Quote from jsmooth:
...
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.
...
