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tradersPLUS: Watch a FREE trading film  direct from the Chicago pits!

This week, I’ve seen two stories flagging the end of an era…

The dying days of the trading pits are not pretty to watch.

Ok, I know it’s not how most of us trade nowadays – a good job too – but to understand where the industry is heading in future, you have to pay attention to, and understand the history.

The Forex markets are pretty advanced in terms of technology but even still, the pit traders are the direct ancestors we’ve evolved from.

(It’s funny when you phrase it like that. It makes you realise some of those pit guys even look a bit Neanderthal!)

So firstly, there was Stephen Fry’s program Key to The City on ITV last Tuesday. He’s been made a Freeman of the City of London and went on a tour of the Square Mile to see what it was all about.

One of the places he visited was the London Metals Exchange. He introduced it as the last open-outcry venue operating in London after LIFFE (the main futures and options exchange) closed their floor in 2000.

He described the decline of the pits as ‘all but one having gone to computerised heaven’.

But I know one group of traders who would definitely take issue with this description…

Over on Reuters.com there’s an article about a group of traders suing the CME group (Chicago Mercantile Exchange).

The exchange has made changes to the way they close the markets and they now blend electronic pricing with pit prices to plot the closing-range. This used to be the sole-preserve of the pit and represented a huge chunk of the volume flowing in there every day.

‘Market data shows the flow of business to electronic markets has accelerated since CME last June began factoring in electronic trades to the closing prices it reports’.

That’s the law of supply and demand in action right there.

The customers of the exchange have voted with their feet so I don’t understand why these traders are kicking and screaming so much.

I’ll rephrase that actually…

I do know why they’re up in arms. It’s because their sacred cash-cow has been led by the nose onto pastures new. So it’s more a case of ‘I don’t really have any sympathy for their plight’.

Because after all, they are fighting to protect their way of life at your and my expense!

Here’s the key statement about these 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”.

See, the thing is, the pit traders who actually have the skills already adapted to trading off the screen anyway, why wouldn’t they?

The problem is, too many guys were making very easy money for a very long time without really justifying it.

Don’t get me wrong, there were a hell of a lot of hard-working, smart guys in there. But also a lot of ungrateful sons and nephews who had a path into the pits cleared for them with sharpened elbows. And who then abused their position.

Here’s an eye-opening aside… the kind of antics some of them were getting up to:

The O’Hare Spread is a diabolical trade

The O’Hare spread is where huge positions are taken in two different markets. To the clearing firms – the trader could claim he was hedging his risk; the reality was he was doubling-down, going for broke.

He had no way of covering the loss if it all went wobbly, so what the trader did was head out to O’Hare airport and phone into the floor for updated prices.

If the trade was good, he’d call in the order to cover the trade and head back to the exchange a wealthier man.

But if the trade was bad… he’d jump on the first available flight and high-tail it out of Chicago!

So thankfully, the shifting power moves from the closed-shop of the open-outcry pits and now beams directly to your home-office, trading room, or even your kitchen table.

The sun may be setting on the pit trader but your day is dawning…

Here are three reasons you have the ultimate ‘level playing field’ as an independent Forex trader today:

  1. You have direct access to Institutional Liquidity – no excuses, you don’t need to get stiffed by poor third-rate brokers any longer. With a few mouse clicks you can now access institutional liquidity just the same as the hedge fund trader sat in his Mayfair office.
  2. Your barrier of entry is low – To trade with comparable direct access to the markets, the pit traders pay as much as $300,000 for a seat at the exchange. Today, you get it for the cost of a monthly broadband fee.
  3. You get complete transparency – When I traded pit-based futures contracts I often used Market-On-Close orders. This meant I’d be filled somewhere inside the official ‘closing range’ of the day. It was a way of limiting exposure to bad fills by the brokers.

Because, listen to this… if I got a bad fill, ‘MT’ – my broker – would sometimes phone down to the firm’s pit broker and ‘call in a favour’.
My fill would miraculously improve in an instant.

On the other hand, I’d sometimes swallow a bad fill for the sake of keeping good relations with my broker. I knew he’d probably given the good fill to a new client he was trying to impress. But what are you going to do?

It’s just the way that world works.

Thankfully, with a reputable broker, your portal into the Forex markets is a cleaner, corruption-free environment.

Despite the above, the trading pits are still fascinating to me and in the words of Stephen Fry “…as theatre, it was one of the most impressive things I’ve seen”.

If you’re interested in seeing more – even for pure entertainment value – have a look at my Recommended Viewing below.

Recommended Viewing

floored_imageFloored: Into The Pits

“Computerised trading may take the emotion out of the job, but it may also take these old-timers out – they are dinosaurs in a young man’s game.

At a time when millions have lost fortunes in the fickle stock market and fear abounds about the faltering financial system, FLOORED is a gripping, honest look behind the curtain of the trading floor that few have ever seen.”

You can see it here:

Check out the official website here

Be Prepared: Market Moving Data Coming This Week (London Time – BST)

Here’s what we’ve got coming this week:

Tuesday 13th August:
09:30        UK    CPI (GBP)
10:00        DE    German Economic Sentiment (EUR)
13:30        US    Retail Sales (USD)

Wednesday 14th August:
07:00        DE    German GDP (EUR)
09:30        UK    Claimant Count Change (GBP)
09:30        UK    MPC Minutes
18:20        US    FOMC Bullard Speaks (USD)
20:15        US     FOMC Bullard Speaks (USD)

Thursday 15th August:
09:30        UK    Retail Sales (GBP)
13:15        US    FOMC Bullard Speaks (USD)
13:30        US    Initial Jobless Claims (USD)
13:30        US    CPI (USD)

Friday 16th August:
13:30        US    Housing Starts (USD)
13:30        US    Non Farm Productivity (USD)
15:55        US    Michigan Sentiment (USD)

Quite a busy week with the economic data releases, let’s see if can liven things up a bit this week!

You’ve always got that ‘Floored’ movie to watch if things stay quiet. Let me know what you think if you get chance to see it.