When a young law student called Leo Melamed arrived at 110 North Franklin, Chicago, for a job interview at what he thought was a legal firm in 1952, the chaotic scene he witnessed blew him away.
Merrill Lynch, Pierce, Fenner & Beane was actually a brokerage, and the job was for a “runner” who shuttled messages around the trading pit of the Chicago Mercantile Exchange where financial contracts were settled on everything from onions to eggs.
The maelstrom of people in coloured jackets shouting and jostling, marking deals on enormous blackboards and recording the end-of-day results with Polaroid cameras hooked the young Melamed. After finishing law school and quickly aborting a stint as an actual lawyer, he returned to “The Merc”, and rose to be its chair 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 fell instantly in love with everyone and everything.”
Covid-19 has killed off some of the last bastions of “open outcry” trading. Traders who prefer to negotiate deals face-to-face scored a rare victory this week when the London Metal Exchange reversed an earlier plan to permanently close “the Ring” — the last significant traditional trading pit in Europe.
But last month Melamed’s alma mater, now called CME Group, announced that it would permanently close the trading floors that were first shuttered by the pandemic a year ago, with the sole exception of the eurodollar options pit. For many in Chicago’s trading community, it signalled the end of an era.
The trading pits where Melamed and many other titans of finance learned their trade — and immortalised in popular culture by the movie Trading Places — had been slowly dying out even before the pandemic. Over the past few decades, trading has overwhelmingly shifted into the world of algorithms. Today, even the New York Stock Exchange is largely a TV studio, with most of the actual trading taking place at its data centre in New Jersey.
Others have survived, including the NYSE’s Arca options floor in San Francisco and the Box Options Exchange in Chicago. Bucking the trend, CBOE Global Markets, where the Vix volatility index is traded, is building a new and bigger trading floor to accommodate hundreds of traders, and will move there in 2022.
By keeping the Ring open, the LME is trying to placate both traditional members, who preferred the open outcry pit, and its larger merchant trader and financial participants, who backed the move towards electronic trading.
Matthew Chamberlain, chief executive of the LME, said he hoped a hybrid approach would extend its longevity. “I love the Ring, I think everyone at the LME loves the Ring — it’s a big part of the culture, a big part why many of us joined the organisation. We love the community, the excitement. From a personal point of view, I hope it’s here in 10-20 years’ time.”
Waylaid Ni, head of eurodollar options at DRW, a big Chicago trading firm, said having someone in the CME eurodollar options pit was still valuable, and predicted its surviving open outcry floor would remain open for many years to come.
“Many of the strategies traded in this product are complicated,” he said. “It’s far more efficient to execute that type of complex trading when all the parties are talking to each other in real time versus seeing flashes on a screen.”
The pandemic offered a live test of what would happen if markets that relied on floor trading were suddenly shut. The results were not encouraging for open outcry, argues Thomas Fitch, founder and chief executive of RV Assets, a UK company that provides trading algorithms for market makers and proprietary traders.
Despite the eurodollar options market going from about 60 per cent pit-traded to entirely electronic overnight, volumes and the difference between the prices that people will buy or sell was entirely unaffected, 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 1.5m contracts a day, that amounts to $1.35bn of extra costs to the end user, Fitch said. “Why has it moved back? It suits the people who execute trades, the brokers and the market makers.”
Many veterans are increasingly resigned to the fact that open outcry pits will soon perish. “Open outcry trading took a lot longer to die [than people expected], and it’s still not completely dead, but it will be bled to death as electronic trading takes more and more of the volume away,” said John Lothian, who started in the pits before writing a well-read industry newsletter.
After the death of a former pit trader friend in 2011, he started an oral history project to collect the memories of veterans of the open outcry era, modelled loosely on the Library of Congress’ Veterans History Project. “We’re losing so many of the open outcry traders every day, and I thought it was important that we captured how markets operated for so long during our history,” Lothian said. “It was face-to-face commerce, where you could do deals for millions of dollars on just an exchange of hand signals.”
The shift has been emotionally charged for many traders that remain attached to the era, and the camaraderie and creativity it engendered. Melamed remembers how he was once lambasted by some CME brokers as “Darth Vader” for eventually embracing electronic trading, but admits to “sadness” at seeing the final closure of most of its open outcry venues. “The floor was a crucible of ideas,” he said. “That’s what you lose.”
But they have been losing a battle that began in the early 1980s when pioneers such as Thomas Peterffy hooked up their data feeds to basic computer programmes that performed the same functions traders performed — scanning the market for mispriced quotes. At that point, humans still executed the trades.
Peterffy still remembers his first day in a trading pit, the silver options floor of New York’s Comex in 1967 (the commodities exchange where the climax of Trading Places was later filmed), which left an indelible mark. “It was serious money, and very exciting,” Peterffy said. “Numbers on a computer can also be exciting, but not as much 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 scrappy little brother that initially started as an outdoor market on Broad Street in lower Manhattan. But being slight of build and with a heavy Hungarian accent, other floor traders struggled to hear and understand Peterffy in the maelstrom of the Amex floor, which proved the impetus for his efforts to bring trading into the computer era.
Like many other veterans of the open outcry era, Peterffy is nostalgic, but tempers it with realism. “It was a great experience, but things change. It was also exciting to drive a horse and carriage”.
The slow decline of floor trading
“The Battle of the Bund” led to Germany’s Eurex exchange seizing the market for futures on the country’s long-term debt from London rival Liffe. The contracts had been traded by “open outcry” in the UK, but traders preferred the electronic version because it could be more easily traded remotely, and shifted en masse.
Intercontinental Exchange, then a small start-up, made waves by buying London’s International Petroleum Exchange (IPE), where most volume was traded on the floor. Taking its cue from the Battle of the Bund, ICE built a modern electronic platform.
ICE announced the closure of IPE’s pits, turning energy futures contracts such as Brent crude fully electronic. Weeks later IPE’s then-larger rival, the New York Mercantile Exchange (Nymex), unveiled plans for an open outcry pit in London.
Nymex abandoned its plan to reintroduce floor trading in oil contracts after eliciting little interest from traders.
Intercontinental Exchange ends 142 years of history by shutting the soft commodity trading pits in New York as volumes dwindled, in favour of electronic trading.
After 167 years, CME shut most of its trading pits in Chicago and New York. Open outcry trading had fallen to just 1 per cent of total futures volume. The decision included the Nymex open outcry futures pits, which CME bought in an $8.9bn deal seven years earlier. Only pits connected to some options remained open.
Coronavirus forced CME and Cboe Global Markets to shut their trading floors in Chicago, but they reopened many of them over the summer. Among the precautions, traders had to submit to health checks and wear face shields in the pit.
London Metal Exchange reversed an earlier proposal to permanently close its open outcry Ring after trading was temporarily halted by the pandemic.