Could You Make It In The Trading Pits?

Dear Reader,

 

Jon Najarian used to be one of the top traders in the pits of Chicago. 

 

When I was a young trader on Wall Street, I would call down to the pit and hear all these guys yelling and screaming: sometimes upwards of 300 men all corralled together trying to get the best price. 

 

These guys were legendary traders and I always wanted to sit down and meet with them because they were pure traders and had an instinct for what trading was all about. Jon was one of these guys, and later became one of the best option traders in the world. 

 

Before he was a professional investor, money manager and media analyst, Jon was actually a professional American football player. 

 

He has earned a reputation in the industry as an options trading expert and pioneer and has developed patented trading algorithms used to identify unusual activity in stock, options, and futures markets.

 

Jon Najarian spent 25 years on the Chicago Board Options Exchange as a floor trader before selling his firm to Citadel, one of the world’s largest hedge funds.

 

He has been on television for 20 years and currently co-hosts CNBC’s Fast Money with his brother Pete.

 

I loved getting to sit down with Jon to talk about the evolution of trading, option trading, and what he is up to today. I wanted to talk to Jon more in depth about the Trading Pit Culture so I could give you all a better idea of the reality of working in the pit. 

Jon Najarian

Where It All Began

I began by posing a few questions to Jon about his experiences. I wanted to know, what a pit is, why everyone is in the pit and why is this happening specifically in Chicago and not in New York City or LA; and finally, what was happening in the pit? 

 

Jon launched into a history of the pits, telling me that the very first pits started in the 1800’s. They were octagon shaped with a series of steps that went higher and higher. 

 

Back then grains were traded in the pits. Trading of live cattle and pork belly came next.

 

There was a lot of prejudice in the pits historically. The Board of Trade was mostly Irish so if you were, for example, an Armenian trader, like Jon is, it was incredibly hard to become a part of The Board of Trade. 

 

All this to say, it was very hard to be a member back then. Because of this, the Chicago Mercantile Exchange, referred to as The Merc, sprung up across town with the same idea and the same set up for buying and selling goods. 

 

Ultimately the pits where a place where all the firms could meet in one place and set prices for goods such as corn, soy beans, or gold. They determined that bids and offers were the fairest way to decide what the price should be. 

The Pits of Chicago 

Chicago was the center for the trading pits because; at the time, all the commerce in America was coming through Chicago via the railroads. 

 

Later, Chicago adopted bond futures and other financial instruments because they had the know how, the liquidity of trading, and all the people available to begin trading instruments that had nothing to do with Chicago. 

 

I remember in 1993, I went from MIT to Bankers Trust in New York City. I got on the floor and was given a big phone with a bunch of buttons and was told which buttons were for the Chicago Mercantile Exchange and the Chicago Board of Trade. My next instruction was just: “GO”. 

 

Whoever I happened to be talking to on the phone would constantly be yelling down to the pit to get the real time info on where the inside market was. The guys down in the pit were the ones responsible for sending the information out to guys like me in New York City. They are the ones who know where the real prices are. This is the way the old school trading happened in the 80s and 90s. 

 

Being aware of how the pits work and knowing the vast amount of second to second, current, insider info that can be gleaned from the guys in the pits is what allows good brokers to become great brokers. 

 

If you are a trader in New York, the prices you see are only current to what has been sold already; however, if you are able to communicate with the guys in the pit you can discover price deceases that can be used to your advantage and be the first to buy commodities at lower prices. 

 

When you know how to use the information from the inside you will become a better businessman or woman. 

 

Later in my life, when I moved to Chicago, I went down to The Board of Trade and I remember being blown away walking into the bond futures pit, the most liquid instrument at the Chicago Board of Trade. There were 300-400 guys on the floor and it was complete mayhem. This was before cell phones so I got to watch the incredible way the men would communicate with screams or hand signals in order to pass information along.

 

I absolutely love swapping stories with Jon about both of our experiences in the banking world. 

If you want to learn even more about Jon and all the incredible knowledge he has to offer, check out my full discussion with him.

Regards,

Brian Rose

Brian Rose
Editor, Brian Rose Uncensored

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Brian Rose

Brian Rose is an MIT graduate, with a degree in engineering. Upon finishing school, he immediately began working on Wall Street. An advanced technical trader, Brian was trading a book of $100 million at the age of 22. He spent years on Wall Street, working in New York, Chicago and London. He made millions, but...

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