In our April cover story “End of an era,” we talk to numerous futures floor traders regarding CME Group’s decision to close its futures trading pits this July. What I learned from traders upset about the decision is that there is a small group of traders still making a decent living on the floor. There is active trading on the floor in the meat complex where end users say they can’t execute size on the screen without getting picked off and bond traders claim that up to 20% or more of the quarterly Treasury roll is executed on the floor. In the last week of February during the March/June roll more than 2.5 million contracts in the Treasury complex traded on the floor.
The traders I spoke to didn’t dispute the numbers CME used to justify its decision, though they say the 99% of volume figure traded on the screen that CME quotes is a bit of a distortion. Floor traders argue that they still add value and since the options pit are remaining open, there isn’t a great deal of efficiency gained through closing the futures pits. In fact, CME Group acknowledged this in its meeting with members saying the decision was based on the overall floor volume dropping below 1% of overall volume and not the estimated $10 million savings from closing the futures pits.
Newsletter writer and friend John Lothian took a playful swipe at a piece we posted previewing the story. Lothian unwittingly proves a point I make in the story and in this month’s Editor's Note. Lothian wrote, “I am not sure who can't let go more, traders on the floor or Dan Collins of Futures Magazine.”
I can let go and the traders have been preparing to let go for years. Price discovery has moved to the screen. Most of the industry has moved on. There is no one down there with delusions the floor will continue much longer. That is precisely the point. The battle over the future is over and end users have decisively chosen the screen, which means those customers sending orders to the floor, particularly during the quarterly Treasury roll, are doing so for a reason. That reason isn’t nostalgia and it isn’t to keep those remaining floor traders gainfully employed. It is because they believe they get better service executing trades in a few unique order types on the floor then they would sending it to the screen. That’s it. It is a bottom line business. It’s not a matter of letting go. As I noted in the story, trading moved to the screen because it was less expensive and more efficient, the few remaining orders being executed on floor are done so for the same reason.
What some traders indicated is that the CME leadership wasn’t quite up to speed with what was happening on the floor. That, like Lothian, they made an assumption that this is just about a bunch of old timers hanging on to an outdated way of doing business. That is an over-simplification. Traders report that more rolls are being executed on the floor because more of them are being executed with tails (uneven roll) where locals often give up an edge on the tails. End users can’t replicate this on the screen—or not without entailing spread risk—and are getting significantly better fills.
If a certain group of end users are getting value added service on the floor it would make sense to ensure that efficiency can be replicated on the screen before the floor and its market makers go away.
Perhaps a decision was made that what remaining volume executed on the floor was so insignificant, it didn’t matter. Given the 99% figure that would not be unreasonable, as long as your trades are not part of the 1%.
CME group did not have a specific comment about creating additional functionality for various spreads trades but a spokesperson noted that CME has been meeting with the floor community on this topic and is working to find an alternative solution. That is an indication that there is a solution to be found other than simply, “letting go.”