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September 30, 2004

The Trading Rust Belt

By John A. Byrne

There is a striking parallel in the U.S. - really, it's amazing - between the growth in algorithmic trading and the national hunger for investment returns. It is the concern that opportunities for well-compensated professional labor are collapsing because of technology and outsourcing. The massive reduction in traditional OTC sellside institutional trading jobs was a devastating blow. Hundreds of professionals on the listed side will never go back to their former jobs. On the investment side, the salad days of the stock market are over. Unless there is a return of a strong IPO business - the locomotive of our recent stock market boom - it is unlikely that the market will soon pick up steam. As of this writing, the market is having a lousy year. The Dow recently failed to hold 10,000. Both the S&P and the Nasdaq were down. The latter had lost some seven percent for the year by late September. All of this occurs as the digital revolution has unleashed huge productivity gains in trading markets. That's while it has brought about more mobility in the four factors of production: land, labor, capital and enterprise. Art Samberg, the hedgie who runs Pequot Partners, put it in rather blunt terms in the Welling Column. "The growth in the world is being created by labor arbitrage between the West and the East." Some of these same technological currents had their origins in technology labs in the American heartland. These currents later manifested themselves in networked computing across the trading world.

This might be history repeating itself. The industrial revolution in the 19th century, for instance, threw many people out of work but then created more and often better-paid jobs. The sequence of events was often brutal and inhuman. It would, of course, be foolish to take all our clues from history. That's because some economic and political events may be inexplicable in nature, beyond the scope of human comprehension. Still, in the current phase of our technological expansion, two phenomena stand shoulder to shoulder: The growth in hedge fund investments and the changing profile of the trader. The fortunes of both will be tied in good measure to algorithmic trading models and the arbitrage opportunities worldwide. Is this a time for traders to start polishing up their resumes? Michael LaBranche, CEO of NYSE specialist, LaBranche & Company, says the introduction of a hybrid floor on the Big Board will lead to some job losses at the exchange. [See Cover Story by Gregory Bresiger.] But then there is this from Gavin Little-Gill, in a report for the TowerGroup: "The need for traders' relationships and negotiating skills is diminishing while the need for traders with mathematical and programming skills to interface with an increasingly electronic and quantitative trading environment is increasing." Some traditionalists might take that as a mixed blessing. Indeed, predicting the outcome of this extraordinary intersection of technology and commerce can be

John A. Byrne