Hurricane’s shutdown of markets irks idled Chicago traders
BY DAVID ROEDER Business Reporteremail@example.com October 29, 2012 6:08PM
CHICAGO, IL - OCTOBER 29: The Volatility Index (VIX) pit at the Chicago Board Options Exchange (CBOE) sits deserted on October 29, 2012 in Chicago, Illinois. The CBOE and other U.S. financial exchanges were closed today and will remain closed Tuesday because of Hurricane Sandy. This will be the first two-day weather-related shutdown of the markets since 1888. (Photo by Scott Olson/Getty Images)
Updated: December 1, 2012 4:25PM
For Chicago trading firms, Monday was a quasi-holiday. As traders on the East Coast stayed away from offices because of Hurricane Sandy’s life-threatening barrage, financial markets here operated at a leisurely pace.
And some Chicago traders didn’t care for it one bit. But they’ll have to put up with it again Tuesday, as the storm has forced the closure of most financial markets, including all stock-related dealings, for a second day.
The New York Stock Exchange and the New York-based Nasdaq Stock Market said they expect to reopen Wednesday but would post further advisories based on damage done by the hurricane. The storm was expected to make landfall late Monday in southern New Jersey.
It was the first unplanned closing of the exchange since the Sept. 11 terrorist attacks, and the first weather-related closing since Hurricane Gloria threatened Manhattan in 1985.
The decision of the New York exchanges led the Chicago markets to follow suit. In Chicago, the financial markets deal in “derivatives,” so-called because they are futures and options contracts derived from an underlying cash market.
In the case of stock, the NYSE is one such cash market for the Chicago Board Options Exchange, a business entirely based on equities. The situation is different at the Chicago Mercantile Exchange and the Chicago Board of Trade, which deal in derivatives from several markets, including stock indexes.
The Merc and the CBOT, both owned by CME Group Inc., closed their daytime trading in stock indexes Monday and Tuesday. Their other markets, including sessions for crop and energy contracts, were open as usual.
Quantifying the financial impact here is difficult. Traders said it’s impossible to calculate losses from absent opportunities.
A look at the exchanges’ financial records shows a one-day closure costs them several million dollars. At the CBOE, the nation’s busiest options exchange, daily volume has averaged 4 million contracts, with the exchange getting about 31.25 cents for each one. That works out to almost $1.26 million in foregone business for the CBOE.
At the CME markets, equity-based trading accounts for an average 2.4 million contracts a day, with the exchanges collecting about 68.5 cents for each one. The calculated daily loss comes to $1.64 million but extends beyond that, as the slower activity was registered in all its markets.
Around Chicago’s financial hub on La Salle Street, some traders criticized the exchanges for shutting down entirely. They said computerized trading should have proceeded to serve investors and firms worldwide.
“In an age of electronic markets, it’s a fair question to ask if they should have closed completely,” said Christopher Hehmeyer, chief executive officer of HTG Capital Partners, a firm that trades for its own accounts and uses high-frequency computer programs. “These markets are supposed to be virtual.”
A spokeswoman for Getco LLC, among the largest high-frequency trading firms in Chicago, also voiced displeasure with the closure. “Our sense is that it’s more important for financial markets to be open,” she said.
The closures eliminated business opportunities for trading firms, which still had to pay overhead. But the Chicagoans were speaking from a city that was dry and no worse than a blustery Monday.
NYSE spokesman Robert Rendine, watching the storm pelt his eighth-floor window in Manhattan, reacted angrily to the comments out of Chicago.
“That’s the kind of criticism you get from people sitting in an armchair 800 miles away,” he said.
Rendine said the exchange made its decision in consultation with regulators and other markets, including those in Chicago, during several conference calls. It was based not only on public safety, but on people’s inability to get to work.
Other market pros in Chicago agreed with the closure and said its financial impact here, while large, will be fleeting.
Leo Melamed, chairman emeritus of CME Group, said there’s “always a debate” among exchanges about a shutdown. In the end, he said, “The decision is made on what we feel is best for the markets as a whole.”
The CME kept nighttime computer trading in stock indexes open Sunday and Monday nights, as is its custom when stock markets are closed but functioning normally.
The hurricane also is having another impact on the futures business. An annual convention sponsored by the Futures Industry Association, which represents large trading firms, is scheduled for Wednesday and Thursday at the Hilton Chicago hotel.
The association was telling people Monday the convention is still on, but with flight cancellations everywhere along the eastern seaboard, many people will be unable to get here or will be dealing with urgent worries at home.