When a young law student named Leo Melamed arrived at 110 North Franklin, Chicago for a law firm interview in 1952, the chaotic scene he witnessed startled him.
Merrill Lynch, Pierce, Fenner & Beane was actually a brokerage firm, and the job was for a runner who sent messages through the Chicago Mercantile Exchange’s trading pit, where financial contracts were made for everything from onions to eggs.
A swirl of people in colored jackets screaming and jostling, marking deals on huge chalkboards and recording the day’s results on Polaroid cameras, hooked young Melamed. After graduating from law school and quickly interrupting his career as a real lawyer, he returned to Merck and became its chairman in 1969.
“We were a bunch of guys who didn’t know the difference between turkey and treasury bills, Swiss francs and cattle,” he said. “I instantly fell in love with everyone and everything.”
Covid-19 has destroyed some of the last bastions of “open protest”. Traders who prefer to negotiate deals face-to-face scored a rare victory this week when the London Metal Exchange canceled a previous plan to permanently close the Ring, Europe’s last significant traditional trading hole.
But last month, Melamed’s alma mater, now called the CME Group, announced it would permanently close the trading floors that were closed by the pandemic a year ago, with the one exception of the Eurodollar options pit. For many in the Chicago trading community, this meant the end of an era.
The trading pits where Melamed and many other financial titans learned their craft – and are immortalized in popular culture by the film. Trading places – was slowly dying before the pandemic. Over the past few decades, trading has overwhelmingly moved into the world of algorithms. Today, even the New York Stock Exchange is largely a television studio, with most of the actual trading taking place at its New Jersey data center.
The rest survived, including the Arca options exchange on the NYSE in San Francisco and the Box options exchange in Chicago. Counteracting the trend, CBOE Global Markets, where the Vix Volatility Index is traded, is building a new and larger trading floor to accommodate hundreds of traders and will move there in 2022.
By keeping the ring open, the LME is trying to appease both traditional members, who preferred an open pit, and its larger trading traders and financial participants, who have supported the move to e-commerce.
Matthew Chamberlain, CEO of LME, said he hoped the hybrid approach would extend its lifespan. “I love the Ring, I think everyone at LME loves the Ring — it’s a big part of the culture, a big part of why so many of us have joined the organization. We love community, passion. From a personal point of view, I hope that it will appear in 10-20 years. “
Waylaid Nee, head of Eurodollar options for DRW, a large Chicago-based trading firm, said there was still value in having someone in the CME Eurodollar options pit and predicted that the remaining open ground for protests would remain open for years.
“Many of the strategies that trade with this product are complex,” he said. “It is much more efficient to execute this type of complex trade where all parties are talking to each other in real time, rather than seeing flashes on the screen.”
The pandemic offered a live test of what would happen if markets that relied on stock trading suddenly closed. The results are not encouraging for open protest, said Thomas Fitch, founder and CEO of RV Assets, a UK-based company that provides trading algorithms for market makers and private traders.
Despite the fact that the Eurodollar options market went from roughly 60% traded in pit trades to fully electronic overnight, the volumes and price differentials that people will buy or sell have not been affected, 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 1.5 million contracts per day, Fitch said this translates into $ 1.35 billion in additional end-user costs. “Why did he step back? It suits traders, brokers and market makers. “
Many veterans are increasingly resigned to the fact that open careers will soon perish. “The open bidding for the protest has died much longer. [than people expected]and he’s still not completely dead, but he will bleed to death as e-commerce picks up more and more volume, ”said John Lothian, who started with the pits before writing a well-read industry newsletter.
After the death of a former friend of the pit dealer in 2011, he began an oral history project to collect the memories of veterans of the era of open protest, modeled on the Library of Congress Veterans History Project. “We are losing so many open traders every day, and I thought it was important that we document how the markets have worked for so long throughout our history,” Lothian said. “It was personal trading where you could make millions of dollars worth of trades just by exchanging hand signals.”
This shift has been emotionally charged for many traders who have stayed true to the era, the camaraderie and creativity that it has spawned. Melamed recalls how he was once criticized by some CME brokers as “Darth Vader” for eventually switching to e-commerce, but admits he was “sad” to see the final closure of most of the open markets he protested. “The floor was a crucible of ideas,” he said. “This is what you are missing.”
But they are losing a battle that began in the early 1980s, when pioneers like Thomas Peterffy plugged their data feeds into basic computer programs that did the same job as traders — scanning the market for misjudged quotes. At that point, people were still executing deals.
Peterffy still remembers his first day in a trading pit, a silver options market on the New York Comex in 1967 (the commodity exchange that climbed. Trading places was later filmed), which left an indelible mark. “It was serious money and it was very interesting,” Peterffy said. “Numbers on a computer can be interesting too, but not as much as people yelling at each other.”
Eventually, he saved enough money to buy a seat on the American Stock Exchange in 1977, the humble little brother of the NYSE, which originally started out as an open market on Broad Street in lower Manhattan. But with a small build and a strong Hungarian accent, other traders struggled to hear and understand Peterffy in the vortex of the Amex exchange, which triggered his efforts to bring trading into the computer age.
Like many veterans of the era of open protest, Peterffy has nostalgia, but softens it with realism. “It was a great experience, but things are changing. It was also interesting to drive a horse and a cart ”.
Slow decline in stock trading
The “Battle of the Bund” resulted in the German stock exchange Eurex taking over the country’s long-term debt futures market from London rival Liffe. The contracts were sold “openly” in the UK, but traders preferred the electronic version because it was easier for them to trade remotely and move them in droves.
The Intercontinental Exchange, then a small startup, made a splash with the purchase of the London International Petroleum Exchange (IPE), where most of the volume was traded on the exchange. Taking a cue from the Battle of the Bund, ICE has built a state-of-the-art electronic platform.
ICE announced the closure of the IPE quarries, making energy futures contracts such as Brent oil fully electronic. A few weeks later, IPE’s larger rival, the New York Mercantile Exchange (Nymex), unveiled plans to open a public stock pit in London.
Nymex scrapped its plan to resume trading in oil contracts after receiving little interest from traders.
The Intercontinental Exchange completes 142 years of history by closing soft commodity pits in New York City as volumes decline in favor of e-commerce.
After 167 years, CME has closed most of its trading pits in Chicago and New York. Open trades on the protest fell to 1% of total futures. The decision related to open-pit futures on Nymex, which CME had bought for $ 8.9 billion seven years earlier. Only the pits associated with some options remained open.
The coronavirus forced CME and Cboe Global Markets to close their Chicago trading floors, but they reopened many of them over the summer. As a precaution, traders were required to undergo a physical examination and wear protective masks in the pit.
The London Metal Exchange has canceled a previous proposal to permanently close its open ring of protest after trading was temporarily suspended due to the pandemic.