American capitalism has no more potent symbol than a raucous exchange floor packed with traders shouting and signaling buy and sell orders. But with the rise of electronic and high-frequency trading, the clamorous “trading pit” is rapidly becoming a thing of the past. On the last trading day of the year, Dec. 30, the world’s largest futures-market operator, CME Group, will close its final trading pit in New York City. CME closed most of its trading pits in Chicago in the summer of 2015. Some options pits remain, but it’s expected they too will eventually pass into history.
As a longtime over-the-counter broker I understand that this is a natural, and perhaps overdue, process. But that doesn’t mean this onetime pit trader can’t mourn the passing of the rowdy world of open outcry, a fixture in the American economic psyche since the Chicago Board of Trade opened the first futures exchange in 1848-13 years before the Civil War. Today, electronic platforms dominate a trading industry that was once the exclusive domain of red-faced market makers and A-personality brokers. Shouts and phone calls and the ca-chunk! of stamping order tickets are being replaced with point-and-click, and powerful algorithmic search engines that scour the e-universe of financial transactions for the slightest anomalies in pricing to pounce on them with hyperspeed and efficiency.
In the past, the trading pits were where those who lacked the proper pedigree but had intelligence, chutzpah and a work ethic could enter what is now a far more exclusive and professional industry. The path to success often began as a clerk schlepping coffee for the traders in their colorful smocks or brokers in shirt sleeves pacing at their desks with a phone to each ear.
The floors were great equalizers. During my time in the commodities-options pits of Chicago and New York in the early 1990s, I stood elbow-to-elbow with a Harvard law graduate and a high-school dropout tennis pro. One of the wealthiest and most respected bond traders on the Chicago Board of Trade left a job as a meatpacker to try his hand at trading. Yet today there is seemingly no place for the working-class kid willing to put in long hours for little pay to learn through osmosis rather than expensive graduate schools. Beyond populist nostalgia, one wonders what will be lost in the derivatives world when those who honed their skills in the crucible of the pit are gone? A streetwise floor trader among the young wizards at a hedge fund might caution that what looks good on their models may not pan out in the real world of markets, which don’t always behave rationally. Entrepreneurial OTC firms will do well in the digital trading age. Many who run these firms came of age on trading floors but have used their adaptive skills to thrive. Trading floors may be vanishing, but platform execution, and the businesses that offer them, will prosper because of the essential role they play in these unique but vital transactions.