I recently visited the trading floor of CBOE where especially the pits of SPX and VIX are relatively crowded and open outcry is still performed. I was surprised to hear that the traded volume is non negligible compared to the electronic trading which takes place in parallel. Apparently some customers still prefer to communicate their orders using trading pitches - often heard and read reasons are the ability to get better prices (especially for big orders) and the ability to split trades among many traders see here, for instance.

However, I am wondering about three things:

  1. Where does the ability to get better prices come from? If it is about established relationships or professional environment I do not see why appropriate trading platforms would provide equivalent means to replace open-outcry.

  2. How fast is the information gathered at the trading pitch communicated to electronic traders? Given, a broker signalizes her aim to sell/buy a large quantity of a certain option and her orders gets filled, how many seconds does it take until the information is processed? In a world where time-stamps of trading data are sometimes in measures of nano/micro seconds, I suppose that manually recording the trades takes an awful long period of time.

  3. Especially with respect to question 2: i am wondering about the reliability of high-frequency data for academic (but also industrial) purposes if a substantial amount of trading (CBOE representative claimed that roughly 30 % of daily VIX and SPX volume is settled in the trading pitches) is not performed in an electronic fashion but instead rather anonymous if we consider the substantial lags. And may this even be the real reason why some customers still prefer to send employees to the trading pitches?


1 Answer 1

  1. The better price will come from two live traders (one on each side of the trade) willing to take a smaller percentage commission for a large block trade. For example, if a trader's average commission per day is USD 2,000 and someone sends them a 100M block trade, they aren't going to insist on their standard commission rate. Let's say they usually get a .5% commission (this is an absurdly large commission that I am just using for the sake of the example). They aren't going to turn away a trade of that size if they don't receive their full 500,000 commission. They will gladly take 50-100k and be very happy. Reducing their commission, generally, involves taking a smaller spread on the execution which translates into a better price for the client.

  2. Usually, the traders are in constant contact with people from their firm who are off the floor. Either by phone or by hand signals. While it may take a minute for the large order to hit the tape, the electronic market already 'knows' about it due to the communication between the floor trader and the 'upstairs' trading desk. They are working together to fill their customer order and to manage the firm's exposure. Exposure management will be handled electronically with e-mini contracts or SPY, so the large floor trade is already being felt in electronic marketplaces. **These large trades don't always need hedging help from a firm's delta-one desk, so the last sentence will not apply to every trade.

  3. Aside from anonymity, you don't have to worry as much about getting front run by a high-frequency firm because the two live traders are handling it personally and it is in their best interest to not divulge too much information because their commission and relationship with the large order customer is also on the line. This is why you may see large block prints on the tape that appear to come out of nowhere but don't seem to have a large impact on anything.

The main consequence is that a live trader requires a much higher commission to execute then executing electronically. For this reason, they are mostly just executing large orders or for people who value anonymity enough to pay the higher execution price (though they aren't truly anonymous).

Even when the trading floor ceases to exist these type of 'high-touch' executions will still be around; they just won't be two trader's in a pit communicating with each other. Instead, the trader receiving the order will email or call several of their trader friends and see if they can find a middle ground and get the order executed.


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