Market Matters Blog

A Pensive Moment in the History of Pit Trade

The trading pits are about people. They can be emotional, brash, full of fury and glory. They're a noisy, rambunctious fraternity in octagonal organization, or so I've been told. The movie "Trading Places" is older than I am, and by the time I started writing about agriculture, electronic trade had already become the norm. And while I didn't witness pit trading at its height, I love hearing the stories people have to tell. It's an end of an era I barely knew, yet I appreciate its loss because of the stories I've heard.

It's sad to say that everyone saw it coming. Sooner or later, the pits would close. But now that we know most trading pits in Chicago and New York will go dark on July 2, it's like we just put open outcry trade in hospice care. No matter how prepared we were for this moment, it was bound to provoke pensive thoughts and a walk down memory lane. It's simply how people process knowing they're going to lose something special, regardless of whether it's a loved one or a storied institution.

Perhaps one of the most honest reflections of this moment is from Jeffrey Carter, an independent trader, angel investor and former member of the CME's board of directors. With his permission, we're rerunning several excerpts from his recent blog post, "The End of the Pits," unedited. You can read the entire post here: http://bit.ly/…. Please feel free to share your stories and thoughts in the comments section.

Excerpt One:

To those that don't know the business, the trading floor is the cultural heart and soul of an exchange. It's the beating heart.

But, used correctly, the trading floor is also the brain. It's also the ethos, and the morality of an exchange.

Of course, today most of the market is on the screen and electrified.

Some people love electronic markets. Some hate them. What I will tell you is they aren't better or worse, but they are different. That's not "good" or "bad" in a moral sense. They are just different.

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There are some realities that one has to grasp when looking at the trading business.

First, the power brokers in New York (Big banks) have always hated Chicago. Prior to 1972, Chicago was small potatoes. Post the introduction of financial futures, Chicago was an international powerhouse. New York guys were jealous because they didn't think of it. They were pissed because a few thousand guys that didn't have prep school/fancy college degrees were beating the pants off them in the market every single day.

Post demutualization, the power brokers were able to exert their influence over CME corporate structure to give artificial advantages to people that were not necessarily members of the exchange. Co-location, fee breaks, other perks.

Some will say this was purely a fight between an old way of doing things, open outcry, and a new way of doing things, electronic trading. They aren't really correct. The members of the exchange voted to take the first two contracts of Eurodollars electronic under competitive threats from Eurex back in 2001. It took a few years before the entire contract made the jump to the screen. But, in fairness, CME marketing people were out on the street actively telling customers to go to the screen rather than the pit.

The pit not only had advantages for traders, but many customers were advantaged by the pit too. You can't bitch about a fill on the screen and get it adjusted. You can't use a "tick" on the screen. There are no fat fingers in a trading pit.

Excerpt Two:

The floor was the place for dreamers. It was the place for entrepreneurs, because that's what independent traders really were. It was a place where a guy that never graduated from high school but had his wits about him, and a high appetite for risk could make a living. Some even got rich.

The floor was a place for everyone and anyone. It was like America, democratic. All walks of life. All you needed was enough money to rent a seat and you were a trader. No special qualification or certification. No degree. Sure, there were cliques. It was clubby. Not everyone was ethical. Not everyone liked everyone else. There were fights. But, the floor reminds me of startup companies today.

The floor was a constant vaudeville show. Colorful. Frenzied. Loud. Smelly. Smoky. It was on the run entertainment from 5AM to 4PM. Every day. Tourists would come like the zoo, stand behind thick panes of glass and point at the animals.

The floor was an economic engine that built all of the cultural institutions in Chicago. All of them. They have roots in the floor. The banks that line LaSalle Street are here for one reason. Chicago would be nothing without its exchanges. Fortunately we made the right choices in the late 1990's and Chicago still has its exchanges. The city and state would be in even worse shape without them.

But maybe most of all, the floor was about hope. It was a place where you could realize some of your wildest dreams. You could go from electrician, cop, milk man, farmer, military, to wealthy trader. I think hope still exists on screens, but it's a lot different. Hope always works better when there are other people next to you supporting you.

Today, it's almost impossible to start out as an independent trader on a screen and make it. If you want to really compete and become a high frequency trader, the startup costs are just too high. Frankly, to be an HFT trader, you better be a very skilled programmer and probability theorist as well-and be able to take some risk. The barriers to entry on trading are much higher today than they were back when I started.

I left the floor a few years ago. I finally sold my last seat last year. So, I am not a shareholder, or a member of CME. But, I still have friends there that I think of. Even guys that I haven't spoken to in years. Some of the old Eurodollar ($GE_F) guys, the Hog ($HE_F) guys, and just people you'd see everyday. The truth is, if you were a real trader and spent a long time there, a piece of the floor is always in you-and a piece of you will always be in the floor whether it's open or not. I am trying to start a new venture. Maybe old floor traders want to chat about it?

When traders meet on the street, there is an instant comfort. Floor trading had a code. Floor traders engaging in the "real world" have learned that the rest of the world doesn't live by that code. That's why lawyers stay in business.

It's not a sad day that the floor is closing. What's sad is that the dynamic innovative energy from the floor isn't concentrated anywhere else. When you get a group of 3000 risk takers in one room, stuff happens. A lot of it fails, but a lot of it is quite successful. Remember, we had three trading floors full of crazies in Chicago. Not only things inside the exchange, but businesses outside the exchange too. The floor created a ton of value outside of trading. It was the greatest social network in the world. It was the original co-working space.

(AG\SK)

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Comments

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Unknown
2/8/2015 | 7:53 PM CST
I happy to have had my 30 minutes on the floor 10 years ago it's a memory I'll never forget. I remember my heart just keep beat faster as I stood there.