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Some of the greatest scalpers I’ve seen are people who must have been born as pure traders. The best example of the quintessential scalper is Donald Sliter. Growing up in Rogers Park, my old working-class neighborhood on the far north end of Chicago, Sliter was known as one of the local tough guys. But something always stood out about Don that separated him from the crowd. He was always a bit smarter than the rest. When his friends started fights, Sliter tried to break them up. When they drank in bars, he was always the bouncer. And when his friends gambled on sports, Don figured out how to middle the point spread. What Sliter lacked in the way of a formal education, he made up for with a natural gift—an instinctual gut feeling.

If you were to ask Sliter what makes him a good trader, he would have a hard time explaining the qualities that give him an edge. Sliter’s philosophy involves the frequency of trades. To watch Don trade is to watch a master; he plays the pit and the order flow as if it were a violin, making sweet music with every profitable scalp. He’s been known to say that the rest of the market trades against support and resistance but they fail to realize that there are hundreds of profitable trades hidden between those levels. This is the type of comment that would be expected from a scalper. A position trader can’t think like that.

The one quality that every scalper in any market must possess is a total disregard for money. As the profit and loss for the day are calculated, very seldom do you hear scalpers talk in terms of dollars and cents; rather, they describe the equity swings as “ticks” made or lost. Maybe they’re entwined; maybe it’s ironic, but necessary that anyone trading the huge notional size of a local would completely lack respect for capital. Bing Sung, my old mentor, would say to me that when you’re scalping the market you have to leave your brains at home. If you think too much about it, it becomes possible to think yourself out of every trade made as a local.

As a scalper, it is imperative not to think about the notional value of the position or the amount of risk acquired. For the very best, in- cluding Sliter, the amount of activity is dictated by the frequency of cus- tomer order flow and daily intraday liquidity of a market. All scalpers will tell you that what makes them profitable is the geographical edge asso- ciated with making markets in the pit when it’s the center of price dis- covery. It’s logical that the only reason a scalper will take down a large trade is because there is a perceived edge in the trade. Many markets, especially in the stock index and fixed-income futures, have experienced the proliferation of electronic trading, which has dwarfed the pit in no- tional value and rendered useless the geographical edge once associated with the pit.

So what happened to traders who had a geographical edge and watched it slowly evolve into a technological edge on the screen? For many veterans, it became a matter of survival, and they began to reinvent themselves as electronic traders. They morphed scalping into a different art form. Many former floor members left the trading pits and were able to take advantage of the spread between the e-mini contracts of the S&Ps against the large contract, which has had a supplementary effect of creating an amazing amount of liquidity on the screen.

But more important, these traders picked up larger intraday patterns that enabled them to use the same scalping techniques they used in the open outcry pit on a grander scale and with many different markets at their disposal. Their frequency of trade isn’t nearly as great in any given market as it was when they were on the floor, but they’re trading

many different types of markets and it allows them the diversification that enables them to find the higher-percentage trades that were formerly hidden from them.

SPREADING

The world of spreading is completely different from those of other trading methodologies. A spreader is a trader or investor who takes out whatever differential might exist between two different markets and capitalizes on that disparity. Some people trade an intermarket spread, which is one mar- ket’s calendar month against another calendar month, and others spread intramarket, which is one contract against a completely different market. An example of an intramarket spreader is a trader who makes a market in pork bellies versus live cattle or S&P versus Nasdaq. An example of an in- termarket spread is trading the August live cattle versus October or trading the S&P December contract against the S&P March contract.

Trading the intermarket spread enables you to take advantage of the seasonal adjustments of the contract as opposed to the differential and price disparity between the two completely different markets. Spreading really developed into an art form in the 1960s as trading of the livestock products became more and more popular. One of the pioneers in spreading, Joe Segal, came from the agricultural pits in Chicago. Joe was a good market maker who discovered he could take advantage of a differential in prices between the months of any given market as the seasonal adjustments came in that would create aberrations in pricing. Prior to Segal’s legitimization of this art, the act of spreading the markets was never looked upon as a viable trading methodology; in fact, many of the traders from that time frowned on the practice, as one of the byproducts of the strategy was that it made their markets more efficient.

The most important ancillary effect of the emergence of spreading was the creation of instant liquidity. It’s a difficult academic exercise to gauge and understand where these markets would be without the spreaders, who make huge markets for the commercial houses and other end users of the products. Spreading became more widely accepted as foreign currency con- tracts emerged, which quickly became a part of mainstream futures trading. As financial futures proliferated throughout the 1970s, currency trading be- came more and more popular. Most educated players who trade the currency contracts even today overlook the fact that every currency transaction is essentially a spread.

The differentials between the currencies—Swiss franc/Deutschmark, Deutschmark/yen, yen/British pound, the U.S. dollar/everything—became wonderful ways to spread the Forex market with very little effort. Spreading

is an art that has worked its way into many different strategies found throughout the trading community; it has helped generate a huge pool of liquidity in every market and has been an intricate part of legitimizing the use of futures among institutional users. One of the secrets of the trading floor is that the act of spreading and the personality of the spreader are unique. Spreaders are very risk-averse individuals.