We have seen it on television, frantic traders shouting at the top of their voices, biggest brokerage houses calling the shots, agents handling 4 computer screens at one time….it can’t get bigger than this. And we saw all this LIVE. The 15 students group of General Management Program, XLRI at Loyola University, Chicago was taken for a tour of Chicago Board of (CBOT) which is part of the CME group. Incidentally, highest volume in commodity trade in the world happens at CBOT.
The tour started by a 40 minute video elucidating future contracts and emphasizing their importance. True to Chicago’s style the video was as very lively and entertaining. The tour brought out how future trade helps in price discovery and transfer of risk. The tour categorized traders as the following- Hedgers who try to smooth out the prices and thus try to manage risk. While others are Speculators who are interested in swinging the price to their favor. Both work on sound technical principles of statistics.
The tour was coordinated by Professor Schwartz, a Senior Professor at Loyola College along with Pooja and Michelle, and both MBA students at Loyola. At CBOT it was Mr. Curt Zuckert, Associate Director at CME group who explained the working of the Globex model of CBOT.
For those of who are wondering why is there any floor trading in the electronic age, well we had the same feelings. But as MR Zuckert explained – the floor trading has been popular for ages, much before the electronic trading started. Many people who trade on the floor are the ones who are most comfortable with this system of trading for quite some time now. Also there is opportunity to make money out of arbitrage opportunities between prices in the pit and on the Globex. Some of the brokers derive both the pleasure of trading in a pit and the convenience of electronic trading by having their terminals in the pit itself. The value of time in trading goes down to nano seconds as some brokers have located their offices right next to CBOT in order to save on transaction time.
The CME group employs about 2200 people and out of them 1200 are technical guys maintaining their exchanges.
After a detailed tour of CBOT trading pits the group experienced simulated trading in S&P futures. That was an experience of its own kind to see the index gyrating back and forth and giving enough opportunities to make and lose money. Mr Zuckert , through these simulations brought to light the subtle principles of trading e.g. The more you trade the less money you make, importance of algorithms in high speed trading, etc. Another subtle difference in trading electronically and trading on the floor is that in the former the top ten bids (both buy and sell side) are displayed while in the latter only the top bid on each side is displayed. So the buyer and seller have limited idea on what is the underlying sentiment of the market. Also the electronic trading gives you option of analyzing various other news information happening worldwide while you are trading.
In the pit there are people varying different colored jackets. The clerks, brokers etc wear different color jackets. The broker’s agents communicate using hand signals with other people from their brokerage house who are sitting on the sidelines away from the pit. Due to the noise in the pit, it is difficult to communicate on the phone. So here we saw trades worth millions of dollars happening using mere hand signals.
The tour gave rare insight into real time floor trading and working of the largest commodity exchange in the world. The group learnt how such massive volumes were handled professionally highlighting the best practices of the exchange.
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