Floor Trader: Smashing Size Into Bids
The story of number one pit local
“If you ever say my name again I’ll throw you in the Chicago river with concrete boots on”
That was a warning from a man you didn’t mess with. From that moment on he was referred to as the “Number one local”
Back in the days when the S&P open outcry pit was still doing volume and electronic trade hadn’t entirely killed it off, brokers and dealers still used to execute in the pit.
One entrepreneur decided to set up a squawk service live from the pit.
He would stand there all day telling you what was happening on the floor. A kind of eyes and ears for screen-based traders.
I was a long-time subscriber of this squawk. (The service no longer exists, but similar news squawks are available to help you trade the news)
I would have it turned on throughout the trading day and I figured out when it was an edge and when it was noise…
Most of the time it was quiet, he’d talk about people throwing things, and generally goofing about in between orders.
Every now and then a paper seller or buyer would come in and the locals in the pit would all start shouting, trying to get the deal to make a slither on the trade.
But occasionally activity in the pit got really interesting…
E-Mini S&P - A mini electronic futures contract of the S&P 500
Number One Local
There was this one local, who he called “number 1 local” (allegedly because he was told in no uncertain terms never to use his name again) who used to come in at opportune moments and single-handedly move the markets in his favour.
I spotted this pattern and over time started to reverse-engineer his method.
Pit Traders Trading Strategy
- A quiet range-bound market with not much paper (institutional) activity.
He knew he couldn’t move the market unless it was quiet. He can’t compete with institutional money flow. - Other pit locals holding long positions
Locals would often build positions to profit from a market move in addition to being market makers. The no 1 local would be watching like a shark from upstairs to see how the others had positioned. - A big set of B%lls!
Here’s what he would do.
Trapped Traders
Knowing locals were holding long and the market was quiet. He’d stroll into the pit and start aggressively selling.
Like REALLY aggressive, offering under the bid price and selling to anyone who dared to buy.
The market would start to move lower – he smelt blood!
He would push and push the market lower selling everything he could, knowing the other locals were already long and by buying more they were getting even more exposed, probably outside of their risk tolerance level.
When they stopped buying from him, he’d step it up a gear and sell even harder, getting low prints in.
His objective was nearly always to get price under the prior day’s low.
Why?
Because he knew that there would be a load of stops there, meaning a bunch more selling to suddenly hit the pit and the screen adding fuel to the fire AND giving him the liquidity to exit his monster short position.
The pit would be roaring, you’d hear number 1 selling and other locals stuck long capitulating.
Yesterday’s low was in sight, he knew exactly where it was.
PING!
The level would breach and a wave of paper sell orders would come into the pit from execution brokers, plus the screen-based stops would be getting hit.
No 1 would cover his short position and walk right out.
Just another day at the office 🙂
Golden Rule of Trading: Know when you are wrong!
As I mentioned he was very specific about when he made this play. He was also pretty smart about bailing if it was not working.
So, if he started his selling and the market wasn’t budging, he’d realised there was probably a larger passive buyer on the screen holding it up and he’d cover and walk off.
Only when he had everything lined up AND the market started heading lower from his selling did he really ramp things up.
He knew his edge.
Trading Edge: What's yours?
- How can you get better at bailing when you are wrong and pressing when you are right?
- How can you define strict criteria for even getting involved?
I’m obviously not suggesting you can bully the market!
But like the no 1 local you can be strict with your criteria and you can know when the idea is working and when it’s not.
Flash Crash Video Clip
This is a clip from the same audio during the flash crash. I remember listening to and trading this live…
See if you can hear his change of tone and aggression when he sees the sellers.
“Here they come to sell ‘em again”