End of an era: Nymex trading pits shut down

Traders work in the gold and silver options pit at the New York Mercantile Exchange in New York, U.S., on Wednesday, Aug. 24, 2011

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Traders work in the gold and silver options pit at the New York Mercantile Exchange

CME Group, which owns the Nymex, said in April that the New York trading floor would close at the end of the year after the share of options volume executed there had dwindled to just 0.3% of the company’s overall energy and metals volumes. Chicago-based CME had already stopped futures trading on the Nymex floor last year.

Though long expected, the closure of the 25,000-square-foot Nymex floor has instilled nostalgia in traders who remember its heyday, when more than 1,000 people crowded into its pits to shout, jockey for position and arrange trades through an arcane language of hand signals.

“It was like going to the Super Bowl every day for work,” said David Greenberg, a former Nymex board member and veteran of the crude oil and gold pits.

Some vestiges of that culture will live on in a “Trading Annex” that CME set up for displaced floor traders and brokers. About 70 of them have agreed to trade electronically out of booth-like spaces in the Nymex building while retaining their status as registered floor brokers or traders, a CME spokeswoman said.

The Nymex dates back to the founding of the Butter and Cheese Exchange of New York in 1872. It became best known for energy trading after the launch of oil futures in 1983, and in 1994 it merged with the Comex, which focused on precious metals.

In their glory days, the New York commodities exchanges were a magnet for ambitious young men looking to make it rich, including many from working-class families, veteran traders recall. Fistfights sometimes broke out on the floor, and unlike at the elite banks, it didn’t take a college degree to get a trading job.

“Commodities were the other side of the tracks,” said Michel Marks, the Nymex’s chairman from 1978 to 1987.

Technology eventually doomed the floor. A turning point came in September 2006, when the Nymex allowed electronic trading during the same hours as open-outcry, after years of resistance from floor traders. The share of futures trades executed in the pits fell drastically afterward.

The Nymex’s slow response to the rise of electronic trading was among the factors that led to its acquisition by CME in 2008.

Options continued to be a bastion of floor trading, due to the difficulty of executing complex options trades through a computer. As late as 2012, nearly half the volume in Nymex options was still done through open outcry, CME data show.

Some longtime traders say the shift to screen trading had its drawbacks. George Gero, managing director at RBC Wealth Management, said the floor made it possible to sense the collective mood of the market and relay it to clients – an impossibility in today’s faceless electronic markets.

“It’s a loss for the markets because the human input was sometimes very good for guiding customers,” said Gero, who first bought a seat at the Nymex in 1964 and started out trading platinum and palladium futures.

Others counter that electronification slashed costs and made markets fairer and more efficient.

“Good riddance to open outcry,” John Arnold, the billionaire former chief executive of natural-gas hedge fund Centaurus Energy, said in an email to The Wall Street Journal. “The transition from open-outcry to electronic trading happened so quickly because it provided far superior execution to the customer.”

Floor traders sometimes sparked resentment because their positions in the pits gave them immediate access to market-moving information. A fear among firms outside the clubby Nymex community was that their buying and selling of futures would be undermined by those at the exchange, who would catch wind of incoming transactions and trade against them.

“It never struck me as the most brilliant system,” said Nigel Saperia, a retired oil trader who worked at firms including Royal Dutch Shell. “It was way too easy for [traders in the pits] to make money.”

There were cases of outright wrongdoing. In April 2008, a former Nymex board member pleaded guilty to fraud in connection with criminal allegations that he had allocated profitable orders to himself and money-losing orders to his customers.

Exchanges still operate a small number of trading floors around the country. The best known is perhaps the New York Stock Exchange.

CME still has open-outcry pits in Chicago for financial contracts such as S&P 500 futures, as well as options on soybeans, wheat and other agricultural commodities. There are no plans to close the Chicago trading pits, the CME spokeswoman said.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

This article was published by The Wall Street Journal

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