What happened during the revolution? The last two decades saw a huge sea change in the structure and workings of the capital markets, and the people pounded by the waves of change were the traders. Looking back, it’s easy to think that the electronic trading revolution was slow and steady – and in some cases it was – but the trading floor and the role of the traders has changed so dramatically that it will never go back to what trading veterans call “the good old days.”
Traders recently spoke with a former trader who worked at a number of different positions on the buyside. Starting out as a floor trader on an exchange, then working for a large asset manager and finally landing with a prop shop, Marc Orenstein had a ringside seat when the world of trading changed.
Traders: I’m interested in trading back in the 1990s and how it compares to today. As a trader, you saw the introduction of automated trading. What was it like?
Marc Orenstein: I began in the early 1990s, and Nasdaq was obviously on the screen at that point. From what I heard, it used to be phone-only; you had to call to get a trade done. So that was becoming automated in the early 1990s to around 1995.
Then there was the transition from phone orders to the floor to DOT orders and then SuperDOT — program trading. This began in the late 1980s, I think, but DOT and SuperDOT became widely used in the mid-’90s. The old-timers didn’t even know how to really use “the machine,” as they called it. That was the beginning of computerization of the markets.
Traders: When did you see the first computers in your trading career?
Orenstein: By 1999 to 2000, you started to see more and more computers and algorithms, and you also saw the spreads tighten at that time. I think it was in 1999 or 2000 when the spreads tightened significantly on the New York Stock Exchange floor and eventually Nasdaq. [Both] were unwilling [to do so] because spreads are great for everyone; everyone makes more money if you’re a dealer. But the prevalence of ECNs [electronic communication networks] in the tech market at that time forced the spreads to tighten. It was only Instinet, let’s say, in the mid-1990s, and then they just started adding ECN exchanges throughout the years. ARCA became big, and then we saw the debut of BATS.
Traders: How did they change the trading landscape?
Orenstein: Once the markets were visible — and that’s key — and once it could be executed, it’s also key because Instinet was pretty hidden. The dealers saw the inside market in Instinet where the institutions were outsiders; the retail investor didn’t see the inner market that happened on Instinet. That’s where it was an anonymous market, similar to today, where the dealers would offload their shares.
Traders: Back in 2012, brokers were going belly-up; they just couldn’t keep up with everything that was happening.
Orenstein: There was a broker, a sales trader, so to speak, on the sellside who primarily offered execution services to the buyside. There was no need for that person anymore. That was true even in 2006 and 2007 because with the amount of liquid ECNs and the spreads that were so tight, people realized, “Why am I paying a human?” First of all, it’s not as fast, but we knew that even when DOT started. I could hit a bid in two seconds or one second, however long it took to transmit to the floor.
Traders: An entire whole second. Now it’s sub-seconds.
Orenstein: Right, now it’s milliseconds. So, the old-timer block traders were not very good with any computer; even the DOT machine was rudimentary, like a dumb terminal. But they didn’t like to use it because they were so used to picking up the phone and calling their floor broker to run to the pit. Some people were aware enough, saying, “Don’t call the floor, Marc.” I was actually the DOT person, one of the two DOT people on the desk, and they knew they can get 10,000 shares in a second. Why wait two minutes or five minutes to get the verbal approval?
We started in the slow, gradual transformation from humans to computers as, let’s say, market-makers. Then, slowly but surely, these ECNs started competing against each other in hundredths of pennies. They still do that, actually. Even a retail investor goes in the market and says buy market, and will get a price to three decimal places.
Traders: Where were you in the early 1990s?
Orenstein: Besides college internships, I really started my career at Bear Stearns in convertible bonds. Then J.P. Morgan, in 1993, was beginning J.P. Morgan Securities. With the repeal of Glass-Steagall, it was able to open as a broker-dealer. It seemed like an exciting place to be and I thought there was more upside for me there, so I went to J.P. Morgan and within six to nine months I was on the listed equity block desk.
Traders: You worked in the trading pits?
Orenstein: I have an M.B.A., but what always appealed to me was the floor trader, the guy who goes into the pits and rules the bond market, oil market and gold market. I thought it was the most interesting and challenging aspect, and that’s debatable, of finance at that time. I had no real interest in doing 100-hour weeks as an investment banker; I thought [being a floor trader] would be the most exciting and lucrative type of work.
End of Part 1.
