Man Vs Machine Battle in Futures Trading Sat Mar 23, 4:31 PM ET By Greg McCune CHICAGO (Reuters) - Not long ago industry experts predicted that the waving, shouting, colorfully-dressed traders in the Chicago exchange pits would soon go the way of the dinosaur, replaced by the silence of electronic trade. But a funny thing happened on the way to extinction -- trading volume in the pits actually went up last year. On the surface, it seems that happy days are here again in Chicago. Volume on the Chicago Mercantile Exchange, the largest U.S. futures market, surged 78 percent last year. At the venerable Chicago Board of Trade, the world's oldest futures exchange, volume jumped 11.5 percent in 2001 due to more active financial futures and options contracts. Both exchanges showed profit last year as higher volume boosted income from trading fees. The exchanges managed their robust performances even though electronic trading accounted for just a fifth of the volume of both exchanges in 2001. But look beyond the increased volume and the situation in Chicago is more troubling. Electronic trading is growing rapidly internationally, and those who use the computerized markets like the low cost and efficiency they bring. Change advocates continue to call for a faster pace of automation, although the strong performance of the last year has emboldened the traditional traders who call orders in the trading pits. The conflict is leading to a battle for control at the Chicago Mercantile Exchange leadership because of worries over the pace of change. "They (Chicago) don't want to change. The market was so good last year, they are thinking 'it's working again, so why should we do something new or dangerous for us?"' said Patrice Blanc, Chairman of trading firm Fimat USA, Inc. ELECTRONIC BOOM While Chicago clings to traditional ways, the rest of the world had moved rapidly to electronic trade. Two powerhouse derivatives exchanges have emerged in Europe -- the world's largest futures exchange, Eurex, and Euronext/LIFFE, a merger of stock and derivatives marts -- both exclusively electronic. Once preeminent, Chicago's share of world derivatives trade shrank to just 21 percent last year. And new exchanges are springing up to take on Chicago as a derivatives hub. The most successful, the International Securities Exchange, last year cut into the stock options business of the Chicago Board Options Exchange. Another electronic exchange, BrokerTec, has set out to peal away Chicago volume in government bonds with limited success so far. At least three other groups, including a consortium of LIFFE and stock exchange Nasdaq, electronic stock trading system Island Futures Exchange, and the American Stock Exchange, are lining up to take on Chicago later this year in single stock futures, the newest niche in U.S. futures trade. FRIGHTENED INTO CHANGE A few years ago the Chicago exchanges were so frightened by electronic trading they took halting steps to reform. They reached outside their own ranks to hire new chief executives to run the exchanges more like public companies. The CME in 2000 hired James McNulty from the investment banking firm Warburg Dillon Read, and last year the CBOT hired David Vitale from Bank One Corp . They took steps to "demutualize" or transform themselves from member-owned to publicly-listed corporations. The CME could launch an initial public offering at any time, while the CBOT is not yet as far along in the process. They have invested in electronic trading systems -- GLOBEX at the CME, and a/c/e, a venture with Eurex, for CBOT. For a while the strategy seemed to offer the best of both worlds -- prepare for an electronic world and keep open outcry trading going as long as possible. But in a strange irony, the trading boom last year has fueled a backlash. "Now people say things are going pretty well, maybe we can slow down," CME Chairman Scott Gordon told Reuters. "We can't stop (innovating) because we had a good year." Industry sources told Reuters that the CME old guard, led by former chairmen Leo Melamed and Jack Sandner, are organizing an effort to oust Gordon and replace him with Vice Chairman Terrence Duffy, who they believe is more in tune with the wishes of the traders in the pits. The battle could play out around April 17, when Gordon is standing for reelection to the CME board. LAST STAND IN THE PITS Reform-minded traders in Chicago and industry officials outside said another bout of infighting would be a setback for Chicago's efforts to transform itself. "It is impossible for me to imagine five years from now any open outcry trading almost anywhere in the world," Ron Hersch, Senior Managing Director of Bear, Stearns & Co. Inc, told the annual futures industry conference in Florida last week. Some companies are starting to complain that Chicago's straddling the fence between the pits and computers is costing them money because they must keep parallel pit trading and electronic trading operations. "Having to support these two venues is really killing us," Hersch said. The dual systems mean that it is more expensive to trade on U.S. markets than in Europe, FIMAT's Blanc said. To be sure, there are practical problems to sort out before Chicago trading could move exclusively to electronic systems. For example, traders said that the sophisticated spread strategies used in Eurodollars are easier executed in the pits than on electronic screens. But others said the pace of technology is so fast that before long even the Eurodollar trading complexities could be sorted out on electronic systems. The CME is investing in software to do just that. A few of the basic commodity markets such as metals in London and grains and livestock in Chicago may continue to trade in the pits for a long time, industry sources said. "What we would like to see is the big financial contracts go all electronic," FIMAT's Blanc said.
The pits have got to go. but lets look at the whole US market system is an antiquated dinosaur.... pit trading in futures...... pit trading and switch off the autoex when we don't like the prices option exchanges... the nasdaq market making system.... the nyse specialist .... electronic central limit order books with price and time priority...thats all that we want. simple. as for the cme pits....well they'll die away soon.....look at the currencies as an example....2 years ago they were pit traded...I can remember going to the pits and the currency pits were empty...dead and empty....volumes running off into the interbank market....then they 23hr electronic...and the spreads were wide and uncomfortable.....anyone trade fx futures today? A retail guy would be stupid to trade with the FX spot bucket shops. FX futures now trade with tiny spreads ...even cable and the aussie trade 1 to 2 tick spreads with decent size at the BBO...... now if only the other contracts cud go electronic...and if only someone wud shut down nymex and comex and stick gold and silver and oil on one big electronic chicago exchange...oh how life wud be simple..
The party has been over for a while; nobody told those guys still left to turn out the lights and go home.
at the moment you have a bunch of guys in the pit in chicago who make their money from moving the futures index prices - and they use that movement to make themselves money and the cash in the main follows - but if these guys are not doing it - and it is only the distance buying and selling of traders that moves the market - might the markets then move less - or not at all - who will have the balls to move the markets - day in - day out?
Successful pit traders move upstairs as soon as their body parts start to give out; been going on for a long time. The game is just played a little differently.
I have the opinion that markets will continue to move - no matter if there are pit locals or not. too many bank and prop traders are around who must make their money each day. They cannot afford to stand still - and so will the market. However, i am sure when the market gets decentralized, it will be more fair. There will be less capital which has a real advantage. You will probably get your E-Mini fill in more cases when the market will not go against you next seconds, because some pitty has just arbitraged you (and your money) away. However, pit is still by far not gone. I am sure the guys who paid a million for 2 seats have something in the pipeline to - at least -slow down the development in the right direction.
An exchange member trading upstairs as opposed to in the pit still maintains an edge in substantially reduced transaction fees, as opposed to a customer's transaction fees. They will live through it.
metsoxx, I beg to differ..from what i've seen only a very small percentage of pit traders are actually successful when they move upstairs...most find it extremely difficult to adapt to the new environment and to change the way they have been doing things for years...I'd say the majoriity bite the dust after 6 months
metooxx do u see my point though - will there be people to move the markets - in times when there is no real force to move the market if everyone is on the same playing field - and you lose some of the levels of having an edge - so you remove some of the forces that move markets
metooxx: if the big contracts would go electronic, i think it is reasonable to expect that CME will probably charge, maybe twice the e-mini fee as exchange fee, everything else would be unreasonable, because from the cost side it does not matter if you clear a small or a big contract, on the other hand the contract is bigger and a higher fee is justified by more movement. i would "estimate", we will probably be able to trade big spooz's for 5 bucks per side one day via IB. in this case, the fees are so small related to the size you move, that in my opinion a ex-local who trades for $2 per side has no longer a really significant advantage. of course, all numbers are 100% fictional