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January 1, 1999

The Electronic Trader

By Russell Glisker

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Trading is on the verge of a quantum leap forward, and it is being spurred by advances in technology. Exaggeration? Hyperbole? Perhaps.

But there is no doubt about the important changes being brought about by technology in the pre-trade, execution and settlement stages of the trade cycle. Let me explain with some examples.

For one, consider the electronic transmission of indications of interest, and the ability of the buyside to electronically respond in turn to those indications. For another, take the proliferation of new execution mechanisms directly accessible to the buyside, mechanisms that include electronic communications networks and other alternative trading systems (ATSs), such as OptiMark, Instinet and POSIT.

The push towards straight-through processing, moreover, further demonstrates the role played by technology in the trade cycle.

At the moment, trading-desk technology is aimed primarily at generating efficiencies rather than transforming the traditional trading process. If these ATSs are as successful as their promoters expect, technology will become instrumental in the trading process in ways not seen before. Technology will become a more significant factor in the ability of both buy-side and sell-side firms to access markets and to compete.

How to Prepare

So how can firms prepare for change if, in fact, these new vehicles fulfill the hopes of their promoters? First, consider that there has always been tension between the trading community and technologists a tension that can be traced directly to the separate worldviews of the two groups.

Trading is critically dependent on instant access to rapidly-changing information; transactions have high dollar value, placing a premium on accuracy and timeliness in recording trade details. Speed is of the essence for capturing liquidity in today's fast-moving markets.

Technologists see in technology the power to speed the dissemination of information and to enhance the ability to act on it. In the view of technologists, trading is precisely the sort of activity that can benefit from these powers. In their view, technology provides exactly the tools traders need to cope with the information deluge.

Traders, on the other hand, see the world quite differently. They place a premium on person-to-person contacts and on personal relationships. For traders, the extra seconds it takes to execute a trade using an unfamiliar technology equates to lost opportunities for the firm and its clients. The consequences of missing a market extend far beyond the dollar-cost involved.

Some traders are concerned that technology will diminish their importance or even eliminate the need for their role in the market. In the trader's view, information is essential, but cannot in itself assure successful trading. Personal relationships and professional skills are the precursors to excellent executions.

The Challenge

Given this reality, firms must do two things to meet the challenges presented by new market structures that require adept use of new technologies. First, they must find a way to bridge the cultural divide between traders and technologists.

Earlier this year, a survey was conducted among the traders and chief information officers (CIOs) who attended the Financial Technology Forum.

In response to the question of the biggest problem traders have with information-technology departments, 31 percent of the traders said that the departments did not understand the trading process. (It was the most frequent response given by traders.) Among the CIOs, however, only 18 percent held this view.