07/07/16 | Article

Financial Times:
What Happened When the Pit Stopped

A job dealing futures and options on the Nymex floor brought wealth for many without pedigree or a prestigious education with electronic trading now dominant, that route has been shut off.

By Gregory Meyer | Read the article in pdf format

‘This business is all about productivity right now. Computers don’t ask for a raise. They don’t ask for a bonus’ -Mark Vonderheide, GEM

Cindee Rifkin was a 19-year-old babysitter when her employer, a commodities trader, invited her to lower Manhattan’s oil exchange. In the din of the floor a broker gave her a card scrawled with the arcane terms of a futures deal.

“He said, ‘Can you read this?'” Ms Rifkin recalls. “It was this jumble. I said, ‘No.’ He said, ‘You’re hired.'”

She quit babysitting for the job as a clerk on the New York Mercantile Exchange, at the time the world’s dominant oil bourse. Days later, Saddam Hussein’s Iraq invaded Kuwait and crude prices shot up 90 percent. She learnt to use hand signals to relay phone orders to traders screaming in Nymex’s pits. By her twenties, Ms Rifkin, who not finish high school, was earning six figure pay.

“It was such an amazing place to work, as crazy as it was,” she says. “No matter what job you had down there, you were part of a tribe.”

The place where Ms Rifkin found fortune is set to vanish by the end of the year. Nymex’s owner, CME Group of Chicago, says it will close down its New York commodities trading floor, the last of its kind in a city once full of them, after all but 0.3 per cent of its energy and metals volumes shifted to computers. Nymex will exist as a legal entity and a brand, but the action will unfold in a secure data centre next to a bike path in Aurora, Illinois.

Its disappearance into the virtual realm testifies to the technological disruption reshaping markets and threatening vast segments of the workforce, from taxi drivers to bankers. In New York City the number of jobs in securities and commodity contracts fell to 98,700 in May, the lowest for that month since at least 1990, state labour department data show. Trading on automated systems now accounts for more than half of US crude oil futures volumes, according to a Commodity Futures Trading Commission study.

Markets have become increasingly placeless, regulated by national laws but open in any time zone. A quarter of CME’s total volumes now originate outside the US. Money that once sluiced through the chokepoint that was the Nymex floor now spreads across a much broader area, enriching some and stranding others. A Nymex seat last month sold for $180,000, down from a recent high of $350,000 in 2012.

The commodities floor was once a route to Wall Street for New Yorkers without the pedigree, connections or schooling to be a bond trader or banker. “Harvard MBAs were standing shoulder to shoulder with former hot dog and pretzel street vendors,” says Gene Rozgonyi, chief risk officer of natural gas distributor AGL Resources, who started on the floor as a teenage runner. In the early 2000s the Nymex building beside the Hudson river housed 6,000 people who worked in jobs connected to the exchange, recalls Bo Collins, a former Nymex president.

Those opportunities are gone, says Terrence Martell, finance professor at Baruch College and a director at the Intercontinetal Exchange, whose all electronic energy bourse is Nymex’s main rival. The death of the Nymex floor forced some traders back into the middle or working classes, or even poverty. “They were making like $10,000 a day,” says Jack Cappello, a barber on the ground floor of the Nymex building. “After they went electronic, they were coming to me to borrow money. I wasn’t a bank. I had to refuse them.”

Trading up

For much of its history, the Nymex dwelt in an unglamorous corner of New York’s financial world. Established in 1872 as the Butter and Cheese Exchange, it was one of several commodity venues in Manhattan including the Coffee & Sugar Exchange, the Hide Exchange and the Produce Exchange.

A newspaper account from 1893 reported how exchange leaders met “to discuss the question of oleo margarine and butterine, which have lately been sold in this city in large quantities, under the guise of butter.”

Until the late 1970s clerks updated futures prices on chalkboards and recorded them on Polaroid film, says Jan Marks, a former trader and broker. The exchange was rocked by scandal in 1976 after futures sellers failed to feliver nearly 50m pounds of Main potatoes.

After the potato debacle, Nymex reinvented itself as an energy futures and options exchange, listing heating oil in 1978, crude oil in 1983 and natural gas in 1990. Trading moved from Nymex’s brick building on Harrison Street to a space shared with other futures exchanges inside the World Trade Center, the setting for the frenetic climax of the 1983 film Trading Places.

Electronic futures trading arrived in 1992, when the Chicago Mercantile Exchange launched its Globex technology. Nymex followed a year later with Access, short for American Computerized Commodity Exchange System and Services. But access to Access was confined to hours when pits were closed, to protect the value of seats on the floor, Mr Collins says.

The prospect of electronics conquering the floor seemed farfetched at the time. In 1997, when the ribbon was cut on its current building, the premises included what Nymex called “state of the art trading facilities” – two 25,000 sq ft floors. As late as 2005, after ICE bought and unceremoniously shut down the trading floor of London’s International Petroleum Exchange, Nymex opened a new floor in the UK capital. “Coming soon to London, a champion of open outcry trading,” it announced in an advertisement placed in the Financial Times. “Our floor will be fitted with the latest in technology – humans.” (It failed within months.)

The traders and brokers jostling on the floor did meld into a kind of machine for price discovery.

“It was like one giant computer, where each moment everybody was saying what their bids and offers and quantities would be,” says Henry Jarecki, former board member of the Commodity Exchange, acquired by Nymex.

But the human computer had limitations, notably that it gave occupants a first look at shifts in market flow. “You’re in a situation where your benefit is seeing things that the world at large can’t see,” says Dr Jarecki, who is also a psychiatrist.

This privileged perch could breed scams. In 2008 a former broker who had served as Nymex’s compliance review committee chairman pleaded guilty to front-running customers’ natural gas orders so he could allocate profitable trades to himself.

Danny Masters, a former banker and hedge fund manager who spent 2001-08 in the pits, says: “The floor of the New York Mercantile Exchange is like a cross between Goldman Sachs and maximum-security prison.”

Getting a position on the floor did not require extensive training. Stephen Ardizzone says he visited a relative in the gold pit in 1981 after his first year of university and never returned to school. In 1986 he asked his father, a homicide detective, to mortgage his house so he could buy an exchange seat. Alongside his broker business, Mr Ardizzone owned a restaurant – and he made a point of offering jobs at Nymex to his waiters and bartenders. Ms Rifkin, now teaching yoga, suspects she was hired because she was a “pretty girl”.

Losing out to algorithms

Nymex lists futures and options contracts on energy and metals. Both are used by companies and speculators to guard against or bet on price moves.

Futures are simpler, obligating to holders to buy or sell a commodity at an agreed price by a certain moth. Options tack on complexity, as they convey the right to buy or sell these futures.

The futures pits dried up first. After years of resistance, Nymex adopted CME’s Globex system and allowed electronic futures to trade simultaneously with the pits in September 2006.

The shift was swift and severe. Electronics rose from 17 per cent to 70 per cent of Nymex volumes by June 2007. Total volumes also soard, with the West Texas Intermediate crude benchmark doubling between 2005 and 2007.

Some veterans were bewildered. On the floor, a trader might know which broker did business for a big bank or aggressive hedge fund and could buy on signs that a broker was in the market.

“On a screen, you don’t know who’s on the other side – or if it’s a person at all,” says Mr Ardizzone, who now runs an electronic trading group.

Craig Weinstein was trading heating oil and crude in a combination known as a crack spread (a refinery’s profit margin from “cracking” crude oil into distinct fuels) when the computers took charge. In his best years he was earning $900,000 and owned a house in suburban New Jersey, a Porsche and two Harley-Davidsons.

“No one ever told you this market was going to end,” Mr Weinstein says. “All of a sudden it was lose, lose, lose. I would lose a thousand, two thousand, three thousand. The first month I lost 30 grand I was like, OK, I”m losing money, this is not working any more. I just stopped.”

Since leaving Nymex, Mr Weinstein has pinballed between jobs including speculating on houses, hawking shoes on eBay and dealing Lexus cars. He just found a new job selling fertiliser to golf courses in Arizona. “I’m down to probably my last 50 grand at this point,” Mr Weinstein says.

Former floor traders recount stories of colleagues now laying bricks, selling stationary, inspecting construction sites or slicing lunchmeat, in addition to the handful who successfully navigated the electronic world. Raymond Carbone of Paramount Options, a broker who closed his floor operation last year, says: “A friend used to say, ‘If I weren’t trading gasoline, I’d be pumping it.’ Well, some of them are.”

“One guy put a gun to his head and killed himself. It’s pretty amazing what technology has done to that market,” Mr Weinstein says.

Options clung to the floor longer, owing to their sometimes tricky structures. As recently as 2012, US crude oil options volumes were roughly balanced between floor and screen, with each trading about 10m contracts, plus another 10m in private deals brokered by phone or instant message.

In the first six months of 2016, only 184,00 WTI crude options had changed hands on the floor, compared with 16.5 on screens, as CME pushes to globalise its options business.

Mark Vonderheide has no nostalgia for a dying floor. He calls it “middle school with money.” Among the trading groups to fill the gap left by the floorbased market makers of old is the one founded in 208, Geneva Energy Markets.

GEM’s 17th floor office off Columbus Circle in midtown Manhattan contains just five traders on a recent afternoon, with a few more patched in by video feed from offices in Chicago and Dublin. The room is quiet but for the hum of the air conditioner, brokers quoting oil structures over speaker phones and the bleep of trades being executed, often driven by algorithms.

Mr Vonderheide’s employees studied physics, economics, chemistry and finance at top US universities. He says there is no reason for GEM to be in  New York other than his wife’s love of the city. “Look how many people it took to run the floor and push paper around. This business is all about productivity right now. Computers don’t ask for a raise. They don’t ask for a bonus. It would have been unheard of 10 years ago to do the kind of volume I do with the headcount I have,” he says.

The demise of New York’s trading floor is an ominous sign for traders lingering on CME’s floor in Chicago, where most futures pits were closed last year but options carry on. In a recent investor presentation, CME executives touted the fact that volumes of options on eurodollar contracts, an important interest rate benchmark, had now gone 23 per cent electronic.

Terry Duffy, CME executive chairman, worked in the pits for more than 20 years but says he “can’t get too worked up” about their extinction. He adds that in the pits, someone with his 6ft 1in frame had an advantage over a shorter person. “The computer puts us all at the same height, the same weight and everything else,” he says. “it puts us all on very level playing field.”