Article on E-minis

[saschabr]

THX BUNDLE,

this is what is called a "reverse desk" as well.
putting fear into the market using your reputable name
and trading the opposite direction later...

 

[Tea]

Quote from Pabst:

Of course the massive irony is that by canceling trades the exchanges are penalizing the buyers who step in to stabilize the market.

Had not really thought of that - but its true. Instead of punishing the bandits - they are punishing the calvary who are coming to the rescue.

As said in another post, the problem IMHO is a speed imbalance. The exchanges either need to slow down the futures contracts when the premium surges (mini-halts) OR speed up the arbing process.

Between the two alternatives - speeding up the arb (laying off risk - buying/selling the pit contract or a basket of stocks or options) - is less disruptive.

So how do you speed up the arb?

 

[Tea]

Quote from bundlemaker:

CME Pit shenanigans:
The really basic example is where a familiar face on the floor starts bidding up the contract and gets everyone else excited, but the famiiliar face has his cronies steadily selling in the electronic market.

As an aside, Borsellino pointed out that the price differential between open outcry and emini contracts (referring to the SP500) can be just enough to give his computerized systems conflicting signals.

Looks like the boneheads have figured out a way to screw over the customers who still use the pit. No wonder why the electronic contract keeps growing.

The price differential referred to in the second paragraph is mostly attributed to the difference in the spread between the Emini and the pit contract. Time to reduce the tick increment to .10 for both.

 

[limitdown]

Quote from Tea:



Looks like the boneheads have figured out a way to screw over the customers who still use the pit. No wonder why the electronic contract keeps growing.

The price differential referred to in the second paragraph is mostly attributed to the difference in the spread between the Emini and the pit contract. Time to reduce the tick increment to .10 for both.

fairness always seeks its own level,

prop traders by the dozens are moving out of those shops and moving into the Emini pits...

Wonder why?

 

[stock777]

More games of one kind or another per day in the ES than in all of Las Vegas.

Nice to see at least some of you have a clue.

 

[TriPack]

Quote from Pabst:

Of course the massive irony is that by canceling trades the exchanges are penalizing the buyers who step in to stabilize the market. Often these busted trades leave buyers naked short and benefit those directly responsible for the dramatic declines. Price changes don't occur in a vacuum. The reasons for the snapbacks is because risk takers stepped in and made purchases, in many cases not knowing whether the sudden breaks were the first reaction to horrific news.

For the exchanges this will be a tough problem to fix. While many participants choose to have stops away from the market residing on exchange servers, there is little incentive to leave a size bid or offer "live" away from the market. Why work a bid for 500 ES ten handles lower when the only way you're going to get filled is if something bizarre happens as the market trades off 50 points! Thus at any given time, i.e. all the time, the aggregate number of stops far exceeds the number of limit orders in the book. Don't let the size you see in your "market depth" deceive you, that is only a sample of what is close to the market and thus somewhat "marketable". Further away from the current bid/offer the number of limit orders severely decreases and the number of stops hugely increases.

The CME's secret plan to counteract the avalanche of stops is noble, BUT, what if a legitimate terror, assassination, resignation, or Fed action justifies a sudden revaluation of futures beyond a previous defined yardstick. There were a few rate cuts in the last few years where being filled 10 pts worse on a stop would have been a great fill!! For lack of a better idea perhaps there should be no new circuit breakers but instead could the exchanges offer some inducement (waive fees) to institutions who leave resting orders scaled away. I don't know but maybe a great way to "pay" these institutions for liquidity would be to not bust their bargain basement trades when they're actually winners.

Nice post, Pabst. That sums up the entire situation perfectly. Incentives are all screwed up. Until the exchanges stop providing rewards for those who cause illiquidity, and stop punishing those who provide liquidity during the price panics the situation won't change. All the software tweaks in the world (like the one that is intended to prevent cascading stop orders at the CME) won't work, because the root problem isn't being addressed.

It would be nice is we had a way to shame the CME into ending the practice of busting trades. Like getting an online petition going, and getting some news coverage. Let Kudlow and Cramer duke it out with the CME brass on live television.