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THE S&P PIT AND THE 1%

dboy

When the bulls reappeared after the cliff vote, they came back with a vengeance. There is an old saying in Chicago, “Never fight City Hall,” and that applies in the S&P’s too.

Wednesday’s broader market opening and closing imbalance totaled BUY $4bil and on yesterday’s close the imbalance showed BUY $1.15bil, together that is over $5bil in stock to buy. Over the years we have learned that when you see such a large amount of money moving in the stock market, it is generally a sign that the markets are going higher.

After a little back and fill in the S&P yesterday the SPH made a new daily high at 1460.50. After the last few days of seeing a big run-up late in the day and new highs that didn't happen yesterday, Brian Coolie (COOL) a top step broker in the S&P, sold 5,000 SPH (big S&P contracts in the pit) for a New Edge (old FIMAT) account. I know COOL because I helped him get his membership over 20 years ago.

The pit and taking on big orders: Do you know where most of the ESH selling came from late in the day? Well, we do. It came from the selling in the S&P pit. There are few times that the big contract trade overpowers the ES, but it did yesterday as a barrage of sell orders hit the pit. While there are still customers that trade in the pit, there were not enough big customers to take the other side of the orders, so the locals end up buying most of the big offers. If COOL is offering 200 at 1454.00 in the S&P pit and it’s 1453.75 bid in the ESH, the only way the locals will buy the SPH is if the ESH goes 1454.00 even bid. When that happens the locals will buy the existing 1454.00 from COOL. The locals will then try to offer them out at 1454.25 or 1454.50 in the ESH. Some of the locals in the S&P pit wear headsets that are connected to a clerk on Globex terminal (platform) or turn to what they call a mini broker. An e-mini broker is actually a clerk who stands in the pit with a headset on, taking buy and sell orders from the locals in the S&P pit to offset their SPH positions with ESH. As small as that is, it’s called an “edge.” As soon as the ESH goes bid, the locals buy the 200 SPHs at 1454.00 and offer the equivalent out in the ESH. The other way a local gets an “edge” is when COOL has 500 SPH to sell and the market is 1455.50 bid at 1455.75 and the desk guy tells COOL to sell 500 SPH down to 1454.50. In order to execute that order COOL must sell below the bid in the ESH to get the locals to buy the SPH. In other words, the SPH is 1455.50@1455.80 in the pit while at the same time the mini is 1455.50 at 1455.75, in order to get the locals to buy the 500 big futures he has to sell, COOL will offer 1455.50s and then the locals will bid 1455.30, a nickel above the bid/ask; he then sells the SPHs to the locals.

Slippage: There was not a lot of slippage on that order because of the size of the liquidity in the ESH. Yes, other desk people saw the selling, but the computers can't be told that there are 5,000 big S&Ps being sold. So the bid offer in the ES becomes a backdrop for all the selling in the pit. As traders on the floor, we understand that 98% to 99% of all the futures are traded electronically, but that still has not stopped the 1% from using the pit on some big orders. As you know, I track volume, and on Wednesday the SPH did 20k contracts and yesterday the pit did another 15k. That’s a good thing for the locals.

In the end, orders like that are what the locals in the S&P pit feed on. And yes, there has been a big shrinkdown over the last few years, but that’s not stopping the locals from marching to the pit every day. And while they may not make as much as they used to, there is still only one S&P pit in the world, and that’s here on the floor of the CME Group in the heart of the Windy City.

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: The S&P has gone a long way in a very short time. We think it’s safe to assume that most of the shorts have covered. This morning is all about the job numbers, and MrTopStep has a trading rule we look at on job Fridays. It’s called counter-trend Friday and here is how the rule works:

COUNTER-TREND FRIDAY: Over the years this trade works best on monthly NFP jobs Friday when the S&P futures gap sharply higher or lower on oversized pre-market Globex volumes of +400k ES contracts before the 8:30 am CT open. This is a fade, “the bus is too full” type trade. Example: The S&P is down 6 handles at 6:00 am and then down another 8 or more handles after the jobs number is released. Now, the S&P is down 14 handles or more at the 8:30 am open. With 400k+ minis traded before the open, this tells us that traders have already voted (sold). Depending on the price action, the idea is to buy a sharply lower open or allow for another 2-4 handle drop just after the open. The idea behind this is that with so many minis traded and it being a Friday and knowing most traders can’t hold the futures over the weekend, they put in buy stops and the algorithms go right for the buy stops. With all the selling used up pre-open, the ES will start to short cover into the buy stops that lift the offer side of a buy program. We don’t know what the results of the jobs number may be, but if the S&P gaps sharply higher we are going the other way. As always, keep an eye on the 10-handle rule and please make sure you use stops when trading futures.

  • It’s 7 a.m. and the ESH is trading 1453.75, up 0.25 handle; crude is down 92 cents at 92.00; and the euro is down 46 pips at 1.3023.
  • In Asia, 6 out of 11 markets closed lower (Shanghai Comp. +0.35%, Hang Seng -0.29%).
  • In Europe, 10 out of 12 markets are trading lower (CAC -0.43%, DAX -0.17%).
  • Today’s headline: “S&P Futures Steady Before the Jobs Release”
  • Economic calendar: Today:  Employment situation, factory orders, ISM non-mfg index, oil inventories, Fed's Yellen speaks; earnings from Mosaic
  • Total volume: 1.59mil ESH and 15k SPH traded
  • Fair value: S&P at FV, NASDAQ +3.25
  • MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/?id=37136

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