MrTopStep Best of 2012: WHEN ROBOTS REPLACE LOCALS

The “thrill of victory and the agony of defeat” ring loud on the trading floors of the Chicago Merc.  For years the trading floor of the CME has been a place where people of all walks of life  could apply for a membership, go to the trading floor and start trading.  The trading floors and the traders made a name for themselves making millions fighting and pushing to just get the edge on a trade.  If you had some street smarts and a little luck,  it wasn't that hard for some traders to make $100,000 in a day.

There was no bigger pit in the world than the Chicago Board of Trades bond pit. At its height it held over 600 locals, order fillers and clerks. The sound of the pit was deafening, and if you did your hand signal wrong it was nearly impossible for the pit clerk to hear you yelling as he stuck his head in the pit. If you were lucky, another pit clerk that saw the mistake might try and help, but once in there was no stopping the trade from going down.

When the Chicago Board of Trade built the new annex and trading floor, it became the world's largest trading floor. Pat Arbor, the then director of the CBOT, boasted that the room was large enough to fit a 747 wing to wing.  This did not make their crosstown rival the CME very happy, so they put up two twin towers and a new upper and lower trading floor.  The race for exchange supremacy was hot and heavy.  The two exchanges didn't get along and they admitted it. After having a very successful 30 year bond contract, the CBOT opened the new financial room and increased the size of the bond pit . It was not long after that that it filled up. This is the same pit whereTom Baldwin started out with $15,000 and made over $150mil. Long before the CME bought the CBOT, the bonds had gone online, and the pit fell apart soon after. The over 600 occupants of the bond pit slowly disappeared.

I remember that pit well. The bond room had a smell like a locker room after a football game. Men leaning on men all day, sweating, pushing, swearing, fighting.  It was financial chaos, and the bonds were one of the first big financial products to get knocked off by electronic trading. Today the bond pit is a much smaller pit. It is a hybrid open outcry/electronic market where traders can “bid and or offer” open outcry markets or trade electronically. The 600 strong locals, order fillers and clerks is now one pit that covers the 2 year note, 5 year, 10 year and 30 year bond all in one pit. Most of the time there are less than 20 traders in the pit and during the rollover it may get up to 30 traders. The liquidity supplied by the “pit” is gone, replaced by hedge funds, banks and prop traders trying to gain an edge that barely exists.

Things have changed on the floor in Chicago, but it still the largest trading floor in the world and preserving the open outcry system after the MF Global debacle has only hurried the pace. We do not know how much time we have left, but rest assured that we are going to make the best of it while we can …

Our view:
The S&P futures are up despite the Spanish bank downgrades by Moody's. One of the rules we follow after a big down day is that the S&P's trend to go sideways to higher. That said, we are not sure that will hold up today. The markets are still  trying to hold the 1300 level, but there is a powder keg of sell stops sitting right there down to 1296 and more sell stops under 1293 down to 1287. We are not saying they are going to go there today, but be forewarned that if the SPU starts trading under 1301 what you will be up against.  As always, keep an eye on the 10-handle rule and please remember to use stops.

For today:

• It's 5:30 am and the ESU isup 4.5 handles at 1311.00, crude is up 18 cents at 79.39 and the EC is trading 1.2512,  up 6 ticks.
• In Asia 8 of 11 markets closed lower.
• In Europe 7 out of 12 markets are trading higher.
• The main headline this morning: “Europe Stocks Erase Gains on Spanish Bonds Sale.”
• Today's economic calendar: Redbook, S&P Case-Shiller HPI, consumer credit, Richmond Fed manufacturing index.

• VOLUME:   1.84mil ESU and 6.7k SPU traded
• SPREADS:  5 SPU/Z spreads traded
• FAIR VALUE: S&P +3.00,  Nasdaq +8.00

Closing Print Video:  http://www.mrtopstep.com/videos/?id=20036

Monday's wrap-up from the S&P pit:

The overseas equity markets were trading sharply lower to start the week as traders remain concerned following the price action of last week's big decline and the debt crisis. Last week, the stock market suffered large losses as the FOMC kicked the quantitative easing measures down the road. Mixed manufacturing data along with another firmer housing report, May new home sales hit a two year high 7.6% treasuries saw mild profit-taking up to the highs as the equities flopped for the third day in a row.

Traders continue to chat about the global slowdown, Eurozone meltdown and further global losses in the stock market weigh. Cyprus became the fourth Eurozone country to seek a financial bailout from its European partners, citing its exposure to the Greek economy. As we close out June traders are focusing on the busy economic calendar, month/quarter end and the heavily anticipated European Summit topping the list.

The S&P trade started with 325k ESM and 1.5k SPM traded on Globex, trading range 1312.75 – 1326.50 / Friday's range 1320.50 – 1331.50. The RTH's opening range was 1315.00 – 1315.30, down 11.5 handles which also marked the HOD before settling in at 1306 -1308 area as the VIX opened $2.36 higher at $20.47. There were some early headlines, but nothing new as the Eurozone fires continue to burn. Following the early weakness, it appeared what minor bid the equities had in the opening 45 minutes dissipated following the Supreme Court decision to postpone, until Thursday the health care ruling. Leaves me wondering what can happen in three days? By 10:30CT the 1306 low was being retested and the breach took the spoos to 1303.50. Cyprus became the fourth euro-zone country to seek a financial bailout from its European partners, citing its exposure to the Greek economy. Following a new low at 1302.70 the spoos traded sideways through the midday and by 12:30 was back testing the 1306 area followed by 1308 area and rejection by 1:30. After holding the 1305 area the equities made another run at the midday highs of 1308 and were trading 1309 area as the closing imbalances were mixed showing 13 of the Dow 30 to buy with decent size and the broader market showed $110M to sell. On the 3:00 cash close 1307.30 traded before settling at 1306.60, down 20.2 handles on the 3:15 futures close.

Major macro events to watch 6-25 thru 6-29:

• Tues June 26 – Redbook, CaseShiller home index, consumer confidence, Richmond Fed Mfg

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• Wed June 27 – US durable goods, pending home sales

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• Thurs June 28 – Summit of EU heads of state and government in Brussels. June 28-29.

• GDP, Jobless Claims

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• Fri June 29 – Summit of EU heads of state and government in Brussels. June 28-29.

• Fri June 29 – EC issues quarterly report on euro area

• Fri June 29 – Euro-area May M3/private-sector loan data·

• Fri June 29 – Eurozone flash June inflation.

• Fri June 29 – German lawmakers to vote on fiscal pact/ESM on June 29

• Chicago PMI, Consumer sentiment

MTS video:  http://www.mrtopstep.com/2012/06/6-25-2012-mark-sebastian-covering-options/

May we suggest you visit http://www.mrtopstep.com and http://www.mrtopstep.com/trading-101/  Please read & reread ….we talk about the content on that page in the room often.

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CONTRIBUTORS' CORNER

SPX CHARTS

Roger Volz, BGC Partners

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