Chalk one up for the humans.
For hundreds of years, exchanges have served as a focal point of commerce, a marketplace where merchants, businessmen, buyers and sellers could meet in the orderly trading of goods. Our nation’s oldest exchange, the Philadelphia Stock Exchange, was originally founded in 1790 as the Board of Brokers of Philadelphia. Its location was in a coffee house.
Since the 1990s, the realm of the open-outcry trading floors, where buyers and sellers trade and communicate verbally or by hand signals, has steadily given way to electronic trading. The first major global exchange to transition to a 100 percent electronic trading platform was the London International Financial Futures and Options Exchange, which shuttered its trading floor in 2000.
In the U.S., the former New York Board of Trade, now owned by the Intercontinental Exchange, ended 142 years of open-outcry trading in 2012. The New York Mercantile Exchange, founded in 1872, closed its trading floor in 2016. The Chicago Mercantile Exchange Group, the world’s largest futures and options exchange, closed the majority of its historic 167-year-old trading floor in 2015.
For most financial exchanges around the world, the open-outcry trading floor has become a dinosaur. Today, an estimated 85 percent of all trading activity in the U.S. is now done electronically.
But then something happened. Something that no one had expected or even thought probable — a trading floor was built.
On August 22, the Boston Options Exchange, or BOX, established the first open outcry trading floor in Chicago in more than 44 years. The BOX is jointly owned by Toronto-based TMX Group, a holding company that also operates the Toronto Stock Exchange and the Montreal Exchange. The new Chicago trading floor will trade U.S. equity options. Options are complex financial instruments that convey the right or obligation to buy or sell the underlying stock at a certain price by a set time. Currently, the BOX handles only about 2 percent of the total U.S. equity option volume.
But why is the BOX casting its dice with us slower-paced and emotional humans? Surely this runs counter to the decades-long trend toward electronic trading, whose advocates celebrate the greater efficiencies, speed of execution and lower costs. To answer, we can look to their top competitor, which resides right across the street.
The Chicago Board Options Exchange, or CBOE, is one of the world’s largest options exchanges. Today, its number of floor traders is but a tiny fraction from its halcyon days where thousands of traders, brokers and clerks roamed the floor. Though the majority of trades on the CBOE are now executed electronically, a small but significant niche of options still trade in open-outcry. As a nuance of the options marketplace, for especially large or complex orders, a skilled broker or trader can provide a price and speed of execution that electronic trading simply can’t beat. It’s this type of order flow, along with market information only available in the trading pits, the BOX is looking to capitalize on.
Chicago has long been considered the bastion of open-outcry trading. Wheat, corn, cattle, hogs, lumber, crude oil, gold, silver, interest rates, foreign currency, Treasury notes, stock options and a multitude of other commodities and financial instruments could be traded on the floors of Chicago’s financial exchanges. Spread out across each exchange’s expansive trading floor were the various trading pits, the multi-tiered enclaves where traders and brokers gathered to trade a particular type of security. Traders, wearing their colorful jackets, shouted and used creative hand signals to communicate bids and offers and executed trades. Trading crowds could be packed, standing shoulder-to-shoulder among hundreds of others, all competing for the chance to make money or cover a loss.
For 14 years I considered the CBOE trading pits my stress-filled home; the most pure form of capitalism I’ve known, all wrapped up in a finely tuned ball of controlled chaos. I still have my trading badge and my trading jacket, with holes near the elbows and pockets marred by exploded pens. Yes, I accept the old-school type of frenzied floor trading is just that — a thing of the past. But as someone who spent a large part of his life standing in those trading pits, it’s nice to finally put one on the board for us humans.