The E-mini S&P 500 (ES) trades on the CME Group’s Globex exchange. CME Globex is the electronic market that trades nearly 24/7. At one point in time, open outcry floor trading, where the traders yell orders on behalf of clients in the “pit”, was the dominant form of trading. Now, anyone with a computer, the proper software, and a funded account can engage the markets. Traditional open outcry hours of trading still align with market volatility. Many of our trading methods focus on capitalizing on this volatility that occurs during open outcry hours. This is why having an understanding of pit trading is important.
Why do people still want to trade in the pit? Because of better liquidity compared to electronic trading. Executing a combination of trades and spread strategies is easier in an open outcry environment. For example, a broker can easily buy 25k in options in one day at the same price. If this was accomplished on a screen, you would likely end up moving the market as you buy.
In the CME pit, there are usually up to 200 present on a given day. While it may seem hectic, checks and balances, etiquette and rules are practiced. In some ways, the rules of pit trading are more restrictive than electronic trading.
There are two types of people in the pit: brokers and “locals” (also called market makers). Brokers represent customers who want to place trades. Locals try to make a small percentage of profit or “edge” off of each trade as frequently as possible.
Here’s an example of how the order process works:
1. A broker gets a call from a customer to get a quote.
2. The broker yells and uses a hand signal asking for the quote.
3. The locals yell back and mention two prices: what they are willing to pay for the quoted item (bid) and what they are willing to sell the item for (their offer).
4. The broker tells his customer on the phone what the locals are offering.
5. The customer decides what to buy or sell and tells the broker.
6. The broker yells out the customer’s order to the crowd and uses a hand signal.
7. Depending on order acceptance, the locals will either hold their bid, offer a different bid, or a local will yell “sold”.
8. The broker will confirm the order with the locals after handing out or dividing up the contracts. Once confirmed, he will tell the customer the details of the order.
9. Once all orders are confirmed, the orders are written down and handed to the broker’s clerk. The broker quotes the trade to the market reporters who release the information to the world. The trade is displayed on the board, allowing for additional confirmation. The clerk then confirms with other clerks the details of the trade.
10. The broker waits for his phone to ring again with another order.
Depending on the broker, customers can allow the broker to execute the order at the broker’s discretion (best price or “feel” of the market). In other cases, the customer has an exact price in mind. As a broker, the objective is to be as fair as possible to your customer, the other brokers, and the locals. A positive reputation is extremely valuable in the pit, as this helps in getting your orders recognized.