My identical twin brother, Zack, began clerking, and then trading, on the Chicago Board Options Exchange in 1981, when we were 23. He wasn’t among the first generation of traders at the exchange, but he was close. By then, there were already legends about traders in that first generation, for whom making money was nearly as easy as raising their hands in the air. They rendered fortunes from a witless investing public that lacked an understanding of options’ mechanics and the technology needed to price them.
After college, I was making about $125 a month teaching in Yogyakarta, Indonesia. While I haggled over eggs and fish with toothless women in local markets, my brother haggled over millions in stock options with Merrill and Goldman. When I returned in 1984, Zack invited me to work for him on the floor to learn the business. I agreed. I already had basic training with eggs and fish.
The city’s big trading floors at the CBOE, the Chicago Board of Trade, and the Chicago Mercantile Exchange stank like locker rooms but had the intensity of wartime encryption rooms. The traders’ facility with arithmetic mesmerized me. Options at the CBOE were priced to the 16th of a dollar. My brother and his peers could instantly multiply any fraction in their heads. Their war stories were told in lingo spawned on the floor: Trades were “scalps,” “butterflies,” “straddles and strangles,” or “reversals bought for a teenie.” You didn’t need to speak it to know it was all about money and ambition. Swagger has long been a natural resource in Chicago. When the meatpackers packed up and the factories bellowed less, traders provided the city’s strut.
When it came time for me to trade, being my brother’s clone on the floor seemed a problem. As his clerk, I was routinely mistaken for him. If I were trading, that could be catastrophic. Also, the fractional math at the CBOE intimidated me. At the nearby Chicago Mercantile Exchange, however, futures and options were priced in decimals. I headed there.
The Merc invented the financial derivatives markets, beginning in the early 1970s with futures on world currencies. It eventually became the biggest of all three large exchanges (the Merc merged with the Chicago Board of Trade in 2007). The world’s biggest, richest pits were at the Merc, where futures in currencies, bonds, and stock indexes were traded as futures always had been: by heaving crowds of wildly gesticulating traders—mostly men—in ice-cream jackets. The seeming chaos was a symbol of the city for decades. As the pits grew bigger and louder, Chicago’s place as a center for global finance also grew.
The Merc was a different environment entirely. If the CBOE options traders had youthful swagger, Merc futures traders were hard-bitten war generals. They were mostly older and had seen a lot. There was a history of scandal at the Merc—some proven, some whispered. Chicago mobsters had friends and relatives on the floor. Language was coarser. The most prized gladiators in the pits had brains, lightning math, menace, and stature.
Long before the Internet, standing on the floor put one at the center of the world’s most frenetic riot of information. News tapes scrolled electronically on every wall and on thousands of screens hung over the pits. If Germany cut a 10th of a point from its interest rate, news hit the floor instantly and traders acted. Disasters, wars, corporate battles, energy prices, and the temperature on the moon: anything could matter for a second, or for a year. The risks were huge. The markets went crazy after the Gulf War began. I went home on the first day of the airstrikes knowing I could lose all in the first minute of the next day’s trading. I actually kicked and screamed under my dining room table that night. When the morning bell rang, I lost three times everything I had ever made. (I recouped it all by the end of the day, and actually added to my account.)
One day in January 1989, I showed up to work in the cattle futures options pits to find them eerily empty. The night before, several traders had been arrested in an FBI sting that aimed to uncover illegal collusion and market manipulation. Apparently, I had missed a widespread scheme. What’s more, everyone seemed invited into it except me. I wasn’t just an innocent, I was an idiot. At least my stupidity kept me free of the feds.
Oddly, while that case was making a splash in the papers, a group of Soviet economists and apparatchiks visited Chicago to get a lesson in how to open a futures and options market like the Merc. I asked to be one of the hosts. For Soviets, the rough-and-tumble of Chicago exchanges had always been held up in state propaganda as a symbol of capitalist barbarism. The visitors seemed transfixed by it. As they learned more, they grew impressed by the ability of the traders to process information so quickly and to make hundreds of risky decisions every day. The efficiency of the markets impressed them most. The veterans of Stalin’s campaigns saw beauty in it.
Few then saw the end of the Soviet Union. Few saw the end of open-outcry futures trading at the Merc. Yet when the Soviet Union collapsed and Russian physicists and mathematicians were free to live and work in the United States, many found their way into the high-volume computerized trading firms that accelerated the end of pit trading. Mental math cannot compete with supercomputers, and the human voice is infinitely slower than the electrons that now communicate buy and sell orders. Scrappy traders’ hunches must now match wits with self-correcting algorithms developed by eggheady postdocs.
The futures pits will be gone by this summer, and the options pits will likely vanish sometime soon. The pits gave my brother and me, and so many others, a place in a local rough-and-tumble that helped Chicago reshape world markets. I rarely miss the pits, but I miss the swagger that went with them. That’s been traded away.
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