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Black Monday: a day to make millions, for some

Danny Riley
DannyBrianJasonTeamBackThen 225x300 Black Monday: a day to make millions, for some

The MrTopStep Trading desk (L to R): Jason Kernbauer, Jon Fishel, Brian Shepard, Tim Rudderow Jr., Jason Carter and Danny Riley

There were fortunes made and lost in the S&P pit on Black Friday and Monday and we saw it firsthand. Some locals made so much they took their money and ran, while others battled it out.

I personally remember a broker taking out the error of another broker who was down over $500,000; the guy didn’t even flinch.

Our desk had to sell 3,000 big S&Ps for CapCom on behalf of the Saudi royal family (King Fahd) on Black Friday. The only bids in the pit were for sell programs. I hit every Morgan Stanley sell program bid I could find. I saw hundreds of unmatched trading cards and stacks of orders.

I remember a clerk who thought he had a million-dollar winner but in reality the sales went to Gelber Trading, leaving the clerk long 80 lots; it cost the order filler he worked for over $1 million. I remember the looks on people’s faces and most of all I remember the smell of the pit and all the money that changed hands on those days.

The fighting, the camaraderie, and the big bucks was what the 1987 Crash meant to most traders in the CME’s S&P 500 futures pit. They didn’t care what was going on in Washington or the Persian Gulf; it was a day to make millions and they were determined.

Response from the Federal Reserve

We knew it was serious. After the CBOE shut down at 11:45 the S&P [SNP:^GSPC] continued to plummet. It was like an enormous funnel that everyone turned to. They could not sell stock or options so they sold S&Ps. By 11:30 CT I personally had done over 9,000 big S&Ps and the desk had over 20,000 contracts and the day was not even half over.

The fights between the pit clerks and the desk clerks were going nonstop. The brokers in the pit were not handing out the cards, making it impossible to match the trades to the orders. All sorts of additional CME employees were on the floor as the clearing systems on all the exchanges were overloaded. They had never seen volumes like that and then the CME shut down the S&P pit at 12:15.

After the reopen the S&Ps tanked again but there was word floating around that the Federal Reserve was going to “act” by providing liquidity to the financial system.

On Tuesday morning the Fed issued a statement that it would “support market liquidity,” which helped the Tuesday morning bounce. The Fed followed it up by pushing the Fed funds rate down to 7.00% from 7.5%, along with other short-term interest to help reduce the cost for borrowers. The Fed said this was done to “provide significant liquidity to relieve the turbulence and tension in the wake of the financial market upheaval.”

In the S&P pit that day, everyone was talking about how the Fed was buying S&Ps. For the next several weeks the Fed continued to inject reserves of  liquidity to buoy the financial markets. I am not sure what would have happened had the Fed not come to the rescue. But what I do know is, it was not the fault of the S&P 500 futures or program trading.

There was never a better pit

Sure there were some big names and stories that came out of the Chicago Board of Trade’s bond pit. It held over 600 clerks, locals and order fillers and it was the biggest. Despite its size, I don’t think it got close to what the S&P pit was in its heyday.

Sure a big bond order filler like my roommate Jimmy Carey could knock out 15,000 bonds on one order but it didn’t have the power of a 2,000 or 3,000 lot big S&P order. It was easier to fill bonds than it was the S&Ps. In the bonds locals would take 500 or 1,000 lots. Try and do that in the S&P.

You had to be so fast——you had to remember small lots, what price and who you traded with. It was a whole different deal. I know some won’t like that I say that, but they were not in both pits; I was.

Even today the remaining 50 or 60 locals in the S&P pit still dream of the ‘87 Crash and all the money they made. Even though most locals are in the pit trying to make $500.00 to $1,000 a day, each one will tell you they are still waiting for that one big down day.

That’s something for you to remember if you’re still trading long-only and you’re afraid to sell short: Fortunes are made on the short side.

A different world

brianfloor 272x300 Black Monday: a day to make millions, for some

1600 S&P points later: Brian Shepard and Danny Riley of MrTopStep

Back then there were firms like Thomson McKinnon, Kidder Peabody, Discount of NY, Bear Stearn, Shearson Lehman, Bankers Trust, Drexel Burnham Lambert, EF Hutton and so many other big names. In 1987 between the CME and the CBOT there were over 500 clearing and sub-clearing firms; today that list is down to under 30 and maybe 5 or 6 of those firms will do business with a retail account.

The once high and mighty trading floors have been transformed into a hybrid trading environment where a trader can bid with his or her hands and offer on his handheld. A lot has changed since electronic trading has taken over. Most of the floor trading is done in the option pits.

The roar of the S&P’s 8:30 open has been reduced to a few open outcry futures orders and the traders in the S&P options quoting up an option. The 1987 Crash devastated the S&P pit and the business as a whole. After the crash many big firms stopped trading; the day-to-day flow, the hum of the pit, changed and it took a few years to get it going again, but the traders came back.

Today we live in a very different world. Most of the volumes come from some type of algorithmic trading program and after the credit crisis and MF Global and PFG many traders have walked away from the game.

We don’t really know what’s in store for the S&P next, but as the Fed pulls back from its monthly bond purchases we will find out what the S&P 500 is made of and if the Fed can keep its promise to keep rates low for an extended period of time.

It seems it’s time to stop printing and start paying back and so far the S&P is reacting very well, down 6% in 2014. These are the days that traders dream of. They do not come often and when they do you have all your bullets ready.

In the end Brian and I were the last people to leave the trading floor. We left at 10:30 PM knowing that the S&P had been demolished and that our jobs were on the line. It was not a good feeling, but we stuck with it, and as of the beginning of 2014 the S&P traded all the way up to 1846. We just wonder how far down it can go now …