Bleak futures for Liffe locals as pits close
The dealers who used to dominate the trading floor have not taken to new technology, writes Dan Gledhill
He will never trade again.
Mr Humphries ran up his losses using the computer screens of Liffe's new electronic trading system, Connect. Like many traders, he cut his teeth in the rough and tumble of the exchange's trading floor, where dealers attired in colourful jackets stand shoulder-to-shoulder transacting business using an arcane sign language incomprehensible to outsiders.
Now, the jackets which once dominated the pavements around Liffe's headquarters at London's Cannon Street station have all but disappeared. Competition from the automated system used by Germany's rival exchange, Eurex, has forced Liffe to adopt the similar technology of Connect. Brian Williamson, Liffe's new chairman, has ruthlessly set about halving the exchange's head count in an effort to match Eurex's bargain transaction charges.
The main victim has been Liffe's on-site trading population, better known as "locals". They are the exchange's folk heroes - the dealers who gamble their own money in quick-fire bets on the world's derivatives markets.
Many fortunes have been made in Liffe's sweaty pits, mostly by bumptious young locals whose only qualifications were a quick brain, a sure head for figures and unbridled self-confidence. The breed was epitomised by Terry Crawley, a former carpet layer whose success on the floor was earning him pounds 8m a year in his prime.
But now the local population has dwindled from a peak of about 600 in the exchange's heyday to less than 150. Even the most optimistic estimates suggest that by early next year, it will be wholly extinct. In the bitter aftermath, there is a feeling among locals that an exchange which once provided a gateway to riches for the common man has been hijacked by the faceless City institutions.
Many locals, like Nigel Ackerman, a legendary figure who has dominated the short sterling pit since Liffe's inception in 1982, can settle for a comfortable retirement.
But Mr Humphries is one of the younger locals whose need for a new livelihood has forced them to swap the open outcry pits for an office and a computer screen, only to find that being profitable in the old environment is no guarantee of success in the new one. With hindsight, his disastrous bet looks like the last throw of a man who knew the game was up.
Liffe has already transferred with some success its government bond contracts to the Connect screens. Next month, the electronic revolution will be complete when the Euribor and short sterling markets, which enable participants to bet on the direction of European and UK interest rates, go on to Connect.
"There's a view that the pits could empty within as little as a couple of weeks," says one trader. He cites the example of the Matif, the Parisian exchange whose indigenous human population was cleared out within days of the introduction of an electronic system.
Certainly, the remaining locals say they are being made to feel like guests whose welcome has already been out-stayed. The exchange has begun replacing the defunct trading pits with office space, a renovation which will allow it to economise on a sprawling property portfolio which numbers five buildings in the Square Mile.
One local said: "We've got construction workers banging and hammering around us. It's obvious Liffe is desperate to be ready for the change. It's like sitting in a restaurant late at night when the waiters are trying to clear up."
Only the biggest and most ruthless survive in Liffe's jungle, so it is little wonder that those who have reached the bitter end are refusing to give in without a fight. In their eagerness to expose supposed shortcomings in the electronic system that has jeopardised their livelihoods, several took the opportunity to tip off the press when news of Mr Humphries' demise broke.
Local anger has not been directed only at the exchange. They also blame the banks for hastening the introduction of screens by evacuating their staff from the floor. Merrill Lynch, the investment house which used to have a mighty presence on the exchange, recently became the latest bank to abandon its human presence on Liffe.
One futures trader from another investment bank says: "It's impossible to have a team on the floor and another one looking after business on the screens. One has to go."
But the exodus of the banks from the floor also has a personal dimension. Banks that use their representatives on the floor to execute customers' orders have become incensed with the supposed antics of some locals.
One particular gripe is the alleged practice of front-running. If locals in the pit see a big buy order coming through in the gilt market, for example, they can buy gilts in the knowledge that when the order is executed the price will rise and they can sell at a profit. Such front-running drives up the price before the bank can execute the customer's order. The locals make an easy profit, the customers are over-charged and the banks get the blame. One embittered banker says: "When you see some young kid from Liffe driving an Aston Martin, it rankles a bit."
Locals reject the idea that front-running goes on. They are also incredulous when banks invoke the interests of their customers in their arguments for the introduction of screens.
Nigel Ackerman says: "Open-outcry versus screens is just a cost-cutting exercise. Members will decide based on their own profitability, not necessarily in the best interests of their clients."
It is certainly the case that the introduction of screens has cut the cost of transacting futures on Liffe, generally by about 70 per cent. But the locals who survive in the Euribor and short sterling pits argue that clients will suffer from the introduction of screens.
"People who trade in these markets need to be assured of liquidity and depth," says Mr Ackerman. "I doubt whether we could provide that if we were confined to a screen-based system."
His point is that locals provide a valuable service, guaranteeing to deal with customers however complicated the request. However, some banks some banks do not accept that this service is provided.
"The local population here is very different from in the United States," says one banker. "In Chicago, they are there to provide liquidity. If you get a big order, a large number of them would be there to support it. London is very different. If you're trying to put an order through, locals just walk away."
Some of Liffe's customers accuse some locals of plumbing new depths in recent months in a desperate attempt to wring every last penny of profit out of their profession before its death. However, locals furiously reject the charge. "There is such animosity from upstairs against locals," says one. "In New York, the institutions back the locals. Here they always think the locals are screwing them out of money."
Behind the defiance lies an acceptance among locals that their lucrative 17-year sojourn on the Liffe floor is at an end. Most are ready to hang up their jackets and exchange the hurly-burly of the floor for the serenity of an office and a screen.
Unfortunately, the demise of Steven Humphries will have done nothing to reassure them that they have a secure future on-screen.
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