From strangle to straddle in a few seconds
Wed Nov 5, 3:56 AM ET
By Jeremy Grant
6:50am: At this hour, I am usually asleep. But today I'm sitting at breakfast in the Merc Club, a member-only dining room in the heart of the Chicago Mercantile Exchange, the largest US futures exchange - also called the Merc.
Joe Hafertepe, one of three partners in THC Brokerage, which specialises in trading options on futures, attacks his plate of hash browns and bacon with the enthusiasm of a man preparing for a sports game. Cigarette smoke hangs in the air as traders at other tables light up, order coffee and flip through the morning papers. Many wear the brightly coloured jackets that to me have always looked comic but, I learn later, are essential to communication in the pits.
Joe explains a few ground rules for traders on the Merc's trading pits. "You're not supposed to swear. There are rules against it. You want to try and keep it as professional as possible. Sometimes it spills over into anger and if the other person wants to take issue with it, they can. There's a quasi court in the Merc run by members and they level down fines and know when the line's been crossed. It's pretty much crystal clear."
If things do get out of hand, heavy fines are immediate. Landing a punch is "25 grand to start", Joe explains. "One guy, about six months ago, head-butted another guy. But 95 per cent of the time everything goes in a smooth, businesslike way."
I had heard that the trading pits at Chicago's venerable futures exchanges were high-octane places, where testosterone levels were as high as egos were large. But I wanted to find out for myself. Tess Kearns, 35, is another partner. I ask her how she got into this line of work. Only 10 per cent of the Merc's pit traders are women. She reveals that she is also seven months pregnant, a fact that amazes me given how stressful pit trading is supposed to be.
"I started as a runner just as a way of paying the rent, and there was another woman who worked in the pit, who did the job that I eventually got, who was very loud and aggressive and well respected. And I thought: I can do that. I worked my way up through the ranks. I was a genetic biology major in college, and, you know, being in a laboratory didn't do it for me. There is something about this job that appeals to people who have whatever it is I have, the adrenalin, the rush. I know people who have gone out into the corporate world and felt they were working at a turtle's pace. It's instant gratification out here," she says.
7.10am: We leave the Merc Club and travel up sets of escalators to the vast, hangar-like space that houses the trading pits. The pits are not holes in the floor, but areas of floor ringed by tiers of steps. All around the "hangar" at ceiling level are rapidly changing red ticker displays of stock market, bond, futures and options prices, and TV screens showing CNN. On one side of the room are tiers of desks where clerks sit in front of computer screens, taking orders from customers such as Morgan Stanley or Merrill Lynch, which are then communicated by headset or hand signal to a floor broker, such as Tess or Joe. They wear jackets coloured blue and green - their brokerage's colours. Floor clerks also mill about. They wear mustard yellow jackets.
Tess and Joe take customer orders from a floor clerk or the order is called in to a colleague standing next to them on the uppermost rim of the pit. Brokers then communicate with marketmakers in the centre of the pit - different coloured jackets again. The marketmakers are the lifeblood of the pit because they risk their own capital by taking the opposite side of a trade that a customer is seeking buyers or sellers for. Every order is scribbled on cards.
I ask Tess to walk me though a typical trade, then wish I hadn't. She says: "In the options we trade the 'at-the-money' straddle, which would be buying the put and the call of a single strike exercised at the closest to the futures price right now, the ninety eight, eighty one and a half, ninety eight, eighty seven and a half. The guy on the phone picks up the phone and says, where's the "deece" 87 straddle? The yellow coats ask the blue coats in my group. I ask the pit and they say 'nine ten'. I tell the yellow coats, they tell the guys at Deutsche Bank, they tell the guys in Germany and they say buy a thousand."
This is why the outside world understands so little about pit trading. Not only is the dress colour-coded, but traders have their own vernacular. A "straddle" is a type of trade. There is one called a "strangle", and the less threatening-sounding "butterfly". "Deece" is slang for a December month contract. I ask how long it takes for an order like this to get communicated back and forth. "Hopefully under 30 seconds," Tess says.
7:19 and 48 seconds: The opening bell is still moments away, yet the noise in the pits is already loud. Traders are shouting at each other, preparing for the off. "If you wanted to sleep you should have stayed at home!" one says. Another shouts: 'Let's get something going around here today, huh?"
7:20: A bell sounds. Pandemonium.
"Seventy seven straddle! Seventy seven straddle!" "Hundred and fifty eight!" "O&M one!"
The pit has erupted into a forest of hands, palms facing outwards, then inwards, fingers at all angles. The veins on traders' necks are visible as they shout across the pit, a tight knot of about 60 people standing shoulder-to-shoulder. It is hard to make out what each trader is saying. This is "open outcry" trading at its purest.
Trading has been carried out this way for decades on the Merc and at the Chicago Board of Trade a few streets away. But the arrival in Chicago of Eurex, the all-electronic derivatives exchange from Europe early next year, threatens some of the Chicago pits because electronic trading is cheaper and is increasingly being used by institutional investors.
I ask Tess what she makes of electronic trading. Does she think computers will wipe out the pits? "Eventually. But this [options] market, being as sophisticated as it is, it will be difficult to translate on to the computer screen. Eurodollar options will probably be the last market to give up to computers," she says.
Her view reflects that of many on the trading floors of the Merc and the CBOT, where there is a strong belief that while electronic trading will continue to make inroads into "open outcry", there are complex trades that are still out of the reach of computer software trading programmes. Put simply, the human mind can deal with complex trades more quickly than machines.
I ask how long humans can deal with an environment as stressful as this. It is no secret that many traders have had problems with alcohol and drugs. Some are inveterate gamblers, taking regular weekend trips to Las Vegas to work its casinos.
"In this pit the attrition rate is not that high," says Tess. "We've got a lot of people who've been in here five-plus years. Everybody that's standing on the top step has probably been here 10-plus years. The older we get the less bar-hopping there is. But I wish we could live the life they live in England, where you take the month of August off. If we could do that, life could be so much nicer down here. There's a guy right here who's taking his first week off in a year and a half. He needed it so bad by the time he left it was amazing."
It is not yet half past eight in the morning and I am already exhausted by what I have seen. I thank Tess, and take my leave. As I walk past the shouting crowds, I feel sure they will be around for some time to come. |
