OPENING POSITION
November 1999
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As every reader of STOCKS & COMMODITIES should know, there's a bull market in futures exchanges right now. At last count, there were some 85 futures exchanges in operation around the world, with several others being organized. As they start to offer competing contracts on the same risk, the question arises whether the time zone difference is enough to justify so many similar enterprises. Moreover, as many offer electronic trading as their primary competitive feature, the next question is whether open pits can compete at all in this brave new world.
Open outcry dead? That's what you hear. Yet sellers at the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) are still asking between $400,000 and $500,000 for the privilege of trading anything their exchanges offer. That's up about $50,000 or so from last year, so there's a bull market in pit positions, too. That may come as a surprise to people who think that open outcry is dead.
However, there is an art to moving a position, especially a large one or one entering a thin market. Sometimes a look or a tone of voice on the part of a trader indicates an opening that wouldn't be apparent in a queue of waiting trades or on a screen. Even phone traders are ahead of automated traders in this respect. Looking around the pit is a faster, surer way to see where order flow is coming from than watching a marketmaker screen. Perhaps this is why, even in this day and age of electronic information, people still want to be physically in the pits.
But why do the pits exist in the first place? They exist because, in the past, there had to be a place, a point in space where information exchange could occur. Standardization and regulation were also issues then, but now, the world is decentralizing, not centralizing. Nowadays, those same traders could conceivably trade directly with each other, away from the pit. And here's the kicker: they don't need an exchange to do it. They can interact over the Internet -- or if not now, they will be able to do so soon.
Bankers do it all the time, largely on credit assessments and trust. Many investing institutions routinely go directly online. The communications capability available to most anyone today makes trading associations possible and economical. As communications technology advances and improves, the functionality of a pit may be brought to traders all over the world. It may be the monopoly of the exchanges that is dying, not open outcry.
Good Fortune!
John Sweeney,
Technical Editor
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