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October 29, 2007
Open-outcry trading on the decline
The NY Times writes about the consolidations that will occur as the Chicago Mercantile Exchange merges with the Chicago Board of Trade. It's not quite an obituary, but close.
As a result of its merger in July with the Chicago Board of Trade, the exchange, also known as the Merc, is moving in May to a new trading floor at the board’s Art Deco headquarters. With the consolidation of the two exchanges, the pork belly pit, formerly emblematic of Chicago’s open-outcry commodity trading, will close and begin operating only by computer.
The open-outcry pits of other low-volume markets, including cash dairy products and South American bean futures, are also closing. Many traders believe that all commodity markets will follow suit.
...
The pits have nurtured their own Darwinian values and an ethic of trust. They have been described as high-stakes chess with a locker-room atmosphere, raw capitalism shed of its corporate skin.
Many traders drift away as they age because they find it difficult to keep up. Traders in the livestock pits tend to be older, however, and have been resistant to a different way of trading.
“It depends on how old you are,” said Bob Lassandrello, 51, who has traded for 27 years in the cattle pit. “I see a lot of the younger guys trying to dip their toe in the water of trading electronically.”
Amid the cacophony — yelling that ranges from desperate to triumphant — Mr. Lassandrello, surrounded by some 50 traders in colorful jackets and sneakers, wades into a pool of discarded orders. He takes pride in his ability to read a competitor, a skill critical in the pits but absent from electronic trading. That is why he is considering early retirement.
“We’re near extinction,” said Mr. Lassandrello, who believes many of his generation will not make the transition to the screen.
In a way it is too bad. There's something exciting about open-outcry trading. There is something almost primal about it. And yet, the computer makes things so much more efficient. As economists we know that technological change does cause changes in the types of skills valued by the market. Just because they did it in the "good ol' days" isn't an argument for keeping it.
And yet, it's still too bad.
So is there an economic argument for keeping some form of open-outcry trading? Perhaps. As long as there's some veteran trader out there who thinks he or she can go up against the machine and win, there will be open-outcry trading. I don't think that species has died out yet; and there might just be some times when they can go up against the machine and win. Hence, it will probably never go away entirely. But one thing is clear. The glory days of trading in the pits have passed into history.
Posted by William Polley at October 29, 2007 12:23 AM
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