Yesterday prior to its earnings call today, CME Group announced it was closing the pits. One can read a lot into an announcement ahead of earnings. I don’t know if earnings are good or bad, but certainly the earnings call conversation today might not necessarily be on the numbers. To those that don’t know the business, the trading floor is the cultural heart and soul of an exchange. It’s the beating heart.
But, used correctly, the trading floor is also the brain. It’s also the ethos, and the morality of an exchange.
Of course, today most of the market is on the screen and electrified.
Some people love electronic markets. Some hate them. What I will tell you is they aren’t better or worse, but they are different. That’s not “good” or “bad” in a moral sense. They are just different.
There are some realities that one has to grasp when looking at the trading business.
First, the power brokers in New York (Big banks) have always hated Chicago. Prior to 1972, Chicago was small potatoes. Post the introduction of financial futures, Chicago was an international powerhouse. New York guys were jealous because they didn’t think of it. They were pissed because a few thousand guys that didn’t have prep school/fancy college degrees were beating the pants off them in the market every single day.
Post demutualization, the power brokers were able to exert their influence over CME corporate structure to give artificial advantages to people that were not necessarily members of the exchange. Co-location, fee breaks, other perks.
Some will say this was purely a fight between an old way of doing things, open outcry, and a new way of doing things, electronic trading. They aren’t really correct. The members of the exchange voted to take the first two contracts of Eurodollars electronic under competitive threats from Eurex back in 2001. It took a few years before the entire contract made the jump to the screen. But, in fairness, CME marketing people were out on the street actively telling customers to go to the screen rather than the pit.
The pit not only had advantages for traders, but many customers were advantaged by the pit too. You can’t bitch about a fill on the screen and get it adjusted. You can’t use a “tick” on the screen. There are no fat fingers in a trading pit.
I cannot speak for CBOT products, because I don’t know them very well. I do know that CME Ag products might have never jumped to the screen. CME marketing actively lobbied customers and gave fee breaks to certain traders to push them to the screen. Traders were paid to stand in pits and arbitrage between the floor and screen.
Even today, there are some traders that get fee breaks to make markets in more thinly traded contracts that other traders don’t have access to and cannot get. There are certainly some huge efficiencies with electronic trading. For most of the market it’s cheaper. For the independent floor trader it was a lot more expensive.
But to characterize this is simply open outcry versus electronic trading is simplifying too much.
Another reason that CME corporate wants to close the floor is the board room. Recall last year, CME tried to get rid of the 6 B directors that were guaranteed to be there by the demutualization agreement. By getting rid of the floor, they directly attack the power base where these directors grew up. The floor is mostly symbolic for them now since there aren’t that many people left on it. But rest assured, nothing is done in a vacuum.
Years ago, CME would have probably saved $30 million per year by closing the floors. No idea what they will save today because the floor support personnel is not nearly what it was. I don’t know the actual costs to update, operate equipment, turn the lights on etc. But, it’s not going to be a huge earnings windfall to CME’s bottom line.