Dear Trader,
In the great poker movie Rounders, Matt Damon walks into a judge’s home poker game, sits down, and reads every hand at the table.
He never sees a card. His whole thing is that you play the man, not the cards.
Watch how he bets, the sizing, the timing, the way a guy breathes when he’s got it.
I’m not good enough at poker to play without looking at my hand. But I am that kind of trader.
So is Mark Sebastian.
And so were a lot of us who stood in a trading pit long enough and thrived.
Let me explain…
As a market maker, I made my fair share of trades without even looking at my position sheet. There was a real edge in knowing which trades to do and which to try and avoid. However, some of the best decisions I made in the pit had everything to do with how the broker walked into the pit.
Here’s what it looked like…
A broker walks into the pit with an order and quotes an option from the crowd.
Let's say it was the NVDA November 215 calls.
We would yell out our best bids and offers and a size. “10.70-10.90 500 up”.
That means we’d be willing to buy or sell 500 contracts at those prices.
The broker would then say what the customer wants.
“I wanna buy 200 for 10.85”.
A little fast pace, but mostly pretty chill.
You have time to look at your positions, think a little bit about what you have already. Think about what the flow has been like for the day. Depending on what the stock is doing at the moment, you might wait.
No big deal, the normal course of doing business.
However…
That’s not how it always went down. The exciting times like you’ve seen in movies like Trading Places with Edddie Murphy? That’s not far off from how it got sometimes.
A broker runs into the pit. Not walks, RUNS.
He’s frantic, he’s yelling, he’s stomping his foot.
He needs the order executed right now. You quote him a market, he buys them from you on your offer. Before you’ve even written the ticket, he’s asking what price he can buy more.
Those trades were bad for us and good for him.
Every. Single. Time.
The urgency… the “no limit on the price”… those told me everything I needed to know.
Nobody runs into a crowd screaming to buy something that’s about to lose. So you had two choices. Skip it if you could (we couldn’t). Or sell it to him, then go buy extra of anything else and ride his order. Those trades were so bad they were good, as long as you were on his side of it.
I want to be clear: This part of trading was subtle. It didn’t make or break you as a trader. But it was those subtle tells here and there that added up to be an edge.
I had positions.
I had a view on where things were priced.
The broker read was juice on a trade I already wanted to make. But once in a while, it was pretty clear that was a trade you really wanted to skip if you could.
That’s the part most people miss when they hear reading “order flow.”
They think it means following the big prints. Some options trade with 100,000 contracts of volume, and then people think you can immediately just piggy back and buy. That’s reading a scoreboard after the game.
Options can be used as hedges to a stock position. They could be spread to other months or spread against another product. All of those different possibilities make reading the order flow more difficult than just seeing a big print.
Big volume tells me nothing.
Reading it well is what Mark Sebastian has mastered over the years.
Mark and I traded next to each other on the American Stock Exchange and then the CBOE starting in 2001. We both saw the same brokers, the same desks, the same signatures.
The floor is gone now, but the signatures aren’t. They moved into the data. The options prints still show up, there just isn’t a broker coming into the pit to read.
What Mark does in Strike Force is the same thing we did in the pit. He’s not simply chasing flow. He is reading the order flow to figure out exactly what the customers are doing and using that as confirmation. He also has a direction he wants to be in. The order flow read is the edge.
Let’s take Walmart from just two weeks ago. He and I had been talking about the recent flow into consumer staples and out of semiconductors. Then he saw enormous order flow on the WMT Nov 120 Calls.
Mark ended up buying the October 30th 115 calls for 2.20 and a day later the stock gapped up 3 percent and Mark closed those calls for a 200 percent winner.
Mark reads order flow like this, every single day, and uses it as an edge to make trades like this week in and week out.
The best poker players don’t need to see their cards every hand. The best traders don’t always need to see their position. They need to see who just walked into the room and how fast he’s moving.
Enjoy the journey.
Tim