Hello Pat,
Although this may have been posted previously, an article I found of interest.
tradingmarkets.com
In The Pit With Borsellino
By Marc Dupée
It’s a brisk fall day in Chicago, November 8th, 2000 the day after the presidential election, and the nation has awoken to the possibility that two rather unremarkable campaigns may now go on the warpath, waging battles in Florida courtrooms to decide the next leader of the free world.
The S&Ps have retraced about one-half of the point-loss sustained during a punishing autumn drop brought on by a string of disappointing corporate earnings, higher interest rates, and rising oil prices. A Bush victory could extend a choppy, two-week rally. Markets favor the more corporate-friendly Republicans and could move higher in relief. On the other hand, any uncertainty about the election’s outcome could exacerbate the bigger-picture bearish trend.
Lewis had asked me to sit in on his team’s morning meeting before we walked down to the floor of the Chicago Mercantile Exchange. I arrived at Borsellino Capital Management an hour before the opening of S&P 500 futures trading. I found him discussing the ramifications of the contested presidential elections with his team who were sitting in front of banks of computers with screens flickering charts and quotes.
Lewis greets me and while making introductions to his staff says, “Did you see the big Globex volume on the election results? It hit 4,000 contracts overnight. The low was made when the news said that Gore had won Florida and we hit the high when they said Bush would win the presidency.”
“No, I didn’t see that. How do you think the market will react to that?” I ask.
“Well, there could be an initial sell-off, especially if the drugs and Microsoft move lower. But I’ll probably look to fade whatever move occurs if the presidential election results are announced. If Bush wins, the market should rally. But because that's probably already priced in, we could see profit-taking. Now if Gore wins, we could see a selloff, but then the market might rally. This is one of those cases where you would buy the rumor and sell the news.”
Borsellino Huddles With His Team
We then moved to the conference room for the morning briefing, a room filled with signed helmets from football greats and other sports memorabilia. Six of us came to order around an oval walnut table with Trisha Crisafulli joining in on speakerphone.
Looking at one of the analysts, Lewis begins. “Let’s get going.”
"Today we have wholesale trade; import and export prices were already released but had no effect. Thursday is PPI, forecast at .2%, but everybody’s watching the election. We did unusually high volume on Globex with over a 20-handle range on the election news overnight with a high of 1455 and a low of 1432."
Lewis then detailed the major areas he would be looking at in the pit for Wednesday, November 8, 2000.
“Okay, 1445.50 was Tuesday’s (November 7, 2000) high. We have small resistance at 1450; then we have 1451.50, 1453, 1455-1456 and 1459; these are all small key areas. The major objective is at 1460.50.
“On the downside, we have 1445. And then 1442, which is very key.
“Yesterday, 1441-1442 was our swing area. In the morning we hit a high of 1441.80 and then broke down to the low. Then we came through 1441.80, we went up and made the highs. Below that is 1439.50, 1437.50, which is a major area, and then 1433.50. Yesterday's low was 1432."
Brad Sullivan then provided a briefing on possible action in the Nasdaq 100 futures and some of the other analysts added their ideas on the market for that day.
On The Floor Of The Merc
We then walked downstairs and over to the Chicago Mercantile Exchange, home to where Borsellino has achieved fame and fortune trading for the past two decades. First we go to the coat check where he suits up, trading expensive street shoes for tennis shoes and donning the requisite trader’s jacket with his well-known trader's badge, "LBJ," pinned on it. Less than ten minutes to go until the opening bell and Lewis is calm, making small talk about the exchange and various CME personalities. I, on the other hand, am finding that the energy and intensity of the place is giving me a dry mouth and sweaty palms and we haven’t even set foot on the trading floor.
After ascending another flight of escalators, Lewis signs me in. Security is very tight at the exchange, and you need a member to sign you in. I get a sticker with Lewis’s badge acronym LBJ written on it, my VIP ticket for the day.
After a security check we finally arrive at the threshold of the vast trading floor of the Merc. In a sign of the times, an official at the entrance makes Lewis sign a form in official receipt of what appears to be a legal document. As it turns out, the CME was recently “demutualized,” meaning the members voted to make the exchange a public entity. Members will become shareholders, and with the new currency of CME equity shares, alliances will be forged and the Merc will potentially be better positioned to manage its evolution, as financial markets everywhere go both electronic and global. A long-standing Merc member, Lewis knowingly signed the form and handed it to me, saying, “Read this if you get bored or want to know about us going public.”
Lewis then gave me a ringside perch and moved into his place on the second-to-the-top step of the tiered, octagonal S&P futures arena, a mosh-pit of hundreds of avaricious, high-strung entrepreneurs, trading one of the world’s most watched futures contracts.
Spots near the top of the pit are earned. New traders go to the bottom of the pit where they can get lost in the crowd, have an inferior view, and a more difficult time getting trades done at the best price. The top spots provide the best view of what the biggest locals are doing. They also let you better see the order flow from the major institutions coming in from the filling brokers who surround the pit. When top traders retire or decide to make the move “upstairs,” room is made for more junior traders to move up a step. Moving up the steps is a function of time, experience, and a trader’s capacity to stomach and manage risk.
The capacity to take big orders and stomach the risk is a complex and critical component of being one of the traders situated at the top of the ring. Institutions need the locals to take the other side of their big orders--30-, 50-, and 100-lots and sometimes larger positions. And the institutions are willing to pay the bid-ask spread and some slippage in order to get their paper filled. With a 100-lot position, every “100 points” (1.00 or “one handle”) is worth $25,000. The S&Ps fluctuate by this amount virtually every minute of every day during the open outcry session. Traders need lightning reflexes, a damage-control plan, and an iron gut to handle such size and risk.
The top step is where Borsellino has been standing in three different decades.
Moments after Borsellino had assumed his position in the pit, the opening gong sounds. I am startled because Lewis had literally just left me when the bell sounded. His instinct to be in the right place within a split second was a little unnerving.
So as trading opens, Lewis’s hands are turned in buying, fading (trading against) the market’s impulse to drop on the election result uncertainty. Surrounding me, brokers in cramped and pricey, standing-room-only cubicles bark quotes into banks of phones while simultaneously hand signaling bid and ask quotes and buy or sell orders to the filling brokers on the top ring, feeding the world’s orders into the pit.
On the open, the screaming and noise level surges in what initially sounds like a football team getting psyched for a big game. Instantaneously the pit comes alive, pouncing like a wild animal in a flurry of buy and sell orders. The frenzied chant seems to express itself like an insatiable hunger, simultaneously feeding and gnawing on what appears to me in this setting to be a bottomless appetite of greed and fear. Roars, cries, and growls emanate from the pit’s maw, as extended talons communicate the essential information of survival in this jungle: price and quantity, bought or sold. Five-fingered talons everywhere gesture, snatch, and seek to devour their prey. Other times, what they have snatched devours them. Spittle from the price-seeking visceral cries begins dusting the pit-organism as the animal-market endeavors to digest and price the news of who will be the first president of the new millennium.
The Play by Play Action
It’s seconds or maybe tenths of seconds into the November 8, 2000, session. The opening’s assault on my senses seemed to have suspended me in time. Ringmaster Borsellino’s arms are extended with hands turned in, indicating that he is buying “four-forties” (1444.40) from one of the filling brokers. (Click here for a lesson on CME hand signals). He quickly notes the transaction on index cards in his hand. Chaos and a frenzied roar escalate, agitating the amorphous capitalist beast contained in its octagonal pen.
The market’s moving down. A local in Borsellino’s gaze signals he’s got contracts for sale at 1443.20. “Sold,” Lewis gesticulates, hands punched out as he offsets his opening purchase in a losing trade. Sometime during this opening flurry an announcer bellows over the PA system, “The opening range is five-even, four even” (1445.00-44.00).
Lewis continues his constant scan of the activity across the pit as his hands go back up. His hands are turned out again selling, this time “three evens” (1443.00). The market ticks down 42.80, 42.60, 42.50, pauses, then dips down to 1441.00 and starts ticking back up. At around 1442 even, I see Lewis buying, making what looks like a protective scalp of about a 100-point (1.00) gain. The Spooz keep clicking up and some of the other locals’ hands are also turned in, buying or covering shorts, driving the market back toward its opening highs as locals fill buyers at higher and higher prices.
Lewis bids lower at this point, providing another trader with the opportunity to get a slightly better buy than what most of the other locals in the pit are bidding at that instant, and offsetting some of his 43-evens in an almost scratch trade. Borsellino makes a few rapid-fire trades in succession, performing the role of market maker by selling contracts 20 or 30 points (0.20 to 0.30) above where he buys then, capturing the bid-ask spread in scalp trades. But at this point his position size is small as he appears to be testing the waters and waiting for something--I’m not sure what--to happen.
We are just over 10 minutes into the session and the market is stalling right around the high of the session. For the next several minutes it trades over just a 200-point range (2.00), but mostly within just 100 points. Every time it bangs up to the 1444.50 level or 1445 high, I see Lewis’s hands turned out selling. Some of the other locals are doing the same thing when the market hits its head up against the high. But something has changed. Borsellino does not appear to be doing scalp or test-the-waters types of trades here. Rather, he is going exclusively on the short side, selling, and apparently building a big short position.
Now the market is trading 1444.00 offered and Lewis takes them. He then turns and offers to sell even more contracts at an even lower price, a gutsy move if the market does bang up against the 1445.00 high, break out, and rally. Other traders apparently notice Borsellino’s lower offers to sell. I see one trader look over at Lewis, pause, and go from the buy side to the sell side, offering contracts lower as well.
I remember from the meeting in Borsellino’s office this morning that he said that 1442.00 is a key area. Over the next few minutes, the market approaches this level, and the pace of activity quickens. Lewis keeps offering to sell contracts lower, staying on the sell side and amassing a position worthy of a shot of Pepto-Bismol.
The market at this point is very close to 42-even when there is an eruption of noise and a frenzy of activity as the market blows through “42.” A flurry of fear feeds the pit, seeming to overwhelm some in the arena and the market implodes five handles (5.00) in as many minutes.
In this steep downdraft, the pandemonium and roar notch higher. Clerks’ and order fillers’ movement and attention hasten. But most notably, the locals’ pace and intensity sharpen. Eyes bulge, calls to sell are literally spat, and neck veins swell as arb clerks push fingers away from their chins, seeking to flash fill sell orders phoned to the pits. Other clerks—all twentysomethings and many females—deliver order forms to the pit too. No one is going to touch this inconclusive election above 1445 or above 1440. And as traders are wont to say, “If it ain’t going up, it’s (following the path of least resistance) going down."
Offering to buy into the panic, Borsellino covers some shorts in the 1437.00 through 1438.00 area. I glance at my notes from the morning meeting and remember that he had 1437.50 ear-marked as a “major area.” There is a brief respite in the action, a minute or three where the tone of the pit moderates, digesting the quick dip and probably some lambs that got caught in the gulp down. But taking profits usually has such a calming effect and so too can an upswing in a losing position as hope temporarily drugs with its palliative euphoria. The first taste of blood is always satisfying and so too is the hope of survival. But the lull is short-lived. The S&Ps begin caving again as the chant of “sell” fills the air and the kill continues.
I detect a flicker of a smile on Borsellino’s face, which is otherwise painted with concentration and intensity, and remember something he once said, “As the markets become more chaotic, I get more focused.” In the fifteen minutes since the S&Ps broke the key 1442.00 area, they have dropped 10 handles. And Lewis, or course, had a big position up near the high of the session. He’d come in with a plan of key levels to trade off of, stuck to the plan, and now the discipline and methodical stocking were paying off as the market slashed lower.
“Buy ‘em,” Borsellino booms, snapping up the incoming panic to sell nearly 10 handles below the 1442.00 area he’d identified as key. Fingers turned in and fanning toward his chin and mouth almost as if feeding, Lewis buys some more panic and the market begins to bounce higher. Observe, pounce, and feed: Read the pit, react, and write it on a card. It’s part of the successful hunt.
Touchdown
Lewis then came out of the pit, seeming quite happy and patting me on the back, “Hey, how was that?”
“What’s up, are you taking a break?” I ask.
“I’m done. It hit my objective. The rest of the position I’ll monitor back from the office. Come on, I’ll show you around.”
Although I had expected Lewis to trade longer that day, it dawned on me that his 1432.00 downside objective had been hit only 40 minutes into the trading session. Rather than stay on and trade willy-nilly, Lewis was following his own advice of (winning or losing) “congratulating yourself for sticking to your trading plan.” His job was largely done for the day. His plan of attack executed just as he had spelled out in the morning planning session.
To say I was impressed would be an understatement.
It’s one thing to read about the daily formulation of strategy in "Borsellino’s S&Ps A.M." and "Borsellino’s S&Ps P.M." commentary. It’s another to see it enacted nearly flawlessly amid the confusion and intensity of hundreds of traders and competing factions simultaneously battling in the belly of the S&Ps pit.
We walked around the pit, and up to the top of the other side of the ring. “These guys here, this is where they trade the outside months, the Marches, the Junes, and the Septembers of next year.” A smaller, less hurried bunch of perhaps a dozen traders were staking out this ground.
We then moved over to the arena adjacent to the S&Ps for a look at the even faster-moving Nasdaq 100 futures pit. Pointing to a bespectacled, late-twenties-looking trader, Lewis said, “That’s my cousin.” The Nasdaq 100 pit was pretty active and typically down even more sharply than the S&Ps. And this guy looked like he was on fire, totally focused, and certainly oblivious to us. “Sell five at seven,” Borsellino’s relation screamed.
“I brought a lot of these guys in, into both pits. I gave them a job clerking or helped them get in. Some started in the S&Ps and then moved over here when they started this pit. You’ve got to have a lot of balls to trade in that pit. I wouldn’t want to do it now,” Lewis said.
“Why?” I asked. “I know the S&Ps. That’s my market. This one jumps around too much,” Borsellino explained.
Meanwhile, Lewis’s cousin had turned and yelled, “sell five at seven.” But these were at a level a full 10 handles lower (in the Naz contract, every handle is $100) than the previous “five at seven,” a thousand dollar decline per contract inside of 90 seconds.
As if punctuating Lewis’s point about the extreme volatility in this pit, the Dec. Nasdaq 100 futures (NDZ0) had hit their intraday low so far of 3227.00 just minutes before our arrival and had pulled back from the low up to 3250.00. The 3250 area is where his cousin sold the first five contracts at 3247. The contract knifed down to 3237, where he sold the second five contracts. The market kept on tanking and within five minutes hit the first limit-down level at 3220.
According to CME rules, the first limit-down move at down 95.00 points means trading can occur only at or above, this level for 10 minutes. (The 95.00 point-value is established quarterly and is based on a 2.5% move). Again, each 1.00 point (1 handle) on the contract is $100 dollars. If Lewis’s cousin had covered his 3247 and 3237 short positions 25 handles and 15 handles lower, respectively, at 3222, then he would have made 40 handles on the positions, a gain of $20,000 (40 points * 5 contracts * $100 = $20,000) in the few minutes we were standing there. The Nasdaq futures fell as many as 260.00 points on the session, through a second limit-down level (down 190.00 points) before settling down 253 at 3061.
Continuing on our way through the packed trading floor, Lewis seems to know most everybody in the room. He exchanges light banter with clerks, traders and brokers, and introduces me to Ceci Rodgers, a journalist who sometimes interviews Lewis about the market and who covers the trading action at the CME for CNN.
Other Players
At this point, Lewis is ready to go back to his office but sets me up with Patrick Spears before leaving. Pat runs a pit-side brokerage, RBH Financial, as well as an online brokerage, Webvestor.com. Patrick has a stream of calls coming in and usually a phone on each ear. He maintains an almost non-stop dialogue into each phone while simultaneously hand-signaling orders to the pit and time-stamping and manually filling out order forms with account numbers, contracts transacted and fill prices. He also has two other guys working for him tendering orders as well as other broker-booths located around the pit.
“Do you have any questions?” Pat asks with a phone still attached to his head as he screams to get the attention of a filling broker at the top ring of the pit and gestures that he is buying contracts at the current price.
“Ah, yes, but aren’t you kind of busy?” I reply.
“That’s all right. I’m used to multi-tasking,” he says wryly, time-stamping the front and back of an order form before filling it in.
“No s___,” I say in response to his understatement, one of many so far this day, but presumably par of the action on the floor of the CME.
I asked Pat what was it that he did that made him different from any other broker, why a trader would use him. Pat said, “We’re more of a boutique brokerage in that we offer more attention, better fills, and sometimes a little hand-holding. Some of the other brokers don’t really give a damn where you get filled; they kind of go through the motions. I fight to get good fills.”
And then, as if by way of demonstration, Pat bought contracts back that he had just sold for a client. This had occurred as the pit noise level rose in a flurry that broke the market below 1430 (at 10:35 ET) and to a new low and got the client out of a losing short--a false breakdown--that could have been much worse without such quick reflexes and aggressiveness.
While hanging out up at Pat’s booth, I had a different view of the pit and a chance to talk with some of the other locals as well. What I learned was the traders in the pits come from a variety of backgrounds and use a variety of methods to trade, not surprising really, but a good reminder that there are a variety of ways to make (or lose) money in the market.
One trader I spoke with said he had a law degree but found trading on the floor of the exchange much more interesting than law. He generally did not trade in the pit, scalping in and out of positions. Instead, he would wait outside the pit and when he saw an opportunity, would use his local advantage to quickly establish a position at the price he wanted, using an acquaintance filling broker standing on the top ring to get his fills.
Explaining a trade he just made he started, “What I did was -- there was this Italian mathematician some time in the...”
“Do you mean Fibonacci, a retracement?”
“Yes. Well, I sold the 50% retracement of the high (open) and the low, which was at 1437.” (Here the high of the session was 1445.00, the low 1428.50--a 16.50 range-- leaving the 50% retracement 8.25 handles higher at 1436.75). Hence, he had sold 37s.
“Where did you buy them back?”
“At 33-and-a-half.”
“Why,” I asked, noticing that the market was at 31 and moving down?
“I wanted to take a profit, three handles, 750 bucks.”
His was a good strategy that worked out. Like many traders, I learned that one thing that was keeping him from greater success was that some of his losses were bigger than his winners.
I was also introduced to Martin Waxstein, a guy I was told who “provides technical analysis to many of the best (local) traders.” Waxstein said he “trades upstairs” off a screen but comes down to the floor to talk to the many traders to whom he sells his technical analysis.
"I’ve been doing this for 25 years,” said the silver-headed Waxstein with a no-nonsense brusqueness that served to underscore and substantiate his long-standing experience.
“I used to give these out to twice as many traders and have more headaches,” said Waxstein, showing me the sheet he provides to his trader-clients.
“Now I’ve cut back to half the traders, charge twice as much and have fewer headaches.”
Waxstein presented me with the levels sheet that he had prepared and provided to his client-traders on the floor of the CME that day (Nov. 8). Curious, I compared it with Borsellino’s:
Waxstein/ Borsellino
1460.50 1460.50 (Major objective)
1457.80
1454.80
1452.20 1453.00
1451.90 1451.50
1449.50
1444.40 Close daily/ 1445.50 (Previous high)
1442.00 1442.00 (Key)
1438.00 1437.50 (Major area)
1435.80
1433.50
1432.00 1432.00 (Nov. 7, low)
1431.70 Globex low
The interesting thing is that both the levels Waxstein provides to his client-pit traders and Borsellino’s numbers were substantially the same. While the levels were not identical, the “key” and “major areas” were within half a handle (.50) of each other, if not at the same price. Although this comparison is only one example on one day, I found it important information because it implies that many, if not most, of the best pit traders are looking at substantially similar levels. This is information I can use because it gives me greater understanding of the levels Lewis shares with us every day.
Hence, if you know Lewis’s numbers and are trading (like most traders) off a screen, you will know that there is a high chance that many of the top traders, including Borsellino, are often looking at the same levels. One might say that you could key off these levels with greater certainty, knowing that many of the top locals may be looking at the same thing. Importantly, these levels are given to you every morning in "Borsellino’s S&Ps A.M. column."
Some of the smaller and newer traders told me that they watch the big guys. They watch Borsellino, and when the market hits a key area and they see him selling--as occurred on this day at the 1442 level--they won’t trade against them. Since Borsellino was already done for the day, I asked who were some of the other biggest traders to watch. Traders said that besides Lewis they would watch PRS (Steven Prosinewski), MSLO (Mark Mislo) and Don Sliter, and that these guys' trading could affect what they did.
This response was typical, referring to the traders' badge acronyms. “When I’m putting on a trade, I’ll look at PRS, MSLO or LBJ (Lewis Borsellino). If I know that MSLO has sold 29s, you don’t want to buy them. You don’t trade against those guys.”
So I watched to see if this were true. The market had been trading mostly sideways in the “noon swoon” of lighter lunchtime activity, but had drifted back down from 1437 toward the 1429 low of the session. Prosinewski, a mid-thirties blond guy who looks like he could be just as comfortable wearing banker's pinstripes, had taken a short break from the pit when the rumble and noise level started to pick up and the market appeared poised to test the session lows. He hurried back down the aisle beside me and then down into the pit, raising his arms signifying, “I’m selling.” He resumed his place along one of the top steps of the pit, about five body-widths from where Borsellino stands. The market went 1429.00 and then 1428.50, the session’s low, as the pit jerked, spat and roared again to life. PRS sold into the breakdown and many of the other locals who had been scalping—buying and selling—were now just on the sell side as well. The Spooz tanked to a new intraday low of 1424.00 and then punched again lower to 1423.20.
Borsellino’s push through the 1442 area seemed like a key influence and here was another example. For me, it just reinforced the notion of the value of learning from "The Best" traders.
Regards,
nextrade! |
