Chicago futures Exchange? Imagine trading in a space packed with so many people that the only way to do business is to scream out bids and offers hoping someone sees or hears you. On all sides, guys are yelling and gesturing with wild hand signals. Some haven’t brushed their teeth. And overhead, blinking commodity prices are ticking up and down, building and erasing fortunes.
For more than 30 years, this was what it was like to trade in one of Chicago’s famed open outcry pits.
“It sounded just like a jet engine, and when it got busy, the noise level increased,” recalls third generation Chicago futures trader John Fox, 59. “The noise. The intensity level. The joy. It was an exciting, vibrant environment.”
In July 2015, most of the Chicago futures exchange 35 trading pits shut down. The Chicago Board of Trade building’s vast first floor is making room for a new tenant. The trademark octagonal spaces that once supported 10,000 traders, brokers, and runners are now dark. Futures for cattle, soybeans, pork bellies, metals, T-bills, and currencies will no longer be bought and sold in this wild, go-big-or-go-home, gladiator-like setting.
“It is a sad day. I’ve been on the floor for 45 years. My first day, I was a young kid. I was a phone clerk working on the floor. I thought, ‘This is pretty cool.'”
It was cool. The futures pits are an unfortunate but inevitable casualty of the rise of computers and sophisticated electronic trading. Pen and paper just can’t compete with lightning-fast money transfers, world-wide bidders, and efficient, profit-spotting software. Why risk losses on “gut feelings” when algorithms can pinpoint gains in milliseconds?
Open-outcry futures volumes have fallen 75 percent since 2008, and now account for just 1 percent of the owner’s total futures volume, the Chicago Mercantile Exchange said in a press release. Where once thousands of brokers and clerks buzzed, generating 80 to 90 percent of futures trades, a meager few hundred recently milled.
“The computer stuff just started taking off,” Fox says. “We knew it was coming.”
There are a few other open outcry pits still in existence – the CBOE trades S&P 500 index option contracts across town and the New York Stock Exchange still uses outcry for stocks and options. But the CBOT was the U.S.’s first futures exchange and a beacon for those with sharp minds and a hunger for wealth. Celebrated in movies, the iconic trading pits were portrayed in classic comedies like “Trading Places” and “Ferris Bueller’s Day Off.”
It opened in April 1848, when a group of city merchants tried to create more stable year-round profits for regional farmers by setting “futures” prices and locking in customers for eggs, wheat, corn, and more agricultural products.
Speculators capitalized on the move by bidding on whether those prices would go up or down. They developed sophisticated hand signals for quickly conveying lot size and quantity. In the 70s, before digital displays, prices and brokers’ names were written on chalkboards, and Polaroid cameras recorded the day’s closing deals.
It may have looked like a crazed mob, but there was a system. Brokers for houses like Merrill Lynch and Prudential Bache wore red jackets. Runners in yellow jackets ferried orders from customers on the phones to traders in the pit and back again. The orders had to be precise and time sequential. A typical “filling” broker’s day could be a couple thousand contracts. In the pork belly pit, a contract, or “lot,” could equal 40,000 pounds of frozen bacon in cold storage.
The chaos was governed by “gentleman’s rules,” they like to say. Members were required to wear jacket and ties. Hand signals evolved to include currencies and options. (You can learn the code yourself in the picture book, Trading Pit Hand Signals.) But most still yelled to get their orders across. Others wore earplugs to help amplify the best bids and offers, Fox says.
Occasionally, you might mistakenly think your order was filled when it wasn’t. (Meaning you could be out thousands of dollars.) Arguments might ensue, but there was a $5,000 fine for throwing a punch.
“Hopefully, the broker didn’t miss it or mis-file it. It’s real money. On the trading floor, you can’t lie. Because everyone else saw it, and, if you do, no one will trade with you. It’s not a very even playing field, but you knew that before you got in there.”
So why did they do it? The money could be fast and intoxicating. A few price ticks up or down the board could spell success or ruin.
“Some were making millions, but most brokers just tried to make a decent living. There was a guy who traded hogs, and when he had a good week, he would go to O’Hare airport, get on the next flight and just go wherever it was going — to Florida or Palm Springs, anywhere.”
But many depended on the pit money to support families or pay bills. This was their livelihood.
In the 80s, computers were introduced on the sidelines as a way to check news and prices quickly. They also offered various types of charts. Later, handheld devices were added.
Volume was still going strong in ’90s in the pits but as the new century started, it began to drop. After years of financial problems, the CBOT merged with its pit rival a few blocks over, the Chicago Mercantile Exchange, better known as the “Merc,” in 2007.
Now, many Chicago pit traders have moved to desks upstairs to trade on computers. But others couldn’t make the transition. They need the excitement and the “gut feelings” to close deals. On July 6, the final day of trading, Fox returned to the pits to say farewell.
“The hardest part was walking to my car and realizing there’s no more open outcry. We all miss the yelling and screaming and the paper coming out. It was just a very unique and special time.”
Since trading is trading, whether it’s on a computer or in a pit, here are Fox’s tips …
You don’t have to trade every day. Watch the markets and plan your entry and exit points. Stay on top of trends with research and objective analysis. If the market sells off really hard and there’s no reason for it that you’re aware of, then you buy. Or if it goes up really fast and there’s no reason for it, you sell.
Don’t over-leverage yourself. In commodities, the cost of holding the trade or margin was small, so people overleveraged themselves. With $40,000, they’re controlling $30 million worth of securities. If it goes against them, they’re liable for the loss. That’s why the commodities market is so risky.
Integrity. Your word is everything. You have to own up to your trades.
Your fortunes could change tomorrow. My dad told me, “There’s always another trade tomorrow.” If you had a bad day, you pick yourself up by the bootstraps and get on the train and go back down to the pits and start again.
Remove emotion from trading. People are emotional. And sometimes that’s how they trade. The hardest part is when the market is going against you. Sometimes the heat gets so hot, you just want to get out. If you can step back and say, “I’m not going to get too emotional,” you’ll be successful.
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