This week, traders at the CME walked off the floor to protest policies that some see benefiting the big traders.
Other walk offs have happened in the history of exchanges around the world. I recall one in France, London, and Australia respectively. In this day and age of computerized trading, if the floor traders quit, there are others that will make a market. They are slitting their own throat.
However, in the options market, it’s a bit different. Options have not made the jump to the screen yet. (Remember, we are talking futures, not stock options). The pit has cheaper and better execution with less slippage.
The Eurodollar Option pit is the most liquid options pit in the world. My first clerk job was there in 1986. There are some massive traders in there. Don Wilson started there and built an trading juggernaut. A bunch of option traders walking out of there really does hurt liquidity.
I was also intimately involved in the debate back in 1999 over block trading rules at the CME. The rules were different back then. The banks want the rules as they exist today. A 20 minute delay in price and quantity reporting is an eternity. It’s patently unfair to the entire market, and the people risking their capital. This isn’t a lot different than dark pools that exist on the SEC side.
But, I see a need for block trades. However, it’s the price reporting that needs to change. It needs to be instantaneous. As soon as the trade is made, the price should be reported to the entire marketplace. Also, the size of the trade should be larger than any trade that could potentially take place on the floor. We are talking massive size. Keep the players to the trade a secret, but report the volume. The market is small enough that someone somewhere will figure it out and report back.
The way the rules are structured today, the little guy is no different than the marks in the movie “The Sting”.
The banks own the SEC side of the market. They have made it their playground that is stacked against the regular joe. The way the block trading rules are structured today, they can make the CFTC side of the market their playground too.
Many decry floor traders as a bunch of dinosaurs. In some ways, they are. In other’s they are not. Floor traders are incredibly smart. They immediately have a grasp of risk/reward. Unlike a lot of folks that like to think they are big shot risk takers but never write a check-floor traders write them all day long.
Strategically, some of the first angels I recruited to Hyde Park Angels were floor traders. Surviving on a trading floor isn’t just luck. It takes a lot of skill and balls bigger than most people carry around with them. I know what it’s like to be on the losing side, and winning side of big trades. I know what it’s like to be picked off. I don’t blame the Eurodollar Option guys for being ticked off and I support them. They provide a massive value add to the marketplace. They should get a clean shot at putting up their risk capital. Instead, they get stabbed in the back.
With co-location, block trading rules, why risk your capital? Why buy a membership?