In decades past, the futures trade revolved around brick-and-mortar centers of finance. The Chicago Mercantile Exchange (CME) and New York Mercantile Exchange (NYMEX) fostered the trade of billions in assets using an auction system known as open outcry. Today, technology dominates the industry, and most brokers and traders rely on a digital futures trading platform to conduct day-to-day operations.
The rise of the digital marketplace has rendered the trading floor or “pit” obsolete. Tiered octagons packed with screaming locals have been replaced by dedicated servers hardwired to the exchange. The 2015 CME Group closures of nearly all futures trading pits in New York and Chicago defined the changing times ― electronic trading was rapidly becoming the only show in town.
Breaking Down the Barriers-to-Entry
The single largest impact that digitization has had upon the futures markets is increased accessibility. Regardless of geographic location or time zone, traders from around the globe are able to engage the marketplace. Aside from securing a futures trading platform and meeting a few capital requirements set forth by futures commission merchants, participating is as simple as clicking a mouse.
In previous decades, aspiring futures traders faced many barriers-to-entry. Merely securing a place in the pit or a viable cost structure was a challenge. Personal relationships, exchange memberships, limited availability of futures margin, and high commissions were obstacles that had to be addressed by pit and off-the-floor traders alike.
As a result of the increased market accessibility promoted by futures trading platforms, the rules of the game have evolved considerably in three key areas:
- Liquidity: Vastly expanded levels of participation have led to an enhanced depth-of-market. With an exponentially larger pool of both retail and institutional traders, spreads are tighter and each price level much deeper.
- Speed: Participants are able to place orders upon the market remotely and have trades executed at very near light speeds. In the old days, having orders filled in the live futures market depended upon your broker’s ability to execute quickly.
- Volatility: The ability to place huge orders at market quickly has significantly increased the potential for directional order flow. Black box trading systems are able to enter and exit huge positions in microseconds, producing the conditions for large swings in pricing.
Each of these elements complements one another. The speed in which a trader is capable of entering the market fuels liquidity, which may bolster immediate volatilities. In the days of the pit, the release of a report facing the crude oil price outlook would stimulate action over the course of several minutes. In the digital arena, orders hit the market in mere seconds and drive price accordingly.
Pit vs. Screen: Which Is Better?
Since the introduction of electronic trading in the early 1980s, industry experts have ferociously debated the implications of an exclusively digital marketplace. As with most issues, your final opinion is most likely a function of who you are and your past experiences.
Detractors of electronic trading cite the following as being critical drawbacks:
- Lack of transparency: The electronic marketplace effectively removes the face from the trade. Large orders hit the market quickly and anonymously.
- Uneven playing field: The advent of ultra-low latency disciplines, such as high-frequency trading (HFT), has brought concerns regarding the integrity of the markets to the forefront.
- Potential for disaster: Computer glitches or malicious hacking enterprises are often deemed responsible for market crashes.
On the flip side, proponents of the digital marketplace frequently reference several positive attributes:
- Democratic: The markets are now available to the masses, not just to an exclusive club made up of professional traders or high-net-worth individuals.
- Low fees: Following the integration of technology into the marketplace, commissions and fee structures have dropped precipitously. From deep discounts to affordable broker-assisted options, it’s no longer expensive to place a trade.
- Promotion of efficient markets: The enormity of participation in the markets provides the depth and liquidity needed to efficiently facilitate price discovery.
Even though the pit is nearly extinct, debate rages on regarding technology’s role in finance. Ultimately, the free market will decide. If people want to trade on the screen, then they will. If not, they won’t, and the pit may be in position to make a comeback.
