I am curious to the advantages/disadvantages of trading the pit traded or the globex when it comes to the sp500 both the large and emini versions. I am just not clear why the two exist if they perform the same function. All information is helpful. Thanks
E-minis. Transparent. Super liquid. No to low slippage on most market orders. Big Spooz... Well, I'll let the proponents discuss that. They're a dying breed so I don't suspect you'll hear from too many of them. But there is one thing though since E-mini ES and SP are fungible 5:1. To exit a position, you could save in commission by closing 5 ES's with 1 SP.
There's a few issues. Commission savings is certainly one. For starters there's yet to be a Chicago trading pit eliminated by the screen. Even through the trade in Bonds, Notes, Dow and EuroFx is 90% electronic, the pits still remain. And of course during infrequent service disruptions they enjoy nice volume from temporarily displaced screen traders. The pits are a safeguard. In the case of the S&P500 there's TWO factors. Not only is the pit 5x the popular mini but the trade increment is smaller. Thus trades can be met in the middle of ES's .25 tick. For example, If one is short 20 ES and the market is .25bid at .50 you may not want to immediately pay .50 but at the same time you realize buying the .25's is going to be difficult. You instead may be able to buy 4 SP to offset your 20 ES at .30 or .40. In that case you saved some commish AND received price improvement. As impossible as it is to believe the pit still has a 2-1 edge in notional open interest. Many of the non day trading or program types such as funds prefer not to use the screen because they don't want to assume the internal risk on an order entry error. You'd be SHOCKED at how many bond orders are entered each day on the screen by clerks or brokers on the behalf of an institutional customer who's placing the order by telephone.
Pabst, Couldn't agree with you more buddy. A broker with a desk right next to me enters orders on the screen on behalf of some of the who's who of hedge funds in New York City for Treasury futures. As much money as they manage they are still novices when it comes to electronic execution. Most of the big bank desks on the floor (JPM, Lehman, Goldman, Merrill) still put orders on the screen for the house traders.
It's true. Even at HSBC's trading desk a lot is done by phone and believe it or not, fax. But thanks to Six Sigma initiatives, much of this inefficiency which is defacto SNAFU will change within the next 5 to 10 years. The pits will die out sooner or later. They were good times to be had. They probably would be dead already if it weren't for the venerated culture of pit play. And if the CME ever decides to change the min increment of the ES to .10 or even .01 like the underlying index, well... we'll be waving "bye-bye now" to the pit players forever. I'm thinking that one catalyst to changing the min increment size is a rise in the underlying such that the minimum SPAN perf bond doubles from where it is now to approx $8k. That will make the e-mini too pricey for the players it was originally intended to serve. (and I don't think they'll come out with a mini-e-mini.) In order for the CME to bring the margin back to "reasonable" levels, they would have to change both the contract size and tick value to something such as $25 x index value with min fluc .125 worth $6.25. Problem is, volume would minimally double. Hopefully they'd have bandwith and infrastructure upgrades in place before they institute such a change.
Wow, I am kinda shocked. Institutions using telephone to trade on electronic platform. Then again trading on globex and similar is not their main source of income.
There was a good thread on it. I' ll look for it later maybe. But it boils down to this. If you're doing serious volume, it might. The savings are not going to be dramatic. Like 50%. You'll probably save 2%-15% depending on volume. But you will have more control of your trading. One less entity to blame when things go wrong.
The floor traders definitely had a significant advantage before electronic trading gave retail investors the ability to place their own trades from their PC. Now many of the floor operations are extremely thin; especially those with an electronic counterpart. The most robust pits are still the Euro Dollar pits and some of the option pits. With the proposed merger of the CME and the CBOT scheduled to go through after the first of the year, I would imagine that this will spell certain doom for many of the smaller floor operations. It is only a matter of time before we are all trading 100% electronically.
If you trade significant electronic volume in any of the CME or CBOT contracts it is worth leasing a seat (even if you won't be trading on the floor) because you will receive member exchange fees and member clearing firm rates. This will cut your cost significantly. I would say it is worth it to trade from a booth on the CBOT floor because you will see options flows and you have the cheapest office in the city at about $250 per month (which are very important on nothing days in Treasuries). Not sure how much value left trading from CME floor unless you trade back-month Eurodollar spreads or eurodollar options (as those are really the only pits with any type of flow left). I agree smaller pits such as the Nasdaq, Russell 2k, Currencies, and maybe even SP's, which all trade outright without much spreading could probably be closed but options pits in Chicago still have significant value and it will be tough for the screen to replicate many strategies used in interest rate options.