Swan song nears for hog pit at Chicago Mercantile Exchange

Just seconds before the closing bell at the Chicago Mercantile Exchange, Bill Cipolla stands shoulder to shoulder with other traders in the raucous hog pit, trying to decipher the shouts, winks, gestures and nods that are a language all their own. Millions of dollars change hands daily in the exchange's century-old system of open-outcry trading, in which any hesitation or false movement, like a poker tell, can be exploited for the sake of a good trade.

But after three decades of reading clues on the turbulent landscape, Cipolla is now speculating on his own future, and wondering if, as an open-outcry trader, he is a member of an endangered breed.

As a result of its merger in July with the Chicago Board of Trade, the exchange, or "Merc," is moving in May to a new trading floor at the board's Art Deco headquarters. With the consolidation of the two exchanges, the pork belly pit, formerly emblematic of Chicago's open-outcry commodity trading, will close and begin operating exclusively by computer.

The open-outcry pits of other low-volume markets, including cash dairy products and South American bean futures, are also closing. Many traders believe that all commodity markets will inevitably follow suit.

The closings represent a physical as well as psychological shift for the exchange and its traders, who must weigh their own options.

"This is the last stand of the pit culture, and we are not going to go down without a fight," Cipolla vowed. "They're going to have to turn the lights out to get us to trade electronically."

Once Chicago's signature commodity, pork bellies were synonymous with fast-lane fortune, featured in popular films like "Trading Places" and attracting financial interest from around the globe. "I have never seen a market more tradable," said Cipolla, a 25-year veteran of the belly pit. "They were the cream of the crop."

With only a half-dozen old-timers now active in the pork belly pit, it is a far cry from its heyday. Livestock commodities, a last bastion of open outcry, now trade simultaneously on digital platforms. Since 2000, open-outcry has declined from about 90 percent of the trades at the exchanges to roughly 22 percent.

"We don't have the argument about electronic or open outcry at the CME," said Terrence Duffy, the executive chairman of the exchange. "We have already decided that electronic is our future and our present."

The New York Stock Exchange recently announced its intention to close two trading rooms because of the shrinking number of open-outcry traders. Digital platforms have already replaced open-outcry traders in London, Sydney, Tokyo and Hong Kong. They are less expensive to run, operate around the clock and generate greater volume.

Pit trading traces its roots to 1848, when the Chicago Board of Trade was founded to protect farmers by creating a marketplace to hedge against extreme price swings brought about by droughts and bumper crops. The concept evolved into today's futures and options trading. Before the merger, the two Chicago exchanges were long-term rivals with separate identities and cultures, as different as the Cubs and the White Sox.

The pits have nurtured their own Darwinian values and an inviolable ethic of trust. They have been described as high-stakes chess with a locker-room atmosphere, raw capitalism shed of its corporate skin.

Many traders drift away as they age because they find it difficult to keep up. Traders in the livestock pits tend to be older, however, and have been resistant to a different way of trading.

"It depends on how old you are," said Bob Lassandrello, 51, who has traded for 27 years in the cattle pit. "I see a lot of the younger guys trying to dip their toe in the water of trading electronically."

Amid the cacophony - yelling that ranges from desperate to triumphant - Lassandrello, surrounded by some 50 traders in colorful jackets and sneakers, wades into a pool of discarded orders. He takes pride in his ability to read a competitor, a skill critical in the pits but absent from electronic trading. That is why he is considering early retirement.

"We're near extinction," said Lassandrello, who believes many of his generation will not make the transition to the screen.

Even younger traders like Vanessa Sherwood, 32, a clerk for Lassandrello who recently started to trade for herself, miss the camaraderie of the pits. "The energy is what is addicting," Sherwood said. For the past year she has worked in isolation on a computer on the trading floor, studying price charts and technical indicators while trying to shut out the noise of the pit.
During downtime, she often leaves her terminal to reconnect with Lassandrello and other traders.

Caitlin Zaloom, an anthropologist who writes about the social dynamics of traders in her book "Out of the Pits," said, "People in the pits thrive on face-to-face competition, just like on a football field."

Zaloom has studied the differences between open-outcry trading at the Chicago Board of Trade and electronic trading at the London International Financial Futures Exchange. Zaloom observed that, though pit traders were once the first to see bids and offers, electronic trading has leveled the playing field.

"The screens are anonymous," she said, "and that's part of the idea of having a more pure market, one that doesn't have the complications of flesh and blood."