In defense of floor traders moving to screen, it is totally different. Floor is all about execution edge and turning over size in a hurry. A floor trader may trade 100 contracts at a time looking to take a tick or two out of it. A similarly sized screen trader may trade only 5 or 10 contracts looking to take 10-20 ticks out of it. Its also much harder to operate with that tight stop mentality you can on the floor because the screen gyrations are too large. On the screen you have to be right. On the floor you only assess the order flow and get the according edge which can't be done on the screen.

I clear ADM for my futures and New Edge for my stock stuff. At my firm which is mainly futures, I am the only guy who does anything at all with the stock market and those are mainly some arbitrage spreads.

Bah! Too choppy and no real range (less than a buck since open). Time for me to sit out until last hour and hope close is good. Actually caught a few good ones here at the european close but its been pretty uneventful so far.

glad you caught some going into euro close! I'm a small lot trader so globex is where I normally find the right price action.

I'm going to shut down and not try to trade the last hour....good luck!!!

When I retire I will continue to trade in some form or another. Probably won't be in there slugging out futures every day but will ocassionally on big new events. In my non-work accounts I do a lot of swing type trading in the equity options markets and will continue to do that probably forever.

As a new hire, do what they tell you to do Hopefully you will get training/mentoring that will guide you.

Small guy is at obvious disadvantage but if you play your game and not thiers it isn't so bad. Being small and flexible can be a great advantage. Certain swing trading and trend following approaches will work nicely for small players.

I clear ADM as well. Was just in town a couple weeks ago meeting the whole crew.

I moved over from an RJO office at the beginning of the year.

Awesome thread, ty very much for this

When you were pit trading, did you get involved in mind games with other traders?

Say another pit trader is very long, and needs to sell out his position. He might try to quote a high bid/ask for a low total amount, to try to trick everyone into thinking the price should be higher (getting a high "print" or something?). Then he'll sell out at this higher price if he convinced everyone else this new bid and ask is reasonable

But you might notice what he's doing, and keep selling to him knowing he'll probably have to sell back to you quite soon.

But he might have been pretending to be doing this, and in reality he has no long position to get out of, so you are stuck with a short position and the price won't be going back down

but you know he knows you know etc.

Any mind games going on like this or in some other way?

I never really got involved in any of that kind of thing and it didn't really happen in the options pits where I spent most of my time in the pits. In options there are too many ways to relieve the heat by hedging off in the futures or other options.

I do understand it was more likely to happen in futures pits. If people saw a weak hand they would try and squeeze it. Some of the real big players would also sometimes try to spoof the pit by trying to bid it up and then start selling. From what I understand these kinds of ploys weren't often successful.

Interesting. If people tried to spoof the market in electronic trading, could it be considered illegal, market manipulation? It seems market manipulation is a very grey area, and hence only the most overt cases are punished, would you agree with that?

I'm about to start a job as a market maker, and I'm a bit paranoid about doing something that is 'generally accepted' by the company, but I could be busted for if regulators start cracking down.

In the early days of electronic trading big locals tried to "spoof" the market all of the time. It worked for a while too. Then the algos came in and cleaned their clocks. Now algos try to spoof the market all of the time and for some of them it is their main strategy trying to turn a market and then jam it. As far as I can tell this is all perfectly legal.

In electronic trading it has become very difficult to "read the book". Most real orders of size are masked and most big orders that show are fake. Fake meaning they are designed to never be filled and be cancelled before they can be hit. It's almost a contrary indicator when you see a very big bid or offer just off of the market as they are typically designed to show strength or weakness when there really is none and just attempting to influence the market rather than to trade.

what's your opinion on the proposed(mentioned) minimal time for bid/offer before cancellation and penalties?

What are you going to be trading? Market making is pretty much dominatated by algos these days. Options still have a lot of human market makers though. This is due to the nature of options and the fact that a lot of the big players want to do more complex style spreads which are still priced better by humans than computers. Something like a futures contract or a stock have much more efficient markets made via computer these days.

I haven't really followed the discussion on it much. But I think they will do something since there are so many orders that just autocancel because the algos are just trying to influence rather than trade the market. I'm a dinosaur and not a computer guy though so I'm not really sure how some of this stuff works from the computers angle. I do know they jerk the market around though which probably isn't real good for the marketplace as a whole. I'm just not sure what can be done about it? And I am sure the programmers will have "plan B" to get around whatever countermeasures are put in to combat them.

We have started developing a piece of software (well Ph.d in Physics son in law is doing all the coding) that is going to compare Time and Sale to DOM (depth of market) and we hope to use that algo in conjunction with Market Profile to automate entries and exits for our trades. right now we are only thinking about using this for CL and GC.

Any thoughts?

thanks, and thanks for responding to all of the questions. very interesting stuff.

I'll be trading options. It will be mostly automated as far as I can tell, but quite a lot of room for human (me) input. Pretty much just making adjustments to the proposed true value the algo suggests etc

All electronic, vanilla options, I don't think I will be trading in complex stuff

Thanks again for your answers

Also, in regards to legality, do you think Optiver was doing something illegal here?

http://www.huffingtonpost.com/2012/0...n_1439259.html

cliffs:

They developed an algo to, I think, drive prices in oil futures up or down in the seconds before close, then exit their positions for a profit. "Banging the close".

They decided to just settle, admitting no guilt, for 14 million

That's not really in my area of expertise but I wish you luck on it. Anything to streamline and automate can be effective. Good luck!

Not sure exactly what they were doing but it obviously seems pretty shady. Banging the close happens all of the time though. They paid up and took the trading penalties so they are very likely guilty.

Electronic options market making is pretty interesting. A friend of mine did eltronic ag options for a while. His experience told me it was an arms race for the fastest computer and software. He was getting filled a lot early on but after only a few months he started missing everything as faster programs and hardware started cutting him out.

Basically the idea is to set your volatility parameters and try to scoop as much edge as possible while staying delta neutral and then overriding risk manually if you position gets too much vega risk in it as well as monitoring and adjusting vega levels as they change. Pretty much what the pit guys do its just that you are automatically making a market in each strike as well as hedging out the delta.

For outright options this is better than the humans in the pits. But when someone wants to do some sort of 2-4 legged spread the pit can give far better and tighter markets. From what I inderstand though the electronic systems RFQ's (requests for quote) where the big players can request a quote on a multi-legged spread where the electronic market makers can come in with a bid or offer which will likely be inside how the computerized legs since the computer will look at all of the legs and then add them up which won't be as good as human would be for the desired package.

For example both the put and the call of a straddle may be 2 ticks wide. For the computer this would give a 4 tick wide market for the straddle but a human would like give a 2 tick wide market for the straddle. It gets even wider for stuff like condors or butterflies where the human may even be tighter down to a tick wide market. This is why options pits are still widely populated by human market makers while futures pits are basically empty nowadays.

Yeah I think you are pretty spot on.

During my interview, they let me sweat a trader, and he was pretty much just fiddling with the vega as inputs (vega for 1 month, 2 months, etc). He was currently on a large loss he said because he was long vega but the markets were quieter than expected. Algos kept him delta neutral.

Seems kind of weird to me though a computer cannot offer competitive markets in straddles etc.

I think Optiver was trying to arb TAS (Trade-At- Settlement) contracts. How they work is that you can take a position in them at any point in the day. You are assigned that day's settlement price as your entry price. They open at a price of zero but can move during the day, so some days it might trade -8 or something and you are buying/selling 8 ticks below whatever the price settles at for the day. I have no idea why anyone would sell under the settle or buy over the settle but when I used to look at these they often traded several ticks away from 0.

Anyways I think Optiver would take a position in the TAS contract and than try to manipulate the closing settle price to lock in a huge gain. A basic way of seeing how this would be possible is lets say they get short 1000 TAS contracts earlier in the day. They then have an algo buy the hell out of the close and drive up the price up. If they successfully do this with around 1000 contracts, the CME will calculate a higher settlement price and all those longs will be in the money against the settle. The TAS contracts they were short will than be used to close out the longs and they are flat or near flat with a big profit.

To me this seems like the only reasonable way you can make a market in TAS contracts, but I guess this has been deemed illegal.

^^ ty very much for that. It obv makes sense it was more complicated than I described, since what I described seems commonplace.

Yeah I don't really understand the point or use of the TAS. The above is the only thing I can think of that you can do to get an edge in trading it. But there obviously must be something else if it's there and traded.

BUMP

Mr Baseball, i just finished the greg smith Goldman Sachs book. very very good book in many ways which surprised me. i would highly recommend it for anyone interested in wall street, especially students.

anyway,

the protaganist was the key client trader of futures... he dealt alot with two Goldman guys on the floor in chicago. they cain me across as two of the best people in the book. thought you might be interested.. sorry i didn't write down their names.

some hideous people in the book but not the chicago floor traders.

Nice bump

Mr B, Ive always wondered how the pit traders kept their trades straight. How was never a problem with someone taking a losing trade in the madness of the pit and then erasing it and claiming it never happened? Were there never disputes regarding who traded what to who?

It's really fascinating to watch old videos of those thousand or so people all yelling at each other simultaneously and it actually working.

Woah! Haven't seen this thread in a while figured it was buried forever in the archives

There was a lot of integrity in the pits and no one could survive being a scumbag. It definitely got hectic and confusing in real fast markets. But everyone had a trade check clerk. They would grab your trading cards every 15 minutes or so and double check every trade the opposites trade check clerk. So if there was a problem you could catch it early and before the cards were turned in for processing. You would typically verbally or visually double check trades with your opposite before the trade checkers even showed up.

But still things would fall through the cracks and any out trades (trades that don't match) would hopefully be resolved each morning before the open. If there were still problems and adamant disagreement to what had taken place it would go before an arbitration board. I never experienced that and very rarely had any out trades that needed to be resolved the next day.

But if you are scummy and deny trades that you made you will be a marked man as each pit has a way of policing this. No one will trade with you and you will effectively be black balled. This was never much of a problem though. Out trades could suck though and were usually based on poor communication and unless there was a clear mistake by one of the parties involved the difference ( plus or minus) would be split between the parties.

Just out of curiosity mrbaseball, do you have ancillary sources of income or are you solely dependent on performing well with your trading to pay your bills?

Also, would you say you're overall happy with life? I knew a couple traders back in the day who were doing really well financially, but they were miserable negative f*cks who were completely consumed by their work. Didn't seem like it would be a great trade from an overall life EV perspective. Obviously, that's a sample size of two and they worked together, but curious if you have any thoughts on that.

Well, 11 years ago when this thread started I was working for a trading firm and that was my job and sole source of income. I had a salary and bonus but to make any real money depended on the bonus. The salary was survivable but the real goal was scoring large bonus money. In that 11 years much has changed though.

My firm closed down at the end of 2014 and at that time I "retired". I still trade though just on my own dime and at home. I do it because I just love trading but I don't have to. I have made enough and saved enough that I don't really have to do anything. But to answer your other question I am happy and I really like the markets and trading. Trading has always been my passion so continuing to trade is a great way to keep busy and involved. I take lots of time away though now but will likely never stop trading as it is an activity that that I enjoy. As long as it stays fun and profitable it will be my main pass time activity.