End of the market outcry system?

By Simon Bishop
In Chicago

The price of grain, rice, and eggs is set daily on the trading floor

The planned entry to Chicago's financial and commodities markets of an all-electronic trading system could end the 'open-outcry' system of trading that has been in operation for more than 155 years.

Standing on the 103rd floor of Chicago's Sears Tower, it is possible to see two distinct geographical features that help explain why Chicago is America's third largest city.

In one direction lies America's breadbasket, the cornfields and wheatfields of the Great Plains.

To the east lies Lake Michigan and the Great Lakes which provide the means of transporting that grain to market.

And just beneath the Sears Tower, on LaSalle Street, are the institutions that oil the wheels of Chicago's financial markets.

Open outcry system

There the two great commodity markets, the Chicago Board of Trade (Cbot) and the Mercantile Exchange (Merc), trade in commodity and financial futures.

Traders shout their prices on the floor of the exchange

In the Chicago Board of Trade's 'open-outcry' grain room, it feels like absolute chaos with hundreds of people screaming at each other. There is a complex system of hand signals, which is the way trades are made.

Crowds of traders and brokers, each dressed in the brightly colored jackets of their respective trading houses, stand around small arenas, called pits.

Each pit trades a different commodity, for example soybeans, rice or wheat, generally setting prices for future delivery in 1 and 3 months' time.

Trading is particularly vigorous just before the bell that signals the end of trading is about to ring.

Trades at the Chicago Board of Trade and the Mercantile Exchange, based just around the corner on Wacker Drive, have been made like this for the past 155 years.

Special hand signals are used to indicate trades

Since the late 1980s electronic trading has challenged it (currently 80% of Cbot's trades are made electronically) but has failed to fully replace it.

Eurex arrives

However, later this year the Frankfurt-based Eurex exchange is coming to town, and bringing with it an all-electronic trading system.

Many believe open-outcry will not be able to compete.

"If Eurex are serious, and they seem to be to me, they're going to shut down the floors pretty quickly in my estimation," says Harris Brumfield from his corner office, the Cbot visible from one window, the Merc from the other.

Mr Brumfield traded in the open-outcry pits for ten years.

Then one day someone placed an electronic screen in front of him. Deciding it was the future he left the trading floor, and has never been back.

He now owns Trading Technologies, a company that provides electronic trading software to several major financial exchanges.

"Anytime economics comes in to play and you can do it cheaper, and in my view the world becomes the pit, once the banks, the funds, everybody gets any kind of smell of how well this stuff can be done, they'll want electronic. And when your customers want it electronic, it's going to go electronic-that's it," he says.

More transparency

However, back down on the open-outcry trading floors not everyone agrees.

Harold Lavender has worked at Cbot for 27ears. He says electronic technology cannot handle the more complicated financial trades.

Given recent financial scandals he also trumpets the transparency of the outcry system.

"I think what keeps this thing the way it is, is the vibrancy of it, it's the fact that its face-to-face, its very competitive, and I think it becomes clearer day after day after day that the innate honesty of an open-outcry system is what's really impressive because the market participants continue to make sure the market stays fair," he says.

Mr Lavender predicts open-outcry is here to stay, and both Cbot and the Merc say they intend to keep operating the floors alongside their electronic operations.

But Mr Brumfield is skeptical such a plan can compete with Eurex.

"You can't keep two venues open or you'll go broke. So that's the name of the game," he argues.

So, what is his prediction?

"In less than two years all the floors will be shut down in the US. That's it."

If he is right, a colourful tradition that has played a significant role in making Chicago one of America's greatest cities, will become a museum piece.