What party, you ask? The one with the mosh pit at LaSalle and Jackson in Chicago. The one held in the building that’s in the background image of this page.
That’s right. Today the CME Group announced it was ending floor trading of futures (with the exception of the S&P 500) in Chicago and New York. Floor trading of options will continue.
As a Chicagoan who knew the floor in its glory days, this is a sad day. The floor was an amazing place. (Even though the floors will remain open until July, the past tense is appropriate in that sentence.) A seemingly chaotic place full of shouting and gesticulating men (and yes, it was an overwhelmingly male place). Despite the chaos, it was an extraordinarily efficient way to buy and sell futures. In the bond pit in the 80s and 90s, $100,000,000 notional could be bought in sold with a shout and a wave. Over and over and over.
The economics of the pits were fascinating, but the sociology was as well. They were truly little societies. There were the exchange rules that were in the book, and there were the rules not written in any book that you adhered to, or else. Face-to-face interactions day after day over periods of years created a unique dynamic and a unique culture with its own norms and hierarchies and rituals. And soon it will be but a memory.
Even though I am wistful at the passing of this remarkable institution, I was ahead of the curve in predicting its eventual demise. I worked at an FCM in 1986, when the CME, CBT, and Reuters announced the initial Globex initiative. This got me interested in electronic trading, and when I became an academic a few years later, I researched the subject. In 1994 I wrote one of the early papers documenting that electronic markets could be as liquid and deep as floor-based markets, and I conjectured that parity in liquidity and superiority in speed and cost of access would result in the ultimate victory of computers over the floor. The collective response in the industry was scorn: everyone knew the floor was more liquid, and always would be. The information environment on the floor could never be duplicated on the screen, they said. This view was epitomized by the CEO of LIFFE, Daniel Hodgson, who ridiculed me in the FT as an ivory tower academic.
The first sign that the floor’s days were numbered occurred in 1998, when computerized Eurex wrested the Bund futures contract from LIFFE. (Eurex used my research as part of its marketing push.) LIFFE suffered a near death experience, barely surviving by shutting the floor and going fully electronic. (Mr. Hodgson was shown the door, and I resisted the temptation of sending him a certain FT clipping.)
Computerized trading was only slowly making inroads in the US at the time, in part because the incumbent exchanges resisted its operation during regular floor trading hours. But the fear of the machines was palpable by the mid-1990s. The CBT built its massive trading floor in 1997 in part because the members believed that if it spent so much on a new building the exchange couldn’t afford to render it useless by going electronic. Ironic that a group of traders who lived and breathed real world economics would fall victim to the sunk cost fallacy, and be blind to the gales of competition and creative destruction.
The floor continued to thrive, but inexorably the machines gained on it. By the early-2000s electronic volumes exceeded floor volumes for most contracts, especially in the financials. By the end of the first decade of the millennium, the floors were almost vacant. I remember going to the crude oil pit in NY in early-2009, and where once well over 100 traders stood, engaged in frenzied buying and selling, now a handful of guys sat on the steps of the pit, reading the Post and the Daily News.
When the CME demutualized, and when it acquired CBT and NYMEX, it made commitments to keep the floors open for some period of time. But the commitments were not in perpetuity, and declining floor volumes made it evident that eventually the day would come that the CME would shut down the floors.
Today was that day.
This was inevitable, but in the 80s and 90s the floor trading community, and the futures business generally, couldn’t possibly imagine that machines could ever do what they did. But the technology of the floor was essentially static. Yes, the technology of getting orders to the pit evolved along with telecommunications, but once the orders got there, they were executed in the same way that they had been since 1864 or so.* That execution technology was highly evolved and efficient, but static. In the meantime, Moore’s Law and innovation in hardware, software, and communications technology made electronic trading faster and smarter. Electronic trading lacked some of the information that could be gleaned looking in the eyes of the guy standing across the pit, or knowing who was bidding or offering, but it made accessible to traders vast sources of disparate information that was impossible to absorb on the floor. By the late-00s, HFT essentially computerized what was in locals’ heads, and did it faster with more information and fewer errors and less emotion. Guys that were all about competition were displaced by the competition of a more efficient technology.
Floor trading will live on for a while, in the options pits. Combination trades in options are complex in ways that there are efficiencies in doing them on the floor. But eventually machines will master that too. ICE closed its options pits a couple of years ago (four years after it closed its futures pits), and one day the CME will do so too.
The news of the CME announcement reminded me of something that happened almost exactly 10 years ago, 21 February 2005. Around that time, the management of the International Petroleum Exchange was discussing the closure of the floor. (It decided to do so on 7 March.) Floor traders were very anxious about their future. Totally oblivious to this, Greenpeace decided to mount a protest on the IPE floor to commemorate the Kyoto Protocol. Bad decision. Bad timing. The barrow boys of the London floors, already in a sour mood, didn’t take kindly to this invasion, and mayhem ensued. Punches were thrown. Bones were broken. Furniture was thrown. There was much comedy:
“The violence was instant,” reported one aggrieved recipient of a rain of blows to the head. “I’ve never seen anyone less amenable to listening to our point of view.”
You can’t make that up.
From what I understand, the response was much more subdued in Chicago and New York today. But then again, Occupy or GMO protesters didn’t attempt to sally onto the floor to flog their causes. If they had, they just might have caught a flogging like the enviros did in London a decade back.
Being of a historical bent, I will look back on the floors with fascination. I am grateful to have known them personally, and to have known many who trod the boards in the pit in their colorful jackets, shouting themselves hoarse and at constant risk of being stabbed in the neck with a pencil wielded by a hyperactive peer.
Today is a good day to watch Floored or The Pit. Or even play a game of Pit. The films will give you something of a feel, but just a bit.
2015. The year Chicago lost Ernie Banks and the floor. But life moves on. Machines do not have the color of the floor, but they perform the markets’ vital functions more efficiently now. And not everything has changed in Chicago. The Cubs are still horrible.
*The exact beginning of floor trading on the CBT is unknown. The Board of Trade of the City of Chicago was formed in 1848, but futures trading proper probably did not begin until the Civil War. Sometime in the 1862-1864 period floor trading as we know it today-or should I say knew it?-developed. The first formal trading rules were promulgated in 1867. If you look at pictures from the 19th century or early-20th century, other than the clothes things don’t look much different than they did in the 1980s or 1990s. Electronic boards replaced chalk boards, but other than that, things look very similar.