Electronic trades may muffle roar of pit at NYSE

Similar mergers have cut floor trading jobs

Electronic trades may silence roar of pit at Big Board

April 22, 2005|By Greg Burns | Greg Burns,CHICAGO TRIBUNE

The planned merger between the New York Stock Exchange and an upstart electronic market has sent a tremor through the dwindling ranks of people who work on trading floors across the country.

For years, those boisterous pits full of traders literally screaming to make a buck have been losing ground to computer screens. Some think the latest deal signals the end of manual labor in a rapidly automating business.

Yet the old-fashioned trading method known as open outcry has been counted out prematurely in the past.

Long criticized as a relic of the horse-and-buggy age, prone to corruption and a deterrent to growth, it has shown surprising resilience. And rather than heralding the death of the floor trader, the latest merger could usher in a hybrid system blending the old with the new for some time to come.

"You can't write the final epitaph," said William Brodsky, chairman and chief executive of the Chicago Board Options Exchange, which operates such a hybrid system.

For large, complicated orders, particularly on volatile trading days, customers prefer open outcry to the computer screen, Brodsky said. "It's the customer's choice," he said.

By providing more flexibility, open outcry works better for customers in smaller markets with many complex trades, said Jake Morowitz, a longtime Chicago Board of Trade member. "It is not so easy to go electronic."

Not everyone thinks floor trading has a future. In the merger with Archipelago Holdings Inc., the Chicago electronic trader, the New York exchange will follow the Chicago Mercantile Exchange and others in going public.

And many view that step as leading inevitably to a purely electronic platform.

Up to now, only the entrenched interests of floor traders who controlled the exchanges have kept computers at bay, said John Damgard of the Futures Industry Association, a trade group that represents financial firms.

"Open outcry existed much longer than it should have because the guys who owned the exchanges insisted on it," Damgard said. "When it's stockholders deciding which way it should go based on their investments, open outcry is doomed."

That and the much-improved electronic trading technology can blindside the unwary.

At the beginning of last year, Chicago trader Michael Arbor's successful business as a broker in the Chicago Mercantile Exchange's euro-dollar trading pit supported 10 employees and provided a fine living.

Then electronic trading caught on. "It was a whole different ballgame," Arbor said. By June, his revenues were cut in half and his work force had dropped to five. He was still making "good money," he said, and hopes to hang on.

By November, though, he was barely breaking even. He lost money in December, quit at the end of January and is searching for a new career.

"I don't know what to do," he said. "I'm 42. I did that for 20 years. I have no other job experience but pit experience."

The politics of public ownership and the advance of technology played a role in bringing about the euro-dollar transition, he said, but "the real reason it didn't go quicker is that we didn't have competition."

The pressure of competition, more than anything else, has pushed traditional exchanges to adopt computers.

The euro-dollar pit where Arbor worked was threatened by the all-electronic Euronext.liffe exchange, which targeted Treasury futures at the Board of Trade, and the all-electronic International Securities Exchange, which took aim at the Chicago Board of Exchange's equity options.

Open outcry has the greatest share in markets without competition, such as those based on agricultural products too small to attract much interest and those based on indexes that trade exclusively under license.

The New York Stock Exchange is facing increased competition from the Nasdaq stock market and other electronic bourses.

NYSE Chief Executive Officer John A. Thain has said there are no plans to do away with the trading floor, but the merger with Archipelago could drain the floor of business, even with overall volume soaring.

Competition with electronic markets elsewhere has led to greater access, reduced costs and increased transparency, but volume has surged mainly through computers.

At the publicly held Chicago Mercantile Exchange, volume in the first quarter shot up 39 percent, two-thirds of it done by computer, up from less than half the year before. "The new customers we're targeting are not in Des Moines. They're in Milan, Gibraltar, Singapore and Shanghai," said an exchange spokesman.

The Chicago Tribune is a Tribune Publishing newspaper.

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