The CME eurodollar trading pit – long been facing the threat of extinction as Skynet takes over trading – could finally be facing a perfect storm of headwinds in the coronavirus pandemic.
The pits are arguably the worst place on the face of the Earth to be during a global pandemic is which being spread by droplets. Traders crowd shoulder to shoulder and scream at the top of their lungs, often breathing and sweating on one another, to execute trades.
But in the Eurodollar options pit, traders seem to think they’ll eventually be back, according to Bloomberg. Traders there feel like they can perform better than algorithms and have an advantage on the floor that computers don’t have.
CME member Pete Kosanovich said: “When it gets busy, there is still a buzz, you can feel things happening. When you hear stuff happen in other pits, it’s a lot like being at Augusta and hearing the ‘Tiger roar.’ If you hear something happen in Treasury options, you can get ready for something to happen in eurodollar options.”
The floor closed abruptly on March 13 alongside of other trading floor operators, like ICE and CBOE.
Others, who favor electronic trading, think the time is right to finally do away with floor trading. Christian Hauff, CEO of Quantitative Brokers, which sells trading algorithms for U.S. Treasury securities and Treasury futures said: “This is the opportunity to not look back but move forward as an industry.”
Those in the pit argue that the nature of the product keeps open outcriers in the game. The futures debuted in 1981 as a way to speculate on interest rates paid on dollar deposits overseas. They are the most traded interest rate derivative as of last year, with a daily average volume of about 2.7 million contracts in 2019.
In the pit, trades are often structured as spreads, straddles or butterflies – which traders argue gives humans an advantage, due to the large number of possible trade combinations. Kosanovich, for example, has brokered trades with as many as 16 legs. He says he has seen trades with as many as 24.
He said: “It seems like it should be easy to trade these complicated multi-legged strategies, but it’s just not. Brokers’ fiduciary responsibility as members is to get the best price for the end user.”
Before the shut down, the pit accounted for about half of the daily average volume in eurodollar options. But re-opening – given the physical demands of open outcry trading – is going to be tough. This means that the fate of the pit, perhaps for the long-term, is going to fall to the CME Group. Executives have said they wanted to re-open three weeks after the state lifts its stay-at-home order.
Market makers and floor brokers would have to sign a waiver to acknowledge they are working at their own risk. CME Chief Executive Officer Terry Duffy said on an April earnings call that keeping the floor open doesn’t cost much and that he intended to abide by the rules that as long as the floor was more than 30% of trading volume, he’d keep it open.
The question of whether or not people will have adapted to electronic trading by the time CME re-opens the pit remains to be seen.
Thomas Fitch, founder and CEO of RVAssets, which supplies trading algorithms for eurodollar and Treasury options, said: “Nobody was prepared to go to 100% electronic, but the market did it with no problem whatsoever.”
Chicago-based futures and options broker Albert Marquez concluded: “Under normal conditions, I would expect that most end-users would want the pit back. It’s far more efficient and markets are tighter. That being said, it’s not exactly the best time for eurodollar options with rates where they are.”