A Fictional Account of the Results of Supporting Open Outcry

John Lothian

John Lothian

Executive Chairman

This is the story of open outcry trading, electronic trading and an imaginary secret organization I created to tell the story of both. This was the first time I used SPET, or the Society for the Promotion of Electronic Trading, to tell a story.

Back in the early days of electronic trading, trading was only offered during night time hours. The CME would famously name its trading system Post Market Terminal, or PMT.

When that name was first announced at a Swiss held conference in Burgenstock, there was a huge laugh from the Europeans in attendance. It turns out PMT in Europe stood for Post Menstrual Trauma. Needless to say, the name was changed and today we have Globex.

At the Chicago Board of Trade, the first announced electronic trading platform was called Aurora, but it was never launched because there was too much data and not enough bandwidth at the time, sources have told me.

Later, the CBOT would join the Globex Alliance with the CME and Matif but then ditch that after two years of operation and much foot dragging over functionality of the system. The first CBOT unique electronic trading system in operation was Project A, a local area network system.

Later, in 1999, the CBOT would do a deal with the Germans of Deutsche Boerse to use their system in what was a technology and non-compete deal that gave the CBOT a more robust trading platform to fend off the competition.

The Cantor Financial Futures Exchange was the first exchange to challenge the CBOT’s Treasury complex in 1998, trying to take a page out of Eurex’s success with an electronic market versus LIFFE’s open outcry markets. The CBOT would respond with side by side trading of open outcry and electronic trading and 24 hour electronic trading.

The Cantor challenge was derailed by the 9/11 tragedy, but a new challenger emerged for the CBOT in the form of a consortium of its largest bank customers in the form of the BrokerTec Futures Exchange.

The move in Chicago from open outcry trading to electronic trading was more evolutionary than revolutionary, and for many years open outcry would continue to dominate volumes. The markets used each other’s liquidity in a symbiotic manner, until finally electronic trading won out and the Chicago futures pits were mostly closed in 2015.

Here is my commentary titled “A Fictional Account of the Results of Supporting Open Outcry”

I approached the door and knocked three times, then two more times. The eye slot opened and I said my name, Lothian, my affiliation, Price Group ETD, and the password (Chippewa Potawatomi).

The eyes behind the slot looked at me strangely, shut the slot and did not open the door. I was puzzled. This was the first Thursday of the month, the night for the meeting of the Society for the Promotion of Electronic Trading (“SPET”) and I knew I was current in my dues. But the door did not open.

I knocked again, this time five times followed by three more. The eye slot opened again. Why was the door not opened? I asked. The eyes spoke. “You have been charged with promoting open outcry trading,” the voice said.

“What are you talking about?” I said. “Who makes these charges?”

The eyes said, “The High Electrons make these charges.”

“I demand an immediate hearing,” I said, knowing that the High Electrons held considerable sway in the SPET and supporting open outcry was forbidden.  “I want to face my accusers and refute their charges.”

The door opened and I was let in. The High Electrons, the brokerage firm representatives who only offered pure electronic trading services and no open outcry services whatsoever, were in the corner counting the nickels they saved by trading on all-electronic futures exchanges.  I thought about saying something about being nickel wise and pound foolish, but thought better of it.

I approached the High Electrons. They spat at me and called me an “open outcry loving electronic trading traitor.” I knew I was in trouble. They had the votes to banish me from SPET and their chewing tobacco spit was going to ruin the polish on my new shoes.

I had had a run in with the High Electrons in the past when they were arguing for an electronically traded full-sized S&P 500 futures contract on Globex.  I had suggested that there was such a highly effective ecosystem between the pit traded big contract and the emini that introducing a new third component might hurt the emini contract liquidity and thus the good of electronic trading.

I had two choices. Put up the good argument and probably lose, or beat the crap out of them. Either way I would be thrown out of the organization. I decided to argue my case and send them the new virtual trading mega fill computer virus I had been working on. I could only imagine the look on their faces when they saw the filled orders on their screens selling 10,000 contracts on the low of the day, with the market skyrocketing to new highs.  Yep, it was a dandy. I only hoped there was a portable defibrillator nearby. Welcome to the world of the electronic version of trading pit hijinks, gentlemen.

The hearing was called to order with the Grand Microchip presiding. The Grand Microchip is the High Potentate or Grand Poobah of SPET. I like Chip, he is a nice guy. His name was not Chip, but every Grand Microchip had been called by that name.

Chip said, “John Lothian, you have been charged with promoting open outcry to the detriment of electronic trading. How do you plead?”

I asked where this promotion had occurred. I was told that by praising the Chicago futures exchanges, the CBOT and the CME, in my newsletter in a rebuttal to a High Electron supporting magazine commentary that I had given aid to the forces of open outcry trading.

“What say you?” said Chip.

“Guilty as charged,” I said. “But I would like to offer some mitigating evidence before I am sentenced or expunged from SPET.”

“First, what does an electronic trading exchange look like?” I said. “Would it be like the CME, which sets electronic trading volume and open interest records so often they are embarrassed to issue press releases every day?  Or would it be like the CBOT where they have also been setting electronic trading volume records recently and have introduced a slew of electronically traded contracts in the last 12 months?”

“Which is the electronic exchange, the one where the volume is really on the screen, or the one where the deals are negotiated behind closed doors and then crossed or reported to the screen?”

“How many block trades have you ever participated in?”  I asked Chip. “None,” he said. “How about the High Electrons? Have they participated in a Block Trade?” They refused to answer and only a muffled sound could be heard.

“Clearly I have offered aid to exchanges engaged in open outcry,” I said.  “But those exchanges also offer electronic futures trading in the best form with the levelest playing field as I see it. Those exchanges have the greatest distribution of screens to members of the exchange and members of the public.”

“Those exchanges have offered innovative new contracts that have built the foundation upon which the electronic trading exchanges rest.  Can you name an innovative new product which has come from a purely electronic U.S. based futures exchange?” I asked. “And I was always taught to follow the money.  Which exchanges are making the money now?”

“And the CME has extended its electronic trading services to the NYMEX to help them achieve their electronic trading potential.”

“Yes, this could strengthen the NYMEX open outcry markets with the addition of a dependable two sided electronic market to trade with. But the electronic markets will benefit from the deep liquidity of the open outcry pit and the traders arbitrage between the two,” I said.

“The point is that for right now the open outcry markets need us, the electronic traders, and we electronic traders need the deep liquidity of the open outcry pits,” I said. “So as long as the open outcry markets give us the best electronic markets to trade on, then I am a friend of the open outcry markets too.”

Chip said, “You make a compelling case.”

“I find you guilty as charged, and sentence you to one year of community service of writing your newsletter,” he said with a wink.

 

Talk about your cruel and unusual punishment, I thought to myself!

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