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Ending an era, CME Group to shutter most futures pits

Thursday, February 5, 2015 - 11:10
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At CME's exchanges, including the Chicago Board of Trade, Chicago Mercantile Exchange, New York Mercantile Exchange and Comex, open-outcry volumes have been steadily declining since the first electronic trades were made on the company's Globex trading platform in 1992.

[LONDON] The world's largest futures market operator will shutter most of its open-outcry futures pits by July 2, bringing down the curtain on a once-raucous tradition that has been in decline since the rise of computerized trading.

The decision by CME Group Inc ousts traders of products ranging from grain and livestock in Chicago to gold and oil in New York after open-outcry volume dropped to only about 1 per cent of total futures trading. Options pits, which have stayed active in the face of electronic trading, will remain open in both cities.

Traders were disappointed but not surprised to hear they were being evicted from the futures pits. They had talked for years about the impending closure of the trading floors. "We all knew it was going to end," said Jerry Israelov, who has spent 25 years in CME's open-outcry pits in Chicago, including the last 10 years trading wheat futures.

The closures will mark the end of an era for the futures industry, which built itself around the pits in Chicago. Traders made and lost fortunes there and treated the trading floors like a schoolyard.

When markets were slow, typically around the holidays, pit traders would find other ways to entertain themselves, like making bets on how many cheeseburgers or chicken nuggets a clerk could eat in a few minutes. And when conflicts arose, they sometimes came to blows, earning their reputations as a rough-and-tumble group. "My best memory is 20 years ago when it was much busier. The pits were vibrant," said Scott Shellady, who is in his 28th year of trading and wears a trademark cow-patterned jacket on CME's agricultural floor in Chicago.

Chicago's 167-year-old grain pits are just the latest to bite the dust. CME's biggest rival, IntercontinentalExchange Inc , in 2012 silenced 142 years of open-outcry trading in New York when it closed the trading rings for sugar, cocoa and other soft commodities. They were the last of ICE's markets to go all electronic.

More than a decade earlier, the London International Financial Futures Exchange became the first major futures house to abandon open outcry when it switched abruptly to all-electronic trading.

The London Metal Exchange, the world's biggest and oldest metal exchange, has committed to keeping its open-outcry trading alive. The 138-year-old exchange is the only financial market in Europe that still uses a trading floor with traders standing in the "ring" - a circle of padded red leather seats - using arcane hand signals in boisterous, intense sessions.

At CME's exchanges, including the Chicago Board of Trade, Chicago Mercantile Exchange, New York Mercantile Exchange and Comex, open-outcry volumes have been steadily declining since the first electronic trades were made on the company's Globex trading platform in 1992. Open-outcry volumes fell to less than 9 percent of total volume by 2007 and less than 2 per cent by 2011, according to CME data.

CME is set to report quarterly earnings on Thursday.

CME's futures pits roared back to life in April 2014 when the company suffered a rare electronic trading outage in its grain markets. A Reuters analysis showed floor traders largely succeeded in replacing the machines in at least some markets, despite the difficulties of suddenly using floor trading skills that have mostly died out.

With the futures pits set to close, some brokers worry the markets will no longer have a backup.

Leo Melamed, CME chairman emeritus, said it was futures customers who decided to shift their business to electronic trading from the floor. "The floor had no viability anymore," he said.

As recently as 2013, CME said it counted pit-based trading services as a profitable part of its business.

The market operator will keep open the S&P 500 futures pit because it "continues to provide an important venue for trading"the underlying contract for the open-outcry S&P 500 options, according to the company.

Equity index futures pits and the DJIA (US$10) and NASDAQ-100 options pits will close following the expiration of the June 2015 contract on June 19. All other futures pits will close on July 2.

Options have resisted the shift to electronic trading because the trades are often more complex than futures.

Futures traders said they would miss the comradery of the pits, where some families worked for generations. "A bad day on the floor was better than a good day at work,"said J Mark Kinoff, who spent more than 10 years trading in the Chicago pits, including soymeal and Treasury bonds. "The guy you hated, you tried to run him over. And your buddy, you tried to help. It was just the greatest way in the world to go and make a living."

REUTERS