Saturday, May 8, 2010


This is a bit out of the ordinary but I just listened to this thing and it’s so awesome I had to share it.

There has been a lot of talk about how the crash on Thursday was driven by electronic trading, and it was. But a lot of non-electronic trading still goes on and sometimes tells you more than a straight line down on a screen.

This is a recording of an Phone Clerk in the S&P 500 futures pit in Chicago describing the 10 minute long crash on Thursday. Given the massive reliance on machines a lot of people never hear this kind of thing anymore but it really gives you an emotional sense of what is going on. This has a personal note for me because what this guy is doing is what my first job in finance was way back 21 years ago in 1989 when I was 16. The Chicago floors have a language and culture all their own which might (pardon the pun) be Greek to the average listener so I will try to explain what the guy is doing and the language he is using.

The financial instrument which he talking about is the S&P 500 index future traded on the Chicago Mercantile Exchange. The index futures represent $250 time the value of the index and they expire every three months. Basically if you buy a future and at expiration the S&P 500 is lower you have to pay the seller $250 times the number of points lower it is on expiration day, if it’s higher the seller pays you $250 times the number of points by which it is higher. Given that the S&P closed at 1110 Friday each contract as a notional of $277,500.

The mechanics of pit trading are a bit arcane, and indeed they were invented in 1848. If you look at the photo above you can see what the pit looks like from above. In the center are the market makers, traders who provide liquidity to “paper” the big brokerage firms. They’re called “paper” because their orders used to come to the pit on paper tickets whereas market makers used cards. The way they provide liquidity is by “making markets” to the brokers. A “market” is composed of a “bid” price he is willing to pay and an “offer” or “ask” price at which he is willing to sell as well as a quantity. The traders stand in the pit and with a combination of shouting and hand signals broadcast their bids and offers to the ring of guys you can see in yellow jackets around them. Those guys are Arb Clerks. They communicate with the guys standing in the booths you can see surround the pit called. Those guys are called Phone Clerks because they are on the phones to customers telling them where the markets are. The guy in the audio file is a phone clerk telling you what is going on in the marketplace.

In order to process the massive amount of information and to avoid confusion the arb clerks use a kind of verbal shorthand. The S&P trades in ten cent increments and ordinarily they would tell you where the markets are using only the cents column, and whole points are referred to as “handles.” So if the market drops 5 points you might say “we’re down 5 handles.” So a market quote of 1115.20 bid to buy offered for sale at 1115.80 would be “20 at 80” and it would be presumed that you knew the handle was 5, the last index digit. When the market crosses a whole index point its differentiated with the term “even.” So a market 1115.80 bid offered at 1116 would be “80 bid at 6 even.” 50 cents is abbreviated as “half,” and sometimes whole numbers are designated with “the figure.” So 1118.5 bid at 1119 Might be called “eight half bid at 9 the figure.”

In addition to telling you what the markets are the phone clerk will also tell you what’s trading. This is very helpful because it tells you something about the direction. If the buyer crossed the bid offer spread to pay the offer that’s a sign that things might be going higher. So it’s very important for the phone clerk to tell you what is trading. OK, have a listen and then I’ll give you some more color.

If you don't get the above widget try this:

The conversation begins at about 1:38 in the afternoon Chicago time when the S&P 500 was trading at about 1140. At that point the market was already down over 20 points and someone must have asked him where the limit was. The CME has momentary trading halts if the S&P goes down about 10% but its a fixed number on Thursday it was 110 points. It happens so rarely people forget and the opening conversation is the Phone Clerk and another guy talking about how far away the limit is and the speaker doesn’t believe it’s all the way down at 1053. Which “90 handles, or like 1000 dow points away.” Of course this is ironic because five minutes after they have that conversation it’s a few points away.

In a few minutes a few “HUGE” paper sellers come in and sell it down 25 points in a few minutes to 1115, this is probably panic selling based on the Greek issues. Then once if goes through 1110 the figure the bids just get hit like a steam roller, 1106, 1105, 1104, 1103... crushing them when he gets down to 1070, and 1065 there are offers and no bid down to 1060. For a while it’s 1060-1070, a 10 point wide market in a product which so liquid that it normally a dime wide. That gives you a sense of how massive the uncertainty is. People don’t have any idea what the market should be worth that the bid offer spread on the most liquid US equity product is 1% wide.

To give you an idea of scale, the US market cap is about $11 trillion so each point represents about $10 billion of market cap, so as he’s rattling off the points on the way down each new lower trade represents $10 billion of destroyed value. When the markets are 10 points wide the market can’t properly value the US stock market to the nearest $100 billion.

What is interesting is how little trading actually goes on at the bottom and then how fast it comes up, the offers just start disappearing on the way up, by the time the bid comes back up to about 1090 there are no offers. At one point he talks about how this is going to “blow people out like you would not believe.” At one point he talks about how someone sold a 100 lot at 1060, by the time the tape ends four minutes later that trade would have lost $1,250,000 for whoever did it.

I have to say that the exchange floor culture is one of the coolest places to work ever. The world is melting down and this guy is so high on adrenalin he can’t get enough. My favourite phrase comes at 10:13 when he screams out “WE NEED TO DO THIS EVERY DAY DUDE!”

That’s the Chicago way.


Satya said...

Thank you, enjoyed that!! :) Your blog is always educating and entertaining - do keep going! Cheers

Karen said...


Bya said...

thanks for that.. very nice!