Floor Trading..please explain why?

I can understand why there used to be a need for physical exchanges and floor traders prior to electronic exchanges such as the NASDAQ.

However, now that trades can be conducted electronically, why do we continue to have physical exchanges with floor traders? (What benefit/advantage do they offer?)

Thanks

 
incognito:
I can understand why there used to be a need for physical exchanges and floor traders prior to electronic exchanges such as the NASDAQ.

However, now that trades can be conducted electronically, why do we continue to have physical exchanges with floor traders? (What benefit/advantage do they offer?)

Thanks

This is a good question, and part of the reason I would recommend NOT becoming a floor broker.
 
Bondarb:
the answer is that there is absolutely no real reason why floor traders are needed and thats why open outcry is being phased out. I have respect and nostalgia for the speculators that once populated the floors of chicago and new york, but that era is over.
You clearly know nothing about how options are priced and traded. Open outcry, like I said, gives extremely valuable dimensionality.
 
JSinNOLA:
Bondarb:
the answer is that there is absolutely no real reason why floor traders are needed and thats why open outcry is being phased out. I have respect and nostalgia for the speculators that once populated the floors of chicago and new york, but that era is over.
You clearly know nothing about how options are priced and traded. Open outcry, like I said, gives extremely valuable dimensionality.

I think bondarb is actually quite legit, lol.

 
JSinNOLA:
Bondarb:
the answer is that there is absolutely no real reason why floor traders are needed and thats why open outcry is being phased out. I have respect and nostalgia for the speculators that once populated the floors of chicago and new york, but that era is over.
You clearly know nothing about how options are priced and traded. Open outcry, like I said, gives extremely valuable dimensionality.

perhaps i do know nothing about options, although I have traded them profitably for a few years now so maybe i know enuff. I dont quite know what you mean by "dimensionality", but I know that when I look at expressing an idea using an option it dosent do anything for me to give the order to some floor trader to execute...it just adds a layer of unneccesary hands to the process. The fact that in some products I have to call a dealer who has to call his broker on the floor is a total relic of the past and will soon be gone....dimensionality or no dimensionality...

 

It is pretty profound how fast technology has advanced when it comes to floor trading. I have been on the floor of NYMEX when it was only open outcry, soon after side by side trading started and a while after it began and once computer based trading begins you see floor traders disappear. Kind of sad since floor trading was one of the few areas of finance where you could really start from nothing and work your way up.

 
ANT:
It is pretty profound how fast technology has advanced when it comes to floor trading. I have been on the floor of NYMEX when it was only open outcry, soon after side by side trading started and a while after it began and once computer based trading begins you see floor traders disappear. Kind of sad since floor trading was one of the few areas of finance where you could really start from nothing and work your way up.

I started as a pit reporter/runner right out of college and worked my way up to a local trader. I spent over 12 years at the NYMEX. It was inevitable that the floor would go electronic but it sure was a unique and fun place to work. It was like a different society where the social rules of the rest of the world didn't apply. I laugh when I read articles about how some employee sued their employer because of something off color he said. Off color remarks and fights were part of the excitement down there. I miss those days on the floor. Unfortunately my kids will never have the opportunity to experience the excitement in the pit....or the experience of watching the new guy getting spurred. http://www.linkedin.com/in/kevinkelly2009

Kevin P. Kelly http://www.linkedin.com/in/kevinkelly2009
 
Bondarb:
with a similar upfront capital requirement you can trade yourself on a computer and work your way up from nothing.

What I mean is kids start out as runners or something similar and eventually getting the chance to trade for a firm.

 

You know what, I was a bit harsh, my apologies.

Just very confused because I know several options guys who would tank electronically because they have an acute ability to read the crowd in the pit and trade options accordingly!

 

...being in the pit definitely gives you an edge because you can see all the orders. but just because it gives you an edge dosent mean its necessary or that it is useful to the markets as a whole. its just another person in the way trying to front-run large orders. Why should i subsidize some pit trader when i can find the other side of my trade easily on an electronic exchange?

 

I definitely agree with some of the points you raise.

However, if needing to hedge a position or to simply express a viewpoint on the market, I would prefer to interface primarily with a highly skilled pit trader to opine pricing availability!

 

There are still some pits at the CBOT/CME that do a good amount of volume relative to GLOBEX - cattle, hogs, big spooz... and quite a few commodity, currency, and interest rate options are still totally dominated by the floor guys.

But I would agree that floors are on the way out. I look forward to checking this out:

http://flooredthemovie.com/

 

You're wrong Bondarb. The floor has certain advantages the screen doesn't that will allow it to survive a few more years than it otherwise should. There are a lot of relationships on the floor; if you screw up trading on the screen and "misclick", you're screwed. On the other hand, they can and do bust up trades on the floor if somebody f'ed up.

 
aceon:
You're wrong Bondarb. The floor has certain advantages the screen doesn't that will allow it to survive a few more years than it otherwise should. There are a lot of relationships on the floor; if you screw up trading on the screen and "misclick", you're screwed. On the other hand, they can and do bust up trades on the floor if somebody f'ed up.

cmon thats the best you can do? if i fukk up a trade then a floor trader may be nice enuff to bust it for me? First of all, on big fat fingers electronic trades are busted quite frequently, the exchange always has discretion to do this and secondly, that is a pretty stupid reason to have floor traders. I'll take an occasional out trade over having some guy in between me and the person i want to deal with whose sole living is made off of front-running me.

 

The trading floors still exist for two reasons:

  1. Branding. Exchanges want to be well known and well regarded so that people will trade with them. Maintaining a floor is just a way to gain publicity. Financial news channels want to be able to cut to the floor for certain segments.

  2. Backup. Servers can crash. There are obviously numerous backups but imagine a worst case scenario (i.e. terror attack, EMP) Trading can still get done in the pits without the electronic markets.

 
Best Response

This string caught my attention. Up until last year I worked as a energy options trader at one of the three letter acronym market making shops (DRW/CTC/SIG) on the floor. Now I am currently on the other side, at a bulge bracket bank trading electronically. The energy pits challenged me and allowed me to learn a lot about assessing risk in quickly changing market conditions. However I can tell you if the floor were to disappear tomorrow no one down there would be surprised. I'll quickly address some of the earlier points: - The purpose of the exchange is not "to see Supply/Demand based on emotions". People needed a place to transact financial products without revealing their intentions all while having the ability to trust their counterparty's credit. Exchanges were formed. - The days of working your way up from runner to trader are over. The independent traders who have been able to survive on the floor have been forced (capital reasons, etc.) to form partnerships with other independent traders to stay solvent. Now, they need sophistication to keep up in the market and also are able to hire from the oversupplied market of quantitative college graduates and master's holders. - Pit traders who "are able to read the crowd in the pit" now either work for larger firms where such strategies don't make sense in terms of risk/reward (picking off one of the10 locals left? cannibalization?), or they are irrelevant small-lot traders picking off stale markets and "dentists in Florida" looking to play crude oil. They are one of the biggest reasons why the pit is in decline. - The floors don't offer anymore "backup protection from Natural Disasters/Terrorist Attack/EMP(really?)" than an online exchange because ALL the floor traders/brokers use electronic handhelds. All markets would be pulled from the pit, because no one can pull up their straddle values on their mini computers, just as would be the case if all the redundant servers for ICE and CME were to be hit. NOTE: The fact there is one physical location presents a risk itself. When Obama had Air Force One fly over lower Manhattan for photo ops unannounced, we all evacuated the Nymex. All pit trading was erratically halted for approx.1 hour, whereas the electronic markets continued throughout. - The CME (CME owns Globex) is not keeping a pit around for any other reason other than the fact that the pit is able to generate enough transaction fees for now to pay its "rent". In fact, the CME has been pushing its options trading platform for energy products on Globex, pretty much putting the nail in the coffin of its own physical pits. For now, there is still enough flow in the pit to justify having a physical presence. But aside from regional, small-markets (someone mentioned "cattle futures") that won't be the case for long.

 
antuskarana:
This string caught my attention. Up until last year I worked as a energy options trader at one of the three letter acronym market making shops (DRW/CTC/SIG) on the floor. Now I am currently on the other side, at a bulge bracket bank trading electronically. The energy pits challenged me and allowed me to learn a lot about assessing risk in quickly changing market conditions. However I can tell you if the floor were to disappear tomorrow no one down there would be surprised. I'll quickly address some of the earlier points: - The purpose of the exchange is not "to see Supply/Demand based on emotions". People needed a place to transact financial products without revealing their intentions all while having the ability to trust their counterparty's credit. Exchanges were formed. - The days of working your way up from runner to trader are over. The independent traders who have been able to survive on the floor have been forced (capital reasons, etc.) to form partnerships with other independent traders to stay solvent. Now, they need sophistication to keep up in the market and also are able to hire from the oversupplied market of quantitative college graduates and master's holders. - Pit traders who "are able to read the crowd in the pit" now either work for larger firms where such strategies don't make sense in terms of risk/reward (picking off one of the10 locals left? cannibalization?), or they are irrelevant small-lot traders picking off stale markets and "dentists in Florida" looking to play crude oil. They are one of the biggest reasons why the pit is in decline. - The floors don't offer anymore "backup protection from Natural Disasters/Terrorist Attack/EMP(really?)" than an online exchange because ALL the floor traders/brokers use electronic handhelds. All markets would be pulled from the pit, because no one can pull up their straddle values on their mini computers, just as would be the case if all the redundant servers for ICE and CME were to be hit. NOTE: The fact there is one physical location presents a risk itself. When Obama had Air Force One fly over lower Manhattan for photo ops unannounced, we all evacuated the Nymex. All pit trading was erratically halted for approx.1 hour, whereas the electronic markets continued throughout. - The CME (CME owns Globex) is not keeping a pit around for any other reason other than the fact that the pit is able to generate enough transaction fees for now to pay its "rent". In fact, the CME has been pushing its options trading platform for energy products on Globex, pretty much putting the nail in the coffin of its own physical pits. For now, there is still enough flow in the pit to justify having a physical presence. But aside from regional, small-markets (someone mentioned "cattle futures") that won't be the case for long.

Thanks very well explained.

 

Thank you for the excellent post, clears a number of points that sounded implausible in the preceding discussions.. There is one aspect that might be a factor and that i would like to understand better:
I remember reading how open outcry markets have much lower transaction brokerage costs, because in places like nasdaq the liquidity is provided by market makers, who ensure that the spread never drops below a certain point. Now this is very difficult to do in the open outcry situation, where there is a specialist who merely notes the offers.
This would be a good reason to prefer open outcry, albeit maybe implemented in an electronical setting, not necessarily in physical room?

 

I dont think some of the above posters realized what bondarb was saying. He is saying they are just not needed in the marketplace. If the floor traders dissappeared tomorrow, not much would really change. Just because you think that some guys can make money better in the pit than on screen is irrelevant. Seriously, sometimes Im in awe at the reading comprehension of some posters.

 

I used to work on the NYMEX floor as a runner when I was 17. I worked for some of the guys in the Nat Gas pit. The people down there were absolute animals, very few were educated past high school (if that) and most were middle aged guys who worked their way up. It is indeed a way for people to work up from nothing, but the reality of the situation is there is a shit ton of room for error down there. Electronic trading is more efficient and safer from a logistics perspective.

 

Hi guys, thread caught my eye. A couple of things don't make sense to me: (1) comment about options are better priced by humans on the floor .... I was under the impression all options were priced by computer in realtime nowadays

(2) CL (crude oil) volatility and activity is always consistently much higher during Nymex floor hours ... this doesn't make sense if the floor doesn't have much presence anymore .....

 
mwtzzz:

(2) CL (crude oil) volatility and activity is always consistently much higher during Nymex floor hours ... this doesn't make sense if the floor doesn't have much presence anymore .....

And the real volume and volatility in ES really only shows up during cash equity session, but i assure you it would still be traded heavily if cash was closed.

 

sitting next to 3 ex floor traders (in a HF prop shop), I can tell you that only some of them are capable of switching to the technology side. One of them is hilarious, i call him a dinosaur, make jokes about an abacus and papyrus. he does EVERYTHING manually. The closing auctions in our place are hilarious. This ape is punching away furious swearing at everything, the other 2 (semi automatic) are changing offsets and variables on a few strategies 90% of the strategies are automated, but all of them require monitoring/adjusting, and me (fully automatic) taking the piss out of them for doing a job a computer can do, if only they asked me how to do it :) Pride says they wont, but their PnL's are static, they make good money but the manual stuff occupies so much time they cant develop (or operate) any more strategies.

 

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