Pit Traders - How Do We Classify Their Trading Style?

I recently watched that movie "Floored: Into the Pit" and I began asking myself exactly how one would classify that type of trading.

Obviously fundamentals come into play, but I don't think that you can really classify such an approach to trading as a pure fundamental system. After all, it seemed that a lot of the way trading was done was simply based on the sentiment and buying/selling frenzies that would kick off and go on for who-knows how long.

On the other hand, it really doesn't seem like pit traders could be classified as "technical" traders, right? I mean, there are price feeds all over the place, but there are not a bunch of charts which one could use to look for patterns and you darn well are not running a bunch of indicators on your smart phone and basing all your decisions on whether or not the light is green or red.

So exactly what type of trading are these people doing if they are neither fundamental nor technical traders?

Order-flow traders.

There's an assortment of pit trading types... so I'm going to assume you mean the local independent traders ("locals".)

Go back many years ago (6+) and their main intraday strategy was just to make a market for smaller orders to be filled by breaking off larger lot orders from the major firms/banks and dishing it back out to brokers trying to execute smaller orders.. basically being a middle man buying bulk and selling singles. They did this trying to capture a small gross profit in the process, usually from the spread itself by filling on both sides of it if they could. This worked well back then since the smaller orders came in pretty consistently from both directions (long and short..)

Fast forward to today, and their role has changed a bit. Not just because electronic trading has taken over, but because the order flow has shifted from a constant two-way streams (long and short coming in at the same time) to one-sided waves of hard selling or buying all at once. It's far more one-sided now than it was 5+ years ago, leaving the "locals" having trouble playing the middle man since the ability to trade out a position they took on while filling an order isn't as readily available as before.

So, like all good traders, the locals evolved... and started taking a slightly more directional approach to being the middle man. They'll get a directional bias based on whatever they feel gives them an edge (their strategy varies between them, just like any other independent trader, but a common example would be auction market theory,) and start filling orders working that range.

Understand, this means the difference in average hold time for a position went from a few seconds/minutes to a good portion of the day with the change in strategy.

So does this give pit traders an advantage? No, not really, most people will be at a big disadvantage moving into the pits from a screen trading environment. The pit is just provides the ability to see other pit traders (brokers filling larger orders, firms taking large positions, other locals taking on risk, think of it as reading faces at a poker game..including the bluffing) and for some that's enough of an edge atop of a regular trading strategy to make some coin.

Thanks for that explanation. It was really on-point.

No worries; hope it helped.

Poker. I've watched that movie, and I believe that some of the guys use other guy's facial expression, voice pitch, hand movements and their body language to rip them off. (this could actually be from another trading movie, but I'm confident it's floored.)

There's other styles, but that was what really stuck out to me. You can also see trading gambits on the "billion dollar day" video.

Edit: just read the last paragraph from Jacks awesome post. Wasted typing here!

Pit traders or locals were typically the guys fading the moves for quick scalps. They are on the limit, their job was effectively to provide liquidity and if they were good they got to capture the spread. Also stop hunting etc and orderflow type trades as they could 'see' the order flow and 'see' when the paper (merril, goldman, large hedge funds etc) were entering the market.

The pit trader these days is the guy trading futures at home using the orderbook. Lots of prop shops (i mean the reals ones) now specialise in this too. If you get training with them your first month is trading using depth of market, some don't even let you put up charts at all while you're learning.

Then there are also the HFT algo's.