CME pit (photo courtesy of Yahoo Finance) |
You’d see them around La Salle Street. Groups of young men mostly, wearing loose-fitting jackets of goldenrod or red or blue.
The outfit, like a beautician’s smock, was surprisingly cheap-looking considering what they did: make and lose vast fortunes, buying and selling almost anything that could be bought and sold, from the fall soybean crop to Japanese yen to next year’s weather, which, on the Chicago Mercantile Exchange, was a just another commodity.
These “open outcry” traders, who conducted business by shouting orders and requests at each other, are mostly gone. More than 90 percent of the CME’s business is now conducted electronically. And over the next two months, the nearly-century-old Chicago institution will dismantle 20 of its 35 hexagonal pits in Chicago and New York, hubs trading corn, wheat, soybeans, energy and lumber and more, a near-final step in the decline of a way of life that has been dwindling for decades.
“It was like a family,” said Leo Melamed, chairman emeritus of the CME and founder of the International Monetary Market. “Day after day, you’d stand in the pit with lots of people, shouting at each other. But when the market closed, you’d walk out of there pretty good friends, for dinner or a drink. You really did have a family unity in the pits. It was palpable.”
“Family” might not be the word that comes to mind for anyone who ever saw the mass of wildly gesticulating traders.
Visiting the glassed-in gallery was a tourist staple, like going to the observation deck of Sears Tower, and any filmmaker wanting to convey “Chicago” would tuck a few seconds of chaotic pit trading along with shots of clacking L trains passing the Marina Towers corncobs. Ferris Bueller went there on his classic day off.
You didn’t need a fancy diploma to be one of them. You needed an in, and money, too. Some traded their own accounts. Others worked for firms. Either way, you’d receive an order — say, buy this much November wheat at 5 — and through hand signals would find somebody willing to sell that much November wheat for 5 — a deal was struck, recorded on little cards, the cards handed to clerks just outside the pit (identified by their golden-yellow coats) who would take the order to their clearinghouse to be filled.
Now, that’s all done by computers. On Monday, the futures pits are being shut down (a future is when I pay you $1 for a dozen eggs that you will deliver in October). The options pits still remain in operation (an option is when I pay you a nickel for the right to pay you $1 for a dozen eggs in October).
“Options are difficult to transfer through screens,” said Melamed. “People still like to do it their own way. And as long as it's viable, we don’t have any reason to lose them.”
Melamed estimates that 15 to 20 percent of volume in options comes from trading in the pits, as opposed to futures, which were producing less than 1 percent of trades.
“It really was a chore to keep them going.” he said.
The Chicago Board of Trade and the CME merged in 2007, and the trading pits are in two rooms — agricultural and financial — at the Board of Trade’s Art Deco skyscraper at 141 W. Jackson.
Futures pits in both rooms will be taken apart between now and September. Then, options pits in the agricultural room will move to the financial room, and the physical agricultural pit space will be converted to cubicles and rented to traders.
The CME was created in 1919, growing out of the Chicago Egg and Butter Board. What was it about those two commodities that sparked the futures market?
“When it first began, in 1897, the production cycle of eggs was quite different than today, when chickens lay eggs 24 hours a day, ’round the clock,” said Melamed. “There was a seasonability to it.”
Thus large bakeries could lock in the eggs they’d need next year now.
Melamed said he had eggs in mind in 1972 when he realized he could do the same thing with international currencies.
“I thought you could use the same principle in finance,” said Melamed. “I launched the International Monetary Market. We went from eggs to yen.”
Understanding futures made many traders rich, though laymen could have trouble grasping what was happening. Melamed remembers a visitor from Iowa asking him to see where the “Swiss hot dogs” were trading. Melamed had to think about that for a while before realizing what his guest meant.
“You mean Swiss francs,” he replied.
Such misconceptions linger. For instance, when most people think of futures and options, they think: corn, wheat, pork bellies, rice and such. And those are traded. But all of that accounts for only 15 percent of CME’s volume. The other 85 percent is the twist on egg futures cooked up by Melamed in 1972: financial instruments such as currency and stock index futures.
And a computer works better for that kind of trade.
“The computer took over almost everything,” said Melamed. “In your world, in our world, in everybody’s world. We no longer have elevator operators. And there are no brokers in pits because screens are much more efficient.”
How much more efficient? Before computers, the CME was doing well if it completed a few million transactions a year. When Globex electronic trading was launched in 1992, it took 15 seconds for an order to finish being processed, and that was considered fast. Now, it takes three milliseconds, and the CME conducts 15 million trades every day.
“The world has benefited by computer in every aspect of our lives,” said Melamed. “Google and iPhone and Facebook and Alibaba. We can’t go back to the way it was. It’s quicker and safer.
“Having said that, you lose the family. It’s all very sterile, no noise, no shouting. That’s hard to let go.”
Now, that’s all done by computers. On Monday, the futures pits are being shut down (a future is when I pay you $1 for a dozen eggs that you will deliver in October). The options pits still remain in operation (an option is when I pay you a nickel for the right to pay you $1 for a dozen eggs in October).
“Options are difficult to transfer through screens,” said Melamed. “People still like to do it their own way. And as long as it's viable, we don’t have any reason to lose them.”
Melamed estimates that 15 to 20 percent of volume in options comes from trading in the pits, as opposed to futures, which were producing less than 1 percent of trades.
“It really was a chore to keep them going.” he said.
The Chicago Board of Trade and the CME merged in 2007, and the trading pits are in two rooms — agricultural and financial — at the Board of Trade’s Art Deco skyscraper at 141 W. Jackson.
Futures pits in both rooms will be taken apart between now and September. Then, options pits in the agricultural room will move to the financial room, and the physical agricultural pit space will be converted to cubicles and rented to traders.
The CME was created in 1919, growing out of the Chicago Egg and Butter Board. What was it about those two commodities that sparked the futures market?
“When it first began, in 1897, the production cycle of eggs was quite different than today, when chickens lay eggs 24 hours a day, ’round the clock,” said Melamed. “There was a seasonability to it.”
Thus large bakeries could lock in the eggs they’d need next year now.
Melamed said he had eggs in mind in 1972 when he realized he could do the same thing with international currencies.
“I thought you could use the same principle in finance,” said Melamed. “I launched the International Monetary Market. We went from eggs to yen.”
Understanding futures made many traders rich, though laymen could have trouble grasping what was happening. Melamed remembers a visitor from Iowa asking him to see where the “Swiss hot dogs” were trading. Melamed had to think about that for a while before realizing what his guest meant.
“You mean Swiss francs,” he replied.
Such misconceptions linger. For instance, when most people think of futures and options, they think: corn, wheat, pork bellies, rice and such. And those are traded. But all of that accounts for only 15 percent of CME’s volume. The other 85 percent is the twist on egg futures cooked up by Melamed in 1972: financial instruments such as currency and stock index futures.
And a computer works better for that kind of trade.
“The computer took over almost everything,” said Melamed. “In your world, in our world, in everybody’s world. We no longer have elevator operators. And there are no brokers in pits because screens are much more efficient.”
How much more efficient? Before computers, the CME was doing well if it completed a few million transactions a year. When Globex electronic trading was launched in 1992, it took 15 seconds for an order to finish being processed, and that was considered fast. Now, it takes three milliseconds, and the CME conducts 15 million trades every day.
“The world has benefited by computer in every aspect of our lives,” said Melamed. “Google and iPhone and Facebook and Alibaba. We can’t go back to the way it was. It’s quicker and safer.
“Having said that, you lose the family. It’s all very sterile, no noise, no shouting. That’s hard to let go.”
Interesting and informative. Though sounds like a dangerous line of work at times. All good things(or not so good things) must come to an end, it seems.
ReplyDeleteA family huh? Maybe in the same way that a prison population is a family. These guys would kill each other in a heartbeat if they could get away with it and it meant more precious money in their pocket.
ReplyDeleteKinda like lots of real families.:p
Deletethere you are phillippe, haven't seen you in ages
DeleteI always read the blog, but I don't always have something to say about it.
DeleteSome were ruthless jerks, and some were decent people earning a living to support their families. I'm married to one from the latter group. Like so many others, he left the pit when he could see the writing on the wall about its long-term future.
ReplyDeleteThere was a lot of camaraderie there. And before wide-spread use of the Internet, it was the best source of new jokes. Kind of a boys' club, though. It wasn't impossible for a woman to succeed, but it was challenging. That was partly for physical reasons; men are generally bigger and louder, which is a trading advantage.
I used to bring out of town relatives to the CBOT visitor's gallery Fascinating to watch, they had interesting displays explaining the meaning of the hand signs traders were using. Sadly it was closed post 9/11.
ReplyDeleteI heard that owning or renting a seat was required to trade. And their value was many thousands of dollars. Besides being a daunting first step in this line of work, what happened to those values? Was there a mad scramble to unload them or are they still required? Did I make this up?
ReplyDeleteFrancis
I don't know exactly how it's set up now. When my husband was on the floor, you had to own or lease a seat (he leased.) Owning a seat meant your per-trade fees to the Exchange were lower, which is still true. Seat costs vary by type, but they're in the hundreds of thousands.
DeleteI think you can now trade without a seat, but the per-trade cost is even higher.
That's really helpful. Thanks Coey.
DeleteFrancis
My pleasure. Electronic trading is certainly more efficient than open outcry, and probably fairer, but it's not nearly as interesting.
DeleteI'm sure. Computers make the game seem drier. Although the results, creating or losing wealth, are unchanged.
DeleteFrancis
NS, clever use of pics from the night before to pique one's interest.
ReplyDeleteCoey, your hub sounds like a decent man indeed.
Thanks for the kind words. He puts up with a lot!
Delete