The Smart Confirm Trading Floor Renaissance is Bringing New Life to the CME Trading Floor

Why has volume significantly increased in the open outcry trading pits at the CME Group in recent months compared to before the pits were closed for the Covid-19 breakout? Open outcry volume stood under 50% of total volume before Covid-19 closed the pits, but in the last three months, volume has been about 64%. A company called Smart Confirm might have something to do with it, the leaders of the firm say.

John Lothian News interviewed the founders of Smart Confirm and this story is based on the podcast we recorded. The podcast is being published separately.

The Smart Confirm software brings greater speed and efficiency to pre and post-trade processing of complex open outcry trades executed on the trading floor. Before the pandemic closed the markets, Smart Confirm was only used by one firm at the CME Group. That firm was MarkIV, the brokerage firm that developed the software as a premium service for its trading floor brokerage execution services business, but then pivoted after the floors reopened after the pandemic to offer the service to any brokerage group that wanted to use it.

MarkIV floor broker Mark LeeMaster said half the SOFR option pit broker groups, some 10 broker groups, are now using Smart Confirm. Brokers using Smart Confirm have seen their businesses grow 300 to 400%, LeeMaster said. The community as a whole is seeing Smart Confirm as a benefit, he said. There are 25 separate CME clearing firms that are now connected to Smart Confirm. 

LeeMaster hired Mike Ashcraft to build a system to improve the efficiency of the trading floor experience after floor brokers assumed new responsibilities to report fills by email and provide end of the month reports. The repetitive nature of having to retype the same information over again and again prompted LeeMaster to seek Ashcraft's help to find a way to reduce this redundant and inefficient activity. 

Ashcraft built a prototype tool in Excel that allowed the trade information to only have to be entered once. This tool addressed three issues: key punch, manual punch and confirmations, the biggest inefficiencies LeeMaster was dealing with. 

However, the prototype was still printing trading cards to be key punched by FCMs' back-offices. LeeMaster said the biggest breakthrough came when Smart Confirm was able to submit trading confirmation data directly to the exchange, eliminating the need for the FCM keypunch. The data flowed directly to the FCMs to be allocated into their middle and back office software. 

The Excel product was limited, however, and data flowed only one way, so LeeMaster and Ashcraft had Smart Confirm take the difficult step of becoming an outside vendor to the CME Group. 

The first market problem Smart Confirm sought to solve was one that small S&P 500 pit traders were facing when trading the end of the month contract roll using the open outcry trading pit versus the Globex market. The Globex trades would hit their trading accounts immediately, but the open outcry trades would take hours to be processed. This would leave their accounts seemingly one-sided, long or short, as opposed to spread. Without the proper capital to hold these one-sided positions, they would have to sit out trading until their open outcry trades were processed and their accounts were properly margined again. 

These traders needed a solution to clear their open outcry trades faster and Smart Confirm offered them a solution. Clients saw benefits of Smart Confirm from the start, LeeMaster said.

Next, Smart Confirm addressed Eurodollar options, and MarkIV funded the development of the product by the growth of its business, which grew 400% while using the tool, which was now cloud-based. MarkIV offered Smart Confirm to clients as a premium service starting in 2015 and could execute spreads on their electronic book with 50 to 60 legs to the trades.

LeeMaster told me the story of a client who gave him and another broker an order with sixty-two legs to the trade just five minutes before the close of trading at 2:00 pm. Using Smart Confirm, LeeMaster and his team were able to execute and report the trade within 10 minutes, while the other broker group, without the aid of Smart Confirm, worked until 7 p.m to report and process the trade for the client. 

LeeMaster said the Eurodollar option pit at the CME, now the SOFR option pit, has the best brokers in Chicago in it, but that Smart Confirm set MarkIV apart. LeeMaster said that when the CME Group set a new volume record in March in SOFR products, MarkIV traded a record 10 million contracts during the month, with a team of nine and one floater. The previous record was seven million contracts in a month, executed by a much larger team.

Smart Confirm has processed over 600 million contracts so far and in March did 24.3 million contracts across all the brokers who use the product. 

Of course, there are many reasons why SOFR options are growing in popularity and have grown to an average daily volume in futures and options of 5.6 million contracts, which is about 30% above the highest annual ADV ever recorded for Eurodollar futures and options, the CME says. Open interest has reached 56 million contracts. 

The CME says, "The adoption of SOFR represents a strong success story for the industry and global market participants."