Despite the indisputable decline in physical trading practices, it is enduring within an increasingly technological capital markets world which has already put innumerable out-dated practices out of fashion. Market opinion – and moves – suggest that mourning the death of open outcry may be premature.
Like the return of old Nokia’s and ‘dumbphones’ in the era of the smartphone, a hungering for print in the age of digital, and the comeback of the polaroid camera and vinyl, perhaps there’s just reason why these concepts were once deemed great.
Following the announcement from MIAX last October about plans to launch a new US options electronic exchange and physical trading floor, The TRADE wanted to delve into why open outcry has persisted and the potential for a quiet resurgence of the dying practice.
Charles Dolan, former executive floor governor at the NYSE, and current COO of Green Impact Exchange (GIX), tells The TRADE that in his experience the human element of trading is a critical component in times of stress, remaining valuable despite technological advancement.
“In the past there were 5,000 people who worked on the floor of the New York Stock Exchange and now there’s probably 300. We couldn’t continue to do what we were doing manually in an electronic world. That being said, human judgement is critical in terms of taking control of situations that get out of hand. That’s the overarching thought process as to why [physical trading floors] are important.”
The value placed on the face-to-face auction system, though indisputably less than in times gone by, is proven by its prevailing presence, with MIAX just the latest to invest in the practice.
Once approved, MIAX’s new options venue, named MIAX Sapphire, will open a physical trading floor in Miami in H2 2024, with plans to commence electronic trading operations next quarter, pending regulatory approval from the SEC.
At the time, Shelly Brown, executive vice president, strategic planning and business development, Miami International Holdings, explained that the new exchange, combined with a live trading floor, is set to be particularly effective in the trading of those larger, more complex orders.
Echoing this notion, Anthony Montesano, head of derivatives market structure at Cboe, tells The TRADE that in his experience it is the larger, more complex orders that are routed to the floor, as more sophisticated, orders often want – and benefit from – a little bit more high touch versus the very simple order flow.
He explains: “If somebody’s entering a huge notional-sized order into the marketplace, they might not want to put that on-screen. If the order is routed through a floor broker, they can source liquidity, manage the order and get true price discovery.
“When you look on-screen, the size and price you see in the screens isn’t necessarily the full market, it’s what the market makers are comfortable quoting electronically. There’s often much, much more liquidity behind those on-screen prices. When brokers are facing off with a whole crowd full of highly capitalised traders, they can work the order a bit better, control the execution and have more effective price discovery.”
Read more: Farewell open outcry
Speaking to The TRADE, Daniel Labovitz, former head of regulatory policy at the NYSE and current chief executive of GIX agrees, suggesting that though the market has been focused on commoditising trading faster and cheaper, there is a potential for this to affect the quality of execution, in particular when trading is atomised and one is trying to move a large position.
He further asserts that there is something to be said for a bespoke approach to trading: “It’s the reason that people like to make their own lattes instead of getting it out of a machine, because it tastes better if you can get exactly what you want.”
Strength in diversity, amid volatility
There is the undeniable importance of human presence in times of increased volatility – well documented across the industry. As Graham Sorrell, managing director and head of EMEA and APAC equity, currency and derivatives trading at State Street Global Advisors, previously put it, we are a long way from the stage where the only role of the human is to feed the dog that keeps the human from touching the machine.
With the increasing prevalence of macro-economic divergences, human intervention across the lifecycle of trading remains an important element as even highly developed systems continue to demonstrate gaps when detecting disruptions.
“Human involvement in the kind of market-making that takes place there is important because of those instances when things get out of control. You need the ability for people to react and to hit the brakes and slow things down for a second,” says Dolan, adding: “Now, they’re monitoring everything that’s going on with electronics. So that if something happens, it can be sorted off floor. However, I think that there’s still a reason that the NYC has found value in having those folks down on the floor doing what they do.”
Taking the flash crash of 2010 as an example, Labovitz highlights how the circumstances around how the events unfolded demonstrated a key difference between NASDAQ and NYSE listed stocks – where electronically traded NASDAQ stocks tended to drop faster and farther than the NYSE listed stocks, with the difference being human intervention.
“A computer goes with a stimulus-response – you poke it, and it does something – with the flash crash, it was the humans on the floor thinking, ‘there has to be a glitch somewhere,’ and responding, while the computers were just repeatedly stub quoting. So it kept trading down, down, down, whereas the human brain with all the context says, ‘This doesn’t seem right’ or ‘I think there’s more to this story’. There’s an intelligence and an advantage to being on the floor […] There is a value to the aggregation of people in a place to trade, it creates better markets.”
Sharing his own first-hand experience of crashes whilst working for the NYSE, Dolan recalls: “I’ll never forget it because I was across the road in our office, talking to our CEO and the market was down 300 points and by the time I walked across the street and got onto the floor, the market was down 800 points. That was about five minutes. So, what was interesting was that you weren’t quite sure what was happening, what was going on, what was causing this and over the next 15 minutes, the market dropped down to 1,200 points.
“We reacted – we stood there as market makers and bought when nobody else wanted to buy, and kind of put ourselves in harm’s way to facilitate the market and help the stocks gravitate to a point where the public wanted to trade again.”
Read more: Lessons learned from Flash Boys
The overarching benefit therefore of this reactive component and demonstrably valuable aspect of open outcry – human oversight – is the tangible means of diversification. Speaking to The TRADE, Sylvain Thieullent, chief executive at Horizon Software, explains: “In terms of open outcry as a strategy, it would be counter-intuitive to see it come back full-steam to what it looked like back in the 80s for example, but for best execution it’s useful to have multiple tools and choices available and maybe then use the right one for a specific trade.
“For example, for what we call market sentiment, there is nothing better than open outcry to detect what the sentiment of the market is, so it does make sense that in some specific market conditions specifically the value is clear.”
This perspective on the value-add of live trading floors is in stark contrast with CME Group’s decision to completely shutter the open outcry practice across its exchanges back in 2021.
The group confirmed on 5 May 2021 it would not re-open the open outcry trading pits following their closure in March 2020 during the COVID-19 pandemic, while contrastingly, Cboe opened a new trading floor in June 2022, having also closed due to COVID-19 related reasons in March 2020.
The exchange at the time highlighted client demand for additional floor-based traders as the driving factor behind the decision.
“COVID-19 required us to configure the trading floor to allow for six feet of separation between traders. Our previous floor couldn’t accommodate everyone on that basis. So, on June 6 2022, when we opened our brand-new shiny state-of-the-art trading floor, it was really well received. It has a very attractive and efficient design which appeals to traders,” Montesano tells The TRADE.
He added that based on what the company is seeing currently in terms of real data, the future looks bright in the space. Cboe’s proprietary product suite set several volume records in 2023, including SPX ADV of approximately 2,900,000 and VIX ADV of 743,000, with around 23% and 45% of those volumes taking place on the floor, respectively, The TRADE understands.
It was back in December 2022 that Cboe further expanded its floor having previously asserted that physical trading would remain open “as long as investors wanted them”.
Montesano reaffirmed this to The TRADE: “Cboe will continue to operate a trading floor as long as our customers find utility in that, and in the hybrid market model we have. So far, that is the case. We do run a very robust trading floor, along with the fully electronic market, because our customers are telling us they still find tremendous utility in having the floor […] Our busiest open outcry pit is our S&P 500 options pit, the SPX pit and we now have more Market-Makers in that pit than we did prior to COVID-19.”
Market colour
Linked to the ability to account for anomalies through a physical, human presence, is the so-called ‘colour’ added by outcry trading and the ability to witness and perceive market sentiment first hand.
Dolan asserts that the tone and feeling of the floor was a key aspect: “I could tell when there were certain news items throughout my career down on the floor because there was a sense, a buzz in the air indicating it. For example, if the inflation number was a little bit lower and the market’s ripping upward because everybody thinks the Fed’s going to pause on interest rates, it’s a dynamic feeling.
“You could sense either the downside and the fear of what was going on in bad situations, or the euphoria on the upside when the floor got louder and busier. That was the fun part of the floor because you could sense that something was happening.”
Empirically, this equates to brokers providing this colour to their clients, informing customers in real-time what they are perceiving, and importantly, proactively looking out for these indicators.
As Montesano explains: “Another factor in going via the floor is that brokers can provide market colour and inform their customers in real-time what else they see going on in the pit. For example, they can make their customers aware of other large orders being executed in related or opposing series. That perceived colour is a value add.
“We know of several brand-new firms, including some from overseas, and some that can quote electronically but also wanted a floor presence because they saw the vibrancy of it. In addition, some of the existing firms that have had a pit presence have expanded their presence. We’ve even had more brokerage groups come into the business as well.”
Read more: First ever female traders share experiences of the London trading floor
Elsewhere, speaking to the prevalence of open outcry in the US compared to Europe, there is a marked difference in approaches. While there remains today several open outcry exchanges on one side of the Atlantic, The London Metal Exchange (LME) is the last remaining in Europe.
Thieullent suggests that it was a question of different recipes for different cultures: “[…] These days there is definitely a question around liquidity in Europe, where re-emergence of open outcry being a viable solution for more liquidity is more of a question. It’s a tool which has been lost in some ways in European culture, and there is a real challenge with regard to the number of liquidity pools and the overall liquidity of the market available which makes the potential slice for open outcry very small or very irregular.”
However, on the other side of this is potential for evolution and enough space in the market to consider alternatives: “Obviously people agree that without e-trading, the market could have never survived the COVID-19 pandemic, if it was all physical trading. All that is absolutely true. But in the same breath, everyone was completely convinced that remote working was the future – completely – but then two years later we’re back and the office is once again valued. The winds have changed direction which is interesting,” says Thieullent.
Though electronic trading accounts – understandably and irrevocably – for the bulk of the market’s activity, this aspect of trading life, which does still prevail, is therefore perhaps not merely a nostalgic hark back as many are quick to declare. Rather, open outcry can justly be considered an extra, valuable, facet of an ever-moving and complex industry.
As Labovitz suggests: “Trading floors represent a different way of doing things, not worse, not an inferior way. A different way of doing it – there’s value in that.”