Keeping Pace with Constantly Changing E-minis

The more things change, well… the more they change, I guess. Looking back from February 2007 onward, that month was the real transition from decade’s low volatility (VIX) levels towards a steady trend of rising volatility in the markets. February 27, 2007 was one of the largest-range sessions lower that anyone had seen in years. If I recall correctly, it was Bernanke who uttered something about the Fed’s role not being tied to propping up stock markets. “Whoosh” was the overwhelming response to that idea.

Funny how the fed has seemingly worked overtime to talk – prop – lift financial markets higher ever aft. Can you recall a group of more vocal, public Fed members at any point in history? I can’t. The aggressive pace at which interest rates are being slashed rivals if not exceeds year 2001 efforts. Whether that translates into a years-long stock market bottom akin to Oct 2001 remains unknown.

Volatile Extremes

So we now have the financial watchdogs of U.S. market policy jawboning (literally every week) financial markets that have never before been so sensitive and responsive to breaking news. Recent volatility levels as measured by the VIX, based on the underlying SPX are approaching historical high levels right now. Only Sep-Oct 1999 and the summer of 2002 recorded higher VIX readings than current since way back 1991. Traders who got real good at working dull markets have moderately or completely retooled their trade entry/exit method(s) to keep pace with this other end of the price-action bell curve.

Market volatility is at least partially enhanced by fundamental changes. Stock market exchanges have gone public, complete with listed stocks themselves. Elimination of uptick rule for short sales, much less clarity on Level I and II screens for both stocks and various futures and migration of products listed on various exchanges have altered the playing field from past years until now.

Programmed In

By far the biggest change in my time has been proliferation of program, aka black-box trading. A recent article in Forbes estimated that some 70+% of all volume across U.S. stock exchanges is driven by program trading of some form or another. Instead of human decisions to gradually accumulate or distribute a stock or basket, block trades are hauled in or puked out literally at the speed of light. What once was rather deliberate price action trending upwards or down in a given session (or week) has now morphed into a buzz-buzz-slam-slam-buzz-buzz type of pattern. Index traders in particular essentially position their trades either ahead of or directly into the next program blitz that kicks off. In between those surge moves these days is a whole lot of sideways noise.


In the past, we would see price action moving in more deliberate fashion at a slower pace. Current market movement includes numerous v-reversal moves intraday. What seems to be a deliberate trend move higher or lower abruptly ends with a sharp reversal of direction that races higher or plunges lower. That type of thing was expected before on occasion when breaking news changed the landscape. In today’s market, numerous reactions to bits of information and then the reaction to that initial reaction are computer-driven programmed slams.

Straight-line Surges

On occasion when fundamental news does manage to drive a trend session directionally, the surge upward or down can be straight as a telephone pole. That’s what happens when trading collars are relaxed, uptick rule for shorts eliminated and a majority of volume is traded through computers that click one another like lined dominos.

Same Game, Different Equipment

Overall, the games of baseball and football in America haven’t changed at all in a century. The fundamentals essentially remain the same: run, throw, pitch, catch, tackle, slide. But bring back any player who has been in a vacuum for twenty years and see if he spots any changes. Parts of the game would be unrecognizable, for sure.

The same if true for trading. Buy low, sell high or reverse the order of that sequence. Long or short, stop-loss protection in place, exit for profit or loss. Repeat the process. What part about that hasn’t changed since the major exchanges were held in the open air outdoors?

Bring back traders who have been idle since 1999, 2000 or even 2004 and let them see current price action for the first time since then. A lot of similarities for sure, with some dramatic differences.

A trader’s primary approach should work through all market conditions. Most do better in sideways markets or directional markets overall, but any approach needs to handle whatever price action delivers. That is what periods of prosperity versus periods of drawdown are made from. Longer-term traders can be less flexible than short-term traders. Smaller charts = greater variances of price behavior. Anything compressed is naturally sped up to equal degrees.

It’s the natural evolution of market behavior which thwarts or outright kills rigidity in a trading approach. Mechanical systems built to harvest cash methodically in the dull markets of 2004 – 2005 didn’t stand a chance since 2007 began. Systems or methods based on the huge directional moves stock index futures frequently made past 3pm est through several months past would likewise be carved to shreds once that pattern ceased. For the last couple of months the power surges inside final hour of trading have morphed to big M-shaped or W-shaped surges as computers wage war.

The ability to trade consistently means overall results are a constant. Accomplishing that inside of a market which remains perpetually variable does not permit rigidity. Systems traders must continually tweak and adjust trade management parameters. Discretionary traders must likewise adapt to minor and sometimes major changes as well.

A good example of that is trading the Russell 2000 emini contract. When volatility is low, this contract gained a lot of popularity amongst retail traders. It often makes twice the dollar-value movement intraday than any other emini contract. In other words, if the ES posts a 20-pt intraday range while the ER posts a 17-pt intraday range, the ES covered $1,000 per contract as the ER covered $1,700 per contract of chart distance. That type of ratio used to be common and is still seen often today.

In the past year alone, available open interest size on the ER dome has slid to about half of what it formerly was. Whether it is the gradual migration of ER traffic from CME to ICE exchange, twice as many ER traders chasing the same open interest intraday or fewer surviving ER traders chasing lesser open interest in high volatility conditions is often debated. What we can see with our own eyes is a thinner contract that commonly skips across two – three ticks (or more) when filling block trades. Depending on where an orders sits in the cue, even a 1-lot ER trader can experience one – two tick slippage on fills that are limit orders that become market orders when hit. Heaven forbid someone enters on a pure market order for ER during one of its frequent price surges. Actual fill could be ten ticks or worse than where it was intended to be fill.

Remains to be seen what becomes of the ER next year when full migration to ICE platform is complete. The changes may be subtle or dramatic, and dedicated ER traders will adapt accordingly. Not much different than 30-yr bonds which essentially ceased to be issued (trade) a few years back, only to be reintroduced some time later. 30-yr futures traders either stuck with a dwindling contract, migrated to the 10-yr or 5-yr, or switched to another market entirely for at least awhile.


I’ve been doing this since late 1998 myself, and haven’t missed sitting through many live sessions since late 1999. For these few reasons above and legions more like them, rigid thinking and complete faith in an unchanged future are not part of my thought process. Having a core approach to trade from is important. Being able to mold and adapt when conditions change has been critical to survival. After all, in our profession, the only constant is subtle to dramatic change.

Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures and commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets.