Jan

29

Having spent a considerable amount of time trading in the pit, I came up with many methods to wring out a little extra money, which meant the difference between winning and losing on many days. I earlier recounted the method of finding a loser and fading his trades. That was a great way to make a net average profit. I also alluded to mechanical methods that I used to make money. All of these methods required strict concentration and quick thinking.

Pit brokers are only human, and most of them are just tradesmen. When a pit broker would get an order, I'd carefully watch which direction his eyes moved as he read the order. As all paper orders were made in the same format, one could see if it was a buy or sell just by his eye movement. If he had a buy order, I'd bid at the market price, maybe even bid it up a quarter cent, just to see what he'd do. If he bid the price up in front of me, I'd turn around and sell him the wheat. I'd then offer wheat at that price, sometimes a pr etty large amount, just to try to get some more locals to offer it down a quarter cent, in which I'd buy it back. If the broker didn't do anything with the paper, I'd usually assume that it was a limit order, and was usually right. This was a good piece of information, as I knew that there would be a price where I could pitch out wheat at a certain price after he put the order in his deck. I'd memorize those price points with as many of the brokers as I could, and this greatly lowered my risk.

I learned the individual methods of brokers, such as the brokers that worked for hedging companies. As they were usually sellers, I would try to entice them to sell by offering in front of them in order to move the market. Many of those hedging brokers used to like to sell at 10 cent intervals, and I found that there would sometimes be selling pressure at the dime which was very useful. Back then, I found that there were many brokers that would just let us have the wheat at whatever pr ice we wanted…all they wanted to do was to fill the order, and they didn't really care at what price they filled it. I treated these guys like gold, sometimes giving them trades in distant months, just so they could fill the order. Of course, I'd immediately spread that month, and try to work it out later. All in all, I was a net loser on those trades, but considered it to be a cost of doing business. Some brokers wanted all of the money for themselves, and were very tight. I tried to avoid them like the plague. The brokers that represented the big commercials were very useful, as if you could figure what was in their deck, you could see what they were doing, and at what price. The big commercials did volume, and knowing what and where their order flow was going allowed me to put on sizable scalps with a good guesstimate as to where I could exit the trade, which would also limit risk. During my tenure in the pit, I learned how to read upside down, and to also read the writing through the orders if the light conditions were good. I used to watch brokers put unfilled orders in their decks, and if I had an idea of what price was on the order, and if it was a buy or sell, I could figure out their hand like a good gin rummy player does.

Some brokers were very careless with their order decks, and would accidentally flash their order, much like a careless poker player accidentally flashes his cards. I found it advantageous to sometimes stand behind careless brokers, peeking over their shoulder. I learned to watch what all the players were doing, especially if the big commercials were trying to move a spread. They'd battle it out, and I'd pick up the scraps, some of which were pretty tasty. I had to learn the art of deception as a lot of locals would try to follow me. Sometimes, I had to put on positions through other brokers to disguise my intentions and strategy. In quiet times, if Chicago started moving a couple of cents, I'd sometimes try to fake a rally just to get people sucked in. Unfortunately for me, sometimes I'd start to believe the rally I faked was for real. That would cost me money in the long run. I found a real good indicator for market opens. If the market was poised to open higher, people would get into the pit 5-10 minutes early, whereas a lackluster or down opening would find people arriving at the pit at the last minute.

Unfortunately, as the electronic markets replace the pits, all of these mechanical techniques will be destined to the dustbin of history. I personally feel bad about the impending demise of the open outcry method, and often wonder what will happen to the electronic markets if there's ever a big internet shutdown.


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3 Comments so far

  1. George Parkanyi on January 30, 2008 3:55 pm

    Great post, Jeff! You should write a book on your experiences in the pits. This is true Americana, and valuable economic history.

    Talk about being where the rubber meets the road! To the rest of us it’s just blips on a screen.

    Cheers,
    George

  2. MOSHE LIBER on January 30, 2008 8:45 pm

    very intresting, a litle like playing chess for mony

  3. Acetrader on February 1, 2008 4:05 pm

    good article…the trading pits are like a museum, put yours next to the dinosaur in Chi-town. Yeah, I have an edge on old people too, I found I could talk fast and confuse them, take their money, hey, I'm only human, guess my youth was MY edge.

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