My friend Craig Pirrong wrote about a podcast that talks about the trading floor. Read it. Craig earned his PhD in Economics from the University of Chicago. He’s a brainiac unlike a lot of us.
One thing I like about Craig’s blog is that he is able to take very difficult concepts from economics and relate them to simpletons like me. The blog on the podcast does exactly that. I won’t quote it because you should go there and read it, but I will copy and paste my comment here.
I am an old floor trader. I was on the CME Board that revolutionized the industry…..I have listened to his podcast and like you, brought back so many memories. I don’t think Nagpal was a “real trader”. I think he was on the periphery. I knew, and know the Borselino’s. They were tough guys, and tremendous floor traders. They grew up in my neighborhood and Joey went to high school with me. I knew many of the people in the podcast. Many were from the currencies. The currencies are where the FBI did most of its damage. They found minuscule things. Leo was never in on the bagman game. Jack Sandner wasn’t either, although he was a principle of the largest broker group with the Kaulentis brothers-and they weren’t exactly clean. They didn’t call him “Bracket L Jack” for kicks. Political factions developed over the course of the 1990s at CME, there was the Leo faction and the Jack faction. I was part of the Leo faction. We wanted to go public and become a corporation. Jack’s faction wanted to fill their last order and then let the doors close. Leo gets credit because he’s Leo (and aggressively takes credit) but it was Bill Sheperd who led the charge for change. Ironically, Terry Duffy was politically smart, and was able to thread the needle between both factions and is now still chairman. M. Scott Gordon and Jimmy Oliff led the exchange through the transition, but couldn’t stay after McNulty since they backed Jim, and Leo/Jack/Sheperd wanted McNulty gone.
I traded hogs with Terry. He was always honorable. One time, I made a market in a spread during the Goldman roll and he said, “You really don’t want these.”. I think I sold him 10 and then he had thousands to buy.
The floor was full of some of the smartest people you’d ever want to meet. There are too many to name but no one has heard of Bruce Johnson and he is probably the best meat trader in the world and has been since the 1970s. Bill Sheperd never graduated college but was the largest British Pound futures trader in the world. Don Wilson started in the Eurodollar options as a one and two lot trader. He was so young they called him “Doogie”. He is a multi-billionaire now. Irv Kessler at the CBOT and Ray Cahnman….so many…
There are quite a few of my old friends passing away. I get the notes quarterly. On a sadder note, when the floor closed I know at least 25 that have taken their own life. The amount of divorces when the money ran out is incredible. I know a lot of people that went broke after the floor closed. I myself was unable to make the transition from floor trading to electronic. I lost a lot of money from 2009-2012 when the meats went fully electronic. It’s super depressing, and you are unemployable. I was unemployable even though I was one of the leaders of the exchange transformation, had an MBA from Chicago Booth blah blah blah.
For sure, there were bagmen on the floor. We all knew who they were, and often we detested them. Their broker protected them for the reasons you highlight above. Large brokers had more than one bagman because they were so big. A couple of guys I knew in the Eurodollars had a covey of them. They were filling 25k-50k contracts per day. Let’s say I had 1000 to sell, and 800 to buy. I might look at my bagman and execute the trade: Sell you 1000 at 1, buy 800 at 2. Let the bagman worry about being short 200. OR, I have 1000 to sell at various prices; 500 at 10, 100 at 15, 300 at 20, 400 at 25. The market quickly moves from 5 bid at 10 to 50 bid at 55. I tell the bagman he’s long 1000 at 25. Bagman goes into the market to cover the trade as fast as he can. Next day, maybe he has outtrades with the broker and adjusts his price from 25 down to the other prices. Customers are filled at the price they wanted, and the broker is able to pay the bagman back. No one really gets hurt technically except in theory, the broker should have filled them in the open market, starting to sell at 50. BUT, if everyone sees him selling they might move against him and sell hurting the probability that he could get them all filled at the prices the customer wanted-incurring a loss for himself.
It’s hard to understand unless you were there. Trading in a pit was sometimes like a huge poker game.
To give people the feeling of the money at stake, in 1990, brokers were paid $1 per contract to fill. In the currencies, a one tick move was $12.50. In the Eurodollars, it was $25.00. In the Hogs/Cattle, $4. In the S+P, $5, but it always moved in $25 increments. HOWEVER, contracts could move a hundred or more ticks per day and sometimes in an instant, except in the case of the Eurodollars which moved 1-10 ticks per day. The difference in the Eurodollars was the size. 100 lot orders were common, and the contract was a behemoth trading hundreds of thousand of contracts per day.
FWIW, in the Eurodollars during the week before and after Black Monday in 1987, the market was quoted for bid/ask in 10-20 tick increments ($250/$500 per contract; remember you are trading 100 lots). That is the single craziest day I have ever seen. 2008 comes sort of close buy happened over weeks not a day. Plus, I had a gigantic position in 2008 so I had trouble sleeping.
Screw up an order, and you eat it. One screw up could totally ruin your month, and possibly an order fillers career. Big order fillers had high overhead costs. They likely had 5-6 clerks paid up to $80k-100k, sometimes $150k a year to watch customer desks. They’d have one or two trade checkers paid about $200-$500/week to walk around and re-check trades with other traders to make sure there were no errors. They would have an outtrade clerk who came in early every morning to settle up trades and that person probably got $1000 per week if it was a huge order filler. I paid my out-trade clerk $400/month, and my trade checker around $125 week but I was a medium size local.
When I clerked, I worked 12 hours a day, five days a week no vacation. I made $400 a week at the top and clerked for the largest options trader in the Eurodollars at the time. My hope was he would back me to trade, and after working for him for one year he did. It took that long to earn his trust, and I gave 50% of my profits after costs to him. I traded for him from 1988-1992 and then went on my own. I bought my first membership for $570k, putting half down in cash with a 9% loan over five years on the balance. Outside of that, I had $100k in the bank.
One day, I was trading S+P 500 spreads during the rollover. I thought I had traded an 80 lot spread with a broker. I checked it, we all nodded. A few hours later, a trade checker came to recheck the trade with me. My 80 lot spread was really an 80 lot outright trade which I had gotten out of, meaning, I was long 160 S+P contracts. Sure, S+Ps tick size was $5, but it moved in $10-$25 tick increments and it moved hundreds of points at a time. The risk was huge. In this case, the market was significantly higher and I had a “winning outtrade”. I covered my 160 and don’t recall how much I made but I recall the market being 500 to 600 points higher. Think I made $150k or something. Lucky. I have had losing outtrades too and they aren’t really fun. But, you could see how that could bankrupt you.
I think it’s also important to note that most of the people on the floor were trading their own money. It is not like NYC where you trade other people’s money. When you made 10g, you made 10g. In the parlance of floor trading, make $5k per day and you pull down $1M per year….Seems easy to do until you try it.
I recall one time, I was short 500 Eurodollars ($12,500 per tick). The market was 10 ticks against me, and there was a 9am CT economic report due out. Do I cover them and take the loss ahead of the number, or let them ride and see what happens? I was pissed. I let them ride knowing full well the market could move another ten ticks against me in all probability. Number comes out. Market breaks. A local about five feet from me yells, “500 at Even”. Before you could blink your eye I yelled, “Buy em”. Scratch for me (meaning I only paid commission on the trade which would have worked out to about $100). As soon as we carded them up the market moved higher.
You had to be incredibly quick on your feet as a floor trader. Remember, you are trading your own money and at the same time the job was physically demanding. I am 6’5″. I was closer to people than I am when I am sleeping with my wife and it doesn’t smell as nice. Sweat is flying along with spit. People are screaming in your ear. You are constantly being jostled like you are fighting for position for a rebound under the hoop.
There were lots of people like me on the floor. We had ex NFL, lots of college basketball, tennis, football players and even ex pro hockey and even 1 1980 Olympic hockey player on the floor. It was 5000 people who were unemployable in the corporate world. The guy in the story above was 6’9″. For what it’s worth, we are still friends to this day.
That is another thing people don’t understand about the floor. It was hypercompetitive. Sometimes, you joined up and tried to move the market or take on Goldman/Morgan/JPMorgan/BankersTrust etc and sometimes you were enemies and fighting each other. You competed for order flow. But, at the closing bell often you’d go to a watering hole and have a good time with the people you just competed with.
There are a gazillion stories from the floor. Most of the time, people think about hookers and blow. Sure, there was some of that. But, there were incredible stories that probably could only happen there. There were tremendous acts of kindness, and millions raised for charity. I will try and write about them and publish them.
Ahh the good old days!!!!!!!!!!!!
Unprecedented competitiveness and unprecedented camaraderie.
Great article thank you