CHICAGO On a recent morning in the Chicago Board of Trade's soybean futures pit, the trading action looked like this: One trader hiked up a leg onto a metal railing, stretching his hamstring; another passed time bouncing a green rubber ball; a third yawned.
Activity in Chicago's 165-year-old open-outcry grain markets has been declining for decades because of computerized trading, which can be executed much faster. But after the CBOT changed the way it reports end-of-day prices in June last year, the share of trading attributed to shout-and-gesture trading fell by about half.
Grain traders, merchants and analysts see an unprecedented threat to the viability of one of the world's last bastions of shout-and-gesture trading. But floor traders, some from families that have traded in Chicago's octagonal pits for generations, won't let open outcry die in the city without a fight.
A group of determined floor traders is suing CME Group Inc, which owns the Board of Trade, and its top executives to reverse the new rules they claim are killing the trading pits. The new rules allow electronic prices to be blended with those in the pits for determining settlement prices, a break with prior practice of relying solely on open outcry to set the key pricing benchmark.
The next hearing in the case, which has run into repeated delays, is set for the end of the month.
Heather Koch, a soy broker and plaintiff in the lawsuit, believes the change will put her out of business. The new procedures have reduced demand for pit trades throughout the day and cut her open-outcry futures business in half, she said.
"If you don't need someone at the end of the day, then you don't need them at 10 in the morning," Koch said.
'LIKE A WAX MUSEUM'
Chicago's grain pits are just the latest to battle obsolescence. CME's biggest rival, IntercontinentalExchange, last year silenced 142 years of open-outcry trading in New York when it closed the trading rings for sugar, cocoa and other soft commodities. They were the last of ICE's markets to go all-electronic.
More than a decade earlier, the London International Financial Futures Exchange became the first major futures house to abandon open outcry when it switched abruptly to all-electronic trading.
CME's Comex and Nymex markets are still hanging on to pit trading for oil and precious metals in New York.
A CME spokesman said the company is "very supportive" of the grain pits and counts pit-based trading services as a profitable part of its business. The exchange operator is contesting the traders' lawsuit.
Market data show the flow of business to electronic markets has accelerated since CME last June began factoring in electronic trades to the closing prices it reports for corn and soybeans.
Open-outcry volume in corn futures, the biggest of the Board of Trade's cornerstone agricultural contracts, sank to an average of 3.3 percent of total volume, or 181,599 contracts per month, in the year after the change, according to CME data. It had been 6.8 percent in the year prior to the change.
Patrick Hillegass, a 31-year veteran of the floor, said he no longer relishes taking visitors on tours of Chicago's pits. In the past, guests would hear the deafening roar of raw commerce and see the organized brawl as husky traders in bright-colored jackets competed for prime spaces. In the pits, a few inches of advantage could mean millions in profits.
Today, there's little action to show them.
"I feel like I'm taking them through a wax museum," Hillegass said recently from a seat in a row of nearly empty trading desks on the trading floor, his electronic tablet on the desktop in front of him. A gaggle of traders idled in the trading arena a few steps away.
AN ACCELERATING DECLINE
Open outcry dominated futures trading for decades after the CBOT created the world's first futures exchange in 1848. Chicago's pit-style trading eventually developed its own non-verbal argot: a palm facing toward the body indicates a buyer, and a palm away from the body represents a seller. From banks of phones on the edge of the pits, traders used intricate hand gestures to signal the volume and price of contracts to floor brokers.
That began to change in the 1980s after electronic markets made their first, unsteady appearance. Though computerized trading faced stiff resistance from floor traders at each step, it inexorably became the dominant forum for transactions.
Donald Ludwig, manager for Elkhart Grain Co, said he wouldn't even notice if open-outcry trading disappeared today. Three years ago, he began executing all his grain hedges electronically, and flashing bids and offers on his computer screen now remind him of the vitality that he once felt on the trading floor.
"You see all those changes flashing. It's almost like that roar from the pit," Ludwig said.
Even open-outcry options pits are losing share. In options, floor traders long held the upper hand because of their ability to handle orders too complex for electronic markets. Now, technology is up to the task and users say they are becoming more comfortable trading electronically.
Open-outcry trading comprised 59 percent of corn options volume through June, for a total of 7,008,644 options contracts, according to CME data. Last year, pit trading made up 68 percent of total volume through June.
Electronic markets can give traders an edge over the pit, particularly for relatively straightforward options transactions, said Carter Glass, who trades options both electronically and in the pits for a proprietary firm.
Mike Hall, a grain broker in central Illinois, said he has grown more comfortable trading options electronically. His use of electronic markets has increased as he has watched the growth of liquidity, a key measurement of depth in the market.
"I can make the click and get it done," he said.
FIGHT TO SURVIVE
At R.J. O'Brien, the largest independent U.S. futures brokerage, a handful of customers specifically request open outcry execution in an effort to support the pits, said Jimmy Connor, senior vice president for the firm.
They switch to electronic markets when they feel their orders are not getting efficient execution, he said.
"Everything is about the market's confidence in execution," Connor said. "The confidence, it goes to where the volume goes."
Floor traders said the lawsuit against the exchange puts them in an awkward position. They would like to see open outcry survive but know the markets most efficiently discover commodity prices by incorporating electronic activity.
Hillegass, for one, said he will continue trading on his electronic tablet when business is too slow in the pits.
"You can't really survive in this business on hope," he said.
(Editing by David Greising; Editing by Ken Wills)