The Impact of the Futures Trading Pits Closing

The Chicago Mercantile Group (CME Group) announced recently it will be closing all open outcry trading pits except the S&P contract in July of 2015. Since the New York Mercantile Exchange (energy markets) and the Comex Exchange (metals markets) in New York are part of the CME Group, they will be closing their open outcry trading pits as well. All Futures markets traded on the CME Group’s trading floors will now be exclusively traded on the CME Groups Globex electronic trading platform (excluding the S&P which will continue to trade open outcry and electronically).

This will end an era of 117 years of open outcry auctions for trading Futures contracts. Due to the dynamics of competition from international Exchanges, this had to be done to reduce the overhead to keep the world’s largest Futures Exchange running. The Futures Exchanges in the United States began consolidating several years ago when the CME and the Chicago Board of Trade (CBOT) merged to start this cost reduction process. Electronic trading reduces the cost of labor and facility size over open outcry trading pits therefore reducing operating cost. Soon after, the CME acquired the NYMEX and COMEX Exchanges in New York putting all these Exchanges under the name of the CME Group Exchange. Recently, the CME Group also acquired the Kansas City Board of Trade (KCBT) and the Minneapolis Grain Exchange (MGE) as well. There is only one other Futures Exchange left in the United States and that is the Inter-Continental Exchange (ICE).

For many years open outcry trading was the only way to get your orders filled on the Futures Exchanges. Then electronic trading came along and the members of the Exchanges would not let electronic trading run during the regular trading hours (RTH) because it took business away from the market makers. It didn’t take long before the members were forced to allow simultaneous trading of the electronic trading and the open outcry sessions. This created a more transparent and level playing field for the off the floor traders. We could now see the volume traded, current bid/ask and get instant fills instead of waiting for hours in some cases to get a fill report back (a report from the floor telling you your fill price, if your order was even filled).

Electronic trading has been a tremendous advantage to the Exchanges for creating revenue as well. I believe that if traders had to place orders like we did back in the days before electronic trading (phoning orders to the floor or your broker), that there would not be near as many Futures traders as we have today. Electronic trading also creates a chance for a trader to overtrade because of the ease of executing an order. The Exchanges charge you a hefty price for each contract you trade which is built into your commissions.

But how will the closing of the trading pits impact Futures trading going forward?

To find the answer to this question all we have to do is look at some markets that have already been converted from open outcry to all electronic trading. These markets used to trade on the New York Board of Trade (NYBOT) which was located in the basement of the World Trade Center. After the tragic incident of September 11, 2001, the Exchange had to set up temporary trading floors in warehouses in New Jersey.

Soon after that move, the ICE Exchange acquired the NYBOT and all of its products. Since the ICE Exchange has always been a purely electronic Exchange with no trading pits for Futures, the concern was the same for that move as we are now seeing with the CME closing its open outcry and going purely electronic… How will this impact trading of those Futures contracts?

Believe it or not the markets never changed, if anything they got better because they were traded electronically and there were no market makers taking advantage of off the floor traders. But the biggest question has been – what about the high volume trading session times, will that change?

In the following charts you will see the Sugar and Cocoa contracts with volume throughout the entire session they currently trade. The “high volume” time of the day has stayed almost exactly the same time as when these markets had open outcry trading. And this is exactly what will happen to the CME Group Futures contracts as well, no change.

The reason is because the Futures markets were created for the Commercial traders and the Commercials do not change their hours of operation when trying to hedge their price risk.

Figure 1 shows the sugar markets for one trading day’s session between the two vertical lines. The yellow box represents the early morning opening at 03:30 ET to about 08:00 ET. Notice the very low volume during this period and the size of the candles in the yellow box in the chart. Each day around 08:00 ET the volume spikes and stays high until close in the afternoon close. These high volume sessions are shown in the blue boxes with higher volume and more full bodied candles.

What is really interesting is that the blue box session has the same trading hours as when the Sugar contract traded on the NYBOT in the open outcry pits.

Figure 2 is the Cocoa market, another product that was originally traded on the NYBOT but now trades on the ICE Exchange electronic platform. Remember, any product that trades on the ICE has nothing to do with the CME Group’s Globex platform.

The two vertical lines represent a single trading session on the ICE Exchange. The first yellow box shows very low volume and smaller candle ranges when the market first starts trading each day at 04:45 ET. Then around 08:00 ET the volume spikes and the candles in the blue box have more full bodied candles. The second yellow box shows smaller candles and lower volume again. This is because the official settlement time for Cocoa is 11:50 ET each trading day. After that time it is just post market trading, with low volume. The 08:00 ET to 11:50 ET is approximately the same hours the trading pits were open for trading when they had open outcry in New York.

All of the other products that were acquired by the ICE have this same trading pattern. So, when the CME Group closes the trading pits in July we should expect to see the exact same thing. All of the open outcry trading hours (RTH) will still be the high volume sessions of the day even though it will be traded purely electronically.

“A misty morning does not signify a cloudy day”

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