Technology Drives Fabled Pit At CBOE Toward Extinction
By PETER A. MCKAY
Staff Reporter of THE WALL STREET JOURNAL
CHICAGO -- Legend has it that the options pit where Bart Bergman began at the Chicago Board Options Exchange was so crowded in the 1980s that anyone who raised his hands to signal an order might have to keep them up for the rest of the day.
But now, in his job as senior trader for Timber Hill Group, the 42-year-old Mr. Bergman spends most of his time looking at a computer screen. In fact, most CBOE traders do the same, whether they are using handheld devices to tally orders, desktop personal computers like Mr. Bergman's, or staring up at the rows of giant price-quotation screens that have turned the trading floor into a labyrinth of minicanyons.
And that old trading pit where Mr. Bergman started? It's still there, though there's easily enough room for everyone's arms now to trade options on the Standard & Poor's 100-stock index. Occasionally, getting a blast of nostalgia, Mr. Bergman steps away to shout and signal orders in such pits for products in which Timber Hill doesn't make markets.
But like most traders, he can feel the trading pits dying. And he is both an observer at the funeral and a member of the firing squad.
In a race-to-technology movement that is outpacing even those of the futures and stock markets, the U.S. options-trading industry is phasing out the old and turning over the job of trading to computers. Firms such as Timber Hill have helped lead the charge. In fact, as much as 40% of orders on the CBOE are executed electronically, according to an exchange spokesman.
The transition into an electronic era outpaces steps taken by the neighboring Chicago Board of Trade, which trades bond and commodity futures, and other futures marts that are widely perceived as resistant. The CBOE and CBOT recently called off merger negotiations, in part because the options market feared that the CBOT's plan to create a separate electronic unit would hurt its own membership-seat prices.
In some respects, such as "multiple listing" -- or allowing several exchanges to list the same option -- the options markets' embrace of change has even outpaced that of U.S. stock markets.
Independent traders are already a dying breed in the U.S. options industry amid the consolidation and greater efficiency that computer systems have wrought. Because options markets have traditionally been less dependent on these "locals" than their futures-trading cousins, it helped accelerate the options industry's electronic march.
Exchange spokesmen say that, despite increased computerization, the number of traders at CBOE has remained at least constant -- 930 full members, plus about 700 exercisers of a joint trading right with the CBOT.
But the way they do their work is rapidly evolving amid increased electronic competition and access to outside trading floors. A few days spent on the CBOE's trading floor with Mr. Bergman recently show why he and other traders view that trend with a mixture of welcome and skepticism.
On a trading floor defined by its frat-house atmosphere and husky voiced traders who have literally been yelling for years, Mr. Bergman is an anomaly. He seems more like a math professor -- wiry, bespectacled and soft-spoken. His attention stays fixed on his screen, even at down times when other traders have flipped the nearby television from CNBC to ESPN, or are debating which cast member of "Survivor" should be booted from the island.
Instead of TV shows, Mr. Bergman is struggling to figure out how to deal with the shift to electronic trading.
"In the long run, most people believe the market's going electronic," says Mr. Bergman. "I definitely think it's the way markets should be run. But it's hard to say when or exactly in what form that will happen."
To be sure, the industry has yet to embrace electronic trading fully. Less than 1% of all U.S. options trading is taking place on the International Securities Exchange, the nation's only all-electronic options market. The other four majors are the CBOE, still the biggest options mart by far; the American Stock Exchange; the Philadelphia Stock Exchange; and the Pacific Exchange.
But the ISE has been in business only since May 26, and is rapidly growing, adding options on four or five companies a week. The ISE has grown from three listings to more than 70, and eventually plans to offer 600 options.
Even beyond the ISE's impact, multiple listing has made traders more dependent on computers just to route orders to out-of-town floors where they don't trade but might find the best prices. Options Clearing Corp., which clears all the industry's trades, doesn't keep numbers on such "off exchange" deals. But their existence implicitly means that floor traders must now check a screen before every trade on a big contract.
Electronic trading and quick dissemination of information are also bringing headaches. On a recent morning, the CBOE declared a "floorwide fast market" within minutes of opening, meaning that quotes for all products would be delayed somewhat, and the overhead screens would display less information. The reason? With all the information pouring into the system from several exchanges, the computers sometimes can't keep up as they post data. Such data slowdowns have become almost routine since the exchanges began trading one another's most popular contracts about a year ago.
CBOE spokesmen acknowledge the increased burden on the industrywide quote-sharing system, but say their exchange's technology upgrades ahead of multiple listing have been adequate. The exchange hasn't done a study to generate precise statistics on fast markets, but exchange technicians believe the phenomenon has actually become less frequent in recent months.
"Keep in mind that fast markets can be declared for a variety of nontechnology reasons, like fluctuation in the underlying stock," a CBOE spokeswoman says. "And we think traders have been more vigilant about taking them down once conditions subside."
Mr. Bergman remembers when none of this was a concern. When he started out as a 28-year-old Timber Hill trader at the Chicago Mercantile Exchange in 1987, exchanges didn't list one another's contracts, and stock-options trading was still in its infancy. "Even when I first came to Chicago, the financial products were starting to come to the fore, and they've never really looked back," says Mr. Bergman.
Ben Phillips, 24, has few concerns about the rapid change. A fellow Timber Hill trader, Mr. Phillips is in the opposite stage of his career as Mr. Bergman, his mentor. Like the company's other traders, he receives an annual salary and bonus. For a beginning trader at the CBOE, that package can approach $100,000 a year.
Electronic trading has eaten into the opportunities that a trader in his 20s used to be able to snare, mainly in commissions. But that missed opportunity doesn't necessarily bother Mr. Phillips, who says the electronic era has also taken some burden off traders. He shrugs off worry about the elimination of trading floors, which he expects to happen before long. |
