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CME trading outage showed that man can still match the machine

Traders in the corn options pit at the CME Group signal orders shortly before the closing bell in Chicago, in this February 11, 2011 file photograph. REUTERS/Frank Polich/Files

By Cezary Podkul and Tom Polansek

NEW YORK/CHICAGO (Reuters) - Just over a week ago, CME Group Inc suffered the worst-ever trading outage on the world's most important agricultural markets, plunging electronic screens into darkness and sending dozens of traders scrambling for Chicago's famous but now often deserted trading "pits".

It seemed like an impossible task: replace the seamless efficiency of an electronic trading screen with hand signals and guttural shouts to execute clients' orders to trade corn, wheat or cattle during the "close", often the busiest time of the day.

But a Reuters analysis of CME trading data on the day of the outage, April 8, showed they largely succeeded in replacing the machines in at least some markets despite the difficulties of suddenly using floor trading skills that have mostly died out.

In the open-outcry wheat futures pit, for instance, traders executed a total of 22,606 contracts in the 37 minutes between the start of the electronic outage and the closing bell at 1:15 p.m. CST (2.15 p.m. EDT), according to the analysis, which is the first to show in detail how trading activity was affected.

That's about 40 times more than the average floor volume during that time for the previous nine trading days, and came close to the average 24,000 contracts traded in the same period on CME's Globex electronic platform, which was shut down by an unidentified glitch.

The surprisingly strong showing by floor brokers, who for years have been losing market share to computerized trading, shows that human traders may still have an important role to play in making markets for the staples of the U.S. economy - especially when things go wrong.

"It's a good reminder as to why we still have the pits around," said Jerrod Kitt, analyst at the Linn Group, a futures brokerage that still maintains a presence in the CME's agricultural trading pits in Chicago.

To be sure, various factors, such as contract expiration dates and the timing of key crop reports, can impact volumes on any given day, and the data provided by the exchange is only a subset of a much larger market for agricultural futures traded on the CME. The exchange operator owns the Chicago Board of Trade, Chicago Mercantile Exchange and other trading venues.

Still, analysts who reviewed the data said they were impressed, if not surprised, by the volume handled by floor brokers during the April 8 outage. On a typical day, electronic trading now accounts for nearly 95 percent of volume in grain markets on the CME, with pit traders handling the other 5 percent. The glitch meant that the pit handled 100 percent, if only briefly.

"I thought the volume, looking at these numbers, was overall very good, especially for no heads-up," said Terry Reilly, senior commodity analyst for Futures International.


CME has not commented on the cause of the outage beyond a statement confirming it experienced a technical issue. "We communicated frequently with customers as we sought a solution to this technical issue," a spokesman for CME said.

CME sent out an alert at 12:51 p.m. CDT (1 51 p.m. EDT) that day, saying it had halted trading in 31 markets ranging from corn to livestock and weather futures due to technical issues, according to an email reviewed by Reuters. The outage began at 12:38 p.m. CDT (1.38 p.m. EDT) and was fixed by 2:15 p.m. CDT (3.15 p.m. EDT), according to CME.

"It's almost as if somebody just tripped over a cord or something seized-up," said Eric Scott Hunsader, CEO of Nanex, a Winnetka, Illinois-based trading software firm.

At least some trading time was lost as brokers who normally place orders electronically from offices located stories above the agricultural floor grabbed their multi-colored trading jackets and headed to the pits.

Firms such as Futures International, which have maintained their floor-trading operations, were able to fill most orders during the outage, while other brokers struggled to execute, market sources have said.

Some brokers last week questioned whether the pits should remain open during future outages due to concerns about filling customer orders.

But the data suggests that, in some markets at least, the traders who rushed to the floor handled a lot of those orders.

Floor brokers in the corn futures pit executed 44,565 contracts while electronic trading stopped. That's about three-fourths of the average electronic trading volume during that time on the nine trading days prior to the outage and more than seventeen times the average trading pit volume.

Still, lean hog and live cattle futures saw only modestly elevated floor activity that suggested the trading pits did not fully compensate for the loss of electronic volume.

Electronic migration has hit futures markets especially hard because traders can execute futures trades faster and more efficiently on the screen. It is more difficult to execute options trades electronically, keeping those pits busy. Some options brokers crossed over to futures pits during the CME outage, helping futures colleagues meet the surge in demand.

"We filled in admirably," said Joe Fasano, a futures broker in the corn pit.

(Reporting By Cezary Podkul in New York and Tom Plansek in Chicago; Editing by Martin Howell)