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The Main Event: Trading Pits Vs. Cyberspace


Letter From Chicago

The Main Event: Trading Pits vs. Cyberspace

Tension mounts around the floodlit boxing ring in the main ballroom of the Marriott Chicago Downtown hotel. In one corner, weighing in at 250 pounds: "Lightning" Larry Langowski. An economist by day at the Chicago Board of Trade, Langowski, in boxing gloves and black silk trunks, is a mountain. What he lacks in mobility, he makes up for in mass. His opponent, in red trunks, is 210-pound "Gentleman" Kevin Corbett, a clerk in the eurodollar pit at the Chicago Mercantile Exchange. Corbett wisely spends most of the three rounds avoiding great looping left hooks that could floor an ox.

"I had him in the second round, but the ref stepped in," complains Langowski, 50. His cohorts from the CBOT agree. "Fix! Fix!" they yell, when Corbett, 23, is awarded the split decision.

With the country's two preeminent futures exchanges bringing their long and bitter rivalry into the boxing ring, this is no ordinary fight night. The Seventh Annual Ringside event--brainchild of former exchange Chairmen Patrick Arbor of the CBOT and Jack Sandner of the Merc--is ostensibly a benefit to raise money for Chicago's Mercy Home for Boys & Girls. But it's also a chance for members of the two exchanges to knock each other silly. "We're just having fun and helping a great charity at the same time," says Arbor.

Fun for the men, at least. The floor traders--virtually all of them male--whoop it up as the combatants enter the ring. Wives and girlfriends, dressed to the nines, look faintly bored. "They kinda remind me of gangsters and molls," says my date, ducking a huge cloud of cigar smoke.RELICS? Indeed, the Runyonesque scene is a throwback to simpler times, when the biggest concern of Chicago's two futures exchanges was bragging rights as the city's busiest trading venue. Now, the two are increasingly becoming allies in a bigger prize fight: against competition from cyberspace. If they don't win that one, the CBOT and the Merc may become relics of the past.

Futures exchanges around the world are abandoning physical trading floors for cheaper, faster, and directly accessible computer systems that match buyers with sellers electronically. The French futures exchange, MATIF, closed its floor and moved to an electronic platform last year. LIFFE, the London exchange, is doing the same after the electronic Eurex exchange stole its biggest market in German bond futures. The Chicago exchanges, which pioneered and perfected open-outcry trading, where individuals buy and sell futures contracts face-to-face in "pits," are on the ropes. "Eventually, electronic networks will replace a significant part, if not all, of the trading activity in Chicago," insists Hal Hansen, the former chairman of the Futures Industry Assn. who is now with consultant Chicago Partners. "It's just a question of when."

Last September, New York-based Cantor Fitzgerald Brokerage, the world's largest bond broker, launched Cantor Exchange to trade futures contracts on U.S. Treasury bonds, the mainstay of the CBOT. Cantor already has thousands of computer terminals on the trading desks of the biggest bond buyers, who are also the biggest buyers of futures contracts. With a little tinkering, Cantor could offer access to the cash and futures market in Treasury bonds from one screen.

Despite transaction costs 50% lower than at the CBOT, however, the project has drawn little interest from Wall Street investment houses. Why? The system is not yet interactive: Customers see bid and ask prices on their screens but must call a Cantor broker to place orders and execute trades. And since prices in the larger, more liquid CBOT market are better, most buyers still send their business down to the bond pit. But by summer, Cantor says, the system will allow customers to point, click, and trade contracts entirely on their own.BIG IMPACTS. Other electronic rivals are on the horizon. In December, NASDAQ said it is considering making a market in bond futures on its vast over-the-counter electronic network, another threat to the CBOT. Last year, EBS Partnership, a system developed by 14 commercial banks, began trading forward-rate agreements--similar to the Merc's bread-and-butter eurodollar contract.

The exchanges aren't throwing in the towel. After all, the CBOT, which developed alongside Chicago's grain and meatpacking industries in the last century, has been in business for 150 years. The Merc, founded to trade egg and butter futures, has been here for 80. Both have invested in electronic trading systems and are working to improve them.

Initially, E-networks were open only overnight to let customers trade on news from overseas financial markets. But in September, the CBOT began running its so-called Project A electronic system during the day to compete for E-trades that might go to the Cantor Exchange. Merc Chairman M. Scott Gordon plans to have 24-hour eurodollar-contract trading on Globex2, the exchange's electronic system, by June.

Neither Project A nor Globex2 is scaring away electronic competitors. Their transaction speeds are slow, and they couldn't handle large volumes of trades without serious overhauls. Last year, Patrick Arbor proposed a short cut for the CBOT by forming a technology alliance with Eurex, the 800-pound gorilla of the electronic-trading world. The exchanges would share the cost of a new electronic platform that would list the contracts of both Eurex and the CBOT. But on Jan. 27, CBOT members rejected it.

Even if the exchanges beef up their electronic networks, the bigger challenge may be getting members to use them. Trading from a computer terminal is very different from the rough-and-tumble environment of the open-outcry pits. "Most members just don't want to change," says a trader.

Meanwhile, the exchanges are cutting the costs of floor trading. That means replacing armies of clerks and runners on the trading floors with automated order-handling systems. The futures pits will likely be transformed into something like the Chicago Board Options Exchange, where computer screens flashing orders take up as much space as people. There's also pressure for the rival bourses to merge--cutting administrative and clearing costs. Time is of the essence. "Fewer and fewer young people are interested in coming to the pits to trade," says Ray Cahnman, CEO of Chicago-based clearing firm Transmarkets. "By the time they learn how to trade, the pits could be shut down."

That "would be a big blow" to Chicago, says Robert S. Hamada, dean of the University of Chicago's business school. The exchanges employ about 50,000 directly and support an additional 100,000 jobs. If the pits disappear, everything from bars on Rush Street to posh Michigan Avenue retailers to leafy suburbs such as Wilmette, where many traders live, would suffer.

Still, the Chicago exchanges are famous for taking a punch. As industries have come and gone on the Midwest landscape, the exchanges have adapted. In cyberspace, though, they may face their toughest opponent yet.EDITED BY SANDRA DALLASReturn to top


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