Milton Financial Market Research Institute LLC

History of Pit Trading

The High Stress and Hard Partying Commodity Futures Pits – Pit Trading 

 

The CME shuttered all pit trading activity after almost 170 years. And with it died the pit trader  a very stressful but lucrative job characterized by harsh competition, frenetic screaming and hand signaling among men exchanging billions of dollars worth of commodities per day. Pit trading was not for the faint hearted. Yelling, biting, punching and spitting at each other was part of the game. So you needed definitely more than just trading skills when entering the pit trading arena.

The history of the pits dates back to 1848 when the first futures exchange was established. The traded futures derived their name from their function  that it was an agreement between grain farmers and merchants to exchange a certain amount of grain at a future date for a particular price. It allowed the farmers to know how much they could earn before harvesting their crops. On the other side the merchants were able to lock in prices months in advance. The important factor was price discovery for the grain farming industry. Before that the farmers sold their crop yield without knowledge of their actual value. The CBOT and the market that established was a game changer for all participants and soon thereafter dozens of new futures contracts followed.

Later on the CBOT added other agrarian markets throughout the 20th century — in 1936, it began with soybeans trading, and in 1968 it added its first non-grain-related commodity: chickens. After that the CME changed their name from Chicago Butter and Egg board to CBOT. The intensity of the pits was commemorated in the 1983 John Landis classic “Trading Places.”

In the 1980 they added options contracts. Options differed from futures contracts since they were binding only to one party (the seller). The buyer paid a premium for the option on a contract, meaning he retained the sole right to buy the contract at the agreed-upon price over a given period of time. If there was a profit to be made  the buyer would exercise the option. If the option wasn’t exercised by the expiration date of the option, the contract expired and no money changed hands.

The culture at the CBOT was clearly blue collar.The image of a finance worker nowadays is a computer science genius or Flash Boy ;). Back then the ethnic-religious makeup of the pits was reflected in the names of the largest firms that traded there: O’Connor & Co., Lee B. Stern & Co. and The Goldberg Association; Hennessy & Associates, Rosenthal & Co. and Cunningham Commodities. The CBOT was largely Irish and Italian-Catholic while the CME attracted more Jewish workers.

One reason why people went into pit trading was the opportunity to make millions of dollars and the other reason was that there was no need for a college degree to get a job. The pits were surely American in this way — simultaneously professional and crude; guided by both greed and interpersonal relationships.

The death of the pit trader was the end of an era that once defined what trading was all about. All that thrill and action disappeared over night.

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