How do S&P locals make money?

[ang_99]

What is the s&p pit traders primary strategy? Do they still have an edge since its traded primarily electronic? Do they arb the difference in spread?

Anybody know?

 

[pspr]

Their main job is to hit your stop being held by a fellow floor trader.

 

[youngtrader]

scalp the bid/offer spread on the market. Hardly ever will a local trade with another local. They usually always trade with paper.

 

[spd]

Quote from youngtrader:

scalp the bid/offer spread on the market. Hardly ever will a local trade with another local. They usually always trade with paper.

When Im listening to the sqwak and the action thins out Ben may mention local to local trades. If you listen to the outcry its usually only 1 or 2 contracts. What are these guys doing? Just getting out of a position they are stuck in so they can go get some lunch or something?

 

[youngtrader]

Quote from spd:

When Im listening to the sqwak and the action thins out Ben may mention local to local trades. If you listen to the outcry its usually only 1 or 2 contracts. What are these guys doing? Just getting out of a position they are stuck in so they can go get some lunch or something?

not for sure (im not from the floor) but I would imagine just somebody who found another taker for the other side of his trade. However I do know that locals almost entirely trade with paper as paper is a price taker and locals are price makers. Paper needs to get some business done and locals are there to help them get the business done in order to try to profit on the spread.

 

[chch66]

Locals trade with other locals all day long as well as offset the majority of their trading in the eminis. Very little paper in the market since Dec '09 as Algo prop have increased their activity by nearly 50% year on year according to the latest CME volume figures.

Some paper on the open, some on the close...everything else is on the emini box.

 

[nazzdack]

Quote from chch66:
Very little paper in the market since Dec '09.......

?....!....You must have a "very good" crystal ball.

 

[nazzdack]

Quote from youngtrader:
However I do know that locals almost entirely trade with paper as paper is a price taker and locals are price makers. Paper needs to get some business done and locals are there to help them get the business done in order to try to profit on the spread.

1) That's how it "should" be.
2) Locals don't want to get a reputation for "picking off" other locals. Nobody will trade with you after awhile.
3) "Good" floor brokers want the locals to make money so that progressively larger orders can be traded quickly in the future as the capitalization of the pit-locals increases.
4) Brokers/traders don't buy/lease seats in order to give up the edge to customers.

 

[nazzdack]

Quote from ang_99:
What is the s&p pit traders primary strategy? Do they still have an edge since its traded primarily electronic?

They hope for the CME electronic trading platform to fail and then have volume come into the pit to be traded.

 

[The General]

Quote from ang_99:

What is the s&p pit traders primary strategy? Do they still have an edge since its traded primarily electronic? Do they arb the difference in spread?

Anybody know?

It depends on the trader/s.

One strategy that they use daily is as follows:

Trader 1 on S&P Pit floor and Trader 2 outside on Electronic platform-both working for the same firm.

Trader 1 has a pager that sends him a "wake up" call when 10 min engulfment is forming on main S&P futures contract.

Trader 1 will go long on main S&P by "jumping the engulfment"-for this example we will keep it simple and say long 2 contracts.

Now we have Trader 2 enter the equation.

Trader 2 is watching the main S&P contract chart-not the E-mini which most follow-and when he gets the signal he will sell 5 E-mini contracts to offset 1 of the main S&P contracts that his "buddie" is long.

Trader 2 will then tighten the stop on the remaining 1 long S&P contract-by adjusting the sell stp lmt for the remaining 5 ES contracts- and when this is hit the 2 contracts have been closed out for a profit of anywhere between 1 and 5 points on the main S&P-not the E-mini.

They do this all day long on 10 min engulfment signals-and a few other techniques as well.

The average trader who is not aware of this strategy does not know how the markets operate-as they also use other techniques as well-which I will not mention for now.

When you look at the ES tape-look for multiples of 5-and you now know what is happening.

The General