The End of Open Outcry
Kayvon Pirestani
Issue date: 5/27/04 Section: Perspectives
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Last month, I had the opportunity to visit the Chicago Mercantile Exchange and the Chicago Board of Trade, two of the world's largest derivatives exchanges. They are also two of the last to maintain the 'open outcry' form of trading, where trades are matched by way of specialized hand signals and shouting. The trip downtown was well worth it. The heaving pits of the Board of Trade had the look, smell, and feel of capitalism in its rawest, purest form. It was exhilarating. I marveled at the idea that wildly-gesticulating men dressed in funny coats might form the cornerstone of our financial system. But at the same time, I knew that what I was witnessing would not be around for much longer. Indeed, the era of open outcry trading is already over.
The idea that electronic trading will replace open outcry trading pits is already widely accepted. The Economist calls open outcry an "anachronism". Brooksley Born, former chairwoman of the Commodity Futures Trading Commission, believes it is now just a matter of time before electronic trading becomes dominant. "I think probably it is the wave of the future," Born says. Even the Futures Industry Association admits that "the inevitability of fully electronic trading of futures cannot be disputed."
The United States is the last major market where electronic trading has not already been fully embraced. Equity and derivative exchanges in London, continental Europe, Tokyo, Sydney, and Hong Kong have been all-electronic for years. A sign at the London Stock Exchange warns would-be visitors that the trading floor no longer exists. Even the Merc and the Board of Trade, stalwart defenders of the open outcry model, have installed electronic systems to operate in parallel with the trading pits. At the Board of Trade, already more than 75 percent of financial futures volume has migrated from the pits to CONNECT, the BOT's electronic system.
The reasons for this move to electronic trading are obvious. It doesn't take a Chicago MBA to tell you that a computer can match trades much better than a bunch of people shouting in a pit. In fact, electronic systems have three main advantages over open outcry.
The idea that electronic trading will replace open outcry trading pits is already widely accepted. The Economist calls open outcry an "anachronism". Brooksley Born, former chairwoman of the Commodity Futures Trading Commission, believes it is now just a matter of time before electronic trading becomes dominant. "I think probably it is the wave of the future," Born says. Even the Futures Industry Association admits that "the inevitability of fully electronic trading of futures cannot be disputed."
The United States is the last major market where electronic trading has not already been fully embraced. Equity and derivative exchanges in London, continental Europe, Tokyo, Sydney, and Hong Kong have been all-electronic for years. A sign at the London Stock Exchange warns would-be visitors that the trading floor no longer exists. Even the Merc and the Board of Trade, stalwart defenders of the open outcry model, have installed electronic systems to operate in parallel with the trading pits. At the Board of Trade, already more than 75 percent of financial futures volume has migrated from the pits to CONNECT, the BOT's electronic system.
The reasons for this move to electronic trading are obvious. It doesn't take a Chicago MBA to tell you that a computer can match trades much better than a bunch of people shouting in a pit. In fact, electronic systems have three main advantages over open outcry.