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September 28, 2006

For the Love of Trading: Traders have a lot more choices today

By Brian Pears

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  • For the Love of Trading: Traders have a lot more choices today

A few months back I wrote a rather gloomy piece about the nature of the trading industry today. I bemoaned the passing of The Way Things Used To Be and hoped for a return of a more people-oriented trading model. As a follow-up, I'd like to offer a collection of stories about how I used to walk uphill both to and from school in snowdrifts the size of skyscrapers.

Rather than yearn for a reality that no longer exists, I thought instead I'd follow up with a piece on what's great about The Way Things Are in trading today.

View From The Cockpit

Not sure what I mean by that? If you're not a trader, poke your head into a trading room. What do you see? Enough monitors to make the pilot of a 747 jealous, and each one filled to the edges with blinking, pinging trading applications.

Too many applications, sure. But unless you'd rather have a CLOB, you'll probably have to live with the monitor farm on the desk now.

I like the cockpit because it's indicative of the ever-growing skill set required to trade equities. Many have feared that, with the rise of electronic trading, buyside traders weren't as necessary in implementing trading decisions. There have even been some who have predicted a day when portfolio managers would execute their own trades. I think the opposite has happened.

A discussion of buyside trading usually involves the tools of trading. Indeed, those tools have allowed a certain percentage of trades to be offloaded via electronic execution means.

But any discussion of trading should revolve around feel, not tools. And, if anything, I think traders need more feel than ever to succeed. I defy anyone to take a seat at the controls and learn quickly how to find cheap liquidity. Trading may not be rocket science, but nor is it grade-school arithmetic.

Speaking of Arithmetic...

Many feared that the rise of algorithmic trading would be the catalyst for eliminating those pesky equity traders once and for all. After all, if a machine could discern the sorts of price trends traders have always been paid to discern, why would one need a trader?

But what we've found out over the past few years is that while algos can improve efficiency in some areas, they also can create some price inefficiencies. They leave patterns that are sometimes as obvious as the ones they identify. Also, despite their growing sophistication, they can only discover liquidity open to them. If an algo doesn't interact with a particular liquidity pool, a trader is subject to costs associated with unexecuted trades. And, as any trader who has been yelled at by an unhappy portfolio manager knows, those costs can be steep.

The Empire Strikes Back