Let’s face it, the
credit crisis has devoured just about everything we touch and see. Things we
thought could never be affected are getting affected. From job loss to losing a
home, every American is feeling the pinch.
It also has had a
big effect on the volume of the Chicago Mercantile Exchange’s electronic mini
S&P futures, called the ES. Over many years of watching the S&P I have
seen all levels of cause and effect. I know for a fact when the markets were
busy and all the big boys like Louis Bacon of Moore Capital, Paul Jones of
Tudor, Bruce Kovner from Caxton and George Soros were all pumping orders into
the S&P pit that they were are not doing it for fun. In the ’87 crash every
one of the guys I just named sold the S&P days or weeks before.
Generally after a
steep decline, volume will drop. As the stock market starts to recover the
public starts buying again and the institutions and big banks start making
prices again. When that happens, program trading picks up and the volumes jump.
It works for everyone all the way down to the guy picking up the phone in the
S&P pit. When everyone is trading, liquidity jumps and open interest rises.
Our desk knows all about how that worked back then and how it works
today.
In the late ’80s
and ’90s every desk in the S&P futures was doing orders. It didn’t matter
if it was a big or a small order, someone was putting them into the pit. Then
in the late ’80s the CME came up with its first order routing system. It was
the open outcry system of buying and selling with your hands in the pit.
Brokers trading with other brokers, brokers trading with locals and locals
trading with other locals all helped make up the bid / offer. Sure you could
get some bad fills, but you knew there was going to be a bid to hit or an offer
to lift.
In 1989-90, program
trading volume started to increase in the S&P futures; everyone wanted to
do S&P index arbitrage. It was the craze of the day. By 1995 program
trading had become a predominant factor in the S&P futures. It could no
longer be overlooked by professional traders. In 1996 electronic trading was
introduced. Open outcry volumes were already going down, but as Globex took
more volume away from the pit trade, program traders started to automate. The
initial cost was high, but it also took out the human error factor. As the pit
dried up, electronic ES volumes started to jump. We know from running a desk
what “busy” looks like in the S&Ps when everyone is trading. Going into the
credit crisis in 2007, overall volume was 2 to 3 mil e-minis a day. As the
crisis dragged on, volumes jumped to over 4mil to 5mil contracts a day. You
could feel and see the liquidity building up. This buildup was not at all like
in the past. In October of 2009, the volume in the CME’s e-mini S&P futures
jumped to an all-time high of 6.9mil contracts. As big Wall Street firms went
out of business, it drove up the volumes but with the record volume came record
liquidation. The more firms and trading desks went out of business, the lower
the volumes went. It was a volume bubble in the S&P and it has never
recovered.
The credit crisis
has not only knocked out some of the big players on Wall Street but it has also
affected the retail trader. The absence of this volume is a key factor in why
the S&P floats up and down. After a volume spurt, the S&P has to
rebuild itself and more stops have to be placed. The space that used to be
filled with professional traders, hedge funds and banks and retail traders has
been taken up by the algorithms and program trading. This is why the S&P
goes from buy stops to sell stops all day long.
In the old days it was big order flow
that got things going in the S&P pit and today it’s the algos chasing
stops. As traders we need to follow the news, but we also have to be on the
lookout for where the closest set of stops are …
Danny Riley is a 34-year veteran of the trading floor. He has helped run
one of the largest S&P desks on the floor of the CME Group since 1985.
Our view:
Until the government comes up with an agreement over the fiscal cliff, the S&P is going to be hanging in the wind. As of today there are 7 days left on Congress’ calendar before it adjourns for the rest of the year. As we have said many times, the S&P hates uncertainty and that is exactly where are are at today. We also have pointed out that the S&P tends to be weak Monday through Wednesday and firm up Thursday and Friday. With that in mind, we lean to selling rallies. As always, keep an eye on the 10-handle rule and please use stops.
Until the government comes up with an agreement over the fiscal cliff, the S&P is going to be hanging in the wind. As of today there are 7 days left on Congress’ calendar before it adjourns for the rest of the year. As we have said many times, the S&P hates uncertainty and that is exactly where are are at today. We also have pointed out that the S&P tends to be weak Monday through Wednesday and firm up Thursday and Friday. With that in mind, we lean to selling rallies. As always, keep an eye on the 10-handle rule and please use stops.
Today’s data:
·
It’s 7 a.m. and the SPZ is trading 1409, up 1.9 handles; crude is
trading 88.42, down 67 cents; and the euro is up 37 pips at 1.3096.
·
In Asia 6 out of 11 markets closed lower (Shanghai Comp -0.78%, Hang
Seng +0.15%).
·
In Europe 6 out of 12 markets are trading lower (CAC +0.70%, DAX
+0.28%).
·
Today’s headline: “S&P Futures Signal a Higher Open”
·
Economic calendar: Today: Earnings from AutoZone, Toll Brothers,
Pandora, Mattress Firm. WEDNESDAY: Weekly mortgage apps, ADP employment report,
productivity & costs, factory orders, ISM non-mfg index, oil inventories;
Earnings from Men’s Wearhouse. THURSDAY: BoE announcement, Challenger job-cut
report, ECB announcement, jobless claims, quarterly services survey,
Apple/Samsung hearing; Earnings from H&R Block, Lululemon, Smithfield
Foods, Cooper Cos. FRIDAY: Employment situation, consumer sentiment, consumer
credit
·
Globex volume: 1.65mil ESZ and 13k SPZ trade
·
Fair value: S&P +1, NASDAQ +3.25
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