CBOE Then and Now

Today I had the pleasure of taking a friend of mine on the trading floor. I used to trade in the pits at CBOE so I shared firsthand knowledge of what it was like way back when and what it’s like now. 

One thing you can be certain of in life is that things are going to change.  CBOE was formed in 1973. That’s a long time ago! To put it in perspective, the number one song that year was Tie a Yellow Ribbon Around the Old Oak Tree.  Oh my, change is good! When options began trading here at CBOE they began trading on only 16 stocks and it was just calls back in the beginning. The put option was not introduced until 1977. Traders filled out trading cards and they kept track of their option positions with a pencil on another card.

As the years went by, CBOE floor evolved to over 4,000 people including traders, brokers and runners. The runner. Talk about working your way up the ladder. For some it became the American dream. The story goes like this.  Little Johnny is graduating from high school. He gets a summer job at CBOE running option orders to the pits. Johnny can’t help but to absorb this new world around him and he begins to learn quickly how some make it and others don’t in the rough and tumble trading crowds. After a few months, a veteran trader notices Johnny’s strong interest and work ethic. He offers Johnny a job to be his clerk. This entails logging trades and keeping option positions organized while his new boss makes markets. As time passes, the trader determines that Johnny is ready for the big game. So he says to Johnny, “How would you like to trade for me?” “I’ll put up the capital and we split what you make.” Sounds good! Now Johnny is off and running towards a successful career at CBOE. So much success that he eventually makes enough money to go off and trade for his own account. Ah, the American dream! But guess what? There are no runners today. You see option orders are now transmitted electronically to the pits. The runner is extinct. 

Today there are less than 500 people on our trading floor. No more piles of paper from trades scattered all over the place. The market makers now trade on CBOE’s Hybrid Trading System. This incorporates electronic and open outcry trading, enabling customers to choose the trading method they prefer.

There are only 930 trading permits. That means only 930 traders here at CBOE. A trader must have a permit to make markets and trade.  That permit runs several thousand dollars per month. Along with monthly trading software charges and option commissions, the market maker is faced with big financial expenses. So there is no room for error.

The market maker business is different than the regular retail trader. The market maker is down on the floor for two reasons. Obviously to make money but to also provide continuous two sided option markets. They take the opposite side of your trades. When the market is drifting lower and you want to buy puts for protection, the market maker has to sell them to you. The market maker’s payment for providing that service is the bid and ask spread of each option. Well the bid and ask spread has certainly narrowed over the years and that’s good news for you. We now have options here at  CBOE where the bid and ask spread is now a penny wide! So the market maker more than ever has to be on the right side of volatility to make a living.

So I warned my friend what to expect before we walked down to the trading floor.  It’s kind of like going to the ape house at the zoo. They’re all going to stare at you. Traders don’t see many strangers walking through their world. And here’s what else my friend can expect. The pits are a bit empty. Not all of the 930 traders elect to trade from the floor anymore. They can trade remotely and still participate in the electronic trades. I told my friend to think of the empty pits as an old abandoned amusement park. If you close your eyes you can still hear the excitement. But open your eyes and keep your hands down unless of course you want to make a trade.