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The end of Liffe as we know it

Tim Hulse
Thursday 06 August 1998 00:02 BST

Open outcry traders in their

bright blazers are young,

rash, thick-skinned. They

take a lot of money without

any knowledge of the

markets. And pretty soon

they'll be out of a job, as

trading on a screen replaces

the stand-up routine

It's crazy down there," says Gary. "When it's kicking off, it's blinding. It's very loud, very fierce, very aggressive. It's like a football crowd." Gary is 25 and until recently he was employed by a foreign stockbroking company as a floor trader at the London International Financial Futures and Options Exchange, better known as Liffe (pronounced "life"). Gary is an East End boy. He favours clothes by Fake, which is about as fashionable as it gets at the moment, and he drives a Ferrari. His friend Tony, who is 27, still trades at Liffe. He wears Armani and Boss and his car is a two-seater Merc. Liffe's been good to both of them.

One of the four pillars of the modern City, along with the Bank of England, the Stock Exchange and Lloyd's, London's futures exchange was founded in 1982. It was set up for the purpose of trading complex financial products based on the future value of equities, bonds, currencies and interest rates. The way this business is done is known as "open outcry". Traders stand around a stepped pit area and do deals by means of shouting and a complicated code of hand signals. They wear coloured jackets so that the company or bank they represent can be easily identified in what can become a manic feeding frenzy of buying and selling. It's a job which requires quick wits and a lot of front, but not necessarily a degree in economics. Which is where the likes of Gary and Tony come in.

Gary left school with a couple of A levels. He'd always wanted to be a futures trader "because of the hustle and bustle of it, basically". One day he was in the pub and ran into a guy he'd been at school with who was trading at Liffe. He gave Gary a name to call, and Bob's your uncle, a week later he was in. "It was a word of mouth thing," he says. "It's not what you know, it's who you know, basically."

Gary's new employers were more interested in his attitude than his qualifications. "When I had my interview, they said, 'Gary, can you take shit?'," he says. "I said, 'Yeah, course I can.' They said, 'No, can you really take shit?' You've got to be quite hard."

"There are some very clever people down there who've got qualifications and everything, but some of the guys don't even know who the Prime Minister is, if you know what I mean," says Tony. "If you've got a bit of common sense, you can blag a bit and if you're quite tough, that's enough to get you through, really."

It's a macho world down on the floor, and women traders are rare. "They're like geezer birds," says Gary. "They swear, they scream, they act like one of the lads. They still get shit, but they're pretty thick-skinned. I wouldn't recommend any of my women friends to get a job down there."

"Like mates down the pub" is how Tony describes the ambience on the trading floor. "You have a laugh," he says. "Most of the time you're just sitting around waiting for the orders to come in, so to fill the time you muck around, tell jokes, scream and shout at people."

"But obviously when it kicks off, people do their business," says Gary. "When a trade comes in, you're competing with the person next to you. You have to do the business and generate the profits, because at the end of the year, that's how you're judged."

A salary of pounds 150,000 is by no means uncommon for traders like Gary and Tony. And that's before bonuses, which can be equally huge. But it's the so-called "locals", who wear red jackets and trade with their own money, who make the really big money. A former carpet-fitter from Kent who set up his own dealing business is said to have made pounds 8m in one year. The corresponding losses, however, tend to be less well publicised.

"You've got to have a big pair of bollocks to trade with your own money," says Gary.

"Bollocks of steel," agrees Tony.

But the big money could well be a thing of the past. Gary left his job three months ago and now spends his time ducking and diving in the property business. Tony is uncertain about his future. The jokes and japes on Liffe's trading floor have now been replaced by talk of sackings and salary cuts. The game is finally up, it seems, for the men in coloured jackets, and the very future of Liffe itself is in doubt.

The problem with open outcry trading is that it is costly and cumbersome compared to the alternative - trading electronically on a screen. It's high on manpower, requiring teams of clerks to route deals back to the office, and is said to cost three or four times as much as screen trading. It also restricts the number of people able to trade, requiring a physical presence in the pit or the intermediary of a broker.

Liffe's main European rival, formerly known as the Deutsche Terminborse (DTB), but now known as Eurex and based in Frankfurt, is a purely screen- based exchange, and last summer it began a campaign to exploit its technological edge. The battle was to be fought over the Bund futures market, in which 10-year German government bonds are traded for future delivery. Not only has the Bund long been Liffe's most prestigious trading contract, but it is widely acknowledged that wherever the Bund market ends up will be the home of the futures contract in Euros following the first stage of European Monetary Union at the beginning of next year. The stakes could hardly have been higher.

This time last year, Liffe had around 70 per cent of the Bund market, yet on a typical day last month, the London exchange traded a mere 8,000 lots compared to Frankfurt's 238,000 - a paltry four per cent. The German victory has been comprehensive, and it has been won by means of technology.

Last July, at its annual meeting, the Liffe board announced that it believed its open outcry system was "the fairest and most efficient" and would remain the predominant trading platform for the foreseeable future. In response, Jorg Franke, a director of the German stock exchange, commented, "I think the electronic exchange has the advantage, so I'm pleased London has stayed with open outcry. They will change to the electronic system ultimately". But not even Herr Franke could have imagined how quickly his words would come true.

By the end of January, figures showed that Eurex had captured 56.5 per cent of the Bund futures market, triggering celebrations in Frankfurt and growing alarm in London. By the end of February, Liffe's share of the market was down to 39 per cent. Clearly something had to be done. In March, in a remarkable volte-face, Liffe announced that it would develop an electronic trading system to function alongside its traditional pit trading. The system, called Liffe Connect, would be up and running, it said, by the fourth quarter of 1999.

However, this was too little too late for those traders who were already pushing for the development of screen trading. Typical was David Kyte, an independent trader who resigned from the Liffe board in March because of what he called a "build-up of frustration". Formerly an outspoken advocate of open outcry, Kyte had now seen that the future was screen-based. "Trade will be by mouse, not mouth," he said.

In April, Eurex went one step further, offering all Liffe members a free six-month trial of its electronic trading system. Werner Siebert, chairman of the German stock exchange, declined to comment on how many Liffe members had taken up the offer, saying only, "Let's just say that this has been our cheapest acquisition of members. Traders are very disloyal".

Those who remained loyal, however, were becoming more and more frustrated as the Bund market slipped away. In May, Liffe announced that it planned to bring forward the introduction of electronic trading by six months, and on 9 June, at an extraordinary general meeting, Liffe's members were asked to vote on the proposed changes. They approved them by a resounding majority of 98 per cent. Liffe chairman Jack Wigglesworth could give no definitive answer to questions from the floor asking whether Liffe would try to retain open outcry for some contracts. "The market will vote with its feet," he said.

The market has certainly voted with its feet in terms of Liffe shares, which have fallen in value by up to 75 per cent. Shares in Liffe give trading rights on the floor, and their plummeting price is a clear signal that many believe the best days of the exchange are over. The bleak reality for Liffe's open outcry traders is that they must now adapt or die. The main problem is that trading on a screen requires a considerably greater knowledge of how a market works than does open outcry, and as one Liffe insider points out: "It's probably fair to say that most traders on the Liffe floor don't really know what they're trading. They could be trading sausages."

"Basically most of them are buggered," says Mattimoe. "The trouble for a lot of the traders is that their only skill is in the execution of open outcry trading. They don't know anything about markets. They know the basic rudiments of it, but they don't know why the markets go up or down. They just react to the order flow."

For David Kyte, the answer lies in "re-education". He has already learnt how to trade on a screen, but others are clinging on to their old skills and talk about trading oil at the International Petroleum Exchange, where open outcry still flourishes for the moment. According to one trader, "a quarter will start trading on computer, a quarter will go back to driving cabs, a quarter will be out of work and a quarter will retire".

"People get comfortable with their environment, but you have to change," says David Kyte. "I think it's only a question of time. There'll be problems with computers - mine's just frozen now as I'm talking to you - but when it does work, it's quicker and it's better. Open outcry was a great concept, it is a great concept, but we progress."

At the beginning of October last year, the City of London Corporation unveiled a new statue. Cast in bronze by the sculptor Stephen Melton, it depicted a futures trader in a striped jacket, his tie casually loosened, talking into his mobile phone. It cost pounds 40,000 and stands on the corner of Cannon Street and Walbrook, just a couple of hundred yards from the main Liffe building. It was intended as a celebration of the City's most colourful characters, but already it is taking on the air of a memorial. "Here lies the Unknown Trader - we will remember him."

Or as Gary puts it: "It was good for a while, but you move on, you know what I mean?"

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