Winds of change sweep century old CBOT grain trade
Mon Apr 14, 2008 6:01pm EDT
By Christine Stebbins
CHICAGO, April 14 (Reuters) - Chicago's grain traders know the game they and their forefathers have played is changing for good as they watch more and more trades slip through their hands and go to electronic matching on screens.
That has cast a somber mood across the once-bustling floor of the Chicago Board of Trade, showcase for 160 years of fabled "open outcry" markets where traders -- mostly men -- stand for hours in built-up rings or "pits," shouting bids and offers for commodities like wheat, corn and soybeans.
But CBOT's grain pits now hold just half, some even a third, of the traders they did a year ago. Those hanging on still wear the bright-colored trading jackets that their fathers and grandfathers wore, aiding eye contact in the pits.
But most also have a laptop strapped around their neck to help them track and trade the growing price differences between the floor and screen -- a symbol of how the once-mighty pits have become chained to the tsunami of electronic order flow.
"The mood is one of reality. They're not deaf, dumb and blind. They see the volume is going to the screen," said trader Glenn Hollander of Hollander & Feuerhaken, a grain merchandiser that has been a fixture at CBOT for four generations.
"Those that have been here for a while, been successful and bought a membership, should be in good shape. The younger guys who are staying are trying to find the niche they can fill."
For decades, open-outcry was the only game in town.
From farmers to grain merchants to cereal companies and vegoil makers, the only way to obtain a CBOT futures contract -- a "hedge" or price insurance for their grain needs -- was to go through a CBOT broker, paying commissions for the service.
Electronic matching of bids and offers eliminates those commissions, and the need for the pit broker. It's a trend that began more a decade ago in European markets and it was fought off for years by the CBOT's fraternity of grain traders.
Far ahead of the grain floor, however, was the CBOT's cross-town rival, the Chicago Mercantile Exchange. CME years ago led the way for U.S. electronic trading with its GLOBEX system. CBOT's huge market for financial futures like Treasury bonds soon had to follow suit to stay competitive with CME.
When CME finally bought CBOT last summer to form the world's largest derivatives exchange, CME Group (CME.N: Quote, Profile, Research), grain traders suspected that the days of open-outcry pits were numbered. They were right.
Today, roughly 80 percent of the CBOT's grain futures volume takes place through electronic matching, compared with less than 2 percent just 20 months ago when CBOT grains were first listed for electronic side-by-side trade with the pits.
"The floor will only exist if it needs to exist. It's looking for its niche," Hollander said.
STAY OR LEAVE?
Easing the pain of change has been the soaring revenues being racked up by CME in electronic trading fees, which have boosted the wealth of former CME and CBOT members who became shareholders when the exchanges went public and sold shares.
Jay Homan, a CBOT pit broker in the oats market, knows change is coming, But he says he has no plans to become a screen trader.
"Guys like me who've been down here for 35 years, it's been a gift from God. We know the markets are changing," he said.
"We're probably too old to look for a niche. So we're going to look for a way to exit gracefully and say 'thank you.' There are others who are looking ahead to reinventing themselves, finding ways to fit into the new paradigm."
One such niche may be grain options trading. At least that's what Patrick Quaid, an independent trader and chairman of the CBOT corn options pit, said he is hoping.
Time will tell, since CME launched side-by-side screen trade for grain options on Monday, April 14.
The complexity of the algorithms for the hundreds of myriad "strike" prices of put and call option contracts for each commodity was one reason behind the delay, traders say.
That, and market volatility, have prompted even staunch supporters of electronic matching to admit that pit trading could continue if nothing else but to fill option orders.
"If (screen-traded) options haven't taken off in the S&Ps, the eurodollars and the bonds, there is no way they're going to take off in agricultural options where we're trading 40 percent volatility," said Quaid, a CBOT trader since 1996.
But CBOT option traders say their new boss, CME Group, has been making life difficult over the last month, changing its rules about reporting trades, spreads and settlement prices.
CBOT floor traders are also bracing for more change in May, when hundreds of CME floor traders, who have a different way of thinking and traditions, move into the CBOT's historic building on LaSalle Street, which is crowned by a statue of Ceres, the Greek goddess of grain. (Reporting by Christine Stebbins; Editing by Marguerita Choy) |
