How do people trade in the pits?

How often were trades broken? How often did you end up in arbitration?

 

I was told by some S&P traders that when you start out, NO ONE will trade with you when you're a pit newbie. You have to get to know they guys, take them out for drinks and dinner, etc.

 

but the runners arnt traders...are they?. I thought they were pretty much just wanna traders still in college. How do those runners get paid anyway?, and is there any skill involved in being a runner?

could i be one?

 

do traders in the pits have a longer "life span" than us at home?..can any average joe be a pit trader if they have the capital minimum?

 

I would think they are like secretaries, who get screamed at by traders.

 

Actually open outcry in the equity options world is pretty dead except for a very few pits. Most of the equity options business is done electronically. In the active pits, you need to understand that different month’s trade in different areas of the pit. So the guy all the way across the crowded pit from you is usually trading in a different month.

When you do execute a trade with floor broker you check off on your card the price and size of what you traded and you take his badge acronym and clearing number. Every so often you have a clerk / runner who take your stubs and enter them into the match system. They’re electronically matched to the guy who you did the trade with to make sure the counter party, price, size and particulars are agreed on. If you have out trades which don’t match up what the other party thought then you have to figure out what happened. Its sort of an honor system to a degree, that if one guy has a ton of out trades which all would have been losers over and over no ones going to allocate trades to him in the pit. Don’t forget that floor brokers have a good amount of discretion, so if the whole pit of market makers is bidding 1 price and he only has 100 lot to sell he can choose to break that up any way he likes to what ever mm’s were bidding. There are rules for parity and priority regarding orders from off the floor and what orders get executed before the mm’s and which have status on par with the mm’s.

More recently mm’s now carry a wireless hand held where they just tap the counter party info they used to card up and it sends to trade match instantly. The nice part of that is you can find out trades quickly and you can monitor your net positions in real time. Also risk management can now be done off site if you have a large group of traders. Central management can see everyone’s position in real time from outside the pit.

 

The average Joe can become a pit trader in a couple ways. If you have your own capital you can set up your own firm ( b/d) and plunk your money down at a clearing firm, take the courses that whatever exchange you want to trade on makes you take, then either buy or lease a seat. The other way is to get hired by a firm. Obviously neither is all that easy to do. There are a lot of fixed expenses to which you need to cover each month and you have all the variable expenses each month before you make dollar one.

Don’t forget if you get a seat on a place like the CBOE, you don’t just walk around from pit to pit saying I’d like to buy some calls here or sell some call in that stock. You sign into a pit and you’re responsible for providing liquidity both electronically and open outcry in every series in the pit in all the issues that trade in that pit. You cant say NO I don’t want to trade those if they trade.

Market making really is not about taking directional stands its about trading volume for edge and trading volatility.

 

Its not that no one will trade with you, its more along the lines that you'll be forced to pay the spread....if you (and a handful of other guys) are posting the best bid, a broker or paper will probably just trade with another guy (not with yourself), and if its a big order (like 50 cars) he may not be willing to give 1 car to you and the other 49 to the other broker. But once you get established and paper is willing to trade with you they may always look your way when they have business (mainly because they know they'll get all their trades done at a decent price with no errors). I use to clerk for a guy in the Ag pits that made a lot of markets in the back months (and he would take on substantial size from paper coming into the pit). The same brokers would always look to trade with him if possible because of the reasons listed above.

Also, once your down in the pits its actually not as confusing as it seems, you just have to know what to look and listen for. In my opinion the information flow is faster than watching it on the screen. You have instant access to all the quotes, you can watch the brokers who our outside the pits, on the phones who may be getting ready to work an order, ect...

 

Its not just that they wont trade with a new guy. Who the orders go to in the pit is a complex system of who is sending orders back to who and who is paying for order flow and who takes care of the brokers who are bringing orders to the pits the best.

 

Do the trades from the pits end up on our t&s screens, or is it only the eletronic orders?, and do traders in the pits pay attention to outside volume..or just volume in the pits created by other pit traders?

how much size does it take to create fear/greed in the pits for any givin minute?