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S&P 16-point drop: Why no one else called it
Danny Riley

Someday these news outlets and others will refer to the trading floor and people in the know instead of asking someone who has no idea and just starts talking because he or she was asked the question. Many people keep CNBC on while trading because they want the news, not because they want to hear nonsense garbage.

The S&P opened at its normal time and there really was nothing in the economic reports or headline news to indicate a sharp move in either direction. After all, the summer trade is in full gear; the ranges are small and the volumes are low.

Ripe

Even before the schools let out, the markets were already seeing below-average volume. Zero rates, an S&P (SPU14.CME) that goes up almost every day and a very low level of interest. While some may disagree, the new regulations could be part of it too.

With less bank prop trading and market-making going on, millions of buy and sell orders have completely disappeared. More and more trading desks and trading operations are being shut down. This has created less liquidity and in an already low-volume environment strange things can happen.

Mishandling of large orders

FakeTweet 300x160 S&P 16 point drop: Why no one else called it
FakeTweet 300x160 S&P 16 point drop: Why no one else called it

The tweet we wanted to send

I am sorry but you won’t get this from Jack Bouroudjian or Jim Iuorio. You’re going to get it right here and live in the MrTopStep Trading Room and not one of your talking heads was even close.

6/26/2014 8:30 AM CT The Open of the S&P 500 Futures and Options

After the 8:30 open a large sell order was entered in the CME Groups S&P 500 emini futures contract. Because the desk on the floor has a history of executing large institutional buy and sell orders, we understand how the orders must be entered.

In the 2010 Flash Crash the actual people working the sell order scared all the bids out by selling 5,000 to 10,000 at a time. In my view there were a lot of better ways to work the order, but that’s history now.

After yesterday’s open a 20,000 lot to sell hit the S&P. This seller generally breaks the orders up to 2 or 3 desks. Yesterday the whole 20,000 lot order went to one desk to execute. The desk that did the order sent it to an off-floor trading desk that “banged” the order out, meaning instead of working the order selling 500 lots and 1,000 lots at a time they sold two 10,000 lots one after the other and the algos front-ran the order all the way down to the lows of the day.

If you still believe the propaganda that algorithms are not sometimes used for high-tech, high-speed frontrunning, you are fooling yourself and placing your money and that of your clients in danger.

That’s what happened and that’s what caused 110,000 ESU14s to trade in the first 5 minutes of the day. In the credit crisis our desk would buy and sell 10,000 lot ES orders and that would move the Dow up or down 100 to 150 Dow points. In the current thin-to-win environment you can imagine what a poorly executed 20,000 can do when the algos catch on.

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