Business

Market veterans mourn the slow death of historic trade pits

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When a young law student called Leo Melamed arrived in 110 North Franklin, Chicago, for a job interview on what he thought was a law firm in 1952, the chaotic scene he witnessed blew him away.

Merrill Lynch, Pierce, Fenner & Beane was actually a brokerage, and the work was for a “broker” who dragged messages around the Chicago Mercantile Exchange’s trading floor where financial contracts were settled on everything, from onions in eggs.

The crowd of people in colorful jackets screaming and screaming, marking the business on huge blackboards and recording the end-of-day results with Polaroid cameras shocked the youngsters. Melamed. After graduating from law school and immediately leaving a stint as a lawyer, he returned to “The 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 bills,” he said. “I immediately fell in love with everyone and everything.”

Traders and employees work out the plan for the Eurodollar trade pit on the Chicago Mercantile Exchange in 2001 © Tim Boyle / Getty

Covid-19 has killed some of the last bastions of “open scream»Commerce. Translators who prefer to negotiate face-to-face deals have marked a rare victory this week when the London Metal Exchange changed a previous plan to close permanently. ”the Ring»- the last significant traditional trade pit in Europe.

But last month Melamed’s alma mater, now called CME Group, announced it would it definitely closes business plans which were closed for the first time since the pandemic a year ago, with the sole exception of the eurodollar options pit. For many in the Chicago business community, it marked the end of an era.

Column chart of The part of the daily trading volumes of the CME in futures and options showing The last death sound of the traditional trading of

U trade pits where Melamed and several other finance titans learned their trade – and immortalized in popular culture from the film Business Locations – he had died slowly even before the pandemic. Over the last few decades, trade has gone wild in the world of algorithms. Today, even the New York Stock Exchange is largely a TV studio, with most of its own trading taking place at its data center in New Jersey.

Others have survived, including the NYSE’s Ark options plan in San Francisco and the Box Options Exchange in Chicago. Breaking the trend, the CBOE Global Markets, where the Vix volatility index is traded, builds a new and larger trading plan to accommodate hundreds of traders, and will move here in 2022.

Keeping the Ring open, the LME it tries to appease the two traditional members, who have preferred the open-ended cry pit, and their larger business partner and financial participants, who have supported the move towards e-commerce.

Wall St 1929 dealers

Wall Street traders in 1929 when the New York Stock Exchange collapsed triggering a run on the banks © AFP / Getty

NYSE Traders 2021

Traders are working on the quietest trading plan on the NYSE in 2021 as US stocks move toward records © Courtney Crow / NYSE / AP

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 LME loves the Ring – it’s a big part of the culture, a big part because a lot of us have joined the organization. We love the community, the excitement. From a from a personal point of view, I hope he will be here in 10-20 years ”.

Waylaid Ni, head of Eurodollar options at DRW, a large Chicago trading company, said having someone in the CME Eurodollar options gap was still valuable, and predicted that his surviving open-ended plan would remain open for many years to come.

“Many of the strategies exchanged in this product are complicated,” he said. “It’s much more efficient to perform this type of complex trade when all the parties are talking in real time versus seeing flashes on a screen.”

Data Center for the International Financial Future of London
Out-of-town data center servers replace old London International Financial Futures (Liffe) business plan © ICE Futures Europe

The pandemic offered a live test of what would happen if markets that relied on floor trade were immediately closed. The results have not been encouraging for an open critic, argues Thomas Fitch, founder and CEO of RV Assets, a British company that provides trading algorithms for market makers and private traders.

Despite the eurodollar options market going from about 60 percent to trading electronics all night, the volumes and the difference between the prices people have to buy or sell has not been entirely affected, according to Fitch.

But since the pit was reopened and hybrid trade has resumed, the spread has widened by about 0.15 cents per contract. Fitch said that in a market that trades 1.5 million contracts a day, that amounts to $ 1.35 billion in extra costs for the end user. “Why is it going backwards? It suits people who do business, brokers and marketers.”

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1937 Tokyo Stock Exchange

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

Tokyo Stock Exchange at the end of the 1998 floor trade

Traders on the Tokyo Stock Exchange spread candy in a closing ceremony marking the end of the plan’s trading in 1998 © Alamy / Reuters

Many veterans are increasingly resigned to the fact that open-air pitfalls perish soon. “The open scrutiny business took a lot longer to die.” [than people expected], and it’s still not completely dead, but it will be purged to death as e-commerce moves further and further away from volume, ”said John Lothian, who started in the pits before writing an industry newsletter. well read.

After the death of a former pit trader friend in 2011, he began an oral history project to collect memories of open-screen veterans, loosely modeled on the Veterans of Pit History Project. the Library of Congress. “We lose so many of the open traders on a daily basis, and I thought it was important that we capture how the markets have operated for so long during our history,” Lothian said. “It was a face-to-face trade, where you could do business for millions of dollars just by exchanging manual signals.”

The change has been emotionally charged for many merchants who remained attached to the era, and the camaraderie and creativity it generated. Melamed recalls how he was once slammed by some CME brokers like “Darth Vader” for eventually embracing e-commerce, but admits “sadness” to see the final closure of most of its open venues. “The plan was a crucible of ideas,” he said. “That’s what you lose.”

Trading on the 1978 Hong Kong Stock Exchange plan
Frantic trade in Hong Kong Stock Exchange in 1978 following unexpected rise in interest rates © Chan Kiu / South China Morning Post / Getty

But they lost a battle that began in the early 1980s when they pioneered like that Thomas Peterffy it linked its data feeds to basic computer programs that performed the same functions performed by traders – scanning the market for quotes at the wrong prices. At that point, the men were still running the trades.

Peterffy still remembers his first day in a trading post, New York’s Comex silver options plan in 1967 (the commodity exchange where the climax of Business Locations it was later filmed), which left an indelible mark. “It was serious money, and very exciting,” Peterffy said. “The numbers on a computer can also be exciting, but not as exciting as people shouting at each other.”

He finally saved enough money to buy a seat on the American Stock Exchange in 1977, the younger brother of the NYSE which he started initially as a foreign market on Broad Street in lower Manhattan. But being light-hearted and with a heavy Hungarian accent, other floor traders struggled to hear and understand Peterffy in the voice of the Amex floor, which showed impetus for his efforts to bring the business into the era of computer science.

Like many other veterans of the open screen era, Peterffy is nostalgic, but tempers him with realism. “It was a great experience, but things are changing. It was also exciting to ride a horse and a carriage. ”

The slow decline of the floor trade

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

Oil traders working on New York Mercantile Exchange plan on May 11, 2012 in New York © Justin Sullivan / Getty

1998

“The Battle of the Bund” led to Germany’s Eurex exchange taking the market for futures on the country’s long-term debt from London rival Liffe. Contracts had been exchanged for “open screen” in the UK, but traders preferred the electronic version because it could be more easily exchanged remotely, and moved en masse.

2001

The Intercontinental Exchange, after a small start-up, made waves including the International Petroleum Exchange (IPE) in London, where most of the volume was exchanged on land. Taking up the battle of the Bund, ICE built a modern electronic platform.

2005

ICE has announced the closure of IPE’s pits, transforming energy futures contracts such as Brent crude completely electronic. Weeks later IPE’s biggest rival, the New York Mercantile Exchange (Nymex), unveiled plans for an open pit of protest in London.

2006

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

2012

The Intercontinental Exchange ends 142 years of history since the closure of soft merchandise trading channels in New York when volumes declined, in favor of e-commerce.

2015

After 167 years, CME has closed most of its trading forums in Chicago and New York. Open organization trading had fallen to only 1 percent of the total volume of futures. The decision included Nymex’s open crisis futures, which CME bought into a $ 8.9 billion deal seven years earlier. Only the pits connected to some options remained open.

2020

Coronavirus forced CME and Cboe Global Markets to close their trading plans in Chicago, but they reopened many of them during the summer. Among the precautions, traders had to undergo sanitary checks and carry facial shields in the pit.

2021

The London Metal Exchange has canceled a first proposal to permanently close its open ring after trading was temporarily halted by the pandemic.


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