but we have not seen any movement on that idea. For 150 years the CME and the CBOT have been the financial powerhouses that have helped make La Salle Street the financial center of the city. Clearly the credit crisis, higher taxes and lower volumes are also hurting the exchanges. We are not saying that the floor is closing, but if the options go, what's left?

More and more, the old saying that “traders don't die, they just fade away” has never rung so loud.

Our view: Asia and Europe are taking a breather and North Korea is getting ready to test-launch some long-range missiles. While the U.S. continues to downplay the threat, there could be a time over the next few days that a decision will be made to shoot them down. This will only escalate the situation. With the markets up so much, we think it may be prudent to lighten up some long positions going into the weekend. With the ESM up 50 handles since last Friday’s 1543 low, up against the big figure at 1600, our street smarts are telling us to be cautious. As always, keep an eye on the 10-handle rule and please use stops when trading futures.

  • It’s 7:00 a.m. and the ESM is trading 1582.50, down 5.25 handles; crude is down 1.36 at 92.15; and the euro is down 59 pips at 1.3059.
  • In Asia, 8 out of 11 markets closed lower (Shanghai Comp -0.58%, Hang Seng -0.06%, Nikkei -0.47%).
  • In Europe, 12 out of 12 markets are trading lower (DAX -1.39%, CAC -1.07%).
  • Today’s headline: “S&P 500 Futures Drop Ahead of Retail Sales Report”
  • Total volume: 1.7mil ESM and 7.2k SPM traded
  • Economic calendar: Producer price index, retail sales, consumer credit, business inventories and Ben Bernanke speaks at a community development conference in Washington.
  • Fair value: S&P -5.12, NASDAQ -10.12

MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/latest-you-tube-videos/danny-riley-closing-print/video/latest/closing-print-4-11-2013

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.

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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities.

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