One of the best pit traders I ever knew was Jack O’Bannion. But Jack was one of the shortest locals at the Chicago Board of Trade (CBOT), and short usually didn’t cut it in the pits. In the bond options pit, short couldn’t see the action, short couldn’t signal the arb clerks on the edge of the Treasury bond pit, short was a big disadvantage.
This didn’t stop Jack O’Bannion. He traded size and made tight markets, so the options brokers let him stand up on the brokers’ step along the rim of the pit. Even from up there, Jack had to jump up in the air to signal the bond pit. He was known as Jumping Jack O’Bannion.
One Friday morning when the monthly U.S. employment report came out, Jumping Jack jumped into a deep hole. Unemployment had unexpectedly dropped. Good news for the country, bad news for the bonds, as the Federal Reserve could now increase interest rates. The Treasury bonds tanked over a point before you knew what happened. There were waves of sound. On days like that, you could dive into the sound.
On the south end of the bond pit, the pit committee chairman waved up at an exchange clerk on the radio platform signaling to post fast market conditions.
In the chaos of that fast market, Jack bought 20 calls. Buy calls, sell bonds. Jack needed to hedge his position by selling six bonds in the pit across the alley. To arb, Jack used Paul Mahoney, a bond broker on the rim of the bond pit, and that morning, Paul had a new clerk named Robbie Anderson.
Arb clerks hung off the outer rail of the pit taking orders from locals and relaying them into the brokers inside the pit. So Jack jumped up and flicked one finger sideways off his chin at Robbie, the signal to sell six bonds. But even when he jumped, Jack’s chin wasn’t always above the heads of the taller traders on the step below him. Across the alley and thirty feet away, Robbie missed the signal.
The bond market is tough, it always knows when a trader misses his bonds. At the moment Jack tried to sell six lots, the market was 21 bid at 22. By the time Jack realized Robbie had missed his signal, the bonds had gone 21 sellers. Then a new roar rolled out of the bond pit, and the arb clerks signaled size was trading at 20. Jack leapt up even higher and flicked one finger off his chin again.
This time Robbie saw the signal, and yelled it into Mahoney. Whap, snap, just like that, the broker sold six bonds, and Robbie signaled the fill out to Jack. He was lucky the delay only cost six ticks, $187.50. In a fast market, brokers and clerks are not held, so the loss was Jack’s. Even so, Jack screamed that Robbie was a moron with the IQ of room temperature. Of course, with the market going crazy, Robbie couldn’t hear him. Jack didn’t like being ignored. He leapt up again, and gave Robbie the finger, slapping his right forearm into the crook of his left elbow for added emphasis.
There are signals for everything on the floor from straddles to strangles to calendar spreads, from puts to calls to opening quotes, but this wasn’t an approved CBOT floor signal. Unfortunately for Jack, arms crossed index finger extended is a floor signal: the signal to buy 100 bonds. One hundred U.S. Treasury bonds is worth $10,000,000.
Above a mass of traders in a crowded pit, one finger looks pretty much like another. Robbie misread Jack’s signal and shouted in to Paul Mahoney to buy 100. Whap, snap, just like that, Mahoney paid 21 for 100 bonds. Mahoney yelled, “Filled at 21, paid 21 on a 100 lot.” Robbie chopped his palm downward towards Jack signaling a filled order.
The first rule of trading errors is to get out immediately and fight over fault after the bleeding stops. As soon as he realized what had happened, Jack screamed at Robbie to get out of it. But of course Robbie couldn’t hear exactly what Jack was screaming. Jack had to reverse the signal. He leapt up in the air, extended his index finger and crossed his arms. This time his palm and finger were facing outward: Sell 100.
The bonds were especially evil that morning. When Mahoney filled Jack’s erroneous order to buy 100, the market was 20 bid at 21. In the few moments between when Robbie signaled the fill and Jack tried to get out of it, a Goldman broker took out the 20 bid, and the market went 20 sellers. “19 bid at 20,” an arb clerk yelled, “and Goldman’s got plenty at 20.
When Robbie finally understood what Jack wanted to do, he relayed the new order into Mahoney. The broker tried to work the offer at 20, but when 19s started to trade, Mahoney pulled the plug and hit a Shearson broker at 19. Bought ’em at 21, sold ’em at 19, two bond ticks down the drain on a 100 lot. Somebody was out $6,250.
Jack yelled and screamed and ranted and raved. He claimed that the kid had done it deliberately, but nobody was sympathetic; stick a finger, any finger, up in the air during a fast market, and you got what you deserved. In the end, Jack O’Bannion didn’t even bother to take it to arbitration. He swallowed the entire $6,250 loss.
The CBOT was a magical place. That morning, the bond market punished a mere mortal who lost his temper in the temple of money.
Fred Townsend traded for more than 20 years in the pits at the CBOT, Chicago Mercantile Exchange and the Sidney Futures Exchange and has been a contributor to Futures.
