by Jeffrey Lin
Everyone knows the final hour of the trading day is the most important, especially on options expiration week when most options on broad-based indexes end trading at the close of Thursday (these are European style options. Stock options are American style and trade until market close on Friday). We had to be on the CME floor for the close – this was the main purpose of this trip to Chicago!
[continued from part 2: On The CBOE Floor: S&P Index Options Pit & VIX Pit]
We crossed the street from the CBOE to the CME, headed up to the 4th floor like this morning, and had Brian Shepherd sign us in again. It was about 2:15pm CST when we got back onto the floor, with the S&P futures trading around 1082~1083, having rallied above 1090 and came back down while we were gone. Again, we camped out on the ~2 feet walkway next to the Mr. Topstep desk. And again, Shane and I stood up against the railings to leave room for traders, brokers, clerks, and runners to walk through to the trading pits and back. In the morning, mostly clerks and runners passed us to deliver and take orders from the pits. In the afternoon, both clerks and traders were going back and forth more and more, which made it a bad place for us to stand.
I have no prior experience to compare this day to, but even in the final hour there were still time for us to chat with Danny, Tim Hefke from TopNotch, and other traders. Both trading activity and orders the trading desks received seemed to depend on important market levels. One moment, traders were chatting with each other and singing oldies off-tune like during a basketball time-out. But when the market hit certain levels, or an order came in that needed handling, they were immediately back in action. Brokers putting out the orders they need executed and traders trading against each other.INSIDE THE PIT
During one such slower period, about 3:30pm CST, one older gentleman in the pit invited me to go in and stand on the top ring of the pit. This gentleman was trading the Nasdaq 100 Futures (ticker NQ for futures) and was waiting for the NQ’s to get below a certain level to get short. I was told the upper ring which I was standing was for brokers, who traded against the locals in the lower steps within the pit. Unlike the S&P 500 pit at the CBOE, these pits were full circles. On opposite ends of the pit I was in were boards and screens for data. This pit with the boards and screens looks like a miniature football stadium from afar. The center board on each end displayed headline news as well as prices for several major stocks such as Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS). On either side of the board were 2 screens. The top screen showed current S&P 500 futures (NYSE:ES) and Nasdaq 100 futures (NQ) price ladders and the associated big size, offer size, and trade size. Basically, this screen showed the DOM (Depth of Market) many of us have on our futures trading platform like ThinkOrSwim or Infinity Futures. The bottom screen showed a single-colored bar chart of the S&P 500 futures.
Suddenly, the NQ’s hit the level the gentleman wanted to short, and he quickly turned around. He, as well as other traders, started shouting and making hand signals to other traders put on their position. The market was only there briefly and someone else got the order before he did, so he turned back around to speak to me while he waited for the NQ’s to touch his level of interest again. When I asked how he determined that was his level to short, he simply showed me a folded up printout he receives daily from a service with ES and NQ price levels typed out in 2 columns. This is very similar to the daily price levels I get for the ES from my friend at EminiPlayer.Net. This gentleman had been trading on the floor for over 30 years and doesn’t use indicators or any other fancy techniques, although he’s been looking into it. Also, when I asked how did he know his signal to another trader to short the NQ was not taken, he said “by eye contact.” It is absolutely amazing to have stood there with about 200 people in a ring/pit shouting and signaling to each other at the same time, trying to put on similar trades, and knowing who gave their trade to who and how much just by “eye contact.”
With about 20 mins to go, the gentleman said I should probably get out of the ring/pit as trading was about to heat up into the close. Before I jumped off the upper ring, he told me to watch the center board at the ends of the pit for market imbalance orders of stocks to show up within the next 5 minutes. Sell and buy imbalances are posted by the specialists at 20 min and again at 10 min before the close of the trading day. These are orders from institutions to sell large blocks of shares at the closing price for the day. If the specialist cannot accommodate these orders they are posted so that individual traders can help unload the shares. While this pit only trades futures, the stock imbalance orders were still relevant and important for these floor traders.
All investors and traders, new and experienced, have gone through the process of having to figure out what info is important. Too little info and you can’t make a good trading decision. Too much info and you get information overload and either can’t decide how to trade or gets thrown off by all the information. Seeing the info on the data boards and few screens in these pits really helped clarify what info is important for these big traders on the floor. I realized I should watch and be aware of the same limited data and prices because it is what these traders base their decisions on. These are big traders so what they base their decisions on and trade with will move the markets, so much so that I cannot go against that but should go with it.
[chart of S&P 500 Eminis during final hour of trading while we were there]
INTO THE CLOSE
As you all know, the market slid again into the close, closing at the day low. The cash & stock markets close at 3pm CST, but since this CME floor houses futures pits, the trading didn’t end until 3:15pm CST for futures. I was completely fixated on the DOM (depth of market) screen at one end of the pit I was just in. The price, bid, and offer data flickered so fast, several times faster than I what I see on my own screen at home. It was not because the market was moving fast but just that my bandwidth at home is too small so I cannot pull in as much data that fast. It is definitely a disadvantage, though they tell me I can get data just as fast if I upgrade my internet service provider. Everyone in the pit like the old gentleman were actively shouting and signaling trades after I stepped out of the pit, but the last 5 minutes before the cash close (2:55pm CST) was when the noise from the pits really escalated. There were bells a few minutes before the cash close and at the cash close (3:00pm CST). The noise died down a bit after the cash close and some traders started leaving. However, the majority of traders stayed in the pit, and the noise rose again as the market continued to drop in after hours trading. Minutes seemed like lifetimes down on the floor with so much on the screens as well as in the pits were happening. By about 3:08pm CST (i.e. 8 lifetimes after the cash close) more and more traders had finished business for the day and started to head out.
[We took this picture with Danny around this time on the same upper ring of the pit I was in before. ]
[vid of a trading pit]
[exiting trading floor thru walkway between 2 pits]
There was the final closing bell for futures at 3:15pm CST and the traders started clearing out of the pits like spectators leaving a stadium. Some were really happy and joking with their friends, while a few obviously had a bad day and were physically showing their anger. All the traders, brokers, and clerks cleared out pretty quick and the floor was pretty much empty within 5 mins. The traders disappeared down escalators and headed to the other attached CME building where everyone left their trading jackets and checked out for the day. In the CME/CBOT building lobby, we saw many familiar faces we had just seen on the trading floor, but now dressed in Tshirts and wearing backpacks or bicycle helmets ready to head home. Little may be known by the public about the business on the trading floor, seemingly a mysterious place where the world’s money flows through everyday. But for these people we saw today, even with the market down almost 4% and it being options expiration, it seemed like was just another day at “the office” to them.
On Friday morning, I went down to the S&P options pit at the CBOE during the open for the cash markets to see the options settlement. Check back for that blog post with pictures and videos. Here’s my real-time tweet & pic during the market open.