futures tick data - electronic vs. floor vs. combined?

Found this artcile today about the Option Business at the NYMEX.

http://www.ft.com/intl/cms/s/0/b1b8b784-8bb4-11e0-a725-00144feab49a.html#axzz1NxhemtqC

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Floor loses its voice to electronics
By Gregory Meyer in New York

Published: May 31 2011 19:54 | Last updated: May 31 2011 19:54

It is 9:15am on the floor of the New York Mercantile Exchange and half the gold and silver options trading ring is empty. The gasoline and heating oil options pit contains nine men. In the crude oil and natural gas options pit that serves as the televised face of energy trading, brokers and market makers gaze at handheld computers, occasionally shouting a bid.

Despite record volumes for important contracts on the leading energy and metals exchange, options trading is leaving the Nymex floor. The shift defies forecasts that these derivatives are too complex to be handled electronically. It is also making floor traders wary of a day when Nymex might become only a brand and not also a building beside the Hudson River.

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The once-packed pits had already lost most futures business after Nymex allowed electronic trading to compete head-to-head with the floor. What survived were options, which convey the right to buy or sell these futures.

In the four months to April from the same period in 2010, options volume in Nymex crude oil declined 6.9 per cent on the floor to 5.1m contracts, while electronic volume expanded 167 per cent to 3.6m contracts. Crude options handled off-exchange but guaranteed by the Nymex clearing house rose 29.7 per cent to 4.6m contracts.

The floor is also losing share in natural gas, heating oil and gasoline options. In gold options, the electronic market is now more active than the floor. Traders expect the trend to have continued during May.

“Since the Lehman stuff and Bear Stearns stuff, it’s really slowed down. The business has changed,” says Kevin Touhey, a one-man market maker who trades crude and gas options.

The changes are especially jarring for floor traders because crude oil options volumes have broken records this year, with 432,900 contracts traded on May 5.

It now costs only $1,000 a month to lease a seat on Nymex, down from more than $20,000 before electronic markets started to trade simultaneously with the floor in late 2006, brokers and traders say. Some worry about the future of the floor: After CME Group bought Nymex, the Chicago-based company pledged to keep the existing pits open through 2012.

The exodus from the floor partly reflects a push by CME to improve the way options are listed on its electronic trading system, Globex. CME advertises the ability to “connect over the internet, anywhere in the world” to trade options.

ICE Futures Europe, the UK-based Nymex rival, is also planning an aggressive marketing campaign to promote its own, exclusively electronic options on such commodities as Brent crude and gasoil.

The trend also reflects a gradual decline in volatility as oil and gas supplies swelled in the wake of the global financial crisis. Companies often use options as insurance against volatile price moves. As markets moved more slowly it became easier to place trades by means of a computer mouse.

Brokers and traders say big deals, such as Mexico’s annual programme of hedging its crude oil output, are generally too large to trade on screens. But banks doing business with such producers may be as quick to hedge their own exposure by phone or instant messaging with off-exchange voice brokers as send orders to the floor.

“You’re not compelled to call your floor broker like you used to be,” says Chris Thorpe of oil options dealer HCEnergy.

When prices spike, as happened when Libya descended into civil war in February, the floor’s supporters say it remains the only place to execute a trade.

“Why is the floor better? It’s faster,” says Raymond Carbone, president of brokers Paramount Options on the Nymex floor.

“If the market’s moving quickly, it takes too long to type in the whole process of consummating a trade. On the floor I can do a bigger order in seconds.”

In a statement, CME said: “We offer market participants choice of venues to manage their risk, including open outcry via the trading floor and electronic trading on CME Globex and CME ClearPort. And we remain committed to offering each of these venues to our customers for as long as they choose to use them.”
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thanks everyone for their comments

 

Having traded some Nymex options quite recently, I can tell you from first-hand experience that the floor quotes in OTM WTI Options are ridiculously wide. Got filled at a much better price after showing them on the screen for a few minutes.

FU, Raymond.

 

Is it the same sort of situation in the Chicago grains as Crude, ie most business now done via Globex with only a few Locals left in the pit arbing and spreading etc?

 

Of course. Most of the guys in the pit are brokers who have long ago paid off their seats, and are nursing what little is left of their clientele. They are filling a small fraction of what they used to in terms of orders.

Most telling point is the seat lease prices.

The tough part of the broker business is that the FCM's have staffed up electronic desks to fill phone brokerage orders using their own employees. They are catching that business before it ever gets to the floor, and those desks are staffed six days a week (Sunday nights). They work GTC orders and OCO orders and Stop Limit orders and all kinds of spreads.

 

I presume the orders where a client wants to buy 5000x S&P 500 contracts on the day of "flash crash" still go to the locals.

 

Any order flow going into the pits these days is akin to your feet in the shower - all they get are the dribblings and the unwanted run-off.

 

I realize that I am taking this even further off-topic, but why would seat lease prices go down so much, if you still get great discounts on fees? It's not like there isn't any demand to trade crude oil - it's just moved to a different place.

 

All products and services are worth what people are willing to pay for them. For the monthly price of TT and CQG, and the differential between member and non-member rates, it is certainly cheaper to trade on the floor, and there is a very good reason for that.

 

I dont know how grain options pits work but when I look from the gallery I see one broker in front of a grandstand of traders. Its not like the SPs... a ring with fillers outside and locals in the middle