Stocks and Commodities Magazine

CME Commodity Pit Closures Causing Concern for the Average Retail Trader

What impact will the CME’s pit closure have on the average trader?

In early 2015 the Chicago Mercantile Exchange announced that it would be closing pit trading for all futures contracts in both its Chicago and New York operations, with the exception of the full-sized S&P 500 and most option pits.

The S&P 500 futures contract was the only product that had never been moved to “the screen”. While all other CME futures products traded in both an electronic version, and open outcry version, side-by-side, execution in the “big” S&P has always been strictly open outcry. Because of this, many traders moved their speculation from the original S&P contract, into the electronically executed e-mini S&P 500 futures (symbol ES) to avoid the delays and slippage that sometimes came with pit traded execution.

If you are young, and new to the trading community, you might not be aware of what trading pits are, and the practice of open outcry execution. In short, the pits are designated circular areas in which exchange members buy and sell futures contracts through hand gestures known as arb. Although the transactions are dictated by hand movements, they are accompanied by aggressive voices, and, in some cases, a degree of physicality. The process of open outcry trade execution is often referred to as “organized chaos”. If you haven’t seen Trading Places starring Eddie Murphy and Dan Aykroyd (one of the greatest movies of all time), you should; it manages to capture the essence of pit trading in all of its glory. Further, the documentary “Floored”, directed by James Allen Smith, depicts a candid story of the ups and downs experienced by those on the CME trading floors in Chicago.

As mentioned, along with the “big” S&P 500 futures, the option pits will resume operation. This is because the complexity of option trading hasn’t translated to the “screens” as well as futures contracts have. Simple long and short calls and puts can easily be executed via an electronic platform, but in some circumstances those trading multi-leg option spreads in high volume still find benefits of using an open outcry execution broker. This is expected to be the case for the foreseeable future. Nonetheless, the writing is on the wall…eventually, the option pits will likely go the way of the futures pits.

 

Read more about potential changes for the retail trader from the recent CME Commodity pit closures in the May 2015 issue of Stocks & Commodities Magazine

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