Using the Chicago Mercantile Exchange S&P 500 Pit Audio squawk.

Contrary to popular belief the trading pit is still alive and well. The Chicago Mercantile Exchange still has open outcry trading on the S&P 500 futures, and while the volume is considerably lower than in the E-Minis, it is still used as a venue to facilitate trade by the larger brokerages and investment houses.
Of course for the retail trader, executing trades via the pit is uneconomical and cumbersome. Placing our trades instantly on the S&P Emini is far quicker, easier and more transparent.
The “big” S&P as it is known in the pit is a very similar product to the S&P 500 Mini (E-Mini) that we trade on the screen, but with a few differences:
Contract value:

  • A 1 pt move in the S&P Emini is worth $50 per contract
  • A 1 pt move in the Big S&P traded in the pit is worth $250 per contract
  • The minimum spread on the E-Mini is 0.25pts, each tick is worth 0.25pts.
  • The pit contract however has a lower minimum spread of 0.1pt. This gives the traders in the pit a slight edge over the E-Mini, especially when it comes to arbitrage.

Participants:
In the E-Mini, it’s a first in first out system (FIFO), based on price and time. The best price gets filled first and the first in the queue at that price has priority. So if your brand new account trading a 1 lot is ahead of Goldman’s 1000 lot at the same price in the order book, you’ll be filled first. There’s no bias.
In the pit however, traders have to earn their status, other traders choose who to trade with. Of course they’ll go with the best price but if you’re a new trader jostling for space with 10year veterans expect to get scraps!

There’s also a different structure to how it operates.

The pit has institutional traders called “paper” these are the bigger investment banks and funds who are taking longer term positions and their priority is to fill the order at a reasonable price.

There are also “locals”. These are traders trading their own account who provide liquidity and usually take the other side of the paper. Most of them are looking to make a small amount on each trade but many times per day. They trade with the institutions and amongst each other.

So if the pit’s no good for retail traders how do we use it?
Whilst we don’t execute our trades in the pit we can use it as a tool for our own trading decisions.

Tradersaudio offer what’s called a squawk service. This squawk service is effectively a pit watcher with a headset and microphone constantly commentating on the pit price, the state of the pit, the players in the pit, who is buying and selling and how much. Ben is the main squawker with traders audio and he has years of experience at the pit, he understands fully how it operates, who is who on the floor and can effectively relay the action.
Alongside Ben’s squawk you can hear the pit noise in the background, the shouting the hustle and bustle.

How I use the pit audio:
Every trader use the pit audio differently, these are some of the ways that I use it to benefit my trading.

A quiet pit
Ben will often tell us that the pit is only 25% full or it’s “quiet trade here”. You can often hear for yourself that there’s no shouting or hustle and bustle. People are joking in the background and it’s a low volume, low participation market.
This is valuable information. You may already be able to see that the volume is low on the charts, but hearing that there is no institutional activity in the pit and there are only a few traders trading amongst each other for scraps, can keep you out of trouble.
Is a breakout trade likely to work if the volume is low and the pit is dead?
Should you even be getting involved in the market when it’s dead?
There’s no way I would consider a breakout trade if all of my trading tools are telling me the market is dead, the odds are reduced dramatically.
I will often use the pit population reduction and market slow down as opportunity to take a screen break. Stay out of trouble and get refreshed ready for the afternoon session.
On the flip side if I’ve got an impending fade type setup occurring I’ll use the lack of pit participation as an extra reason to take the trade, assuming that the market is drifting with no real conviction and more likely to turn at a solid support or resistance level.

Locals are pushing
Often the locals will club together and try and “push” a slow market in an attempt to encourage paper activity. They will try to bid the market higher or offer it lower hoping to find a large paper order at the extremes. To do this they often display bids or offers that they don’t really want filled attempting to distort the supply/demand picture. These guys have a good idea where resting orders are, above highs and below lows and so they will try to probe through these levels so they can pick up these paper orders.
I won’t specifically follow the locals push, however if I’ve been waiting for a trade, I may hold back until I feel they are no longer pushing or have been overwhelmed by the market.
Knowing the locals are fully loaded in one direction is a useful bit of info. If the market turns against them, they are going to start hurting and have to dump the position, either in the pit if they can, or hedge in the E-mini. Either way it’s going to have some effect on the market, especially if you see the locals as a smaller representation of the majority of daytraders in the S&P. If the locals are stuck then you can bet other traders will be as well.

Number one local
Number one as Ben calls him is the biggest local in the pit. Out of courtesy he doesn’t use his name. This local has a knack for spotting when the other locals are loaded in a position and have not found the paper orders they wanted. He will then single handily attempt to push the market higher or lower (usually lower!) by offering below the electronic quote. If he is successful he effectively forces the locals out of their positions and also encourages paper orders into the market creating a knock on effect.
This is something that may give me added conviction to hold a position for a larger target. I will look to see which levels he is pushing for and assess whether I should amend my scale strategy accordingly. I won’t however initiate a fresh position based on number one’s actions, nor will I exit if I hear him pushing against my position.
But knowing he has initiated a position gives us screen traders an insight into how an experienced local is viewing the market at pit level.
A few warnings though.
oHe may be hiding his true position;
oBen may have misread his true position and intentions.
oBut most of all “number one” could be completely wrong in his assessment of the pit and in his position.

Institutional participation
Goldman Sachs, Morgan Stanley, Merrily Lynch and other institutions all still use the pit to work orders. Whether for larger clients or for their own book, either way the odds are anyone executing in the pit is playing with a large account or fund. Lack of involvement from these players indicates that the “other time frame” is not interested in the current market levels. Locals are likely batting the price back and forth between each other and the odds are that the market will stay in a range until the larger paper orders come along and push the market out of its range.
Conversely if there is a significant quantity of institutional activity we can assume that if this continues, we may see large swings and trends in the market and can position ourselves accordingly.
I would never initiate a position just on perceived institutional activity but the information helps to complete a picture of the type of market environment right now and hence select trading strategies accordingly.

Timing your entry
One of my preferred setups is to take a trade after an important piece of news or economic data has been released AND has surprised the market resulting in a “reprice”. My trade will be in the direction of the surprise after the initial pulse and during a small pullback or pause. Timing this key to this trade and I’ll use the tape on the E-Mini to judge my entry. However on occasion the pit audio can give you an extra second or two edge on the tape. Let me explain with an example:
Is was FED day, we were due to hear news of the interest rate decision during pit opening hours. Traders were waiting with baited breath as this was an important one. Trade had been subdued all day in anticipation.
The figure came out and it surprised the market and we spiked down heavily, the pit went crazy.
I was looking for a short in this situation and was waiting patiently for a small pullback or pause to enter. I remember how Ben was in full flow, calling the pit price and who was involved. The market started pulling back slightly and I was watching the tape intently waiting for another wave of sellers to come in or for large offers to show at the best ask on the DOM. But before seeing any of that on the screen I heard; “Goldman’s 100 offer” in the pit. Meaning that Goldman Sachs had suddenly come in with a large sell order, probably a smaller tranche of a bigger order.
I waited for a second to see if the locals took the offer, when it was clear no-one was interested it was obvious the supply/demand imbalance was right on the turning point of increased supply. I took my short and sure enough the sellers started to hit the E-Mini. It turned out to be a great trade as Goldman then had to offer lower and ultimately take the best bid available to him resulting in a substantial push lower.
In this situation I used the pit audio as a trigger for a setup I was already about to take. Without it my entry would have been several ticks worse off. I used it to complement my strategy for this market scenario and I continue to use it.

Summary
As with any trading tool, it’s useful in certain circumstances and only when used in conjunction with other tools to complete the picture.
Never use the pit audio on its own to make decisions, don’t follow the locals or number one blindly. Don’t assume that Goldman Sachs is right! Listen to the pit for a few weeks, understand the language used, hear the difference in Ben’s tone throughout different market phases. Once you’ve grasped the pulse of the pit, then you can decide whether or not to implement some of it into your own trading decisions.

Check out Traders Audio, to see if pit audio can enhance your trading.