In The Pit With Borsellino

It’s a brisk fall day in Chicago,
November 8th, 2000 the day after the presidential election
, and the nation has awoken to the possibility that
two rather unremarkable campaigns may now go on the warpath, waging battles in Florida courtrooms to decide the next leader of the free world.

The S&Ps have retraced about one-half of the point-loss sustained during a punishing autumn drop brought on by a string of disappointing corporate earnings, higher interest rates, and rising oil prices. A Bush victory could extend a choppy, two-week rally. Markets favor the more corporate-friendly Republicans and could move higher in relief. On the other hand, any uncertainty about the election’s outcome could exacerbate the bigger-picture bearish trend.

Lewis had asked me to sit in on his team’s morning meeting before we walked down to the floor of the Chicago Mercantile Exchange. I arrived at Borsellino Capital Management an hour before the opening of S&P 500 futures trading. I found him discussing the ramifications of the contested presidential elections with his team who were sitting
in front of banks of computers with screens flickering charts and quotes.

Lewis greets me and while making introductions to his staff says, “Did you see the big Globex volume on the election results? It hit 4,000 contracts overnight. The low was made when the news said that Gore had won Florida and we hit the high when they said Bush would win the presidency.”

“No, I didn’t see that. How do you think the market will react to that?” I ask.

“Well, there could be an initial sell-off, especially if the drugs and Microsoft move lower. But I’ll probably look to fade whatever move occurs if the presidential election results are announced. If Bush wins, the market should rally. But because that’s probably already priced in, we could see profit-taking. Now if Gore wins, we could see a selloff, but then the market might rally.
This is one of those cases where you would buy the rumor and sell the news.”

Borsellino Huddles With His Team

We then moved to the conference room for the
morning briefing, a room filled with signed helmets from football greats and other sports memorabilia. Six of us came to order around an oval walnut table with Trisha Crisafulli joining in on speakerphone.

Looking at one of the analysts, Lewis begins. “Let’s get going.”

“Today we have wholesale trade; import and export prices were already released but had no effect. Thursday is PPI, forecast at .2%, but everybody’s watching the election. We did unusually high volume on Globex with over a 20-handle range on the election news overnight with a high of 1455 and a low of 1432.”

Lewis then detailed the major areas he would be looking at in the pit for Wednesday, November 8, 2000.

“Okay, 1445.50 was Tuesday’s (November 7, 2000) high. We have small resistance at 1450; then we have 1451.50, 1453, 1455-1456 and 1459; these are all small key areas. The major objective is at 1460.50.

“On the downside, we have 1445. And then 1442, which is very key.

“Yesterday, 1441-1442 was our swing area. In the morning we hit a high of 1441.80 and then broke down to the low. Then we came through 1441.80, we went up and made the highs. Below that is 1439.50, 1437.50, which is a major area, and then 1433.50. Yesterday’s low was 1432.”

Brad Sullivan then provided a briefing on possible action in the Nasdaq 100 futures and some of the other analysts added their ideas on the market for that day.

On The Floor Of The Merc

We then walked downstairs and over to the Chicago Mercantile Exchange, home to where Borsellino has achieved fame and fortune trading for the past two decades. First we go to the coat check where he suits up, trading expensive street shoes for tennis shoes and donning the requisite trader’s jacket with his well-known trader’s badge,
“LBJ,” pinned on it. Less than ten minutes to go until the opening bell and Lewis is
, making small talk about the exchange and various CME personalities. I, on the other hand, am finding that the energy and intensity of the place is giving me a dry mouth and sweaty palms and we haven’t even set foot on the trading floor.

After ascending another flight of escalators, Lewis signs me in. Security is very tight at the exchange, and you need a member to sign you in. I get a sticker with Lewis’s badge acronym LBJ written on it, my VIP ticket for the day.

After a security check we finally arrive at the threshold of the vast trading floor of the Merc. In a sign of the times, an official at the entrance makes Lewis sign a form in official receipt of what appears to be a legal document. As it turns out, the CME was recently “demutualized,” meaning the members voted to make the exchange a public entity. Members will become shareholders, and with the new currency of CME equity shares, alliances will be forged and the Merc will potentially be better positioned to manage its evolution, as financial markets everywhere go both electronic and global. A long-standing Merc member, Lewis knowingly signed the form and handed it to me, saying, “Read this if you get bored or want to know about us going public.”

Lewis then gave me a ringside perch and moved into his place on the second-to-the-top step of the tiered, octagonal S&P futures arena, a mosh-pit of hundreds of
avaricious, high-strung entrepreneurs, trading one of the world’s most watched futures contracts.

Spots near the top of the pit are earned. New traders go to the bottom of the pit where they can get lost in the crowd, have an inferior view, and a more difficult time getting trades done at the best price. The top spots provide the best view of what the biggest locals are doing. They also let you better see the order flow from the major institutions coming in from the filling brokers who surround the pit. When top traders retire or decide to make the move “upstairs,” room is made for more junior traders to move up a step. Moving up the steps is a function of time, experience, and a trader’s capacity to stomach and manage risk.

The capacity to take big orders and stomach the risk is a complex and critical component of being one of the traders situated at the top of the ring. Institutions need the locals to take the other side of their big orders–30-, 50-, and 100-lots and sometimes larger positions. And the institutions are willing to pay the bid-ask spread and some slippage in order to get their paper filled. With a 100-lot position, every “100 points” (1.00 or “one handle”) is worth $25,000. The S&Ps fluctuate by this amount virtually every minute of every day during the open outcry session. Traders need lightning reflexes, a damage-control plan, and an iron gut to handle such size and risk.

The top step is where Borsellino has been standing in three different decades.

Moments after Borsellino had assumed his position in the pit, the opening gong sounds. I am startled because Lewis had literally just left me when the bell sounded.
His instinct to be in the right place within a split second was a little unnerving.

So as trading opens, Lewis’s hands are turned in buying, fading (trading against) the market’s impulse to drop on the election result uncertainty. Surrounding me, brokers in cramped and pricey, standing-room-only cubicles bark quotes into banks of phones while simultaneously hand signaling bid and ask quotes and buy or sell orders to the filling brokers on the top ring, feeding the world’s orders into the pit.

On the open, the screaming and noise level surges in what initially sounds like a football team getting psyched for a big game. Instantaneously the pit comes alive, pouncing like a wild animal in a flurry of buy and sell orders. The frenzied chant seems to express itself like an insatiable hunger, simultaneously feeding and gnawing on what appears to me in this setting to be a bottomless appetite of greed and fear. Roars, cries, and growls emanate from the pit’s maw, as extended talons communicate the essential information of survival in this jungle: price and quantity, bought or sold. Five-fingered talons everywhere gesture, snatch, and seek to devour their prey. Other times, what they have snatched devours them. Spittle from the price-seeking visceral cries begins dusting the pit-organism as the animal-market endeavors to digest and price the news of who will be the first president of the
new millennium.

The Play by Play Action

It’s seconds or maybe tenths of seconds into the November 8, 2000, session. The opening’s assault on my senses
seemed to have suspended me in time. Ringmaster Borsellino’s arms are extended
with hands turned in, indicating that he is buying “four-forties” (1444.40) from one of the filling brokers. (Click here for a lesson on CME hand signals). He quickly notes the transaction on index cards in his hand. Chaos and a frenzied roar escalate, agitating the amorphous capitalist beast contained in its octagonal pen.

The market’s moving down. A local in Borsellino’s gaze signals he’s got contracts for sale at 1443.20.
“Sold,” Lewis gesticulates, hands punched out as he offsets his opening purchase in a losing trade. Sometime during this opening flurry an announcer bellows over the PA system, “The opening range is five-even, four even” (1445.00-44.00).

Lewis continues his constant scan of the activity across the pit as his hands go back up. His hands are turned out again selling, this time “three evens” (1443.00). The market ticks down 42.80, 42.60, 42.50, pauses, then dips down to 1441.00 and starts ticking back up. At around 1442 even, I see Lewis buying, making what looks like a protective scalp of about a 100-point (1.00) gain. The Spooz keep clicking up and some of the other locals’ hands are also turned in, buying or covering shorts, driving the market back toward its opening highs as locals fill buyers at higher and higher prices.

Lewis bids lower at this point, providing another trader with the opportunity to get a slightly better buy than what most of the other locals in the pit are bidding at that instant, and offsetting some of his 43-evens in an almost scratch trade. Borsellino makes a few rapid-fire trades in succession, performing the role of market maker by selling contracts 20 or 30 points (0.20 to 0.30) above where he buys then, capturing the bid-ask spread in scalp trades. But at this point his position size is small as he appears to be testing the waters and waiting for something–I’m not sure what–to happen.

We are just over 10 minutes into the session and the market is stalling right around the high of the session. For the next several minutes it trades over just a 200-point range (2.00), but mostly within just 100 points. Every time it bangs up to the 1444.50 level or 1445 high, I see Lewis’s hands turned out selling. Some of the other locals are doing the same thing when the market hits its head up against the high. But something has changed. Borsellino does not appear to be doing scalp or test-the-waters types of trades here. Rather, he is going exclusively on the short side, selling, and apparently
building a big short position.

Now the market is trading 1444.00 offered and Lewis takes them. He then turns and offers to sell even more contracts at an even lower price, a
gutsy move if the market does bang up against the 1445.00 high, break out, and rally. Other traders apparently notice Borsellino’s lower offers to sell.
I see one trader look over at Lewis, pause, and go from the buy side to the sell side, offering contracts lower as well.

I remember from the meeting in Borsellino’s office this morning that he said that 1442.00 is a key area. Over the next few minutes, the market approaches this level, and the pace of activity quickens. Lewis keeps offering to sell contracts lower, staying on the sell side and amassing a position worthy of a shot of Pepto-Bismol.

The market at this point is very close to 42-even when there is an eruption of noise and a frenzy of activity as the market blows through “42.” A flurry of fear feeds the pit, seeming to overwhelm some in the arena and the market implodes five handles (5.00) in as many minutes.

In this steep downdraft, the pandemonium and roar notch higher. Clerks’ and order fillers’ movement and attention hasten. But most notably, the locals’ pace and intensity sharpen.
Eyes bulge, calls to sell are literally spat, and neck veins swell as arb clerks push fingers away from their chins, seeking to flash fill sell orders phoned to the pits. Other clerks—