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Market veterans mourn the slow death of historic trading pits


When a young law student called Leo Melamed arrived at 110 North Franklin, Chicago, for a job interview at what he believed to be a law firm in 1952, the chaotic scene he witnessed the blown away.

Merrill Lynch, Pierce, Fenner & Beane was actually a brokerage house, and the job was that of a “runner” passing messages around the Chicago Mercantile Exchange mall where financial contracts were settled on everything from egg onions.

The whirlwind of people in colorful jackets screaming and jostling each other, scoring chords on huge blackboards and recording end-of-day results with Polaroid cameras hooked young Melamed. After completing his law studies and quickly aborting a position as a lawyer, he returned to “Merc” and became its president in 1969.

“We were a bunch of guys who didn’t know the difference between turkey or treasury bills, or Swiss francs and cattle,” he said. “I instantly fell in love with everyone and everything. “

Traders and employees work on the floor of the Eurodollars exchange pit at the Chicago Mercantile Exchange in 2001 © Tim Boyle / Getty

Covid-19 has killed some of the last strongholds of the trade “at auction”. Traders who prefer to negotiate face-to-face deals scored a rare victory this week when the London Metal Exchange rolled back an earlier plan to permanently shut down “the Ring” – the last major traditional trading pit in Europe.

But last month, Melamed’s alma mater, now called CME Group, announced that it would permanently shut down trading floors that were first closed by the pandemic a year ago, with the sole exception of the eurodollar options pit. For many Chicago traders, this marked the end of an era.

Column chart of CME's share of daily trading volumes in futures and options showing the latest rattle in traditional auction trading

The pits of commerce where Melamed and many other titans of finance learned their trade – and immortalized in popular culture by the film Stock markets – had slowly died out even before the pandemic. Over the past decades, trading has moved massively to the world of algorithms. Today even the New York Stock Exchange is largely a television studio, with most transactions taking place in its New Jersey data center.

Others have survived, including the NYSE’s Arca options floor in San Francisco and the Box Options Exchange in Chicago. Against the trend, CBOE Global Markets, where the Vix volatility index is traded, is building a new, larger trading room to accommodate hundreds of traders, and will move there in 2022.

By keeping the ring open, the LME tries to appease both the traditional members, who preferred the chasm to the auction, and its larger traders and financial participants, who supported the move towards e-commerce.

Wall Street Traders 1929

Traders on Wall Street in 1929 as the New York Stock Exchange collapsed, triggering a bank run © AFP / Getty

NYSE 2021 traders

Traders work in quieter NYSE trading floor in 2021 as US stocks rally to record highs © Courtney Crow / NYSE / AP

Matthew Chamberlain, chief executive of LME, said he hopes a hybrid approach will extend its longevity. “I love the Ring, I think everyone at LME loves the Ring – it’s a big part of the culture, a big part that many of us have joined the organization for. We love the community, the excitement. From a personal point of view, I hope it will be there in 10 to 20 years.

Waylaid Ni, head of eurodollar options at DRW, a large Chicago-based trading firm, said having someone in the eurodollar CME options pit was still valuable, and predicted his remaining uproar floor would remain open for many years to come.

“A lot of the strategies traded on this product are complicated,” he said. “It is much more efficient to execute this type of complex trading when all parties are talking to each other in real time rather than seeing flashes on a screen.”

Data Center for London International Financial Futures
Servers in an out-of-town data center have replaced the old London International Financial Futures (Liffe) trading floor © ICE Futures Europe

The pandemic offered a live test of what would happen if markets that relied on ground trading were suddenly closed. The results were not encouraging for the outcry, argues Thomas Fitch, founder and managing director of RV Assets, a UK company that provides trading algorithms for market makers and owner traders.

Although the Eurodollar options market has moved from around 60 percent stand-alone trading to a fully electronic market overnight, the volumes and the difference between the prices that people will buy or sell have not been affected. , according to Fitch.

But since the pit was reopened and hybrid trading resumed, the spread has widened by about 0.15 cents per contract. In a market that trades 1.5 million contracts per day, that’s $ 1.35 billion in additional end-user costs, Fitch said. “Why did he back off? This is suitable for people who execute trades, brokers and market makers. “

Tokyo Stock Exchange 1937

View of the Tokyo Stock Exchange in 1937 © James A Mills / AP

Tokyo Stock Exchange at the end of the 1998 stock exchange

Tokyo Stock Exchange traders spread confetti at a closing ceremony marking the end of ground trading in 1998 © Alamy / Reuters

Many veterans are increasingly resigned to the fact that the loud-screaming pits will soon be gone. “The auction took much longer to die [than people expected], and it’s still not completely dead, but it will be bled to death as e-commerce takes more and more volume away, ”said John Lothian, who started in the pits before writing a newsletter. well read industry information.

After the death of a former stand-dealer friend in 2011, he started an oral history project to collect the memories of veterans of the Uproar Era, loosely modeled on the Veterans History Project of the Library of Congress. “We are losing so many traders to the auction every day, and I thought it was important that we capture how the markets have worked for so long in our history,” Lothian said. “It was face-to-face trading, where you could do business for millions of dollars on a simple exchange of manual signals.”

The change was emotionally charged for many traders who remain committed to the times, as well as the camaraderie and creativity it spawned. Melamed recalls that he was once lambasted by some CME brokers like “Darth Vader” for finally embracing e-commerce, but admits his “sadness” to see most of his auction sites shut down for good. “The ground was a melting pot of ideas,” he said. “This is what you are losing.”

Trading on the floor of the Hong Kong Stock Exchange 1978
Frenzied trading on the Hong Kong Stock Exchange in 1978 after unexpected interest rate hikes © Chan Kiu / South China Morning Post / Getty

But they lost a battle that began in the early 1980s when pioneers like Thomas Peterffy connected their data feeds to basic computer programs that performed the same functions as traders – scanning the market for poorly evaluated quotes. At this point, humans were still executing transactions.

Peterffy still remembers his first day in a trading pit, the silver options floor of the New York Comex in 1967 (the commodities exchange where the peak of Stock markets was filmed later), which left an indelible mark. “It was serious money and very exciting,” said Peterffy. “Numbers on a computer can be exciting too, but not as exciting as people yelling at each other. ”

He eventually saved up enough money to buy a seat on the American Stock Exchange in 1977, the NYSE’s messy little brother that started out as an open-air market on Broad Street in lower Manhattan. But being small in stature and with a strong Hungarian accent, other ground traders struggled to hear and understand Peterffy in the maelstrom of Amex’s floor, which gave the impetus to his efforts to bring in trading in the computer age.

Like many other outcry-era veterans, Peterffy is nostalgic, but realistically tempers it. “It was a great experience, but things are changing. It was also exciting to drive a horse and a carriage ”.

The slow decline of indoor trading

Oil traders work on the floors of the New York Mercantile Exchange on May 11, 2012 in New York City

Oil traders work on the floors of the New York Mercantile Exchange on May 11, 2012 in New York City © Justin Sullivan / Getty

1998

“The battle of the Bund” led the German stock exchange Eurex to seize the futures market on the long-term debt of the country of its London rival Liffe. The contracts had been traded at auction in the UK, but traders preferred the electronic version as it could be more easily traded from a distance and moved in droves.

2001

Intercontinental Exchange, then a small start-up, made waves by buying the International Petroleum Exchange (IPE) in London, where most volumes were traded on the floor. Drawing inspiration from the Battle of the Bund, ICE built a modern electronic platform.

2005

ICE announced the closure of IPE’s wells, turning energy futures such as Brent crude entirely electronic. A few weeks later, IPE’s then larger rival, the New York Mercantile Exchange (Nymex), unveiled plans for a London auction pit.

2006

Nymex has abandoned its plan to reintroduce ground trading in oil contracts after receiving little interest from traders.

2012

Intercontinental Exchange ends 142 years of history by closing commodity trading pits in New York City as volumes dwindled, in favor of e-commerce.

2015

After 167 years, CME has closed most of its malls in Chicago and New York. The auction had fallen to just 1% of the total volume of futures contracts. The move included the futures pits at the Nymex open auction, which CME bought in an $ 8.9 billion deal seven years earlier. Only the pits linked to certain options remained open.

2020

The coronavirus forced CME and Cboe Global Markets to shut down their Chicago trading floors, but they reopened many over the summer. Among the precautions, traders were required to undergo health checks and wear face shields in the pit.

2021

The London Metal Exchange has canceled an earlier proposal to shut down its Ring at auction permanently after trading was temporarily halted by the pandemic.

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