Pit traders/Locals do more than just "front run" large orders...the big locals are actually taking the "other side" of large institutional orders, and thats why they can move the market. I think most traders (especially those that have never been on the floor) dont really understand how the open outcry process works, and how it relates, and contributes, to the electronic markets. Guys on the floor (locals who trade big size) are taking on substantial amounts of risk, and they are moving the markets because they are trading large size, and essentially allowing major institutions to enter or exit the markets at a fair/agreed upon price. As for the original posters question, do pit traders contribute to electronic volume, the answer is YES....Do you people really think all the electronic volume is done by retail traders sitting in their "home office" trading in their bathrobe? All the substantial volume, that actually moves the market, is done by exchange members and large institutions. The pits will continue to be open until majors institutions decide to do all their business in the electronic markets.
I cant really speak about the NYMEX and their pits, but you can see this whole order flow process (and how the pit and electronic markets inter-relate) if you follow the SP & ES. To give you an example, about a week or two ago the SP's gapped up on the open because their was a big option group doing substantial buying (2000+ cars in the big SP contract), they kept biding in 100-200 car lots, and the locals where basically letting them into the markets (they were selling to the option group). So the option group wants to buy the market, but someone has to let them in and take on all that risk....the guys doing that are the locals and market makers. Now, they obviously want to sell the market (to the option group) as high as possible, in order to minimize their risk. So instead of offering at 6.00, they may say offer at 6.50, 6.60, 6.70, ect...so they will essentially be shorting the market all the way up....long story short, once the option group finished all their buying the locals were basically stuck short between a 3-4 handle range up to the daily highs and forced to bid the market (cover their shorts).
But you cant just liquidate 2000+ cars (2000 x 5 = #ES contracts) unless you can find someone to sellem to you....then their is another conflict, the guy that will sell them will obviously want to sell as high as possible, while the locals want to buy as low as possible (they dont want to buy the highs)....So they will play some games and also try to bid in the ES to liquidate and find some sellers. if the market is 6.00 x 6.50 they may just offer lower, 6.40, 6.30, 6.20, ect and also bid 6.00 on the ES....Or they may just sell em at 6.00 (at the bid - sometimes the only way to bring a mkt down is to sell some more)....and hopefully the market will now be 5.60 x 6.00 and 5.75 x 6.00 (ES).....and the process just continues until new paper comes to the market. And if its a paper seller, the local (whos already short and looking to cover) will do the same thing, but on the bid.
As for the original posters question, why does the market just jump 10-20 cents....its probably because someone wanted to buy (or sell) and in order to get executed he had to pay up 10-20 cents....in simplistic terms, the locals letting him into the market is essentially saying "I wont sell you 100 at 6.50, I'll sell em at 6.70", then the buyer just says "alright buyem 6.70 on 100".
Large players and institutions also continue to do business in the pit because they know there are other brokers and market makers who will take on the size they need to do...There are certain locals that do a lot of business with certain brokers. So if the broker has substantial size to do he can just goto that local(s) and get all his business done at a decent price with minimal slippage.....If he wants to do that business on the screen he may have to lift a handful of offers (and pay up) or bid large size and run the risk of other traders trying to front run him and not let him in.
As for the poster who says pit traders have less information than guys behind the computer (because they cant fit a lot of stuff on their tablet PCs)....your forgetting that most of those guys work with a team of other traders. They are standing in the pit and talking on a headset to guys sitting upstairs in an office, they got other traders sitting at a workstation outside the trading pit, and they got clerks/runners relaying all that information back and forth between all of them.
