Turn Out the Lights, the Party’s Over

http://streetwiseprofessor.com/?p=9124

by minimax • 11 years ago

107 50 11 years ago

streetwiseprofessor.com

dredmorbius2• 11 years ago

"The Party" is the Chicago Mercantile Exchange's trading floor -- for futures. Options trade will continue.

B1narySunset• 11 years ago

Except for the S&P 500 pit which is still pretty active.

dredmorbius2• 11 years ago

Also mentioned in the lede, though yes, I omitted that.

sailfast• 11 years ago

I will always remember them fondly. There was no more visceral way to witness actual change in the markets manifested in physical stress and volume. It was going to happen, sure, but I will miss them.

chollida1• 11 years ago

The book DarkPools does a decent job of describing the rise of machine based trading that eventually replaced pit traders.

http://www.amazon.com/Dark-Pools-Machine-Traders-Rigging/dp/...

Good riddance, the markets are better off in almost every way but removing pit traders.

  - end of day's reconcile, 

  -machines aren't tempted to "lose" trade tickets for trades that would have been loses.  

  - machines don't hold clients trades while they jump infront of them.

  - liquidity is much, much better off now.   Every flash crash has an almost instantaneous rebound of prices back to their "true" values.

To paraphrase Churchill. "“Computerized trade matching is the worst form of trading, except for all the others.”

To the city of Chicago's credit. Even thought they lost pit trading for futures and almost all options, they've still managed to keep the bulk of those trades via the electronic CBOE and being the center of HFT.

I would guess that when an industry gets as disrupted as pit trading was, then the center of gravity would tend to move. In this case, Chicago did well to hang onto it.

pavel_lishin• 11 years ago

the markets are better off in almost every way

In which ways are they not better off?

jackgavigan• 11 years ago

I would guess that when an industry gets as disrupted as pit trading was, then the center of gravity would tend to move. In this case, Chicago did well to hang onto it.

Absolutely. At the beginning of 1997, the London International Financial Futures and Options Exchange (LIFFE) had 65% of the market for trading German Government Bond futures (known in the market at Bunds), its most-traded product. Eurex (the German futures exchange in Frankfurt) had the other 35% of the market. Throughout 1997, Eurex slowly grew its market share by slashing trading fees and extending access to its electronic platform to clients in the US and London. By contrast, LIFFE was slow to embrace technology, preferring to rely on the traditional, open outcry trading floor model. However, in January 1998, for the first time, Eurex captured a larger share of the Bund market than LIFFE. This marked a tipping point and by the end of 1998, virtually all Bund trading had shifted to Eurex (and stayed there).

Coincidentally, the Streetwise Professor himself wrote a paper on the topic: http://www.bauer.uh.edu/spirrong/dtbtip2.pdf

a3n2• 11 years ago

machines don't hold clients trades while they jump infront of them.

Does machine trading actually bring anything with it that discourages that? I would think that it would make it easier to do that as a defacto business model.

jeffreyrogers• 11 years ago

Well, it's illegal, and presumably it's harder to cover up a machine doing it (since it's in the source code) than a human who could just deny doing anything wrong.

serve_yay• 11 years ago

No, it just looks different now. (It looks like spending crazy amounts of money on a wired connection to be 4ms ahead of the other guy.)

kjs32• 11 years ago

Immutable activity logging.

yummyfajitas• 11 years ago

Yes - if you put multiple queues into your software, that's pretty easy to spot and prove in court. It's a bit harder to prove if the queue lives in your broker's head.

joosters• 11 years ago

There's an interesting commentary on this over at the FT:

http://ftalphaville.ft.com/2015/02/05/2113091/reminiscences-... (login needed)

The problem with the abstracted version of the market is that, well, none of the potential repercussions for breaking the rules involve any sort of face-to-face experience. Just the same way that defrauding people via email is much easier than doing it face-to-face, the lack of a physical interchange creates a similar bad behaviour incentive in the market.

With no social-pressure to be collaborative, everyone in it for themselves and regulators inevitably asleep at the wheel, because, well, there’s no way for them to keep up with how bad behaviours are innovating, all we end up with is a Wild West market in which nobody can ever trust anyone. Whether that leads to social stability and growth in the long run, we guess only time will tell?

jsprogrammer6• 11 years ago

This excerpt seems to lack perspective. What email scam has taken people for over a dozen billion dollars[1]? And that's just a single example.

The OP article also seems to be highly colored nostalgia. Really, a "market" with numerous "rules not written in any book that you adhered to, or else" is believed to be a paragon of efficient markets?

I do believe it was a party in there, just not one that anyone but the most well connected and capitalized had any access to.

[1] http://en.wikipedia.org/wiki/Bernard_Madoff

peri3• 11 years ago

coughs I'm not sure what time zone you're in, but my folks have been scammed like this since tulips were a thing.

a3n2• 11 years ago

I think the point is not that email makes scamming more efficient or effective, which seems to be what you're disputing, but that because it's not face to face, it's easier for someone to cross the line and be a scammer, since there's no immediate face to face social feedback to discourage it.

The same thing happens when someone in car screams and swears at someone for not driving up to expectations, or not getting out of the crosswalk in a timely manner. That same screamer would never do that at work, because of immediate social pressure if nothing else.

Distance and darkness does less to inhibit unchecked corruption than regular social feedback.

minimax3• 11 years ago

I do believe it was a party in there, just not one that anyone but the most well connected and capitalized had any access to.

Except it was the exact opposite of that. The archetypal Chicago futures pit trader was a normal guy off the street, usually without a college degree, who managed to scrape together a few thousand dollars to cover the margin for a couple of contracts.

nsxwolf• 11 years ago

My first real programming job was at the Chicago Board of Trade in 1999, just when the electronic trading initiatives were really taking off. But the floor was still totally packed, totally crazy, and completely inscrutable (to me).

I'm glad I had the chance to see it.

wpietri• 11 years ago

Back in the mid-90s I did tech work for a Chicago financial trading firm. I ended up with one of those colorful coats so I could go down to the trading floor and swear at our computers there. (Tech note: there is still no good swear-over-IP protocol; some things apparently you have to do in person.)

It was an amazing place, and I hope somebody collects all the colorful stories that result when you get so many adrenaline junkies together in one place. (E.g., the time somebody punched out a polar bear. Or the the trash bags full of money. Or the snow futures market.) But my guess is that the traders don't really mourn its loss as much as I will. When I was back in Chicago a couple years ago, the Merc had shut down their trading floor at 30 S. Wacker. I stopped in to ask the security guards if the traders missed it. "Those guys? Hah! No, they just left one day and never came back."

EC1• 11 years ago

I would LOVE if you wrote up a few stories, however long! Do you think you could?

barrkel• 11 years ago

LME is still keeping its trading pit for now. Had a tour round is, interesting if you get the chance.

IgorPartola• 11 years ago

Off topic: wow is that text-on-background unreadable...

noname1232• 11 years ago

Great article. Writing has been on the wall for awhile, but sad nonetheless that open outcry is going away.

Quick question, for ES futures, SPX options and other major option series that are operating on a hybrid model (electronic + open outcry?) How do the exchanges reconcile these?

For instance, do open outcry trades have to follow NBBO; and what is the latency of an open outcry trade/bid/ask being broadcasted in quote feeds? Do people mostly still do open outcry to execute extremely large block orders? Finally, would the cease of open outcry affect membership pricing of CME?

minimax3• 11 years ago

You are trying to fit the futures markets into the US equities model. Open outcry and Globex are two separate markets. Open outcry quotes don't show up on Globex. Traders in the pits have handheld devices that allow them view quotes and place orders on Globex.

My understanding is that open outcry is still useful for options trading because it lets you do complex multi-legged trades "atomically." A broker can get together with a local (or several, if it's a big order), and sort out a single price for a trade that will involve multiple instruments.

noname1232• 11 years ago

Thanks appreciate it! So sounds like then Globex and Open outcry are separate markets then although they are closely correlate as they trade the same asset but aren't obligated to reroute orders.

As for options, AFAIK, CBOE and ICE already keep multi-legged books in electronic trading. For example, you can request for a multi-leg order via Interactive Brokers and it'll return a bid/ask spread that's the sum of all your ratio's/legs. When you execute, I think IB's SmartRouter does the magic to figure out which exchange to submit your order to (whether to submit it all to a multi-leg book or as single orders; but IB is on the hook to guarantee the complete execution of your order).

On liquid options, hitting mid on your multi-leg has a decent chance of being executed. However options in general are not as liquid as equity, so happy that guys at CBOE/CME can still do open outcry.

Animats• 11 years ago

Next, the NYSE floor will close. It may take a few more years, because NYSE management views it as a useful tourist attraction and publicity operation.[1] But Dow Jones announced a few months ago that they will no longer run pictures of the trading floor. Even the webcam feed seems to have been shut down. There are still people going there, but they're mostly using computers, not live trading. It's more of a big co-working space now.

http://www.crainsnewyork.com/article/20140602/FINANCE/306019...

Turn Out the Lights, the Party’s Over

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