End of an Era

April 7, 2015 12:00 PM

One member said, “We execute a boatload of spreads on the roll for institutional customers including Morgan Stanley, UBS and Smith Barney. Can’t do that on the screen, you can’t do a spread with a tail.” 

This brings up another point of contention. While the CME emphasized the 1% number as proof that end-users had voted to close the floor, every member we spoke to that executes customer business said that their customers were taken by surprise. 

“What surprises me most is that they say they were being transparent,” one bond trader added. “If they were as transparent as they said, why are all my customers calling me up and saying they were blindsided by this?”

And traders argue the 1% figure is misleading and a product of 24-hour electronic trading and the huge size in Eurodollars and E-mini S&P 500 outrights. However, they acknowledge that it has been several years since the floor volume fell well below the mandated level required to keep it open. 

“If they wanted to close the floor five years ago, they should have,” one member exclaimed. But the prevailing view was that this is a push to close the floor entirely because they could have just as easily moved the futures pits into the financial room, and because the CME is not closing options pits, the cost savings are negligible. 

Peter Kelly, a longtime member who still stands every day in the soybean oil pit and trades where he can, says CME is putting all its eggs in one “high frequency trading” basket. 

“[The exchange] embraced high frequency traders,” Kelly says. “[HFTs] weren’t here 10 years ago and many may not be here five years from now. [CME] pushed people to electronic trading.”

Kelly and fellow traders in the agricultural room tell stories of orders they place on the screen being overshadowed by HFT orders that somehow move in front of their orders despite coming in later. “People don’t think they are getting a fair shake. HFTs don’t take risks, they hang around and steal pennies all day long,” he says. 

Kelly says his Dad, who also was a trader, once told him, “If you don’t have customers you don’t have a job.” 
Tommy Crouch, principal of TKC Investments, says he will stop trading livestock once the pits go away. Crouch is an end-user who started trading livestock futures when they were launched. 

“Those guys [CME leadership] have all forgot what made the exchange. All they care about is algo traders,” says Crouch. “It is impossible for me to do large spreads because the high frequency traders front run them.”
He adds, “Floor traders make market liquid for me, not the screen. Those guys (HFTs) are not risk takers, they don’t carry positions over night, those people don’t make markets, they rape markets.” 

Crouch is a colorful guy with strong opinions, but it would be a mistake to dismiss his point of view. The bottom line is that he manages money in the market and he is upset the floor is closing because it provides better fills for his customers. 

Too often the argument about electronic trading—like many important arguments—gets broken down to a false choice, whether it is between the past and future, old school and innovation, more regulation vs. less regulation. While Crouch may feel somewhat betrayed by the folks who earned a living on the floor choosing to close it, his trading decisions are made based on what serves his customers best. 

“I have better liquidity, I get better fills. I don’t mind giving up 10¢ or 15¢, if a spreader in the pit takes 1,000 loads from me,” he says. “He helped me get a better fill for my investors, I never would have gotten it done within 15¢ on the screen. It boils down to, ‘are they getting good fills?’”

Crouch thinks the move could cost CME its meats complex. “I would hope somebody starts another livestock exchange. I don’t mind taking the other side of Smithfield Foods hedges. Who is going to take the other side of those hedges now?” 

CME estimated a $10 million savings based on the move and stated that it was not the driving factor; the driving factor was the 1% figure they kept repeating. 

Bradley S. Glass, a local in the live hog pit, confirms many of the Crouch’s fears: “I am willing to take size, but I don’t post size on the screen. We will get picked off on the screen.” 

Many traders on the floor think the decision is payback for a lawsuit that is claiming hundreds of millions in damages from the exchange. The reason they see this as personal is because it came out of nowhere and because the functionality within Globex has not been built to handle the transactions that are now being done on the floor.

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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.