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VOL-CME-0311

Brendan Bilko / MEDILL

Open outcry trade volume at the CME Group has dropped precipitously since the inception of Globex electronic trading.


Open outcry trading at CME Group fading into obscurity

by Brendan Bilko
March 10, 2011


At the fount of open-outcry floor trading, CME Group Inc., only 10.7 percent of its volume in January was traded on the exchange floors. The average daily volume of floor trading was down another 4 percent from January 2010. In the full year 2010, floor trading reached a new low of less than 12 percent of total volume.

Extending the downward trend of the last seven years, there will be no remaining floor trading as early as 2017. It will all be electronic, "on the screen" as the traders put it.

CME Group, comprised of the Chicago Board of Trade and the Chicago Mercantile Exchange, plus the acquired New York Mercantile Exchange and New York Commodities Exchange, is a Windy City institution. Established in 1848, the CBOT is the oldest futures exchange in the world. However, the trading trends show that its physical presence inside the art deco building at the foot of La Salle Street may not be long for this world.

“When it comes down to electronic trading or open outcry trading, we have offered multiple venues,” said Chris Grams, a CME Group spokesman. “We’ve offered electronic via CME Globex, and we have the trading floors we operate. It’s really up to the market participants to decide what venue works best to suit their needs.”

Loath to predict an end to floor trading, Grams went on: “We continue to support both, and will continue to support the venues, as long as there are people to trade on the floor as well as electronically.”

“I think the art of trading has become more difficult off the floor as the playing field has become leveled with less edge to floor traders,” said Douglas A. Witter, president of DAW Trading, a division of Dorman Trading, and a member of CME Group, in an e-mail. He got his start on the floor in 1985 as a runner in the CBOT grains pits for Cargill Inc. after graduating from Marquette University with a bachelor’s degree in business administration. Today he is on the clearing and commission side of the business and says that all of his customers trade electronically, with the exception of those who trade options on futures, who still use open-outcry.

“Good traders will adjust to the screen and the ones that trade options, trade spreads or other types of complex longer term floor traders, tend to have more success making the transition than say a short term scalper does in the futures,” Witter said.

“The futures pits are skeletons of what they were," he went on, "with maybe 10 percent of the population they once had, say five to 10 years ago with the exception of the BIG S&P, which is still only open-outcry.” His reference to the Standard & Poor's 500 Stock Index futures contract, which currently trades around $1300, with only one-tenth of the volume electronic, distinguished it from the "mini" S&P, which has one-fifth the value and is more likely to be traded electronically.

Witter continued: “Very few new faces go to the trading floors anymore.”

One area that has seen consistent levels of floor trading is options. Many traders say the nature of options trading has yet to transition properly to the screen. Witter says that many options trades rely on contract combinations that are often times complex.

“It is more efficient to get a market from the pit still, and most times, a tighter market on the floor as well assuming the option spread is even listed on the screen,” said Witter. “Many times to get a market you ask for a quote or a RFQ [request for quote] on the screen and it takes time, and many times you don’t get a reply or get a thin market. The costs of doing it in the pit is still cheaper, faster and more liquid.”

In 1992, the CME's first year of electronic trading, only 0.2 percent of volume was traded on the Globex system, while the rest was in open outcry. Over the course of the next decade, new products were introduced to the system including stock index products in 1995, E-mini S&P 500 futures in 1997 and side-by-side Eurodollar trading in 1999. At the end of the decade Globex accounted for 8 percent of total annual volume.

In 2000, Globex adopted an “open access” policy. Customers were able to trade electronically on the system, as long as their broker financially guaranteed their activity. This eliminated the need to simultaneously put orders through a broker on the phone.

As trade access expanded, so did volume. In 2004, electronic volume on Globex exceeded pit volume for the first time.

“In the pit, a lot of it was who you knew, and who you could intimidate. There’s a physical presence to trading there,” said Chip McNulty, a trader who worked as part of a team on the floor in 2005.

“You could intimidate a broker into giving you an order over somebody else. In another instance, one guy is a trader and his brother is a broker, so whenever the broker gets a good order he feeds it to his brother and they just make each other money. There was a lot of free money in the pit that you just can’t make on the screen.”

McNulty now trades through the electronic outlet exclusively. He says those going into the business now are inclined to do the same.

“The barrier to entry is much easier on the screen. You can have thousands of people on the screen and never know it, whereas in the pit, you have 50 guys if it’s a small enough contract, and it’s crowded. If you try to come in as an outsider, brokers don’t know you, they’re not going to work with you and you’ll be stuck just standing there for three months without ever getting an order from a broker,” he said. “It’s just much easier to get involved on the screen.”

In 2010 CME Group Inc. earned $951.4 million, or $14.31 per diluted share on $3 billion in revenue, up 15 percent from net income of $825.8 million, or $12.41 per diluted share on $2.6 billion in revenue the year prior. According to its yearly SEC filing, the company estimates the percentage of clearing and transaction fee revenue contributed by open outcry was 10 percent, whereas Globex trades contributed 74 percent.