Michigan Avenue - Niche Media - Michigan Avenue magazine is a luxury lifestyle magazine centered around Chicago’s finest people, events, fashion, health & beauty, fine dining & more!
Issue link: http://digital.greengale.com/i/109585
Traders throw confetti at the closing bell to signify the end of the trading year. In earlier days, the trading floor of the Chicago Mercantile Exchange was compared to a rugby scrum. PHOTOGRAPHY BY VISIONS OF AMERICA/UIG VIA GETTY IMAGES (TRADING); SCOTT OLSON/GETTY IMAGES (CELEBRATION) trading pits (on average, each occupied a space only 13 inches wide in which to stand and trade). Some took classes from opera singers to learn how to project their voices and donned flashy magenta or silver lam�� jackets simply to stand out in the crowd and be able to execute their trades. One legendary trader compared the hubbub to a rugby scrum, with injuries ranging from hernias to fatal heart attacks. (Then there were the self-inflicted wounds, like the jubilant hog futures trader who, to celebrate a good day of trading, poured liquor onto his chest and set it on fire.) Then came the computers. Trading became faster; volumes rose. So did liquidity, crucial if Chicago���s futures exchanges were to fend off challenges from rivals as far afield as London, Frankfurt, and Tokyo. No longer was trading volume limited to the number of trades that a few hundred men crammed into a trading pit could execute in several hours a day. Instead, from around the world, anyone could turn to his or her computer and establish a position on S&P 500 stock index futures via a linkup to the Chicago futures markets. T o traders like Terrence Duffy, who today serves as executive chairman and president of CME Group, formed by the 2007 merger of the CBOT and the Merc, the transformation was logical. ���The more volume, the more money the exchange could make, the more the seats would be worth, and the more business would come to the exchange,��� he says. It was a virtuous circle, based on scale and efficiency. The merger made even more sense. ���We both figured that if we didn���t come together, one of us might end up somewhere else other than Chicago, [acquired by a foreign rival], or just gone,��� Duffy says. ���The merger put a whole new life into the exchanges.��� The new products���futures and options on the S&P 500 stock index, Treasury bond futures, short-term interest rate futures, currency futures��� offered hedge fund and mutual fund managers a way to hedge their risk or express an opinion about the health of the Japanese economy by betting on what the yen would do. The way that market participants viewed those markets was altering, and Chicago had anticipated this change. The city���s futures and options traders didn���t approach markets as if the only choice were to buy in expectation of a price increase, or stay away, says Emily Lambert, author of a chronicle of Chicago���s markets titled The Futures. ���They realized that markets can go up and down, and that it���s possible to use these products to express both views, a view that the whole investment industry has adopted over time,��� she explains. The liquidity in these products grew so rapidly that they became still more attractive: It was a lot faster for a trader to buy or sell an S&P 500 futures contract than to accumulate positions in even a handful of the underlying stocks. And because of the structure of the futures contract itself, it was cheaper, too. ���The open outcry system can rein in the raging idiocy that most young traders demonstrate.������THOMAS S. CALDWELL Technology meant that instead of phoning in an order and waiting for it to be ���filled��� in the pit, all a trader had to do was push a button. The proliferation of quantitative investment and trading models made the Chicago exchange���s products more appealing still. Of course, it came at a cost. Faster trading on computers may be speedy and cost-efficient, but the demise of the open outcry systems means traders can no longer read body language in the pit. ���On days when trading was violent, that helped give people confidence in what they were doing,��� says Cashman, who noticed that he had less insight into what the ���commercials������those grain traders with a vested interest in the underlying commodity���were doing as the bulk of trading volume went off the floor. That, he explains, means he has less insight into market trends. ���It���s a lot calmer these days,��� says Lambert, a former Forbes reporter who moved to Chicago in 2004. Today���s futures industry conferences are dominated by geeks���quantitative traders and the computer programmers and video gamers they have hired to develop high-frequency trading programs. ���There���s still a lot of bravado, but it���s of a different kind. It���s less clubby, and while the old trading floor could be ruthless or bloody, if you blew yourself up, someone would take up a collection for you, or pay off your debts if you died.��� Today, futures trading is as firmly centered in Chicago as it has ever been, even if most Chicagoans have less understanding of what actually takes place behind the walls of the old Board of Trade building. While once futures trading was a sideline to the stock market, these days it has become the tail that wags the dog. The trades that move markets take place in index futures and ripple through into the prices of individual stocks. The ���flash crash��� of 2010 that wiped more than 600 points off the Dow Jones Industrial Average in just five minutes had its roots in the S&P futures products, and the high-frequency trading firms that have sprung up as a result of the shift from ���cash��� stocks to futures exacerbated the move. ���In difficult market environments, you really like to have someone to work your order,��� says Thomas S. Caldwell, founder of Toronto-based Caldwell Securities Ltd. and a veteran trader who has studied and invested in a wide array of financial exchanges worldwide. ���The open outcry system can enhance confidence and rein in the raging idiocy that most young traders demonstrate.��� While markets are global, more liquid, and faster than ever before thanks to Chicago���s innovations, those changes have brought fresh challenges for both market participants and regulators. Still, if there is one group of financial experts that is best positioned to manage those new risks and address those challenges, it is likely to be the folks in Chicago. CME Group might have to devise a way to replace what has been lost along with floor trading, such as the culture that taught young members how to take risk without being reckless. But if you���re looking for the future leaders of finance or those with the right skills and tools to construct the future of the futures industry, the logical place to start is still LaSalle Street. MA MICHIGANAVEMAG.COM 122-125_MA_FEAT_Heritage_Spring13.indd 125 125 2/8/13 2:06 PM