Closing the Pits

CME said they were closing almost all their trading pits this past week.  It’s not a surprise.  I remember when I was on the CME Board back in 1999.  The e-Mini S+P had been going since November of 1997 and already you could see the tail wagging the dog meaning the electronic contract was leading the big pit traded contract.  The price discovery was on the machine.

This shouldn’t be a shock or unexpected.

I remember watching an interview with our chairman M. Scott Gordon (MSG), on a small station that used to cover business in Chicago, WSNS Channel 26.  In it, Scott said today 98% percent of CME’s volume was pit traded but you could see a day where it would be 98% electronic.

It was shocking to say back then.

Of course, people on the floor were outraged.  “Open outcry will not die” was the refrain.  Sometimes people would make a trade or fill and order and shout, “You can’t do that on a machine.”

Technology took over.  When I was a representative at the only i7, part of the G7 in Torino Italy I asked the delegates at the Future of Work seminar if any of them had been automated out of a job.  None had. I was the only one.  They were all mostly bureaucrats and we know bureaucrats are never automated out of a job.

The pits were fabulous. It’s really hard to describe what it was like to work there day in and day out.  In descriptions, I have seen they talk about fistfights and the physicality of it all.  It was physical for sure.  Forget about fistfights, at your job today try standing up all day from start to finish.  It wears on your body.

After you try that, do it standing extremely close to two people.  With everyone screaming or talking all the time.  Standing in a pit reminded me of a Robert Altman movie, there never was a break in the conversation or noise.  But, it wasn’t one conversation that you could focus on, there were twenty or thirty of them.  You’d hear them all, until your hearing got so bad you couldn’t.

A few traders wore earplugs similar to the ones the rock and roll bands wear now.  I tried them and didn’t like them so my hearing isn’t so great today.

Some of the smartest people I ever saw were in trading pits.  They might have had a college education, and they might not have.  There weren’t a lot of Ivy-educated or elite school-educated people on the floor. Not too many MBA’s either.  If you got an MBA, you were likely moving away from the floor to do something else.  The only reason I went back and got mine was in 2003 I lost money trading for the first time in my life.

Most of us didn’t respect people from that part of the world, and they didn’t respect us either.

I remember being in the CME board room listening to Wall St. people pitch us so they could lead our IPO.  They’d give us their credentials and virtually all of them were MBA’s from some elite school.  After I heard them pitch, I went over to my very good friend Bill Sheperd and said, “Bill, all these years I thought these people were smarter than me.  Turns out, they are just salespeople.”  Bill laughed.  If you know or knew Bill you’d know why.

He was typical of the type of person you’d meet on the floor.  He grew up in New Jersey.  He went to college at the University of Oklahoma, but he never finished because he got drafted.  Wound up in Germany, not Vietnam, and Bill took full advantage.  He can tell you a lot of stories about his time in Germany.  His brother was on the floor and Bill followed him there.  He started in the Pork Bellies which was a hot contract back then.  When the currencies started he moved over.  He became the largest British Pound trader in the world.  Goldman and other banks hired people to stand in the pit just to track his position.  Bill would ask them to see where they had him, and if they were wrong he’d correct them!

Bill (BILL) is one of the smartest people I ever met.  Genius.  Ability to see right through people.  Street smart.  He can think three steps ahead and plays five-dimensional chess when people think they are playing three-dimensional chess.  CME wouldn’t be where it is today without Bill.  He is one of the great unsung heroes of the industry and frankly doesn’t want and doesn’t seek out the attention.  I never traded with Bill but cleared his clearing firm and would happily listen and learn from him as much as I could.

When I was on the board, I made a mistake on a vote regarding e-Mini currencies and Bill never let me forget it either.

The current Chairman of CME, Terry Duffy (TDA) and I traded with each other.  He was an order filler in the hogs and a good one.  Terry came to the floor through one of the greatest traders ever to walk on the floor, Vince Schreiber.  Vince has passed away but the stories about him are legendary.  Vince was in a bar in Lake Geneva, WI and Terry was working it.  He noticed Terry could count fast, make change fast, and had a great memory.  Terry never graduated from college and borrowed money to trade from his parents.  Lost it, made it back and then got off to the races.

Nothing crushes you more than losing someone else’s money.

I never borrowed money to trade.  Roger Carlsson (EMA) backed me.  I saved up enough to go on my own.  Two years after I did, I lost $350k in ten minutes.  I had just paid off my seat loan too.  Had to take out a new loan.  Paid it off in six weeks and never looked back.

If you wanted to be successful on the floor, you had to have respect for fear but be unafraid.  You had to be willing to go against the entire crowd and be publicly ridiculed constantly for it.  You had to be quick on your feet.  You had to be stubborn when it was time to be stubborn, but admit when you were wrong.  You also had to be honest and trustworthy.  Your word was your bond.

I miss the pit a lot. It’s not just the money or the action.  It was being around people.  It was the constant flow.  5000 people that were unemployable by anyone.  Street smart people with tremendous senses of humor.  I never laughed so hard in my life as I did in trading pits.  Misfits of human society.  Round pegs that couldn’t fit in square holes, but didn’t want to either.  If the pit was open and there was no computerized trading I suspect I’d still be in there trading.

My hope was to grow old, go in, and “sport trade” with some small positions on.  See old friends, play cards and then go home.  I knew some old traders that did just that.  Most of the time your dreams don’t work out for you.  But, it was truly a dream for me to work on the floor all those years I did.

The pit had daily drama.  Sometimes you witnessed it.  Sometimes you participated in it.  There were people in the pit that I certainly didn’t care for.  There were other people I cared a lot about.  Virtually all of them were survivors.  You’d want them on your side if the world was coming to an end because they’d find a way to win.

Pits were human, living breathing things.  They had a distinct smell.  They had personality.  They had a culture.  The cattle pit was not like the hog pit which was not like the S+P pit which was not like the Eurodollar pit.  The same thing could be said about the CBOT pits or the CBOE pits. Computer screens and high-frequency trading shops aren’t like that.  They are generic.

All of us old pit traders are dinosaurs now.  If you saved your jacket and trading cards, you always have a good Halloween costume.  Hopefully, we all don’t get dementia so we can remember the stories. By the way, my badge was CR.

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