The Death of the Pit Trader

When Trading Was Grueling, Gritty, and “Real”

There was a time when trading could have been likened to a contact sport. All trades, equities and commodities, took place between people within a small and tightly packed space: a trading pit.  In the pit, transactions were physical – expressed through shouts, gestures, and hand signals.  The world of financial assets was alive with the shouts of ‘BUY’ and ‘SELL’; aggressive and frenzied maneuverings were required in order to occupy critical ground within that arena. The testosterone, sweat, and stench of the trading pit brought blue collar grit to white collar sensibility.

This form of engagement, a mano a mano “ritual” wherein traders attempted to outmaneuver one another for a better price point that could mark the difference between riches and absolute demise, is how trading had been done for centuries.

The Rise of the Machines and the Dawn of the “Virtual” Trader

Most of those arenas are now empty; roars have gone silent; “pit trader” is an historical memory. In February 2015, “open outcry” comprised a mere 1% of the CME’s trading volume. And later that year, in July of 2015, the Chicago Mercantile Exchange (CME) closed 20 of its main trading pits.

But this extinction was a long time coming. The first electronic trading alternative, Instinet, came into existence in 1967, though its use hadn’t gained steam until the 1980’s, adopted by major players such as Bloomberg and Archipelago. In 1970, Nasdaq was merely a quotation system, eventually adding technological features that later transformed it into an exchange.

But it was in 1992 that CME’s Globex system was born, followed six years later by Eurex. Those two systems were the major game changers that accelerated open outcry culture’s demise. In addition, the advent of 24-hour trading further accelerated this demise, as market trading was no longer limited to a pit within fixed hours, but made accessible throughout the world on a 24-hour (5 days a week) basis

Trading Against the Devil You Can’t See

What does it mean to trade with or against a counterparty you can’t see? How does one outthink another trader whose intentions, designs, and resources are veiled behind a screen? What does it mean to trade with or against order flow rather than “people” you know? To put it simply, the “new world” of electronic trading is just not the same world as the “old world.”

In the pit, most traders (regulars, that is) knew who represented the “big guys.” They often tried to occupy the same place in the pits. So when you see one of the big traders, say, the “Goldman Sachs” guy, buying or selling, you knew he had enough resources to move the market. You knew whether you were trading with or against their positions. Although this kind of information never guaranteed any trader success in estimating market direction, it would have been a very useful reference point in assessing one’s own positions.

In the “new world” of electronic trading, large orders came in that moved the market with frightening volume. Perhaps it moved in your favor; perhaps it destroyed you. That order came in electronically from “lord knows where or who.” Nevertheless, it took everyone on the floor by surprise.

Later that night, the markets moved overnight in a big way. Traders in Asia Pacific or in Europe priced-in the potential macroeconomic impact that certain geopolitical news had on your commodity position. You, now sitting on top of a wealth increased or lost, barely had time to react. You didn’t’ see it coming, nor will you ever know who moved your market.

The reality of the 24-hour electronic trading world is that there is greater transparency with regards to sheer trading numbers (volume, bids and asks, orders, etc.), but the human aspect that allowed you to at least see if not directly engage who you were trading with or against is now removed.

For retail traders, this marks a leveling of the playing field to a limited extent. You have access to much of the same data that other traders have. Not all data, of course. How you decide to use this information to trade in the electronic trading world can mark the difference between success and failure.

Just one word of caution: this new trading world–a world defined as much by technology as it is by the traders who shape it–is much faster and more disruptive than the “old world” of the trading pits. Proceed with caution, because you can never see who might be on the other side of your trade.