An Afternoon at the Options Exchange

This piece was written by Michael Hu, a participant on Business Today’s Chicago Breakout Trip, Crossroads of Humans and Machines. Michael is a member of Princeton’s class of 2021 and is currently studying Computer Science.

Business Today visited the CBOE Global Markets last Wednesday. Here are a few snapshots of our visit, transposed from memory.

1. The SPX Pit 

The SPX pit lies off to one side of the CBOE trading floor. You can hear the buzz intensify as you approach; there's a certain energy in the air. Pastel pink and yellow stock stubs litter the ground like confetti. The pit itself is cordoned off by risers and TV screens, so it's hard to tell exactly what's going on. 

The murmur is magnetic. Turn the corner into the pit to see hundreds of traders standing shoulder-to-shoulder on risers, fanning out from a row of computers and phones at the bottom. Everyone is in motion: writing on a tablet, jawing with a neighbor, or staring up at the screens surrounding the pit, where options prices glow in neon green, flickering as they change with the markets. Millions of S&P 500 options, representing hundreds of millions in equity value, move through this pit every day.

An order hits a broker's phone. He snatches the handheld from its receiver, pinning it against his shoulder as he scribbles down the numbers. Mhm, he grunts to the customer on the line. Mhm. Already heads are starting to turn. Sensing blood in the water, the market makers around him inch closer. Suddenly, the broker draws breath and shouts his order. 100 percent of the heads in a ring around him snap to attention. The feeding frenzy begins. BUYBUYBUYBUY, shout the market makers, their hands writhing in a custom sign language as they signal to the broker their prices. The broker tears off stubs from his pad, each stub representing a trade. There are more hands than stubs; some market makers leave hungry. The entire frenzy lasts no more than 15 seconds. 100 percent of the heads around the broker eventually turn to face front again.

The traders stand in this pit the entire day. At around noon, they'll send a runner to pick up lunch. Their oxford collars wilt in the heat of the pit. The murmur is magnetic. The pit is magnetic. This is sport.

2. Roma Cowell

Roma Colwell welcomed us into CBOE and acted as our guide for the day. A former trader herself, she described how thousands of people filled the CBOE floor in the 1990s, trading a variety of equity and index options. Nowadays, the only active open-outcry trading pits are the SPX and VIX pit. All others trade automatically on electronic exchanges. In other pits, a handful of traders sit where hundreds once stood. They swivel their heads across a panel of monitors. They have entered the modern marketplace.

Roma is unabashedly old-school. She began her trading career fresh out of college at the now-closed Pacific Options Exchange, climbing the totem pole to become a market maker. She told us about the quirks of the pit. For example, in the beginning traders were assigned a spot to stand. A trader could move down a row on the riser by gaining the respect of the other traders. The big fish stood at the bottom. When traders lost their cool, they walked out of the building to fight-- unruly behavior on the trading floor could result in heavy fines. One time, Roma broke up two brawling traders. I smiled, imagining Roma, five-foot-three and sweet like a grandmother, holding apart two red-faced, angry traders.

Roma remembers her first day as a market maker. All traders get a three letter name tag, and Roma had chosen CYP, short for Cypress, where her family was from. After making her first trade, the market makers around her started whispering about sip. Four hours into the day, she eventually asked her trader next to her: What's a sip? The trader pointed squarely to her name tag and said, That's you. Roma then shouted into the pit, None of you ever call me sip! My name is Roma!

From that day on, she had their respect.

3. The Future

The SPX pit still exists due to the complexity of the S&P 500 option product. A broker buying and selling options in-person has the potential to better the option price for the client. This cost saving matters. In the future it is likely that technology will catch up. Near the SPX pit is the gold and silver ETF pit which is manned by a half-dozen traders and computer screens. "If SPX gets automated, it'll happen overnight," as one veteran trader mentioned.

On the CBOE trading floor, reality is becoming history. At 3:10 pm, our group climbed the scaffolding up to the closing bell, giving us a bird's-eye view of the entire floor. Most of the floor was quiet and swept clean, with empty mounts and open sockets where screens and computers once were. And on the far side of the floor was the SPX trading pit, the last of its kind, unabashedly old-school, still humming.

Below are more photos from the Opinions Exchange:

Photo Credits: CBOE Global Exchange