For those that don't know, I had a wonderful trip on Friday to the MERC. It was a great day to be there as there
was a lot of action and volatility. The trader I went with wasn't feeling quite up to par
so we ended up calling it a day around noon time CST and I missed the afternoon
rally. He had a slow day as he is a Goldman Sacs Commodity Index Future trader and
his most busy times are the first two weeks of the month as the contract rolls.
Otherwise there is little retail interest in that contract and it is primarily used as a hedge
for the big houses.
When we first got there it was shortly after 8 am cst. We walked around the floor and
almost no one was there. I was amazed at the size of the pits. The SPOO pit was the
largest and yet it was still smaller than I had envisioned. The pits for the cattle and other
contracts were very small in my estimation, but then I had no basis of comparison so it
just appeared that way to me. There are phones everywhere..and people once 8:25
came around. We went back to the SPOO pit for the open and by 8:45 am I was
already feeling a bit drained by all the commotion and activity. It is nothing like
watching the action on the computer screen. Very different, almost surreal.
For the most part I just stood on a step next to a computer E-Mini trader who was
watching the SPOO pit and constantly hitting the computer keys making trades. There
was about six stairs worth of computer traders just banging out trades. They all
watched the hand signals in the pit to determine what they were doing. The guy I talked
with was green, but the guy next to him was not and had traded over 200 contracts by
noon on the computer and several hundred more over a headset he was wearing
presumably talking to a buddy in the pit itself. He would take the 100 card offers from
the E-Mini arena (open outcry for amounts over 30 cards I think) and I guess would
trade out via the large contracts with the guy in the pit. The pit guys are interesting.
They seem to watch each other exclusively. There are banks upon banks of quotes
along the walls..everything you would want and more and yet, no one seemed to pay
attention to them..just to the guys in the pit. It shocked me as I was watching the
boards and then trying to determine where the SPOO would go based on what I saw.
I was unsuccessful doing so. I need my graphs and charts to do it. Without that I am
lost. The guys in the pit are simply executing orders. There was one guy, a local, that
everyone was watching. The guy next to me said if he had a position on and the one
guy in the pit went the other way, he got out..no questions asked. That guy traded
constantly. When he put up an offer, you could watch the screen change. He set the
pace. It was very interesting.
The one guy I talked to said that the SPOO leads the DOW. The SPOO according to
him leads everything. I have been thinking about that. He is wrong. The SPOO pit is
not an island unto its own. It appears that it is when you are there, but the market is so
vast that it is not. You could tell when the pit was about to tank the SPOO. The noise
level would increase dramatically and down it would go. However it is not the pit that
is doing this. I thought about that and this is what I think happens. Some guy at an
investment firm phones in an order to dump 100 contracts or something. The pit drops
the price and the locals and others buy. This stabilizes the price and then
things seem to quiet down. However, I think that what is happening then and if I was
better at hand signals and the action I could confirm from watching, but I wasn't, but I
think then the locals start to dump their longs they just took from the 100 card that just
hit and get short and then they take it down again. If this is the case, this is why my
system works. It is the lulls where I get short. Sure it misses the big parts of the move,
but if you look at a chart the chart goes down hard, pauses and climbs a couple of
points and then tanks again. This second tanking is due to the locals I think getting
short in anticipation of more dumping by an institution or whomever. It is the first dump
that starts it, the locals then profit from the long side by taking in the sell by the
institution, stabilizing and moving the price up a notch or two and then they short it again. It is the lull where the
longs start to think they have it made and the dumping is over. Many small time players
step up as the price decline ceases and then the locals then send it lower. At least that is my
interpretation.
Everyone who trades the SPOOs should make an effort to spend a day at the pit
watching the action. If you cannot get right on the floor like I was the visitors gallery
overlooks the SPOO pit and you can see the action from there. However, if you can
get on the floor, do so. It is a much more sensory experience.
I did not get a chance to talk to anyone really. The action was to intense and people
were too busy trying to make money. I tell you what, if I get another chance to go to
the floor, I will do it in a heartbeat. It is unreal. The trading floor that I was on is where
millions upon millions of dollars exchange hands in moments. It is fascinating. What is
really fascinating is that most of the people were young. The traders, the runners, the
clerks everyone. You think about the number of dollars exchanging hands at that place
and realize that most of it is done by kids it is remarkable. Of course, being 34, I think
anyone in my age bracket and older by 10 years or so is a kid so it isn't that
remarkable, but still. I can also see how getting a good firm for executions is critical. It
is not something to be taken lightly. In the amount of time to call in the order, get it
signaled from the desk to the floor for the trade and back the SPOO can move a
couple of points. You need to have honest hardworking people behind your trades. It
is no wonder that most fail in this business. There are so many things that can and do
go wrong. I think perhaps the biggest mistake people make is in execution. I had a firm
call me the other day and he told me I would call my trades into CA and they would
call the desk. Forget it! By the time they called they could hum you for a couple of
points. In fact there would be plenty of time under that system for them to decide
which fill it was you received! The other thing that strikes me is don't piss off your
trader. If they want to they can pause for 10 or 15 seconds and then take a fill. If for
some reason they decide they don't like you, fuhgetaboutit. You are toast.
Questions are welcomed. I will do my best to answer anything that comes
my way.
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