Will Chicago’s trading floors ever reopen?

The coronavirus forced closure of Chicago’s trading floors. Now the question is: Will they ever reopen?

Chicago exchange operators CME Group and Cboe Global Markets shut down the South Loop pits March 13 as a precaution because shoulder-to-shoulder trading was perfect terrain for virus-hopping. While Cboe insists in a statement that this is “not a test case for permanent closure,” the companies have left details for reopening them up in the air.

Most trading has shifted to computer screens over the past two decades anyway, but the coronavirus may be the catalyst that shutters the shrinking floors once and for all. A lot depends on how long the closures last, and CME’s path may diverge from Cboe’s. Still, it’s clear that untethering their expanding electronic systems from the costly local Chicago trading floors could free up millions of dollars annually for the next stage of international growth.

“I would not be surprised if the (CME) floor never opens again,” says Ray Cahnman, a former floor trader who is still active in the industry as chairman of Chicago trading firm TransMarket Group.

In the days since the floors went dark, the two companies’ electronic trading systems have performed without mishap. That’s a milestone, especially for Cboe, which has a bigger percentage of trading on the floors.

In its statement on the closure, CME says “the reopening of the trading floor will be evaluated as more medical guidance on the coronavirus becomes available.” Cboe says it will suspend floor trading temporarily.

More than 90 percent of CME’s trading volume takes place electronically, leaving just a minor amount of activity at its historic 333 S. LaSalle St. trading floors, a few blocks from the company’s headquarters on Wacker Drive.

Although CME closed nearly all its futures trading pits permanently in early 2015 because of declining volumes there, it kept open about a dozen busier pits, including its options on futures pits. Traders have long said it’s easier to trade the more complicated options contracts face-to-face. Even the most active eurodollar options pit has become sleepier in recent years. Volume in that pit dropped 32 percent in January compared to that month last year, though it still accounts for about half of overall trading in that contract.

‘THEY HATE THE FLOORS’

Despite the slowdown, CME shoulders the expense of maintaining 300,000 square feet of trading floor and office space at that location, not to mention the staff to oversee trading and an extensive technological infrastructure. Both companies decline to comment on the cost of operating the floors.

“They hate the floors—they’re expensive,” says James Koutoulas, CEO of Florida hedge fund manager Typhon Capital Management, referencing CME. Koutoulas has been in the business since 1995, trading across futures and options, but has never placed a single buy or sell order on a trading floor.

Before his time, traders in colorful jackets packed CME’s circular pits and jockeyed to buy and sell futures contracts and options contracts with aggressive hand gesturing that was a hallmark of Chicago trading. For decades, the floors grew only busier, reshaping their 19th-century origin as the butter and egg board.

But in the 1990s, traders broke away from the floors and founded high-speed trading firms DRW Trading, Jump Trading and the now-defunct Getco, among others, that helped significantly expand CME’s and Cboe’s trading volume.

CME’s annual revenue has risen steadily, increasing 13 percent to $4.9 billion last year, and profits have climbed, too, with nearly $2 billion in net income for the year. Nonetheless, operating costs have risen in tandem, and CEO Terry Duffy would likely welcome the opportunity to pare them.

The calculus at Cboe could be more complicated because of the larger share of trading that has remained in its pits. Specifically, trading of its proprietary options contracts tied to the S&P 500 and to the Cboe Volatility Index, or VIX, have been anchored in floor trading. About 28 percent of options trading took place in Cboe’s pits last year, compared with 27 percent through March 11 this year.

While some in the industry were apprehensive about Cboe’s shift to all-electronic trading March 16, Options Insider CEO Mark Longo was impressed by the smooth migration. “I was stunned—I couldn’t believe how much paper Cboe put up,” Longo says of the large volume Cboe managed online without floor trading. “Their systems can clearly handle it.”

With Cboe revenue having declined 10 percent last year over 2018, to $2.5 billion, it may be in more need of reducing expenses than its crosstown cousin CME.

And it could be a coincidentally appropriate time for Cboe to close the floors because it’s been planning to shut down the current location anyway and relocate the trading floor to the Chicago Board of Trade Building next year after it moves its headquarters west to the Old Post Office.

How long the floors remain closed will be key. Traders themselves may become so accustomed to using the electronic systems that they fail to show up if the pits do reopen, says Jim Bianco, president of Bianco Research in Chicago. “I do think it will accelerate the trend of doing away with the floors,” he says.

In any event, the cries of Chicago traders are likely to keep getting fainter.