July 16, 2021
The June WASDE report confirms tight stocks and drought threatens the western Corn Belt. I should offer my thoughts on the highest grain prices in a decade, but I’m thinking about the CME Group decision to permanently close the physical grain trading pits. This is a momentous change, despite the fact that electronic trading had pit trading on life support for over a decade.
Pit trading of grain futures contract in Chicago (CBOT), Kansas City (KCBOT), and Minneapolis (MGEX) started in the mid-19th century. After 125 years of trade, the MGEX was the first pit to close in 2008, recognizing the runaway success of the electronic platform. I traded in the MGEX pit through much of the 1980s – I know open-outcry, with its unique language and hand signals.
The Minneapolis Grain Exchange had one main pit. In my time, 12-20 traders gathered to trade hard red spring wheat futures. The contrast with the CBOT was great. Minneapolis had one good pit and contract. Chicago featured numerous pits – dense with traders – dedicated to trading corn, wheat and the soybean complex, not to mention even larger pits dedicated to trading newer contracts in energy, metals, interest rates and more.
Filling orders quickly is the name of the game in futures trading. On the floor of the CBOT, there were a lot of busy people working to execute orders. At the top of the pecking-order were the pit traders, often called brokers. At the bottom were the phone clerks, taking and time-stamping orders. In between were the runners, running new orders from phone clerks to the pit, and running filled orders from the pit back to the clerks. Even this description is not adequate, because there was also a pecking order in the pit, with some brokers specializing in trading the front month contract, others trading the second month and still others working spread trades.
How can I possibly describe the stark difference between the CBOT and the MGEX trading pits? A story might do the trick.
The milling company I worked for had interests in all three wheat markets. Much of it was simple hedging – selling futures against cash wheat purchases and buying futures to cover flour sales. We also had customers with interests in intermarket spreading (e.g., buying Chicago wheat, selling Minneapolis, etc.). It was spreading that put me in regular contact with Alex, a new phone clerk on the floor of the CBOT.
One day Alex called me with an order to sell a large number of deferred futures contracts. I could tell by the tone of his voice that Alex was not having a good day – working in and around the trading pit can be stressful. Anyway, I gave it my best shot but there were no buyers. This can happen in a small market, where deferred contracts can suffer from thin trading.
Alex lost his cool and shouted in my ear. “Who your $#@&ing broker? I need to get this done. The market is showing the price, but your guy can’t get the job done!”
A lightbulb went off in my head. I had been working with Alex for several months, but I had never explained how I execute orders in Minneapolis. Alex thinks I’m a phone clerk.
“Alex,” I said, “I don’t think you understand how I work in Minneapolis. I answer the phone, I write down and time-stamp the order, and I run the order into the pit. There I use hand signals and a strong voice to make an offer to anyone and everyone in the pit. Apparently, you did not know that I’m the $#@&ing broker.”
I miss trading in the pit – it was one hell of a way to make a living. I even miss Alex, but he left me with a great story to illustrate the difference between the Chicago and Minneapolis trading pits.
Source: Ed Usset, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
About the Author(s)
Marketing specialist, University of Minnesota Center for Farm Financial Management
Ed Usset is a marketing specialist at the University of Minnesota Center for Farm Financial Management. he authored "Grain Marketing is Simple (It's Just Not Easy)"; helped develop "Winning the Game" grain marketing workshops; and leads Commodity Challenge, an online trading game. He also blogs about grain marketing at Ed's World.
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