Over the last decade, the frenzied screaming and hand-waving on exchange trading floors has started to go the way of the horse and buggy.
The so-called open-outcry trading floors that symbolized the nation’s stock market and investment activity gradually have been displaced by computers and electronic trading.
But if Box Options Exchange gets its way, Chicago could soon get its first new trading floor in years.
Box, a Boston-based exchange focused on electronic trading, is proposing a small options trading floor for about 40 humans at the Chicago Board of Trade Building in the South Loop. The Securities and Exchange Commission is reviewing the request and is expected to decide by Aug. 2 whether to allow Box to proceed. Some other exchanges, including the Chicago Board Options Exchange, have filed objections.
Open-outcry trading hasn’t entirely disappeared from Chicago, but live trading is now a shadow of what it once was. Even the CBOE, which is a far larger player in options than Box Options Exchange, now has just 440 traders working in 18 live trading pits, compared with 1,400 traders in 77 live trading pits in 2001.
An estimated 85 percent of U.S. trading now is done electronically rather than live.
Whether trading occurs online or in person, the objective is the same: Options traders representing buyers and sellers make offers back and forth, a process that theoretically leads to a fair price.
Yet some options traders say it’s more effective to go through this process live on the floor of an exchange, because they can see other traders on the floor and sense opportunities for getting a better price than they would when trading electronically on a computer.
“You just feel and witness the order flow,” said Larry Shover, chief investment officer for Solutions Funds Group, an investment company. “I miss the floor.”
With electronic trading, he said, “there is a lack of information from the trading floor.” All the trader sees is numbers on the screen, and that simple view makes it more difficult to judge whether something might drive the price up or down.
But in objections filed with the SEC, some traders say they aren’t sure the Box proposal would represent an improvement. Because the trading floor proposed is so small, they question whether it will be staffed enough to make it an active place for trading. Under existing rules, they say, Box could simply have a single trader on the floor, and that wouldn’t provide the competition that leads to the best price.
That would be a “far cry” from being a “robust” market, notes Steve Crutchfield of Chicago Trading Co., in a letter to the SEC.
Letters from the CBOE and Nasdaq raise similar concerns. The CBOE says it fears that the proposed exchange, rather than generating many bids and a competitive trading environment, won’t have enough traders on the floor to make it “a bona fide auction process.”
“Our concern is that (the trading floor is) not an empty room or anything close to zero,” said Kevin Kennedy, head of options for Nasdaq. “We would like to see competition within their own trading floor.”
Nasdaq notes in a letter to the SEC that it is not objecting to Box opening a trading floor, but wants the SEC to examine rules that would allow a floor with just one person.
Crutchfield’s letter also says he fears that if Box is allowed to open a trading floor, other small exchanges will copy it, creating challenges for trading companies trying to staff all the facilities.
Lisa Fall, president of Box Options, said in a letter to the SEC that “The exchange strongly believes that an increase in competition will lead to improvements in the market and benefit all participants.” Box Options officials declined to comment.
Currently there are 15 venues in the nation for trading options, including four open-outcry facilities. CBOE Holdings has about 40 percent of the options market share. Box has about 2 percent.
gmarksjarvis@chicagotribune.com
Twitter @gailmarksjarvis
