End of an Era

April 7, 2015 12:00 PM

On Feb. 4, the eve of its quarterly earnings report, CME Group made an announcement that was both a shock and expected, if that is possible:  “As open outcry futures trading has fallen to just one percent of the company’s total futures volume, CME Group today announced it will close most of its futures trading pits in Chicago and New York by July 2, 2015.”

With that, the end of the 167-year history of futures floor trading was in sight, creating an uproar in the small, but viable trading community still making a living on the floor. Those traders are angry and believe the decision was more a personal and emotional reaction by CME Group leadership--Executive Chairman Terry Duffy in particular--to a member lawsuit filed last September than it was a sound business decision. 

It was on the lips of traders as they filed out of the W Hotel, a block down from the historic Chicago Board of Trade Building, shortly after the beginning of a meeting between members and CME Group leadership two days after the announcement was made. It was clear to many members leaving the meeting early after hearing the reaction to their concerns by exchange leaders that the decision was final. Many used the term “arrogant” and “condescending” when describing the response of the chairman to their concerns.

While seemingly counterintuitive — it is assumed in many circles to be the old-time floor traders who are living in the past hanging on to an inefficient way of doing business—there are valid arguments that the remaining business done through open outcry provides value, especially to end-users who would face higher execution costs if forced to place large and complex spread trades electronically. 

Those most upset coming out of the meeting were traders from the Treasury complex who make markets during the quarterly Treasury roll. While the vast majority of trading is executed electronically, customers come to the pits to execute a considerable amount of their rolls (carry a position from the front month to the next option). As much as 20% of the roll by numerous estimates (see “Size matters,” below). While end users can execute simple calendar rolls, there is a greater demand to trade uneven rolls where floor traders give up an edge on the tails. 

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About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.