The uncertain fate of live trading
September 26, 2007
I began this post as a comment to Yuval’s comment on clearing (a concept that I still find very abstract). And I agree with him… an additional layer of technical complexity creates further scope for unexpected trouble. (Wasn’t it a certain Yuval Millo who coined the concept of “second order risks“?). So… right on!
But I’d like to stay on the main topic of the New York Times article. The Times writes of the New York Stock Exchange:
The buzz emanating from its famous trading floor is dying down as computerized trading has rapidly reduced the need for face-to-face transactions. In the next several weeks, the exchange plans to shut two trading rooms that were added decades ago, when its status as the place to buy and sell stocks was unchallenged.
When the latest retreat is complete, the exchange floor will be half the size it was at its peak. The “crowd” — the brokers and clerks on the floor — has dwindled to about 1,700 from a high of more than 3,000. Before the exchange became a public company in 2005, its members controlled 1,366 seats, or licenses to trade. Now, about 800 brokers pay the annual $50,000 fee for a license.
I visited the NYSE three years ago. And it is shocking that two rooms are already closing — so quickly. But at the time of my visit, an interesting sight suggested that the Exchange’s trajectory was not sustainable: tucked in a corner at the reception, there was a cloak room for shoes. That’s right: for shoes. Almost every floor trader entered in the morning, checked his leather shoes, put on rubber soles shoes, and went on the floor. The reason? That, with so many rooms and so much walking during the day, their backs were hurting. On the day that I visited, some floor brokers were experimenting with the skateboarding shoes that they saw their kids use.
Since I have not visited the Exchange again in three years, I have to confess that I am not directly familiar with the details of this change. But if the experience of the commodities exchange (NYMEX), which we visited last August, is anything to go by… it suggests that several things could happen at this point.
As Yuval wrote, what we saw at the NYMEX this past month was a remarkable a technical hybridity. Rather than the demise of a technology (in this case, pit trading), it resembled the early stages of a new technological emergence! Here’s my take on what we saw: following the gradual introduction of computers on the floor, some brokers have been laid off. Others have quit — gone to work at places like Home Depot. Others still buy and sell in the traditional way, making signs with their hands. Yet others use a terrific technology, a tablet computer that they take on the floor. Others trade from home. And other have bunched together in rented spaces in New Jersey, and trade from there.
Technological convergence? The end of live trading? It doesn’t really look like it. As I pointed in a comment, it looks more like a situation where different technological trajectories may emerge. In contexts like this, of course, is where ideas become most important — for they could push events in one direction or the other. And so the situation begs the question — what do academics have to say about this move to computer trading? What ideas exist out there? What practices? What proposals?