Commentary: The Pits Are Becoming A RelicJoseph Weber
The chaos unfolds every market day. A couple of thousand people, clustered around sunken circular pits at the Chicago Board of Trade, shout themselves hoarse bidding on contracts on grains, soybeans, and even U.S. Treasury securities. They trade for their customers or for their own accounts. It's loud, raw, and so physically demanding that some traders lift weights to build stamina. "It's still an amazing world to be part of," says Harold W. Lavender, a 23-year veteran. "All you have to do is walk on the floor to feel the excitement."
But, for all the color, excitement, and spectacle, the "open-outcry" system that Chicago traders created over the last 152 years is simply obsolete. With millions of shares and contracts zipping around on global computer networks, the quaint and--for traders and their aides--lucrative practices at the CBOT and a few other marketplaces are just wasteful throwbacks. As all-electronic exchanges in Tokyo, Sydney, Frankfurt, and other locales have revealed, traders and brokers can work more efficiently at computer screens. Last year, the Eurex, the all-electronic German-Swiss bourse, overtook the CBOT as the world's biggest financial futures market.
Luckily, the CBOT's executives can see the digital wave. They're setting up a joint venture with Eurex to trade transcontinentally. Even more important, they are advancing a plan to split the exchange in two. A privately held unit would operate with open outcry, while a second outfit, to be spun off in an initial public offering, would develop electronic trading. Members are expected to vote on the plan by the end of April. "Status quo is not an option," argues CBOT Chairman David P. Brennan.
COURTING DISASTER. He's right. Just look at the growth of electronic trading networks for stocks. They now account for more than 27% of the dollar volume of stock traded on Nasdaq. "The open-outcry system provides a living [for old-style traders], but it really is providing that living at the expense of the ultimate buyer and seller," argues Andrew J. "Flip" Filipowski, a software entrepreneur recently appointed a director at the CBOT.
Indeed, exchanges that refuse to modernize court disaster. For years, the open-outcry London International Financial Futures & Options Exchange (LIFFE) dominated the market for futures contracts on Germany's 10-year bond. But in less than four years, Eurex' electronic trading mart won the entire business. Now, LIFFE is going electronic. "One doesn't have to be a mystic soothsayer to know which way the wind is blowing," says Robert S. Hamada, dean at the University of Chicago Graduate School of Business and a CBOT director.
Indeed, the CBOT's crosstown rival, the Chicago Mercantile Exchange, is building an electronic trading system, too. Even the hidebound New York Stock Exchange is trying to fashion an electronic system as it attempts to preserve floor trading.
Change may not come smoothly at the CBOT. Many members argue that the ability to see the person with whom they are trading gives them an edge--the ability to read body language and know who is in the market. "There's an information flow that comes from literally hundreds of people that you don't get in an isolated electronic environment," argues Jacob Morowitz, a soybean trader and president of USA Trading, a member firm. "It's value-added."
By providing a choice for customers and traders alike, the CBOT restructuring plan will test whether the old guard is right. Customers who want to go electronic can. The virtue of the CBOT plan is that it will let the market decide whether bonds, or any contract, should trade online or in the pits.
Odds are that the Chicago traders will lose their pits. But if they move swiftly to adapt their trading talents to the computer screen, the brawny Chicagoans may just manage to keep the business.