February 6, 2015 / 12:31 AM / 5 years ago

CME options traders see open outcry resisting fate of futures pits

CHICAGO, Feb 5 (Reuters) - Traders packed shoulder-to-shoulder in Chicago’s grain options pits on Thursday were confident closure of the neighboring futures space did not herald the imminent demise of their business, despite eroding trading volumes and improving technology.

The CME Group Inc, which runs the trading rooms in Chicago, said on Wednesday it would shut down most of the open-outcry futures markets in July. Floor trading accounts for about 1 percent of all futures business at the world’s biggest futures exchange.

Just a smattering of futures traders, who once heavily outnumbered their options brethren, watched on Thursday from nearly deserted octagonal pits at the options frenzy.

Options offer buyers the chance to bet on prices without the obligation to pick up the underlying asset. They have grown in complexity as players seek more ways to hedge against commodity market volatility.

“The computer between your ears is still far and wide greater than the best computer that we have when it comes to functioning the complex strategies in options,” said Chicago Board of Trade member and wheat options broker Virginia McGathey, president of McGathey Commodities.

“The sophistication of options is virtually unlimited. That’s why it needs to stay open.”

Many investors are using electronic screens for basic options strategies, traders said.

“The stuff that’s really trading on the screens is mostly the generic stuff like an at-the-money straddle, or a simple put or a simple call,” said one trader who asked not to be named.

In a letter to members on Wednesday, CME Chairman Terrence Duffy and CEO Phupinder Gill said options pits will remain open “as long as our customer base continues to show a viable preference for using both venues.”

Gill said Thursday that there were some markets where well over half of options trade was still open outcry.

But for all the bullishness on the floor among options traders, the writing may be on the wall.

While options volumes for both live and screen trading at CME Group’s exchanges have increased annually every year since 2008, business has steadily shifted to electronic.

Screens have skimmed away about half of options pits’ market share in the past seven years, with open outcry holding 85 percent of total options volume in 2007 and just a 45 percent share today, according to CME data.

A source familiar with the situation said the floor in Chicago, which made money in 2013, was unprofitable and he expected options to be next.

“The costs of power, staff to physically operate the floor, run (information technology) means it’s not profitable, even for options,” the source said.

CME said it expects to save $10 million per year by closing the futures pits.

When IntercontinentalExchange Inc went fully electronic with futures trading in 2008, options pits closed just four years later. After 142 years, coffee, sugar, coffee and cotton options were no longer traded in pits in lower Manhattan.

The source hinted Chicago’s time frame might be tighter.

“Four years is a lifetime. CME is cutting back. Why keep an unprofitable segment of business running?”

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