Bye-Bye, Open Outcry. In Options, Human Touch Still Matters

Ever-advancing technology shapes our lives and livelihoods every day. This applies to our investing and trading lives, too.

A recent reminder that the only constant is change came earlier this month, when CME Group, the parent company of the Chicago Board of Trade and several other futures exchanges, announced it would close most floor trading by early July.

The amount of buying and selling conducted through so-called open outcry, where brokers and traders shout and gesture in tiered “pits,” has dwindled to just about 1% of CME’s overall futures trading activity. Nearly all other trading is done electronically, on computer screens.

Futures markets may be unfamiliar turf for many individual investors, but the same march of technology has played out in traditional equity markets, too. Many people are increasingly tech-savvy, of course, and can quickly consult a chart or place a stock order with a few mouse clicks or finger taps.

Still, when it comes to the options markets, there’s still a place for living, breathing human beings dealing with each other in the same room. In fact, there’s a good example in downtown Chicago, right across Van Buren Street from the old CBOT building: the Chicago Board Options Exchange, or CBOE.

The CBOE is the largest among the dozen U.S. options markets, and is home base to a couple familiar names: options based on the Standard & Poor’s 500 Index, or SPX, and the CBOE Volatility Index, or VIX. Business in both SPX and VIX options is conducted on the CBOE trading floor, and both pits remain vibrant (see figure 1).

This partly reflects the complex nature of options, as opposed to garden-variety stocks. Given multiple strike prices and expiration dates, and the myriad ways options positions can be constructed, face-to-face interaction enables communication and nuance that a computer simply can’t match, many traders say.

Professional traders gather in the pits to swap options positions of varying sizes. For example, a broker might bring a large order to the pit that is then devoured in smaller “lots” by several others. During high volatility and fast trading, the pit can become a frenzy of flailing arms and buyers and sellers yelling orders from one side to the other.

At the CBOE, business has never been better, as last year’s market tumult led to surging demand for options contracts that can help hedge portfolio risk.

In 2014, an average of 888,089 SPX options contracts traded each day, up 8% from 2013 and an all-time high, according to CBOE data. Trading in VIX options averaged 632,419 contracts a day, up 11% from 2013 and also a record high.

But the trend toward electronic trading shows no signs of slowing. Indeed, the CBOE is a rare bird (as is the NYSE). Most newer markets, such as the International Securities Exchange and BATS Global Markets, are all electronic.

In Chicago, the birthplace of futures trading, this gets personal. The CBOT traces its origins to 1848, when grain merchants established what became the futures contracts we know today. Generations came to Chicago’s pits to make—and lose—fortunes, and the raucous pits found their way into popular culture.

But a lot has changed since the trading floor heyday in the 1980s. CME’s recent decision is merely the latest, and likely inevitable, blow to an era that’s been fading for decades. As in so many other industries, technology has replaced many roles that humans once played. That’s progress.