Pit trading halt as historic change

by Morton I. Sosland
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As tempting as it may be to call the closing set for July 2 of the wheat and other grain futures trading pits operated in Chicago by the CME Group Inc. a sure sign of the modernization of futures trading, it is also correct to note the historic, as distinguished from historical, nature of this event. This is said in the context that “historic” designates an event that has great or lasting importance, while “historical” records an event that is simply a part of history. Ending the human interplay that has been an earmark of dealings in wheat and other grains since the start of futures trading on exchanges in the 19th century marks the replacement of truly visible drama with the efficiency of electronic trading conducted by a number of computers. Yes, the latter no longer require the manpower (as many as 10,000 people were once involved with futures trading in Chicago pits) or the regulatory systems that once governed every aspect of activity in trading pits and on exchange floors or the expensive real estate exchanges occupied.

No one questions the economics or the common sense of this historic transformation. After all, the new grain futures exchanges established recently around the world, notably in London and Paris and also in China, depended from their start on electronic trading, treating personal contact as an anachronism. Where operations resembling the singular aspects of floor trading continue, the focus often turns to their quaintness, to the odd manners and protocol governing the way prices are decided in markets centered on foreign exchange and precious minerals.

In recent years, intra-personal floor trading has often had to compete with electronic trading on major markets. That way the obvious cost and many other plusses of electronic dealings became quickly apparent. The latter’s lead over trading pits eventually became overwhelming. For many exchanges, this has been a form of voting as to preferred methods that won the day for electronics.

Describing this change as “historic” reflects how different the new is from the old. At one time, the roar and the action of trading pits, which are still being used for option trading due to complexities, served as an important attraction to create interest about finding a job in such a visibly exciting industry. At one time, it might have been possible to identify a predominance of top industry executives who had early experience on exchange floors. This was an era when leadership often was drawn from staff engaged in floor-level dealings.

Conducting futures trading in such an openly observable place as the trading pits, which are almost always watchable by school children and interested adults, helps foster the view that prices for grain are determined in an open and transparent manner. As mysterious as it may have been to watch a scrum of men waving arms and fingers and screaming, the end result produces the right price for the world’s most important food source. It is an impression that influences everything from setting standards for grain quality to basic farm bills where debate in Congress more often than not reflects the impression a legislator may have of an exchange floor. Yes, some time that view is negative, but mostly the concept of setting prices so openly wins for being fairly determined.

As pit trading ends after serving the many needs of the grain-based food industry as well as humankind for hundreds of years, it is wise to remember that futures trading in wheat grew out of the city of Chicago becoming delivery point for the expanding prairie wheat crop grown to feed troops and citizenry during America’s Civil War. This crop is credited as an important force in the North’s victory in that war. In the wake of victory and the huge subsequent harvest potential, futures trading on organized exchanges began. It continues the industry’s lifeblood even as historic change occurs in the process.