Starting Jan. 9, 2015, Rory OKane will serve as chairman of the Security Traders Association. OKane serves as managing director, U.S. listed options for KCG. Traders interviewed the future chairman for his views on the up-and coming regional STA hot spots, the new rules the industry may see concerning HFT and dark pools, and what issues are vexing todays traders.
Traders: Youre entering your vice chairmanship of the Security Traders Association after a very interesting year for the capital markets. What do you think 2015 will be like for STA and the industry?
Rory OKane: With Mary Jo Whites speech on June 5, shes laid out her plan and the things that she wants the SEC to focus on. I think this will go a long way in helping us as an organization to address their concerns and where to focus our energies. The number-one concern – depending on whatever product, business, ATS, etc. – seems to be transparency and complexity.
Any new rules that shine a light on those instruments and are enlightening will be good. We still have the best and most efficient markets in the world, and we dont want to do any harm in that regard. But a little more transparency – can we make the markets better? Sure. The SEC has given us a road map on what to focus on.
Traders: Were you surprised when Mary Jo White in her SEC speech mentioned algorithms and that she wanted to look at their impact on the market?
OKane: Yes and no. I think its back to the unknown and people not understanding, or having inaccurate information or ill-advised ideas on how things work. We have the most technologically efficient, interconnected marketplace in the world. Algorithms make that possible because of the computerization of many things that were once done manually years ago. When I started in the business in 1983, I was on the floor, runners ran a ticket out to the crowd and out to the broker. You go to that floor today, there are only two pits: the VIX and the SPX. Hundreds of jobs are gone because of the automation, and a lot of these servers with algorithms are performing many of things that were once handled by humans.
Traders: Are dark pools going to go away? Will we see a shrinking of the vast number of dark pools that are out there?
OKane: No, theyre not going to go away. Could there be a little more light shone on them? Yes. I think with FINRAs ATS disclosure and a little more thats probably going to be coming down the pike, that will be good. People should know what the rule sets are in these pools. They are sort of clubs, members-only type of things, and they should be purported and advertised truthfully and transparently. If theres a problem with actors in those who are being misrepresented, itll be beneficial to shine a light on those elements.
Traders: Are we going to see a speed limit for HFT from Congress or regulators?
OKane: With Congress deadlocked, I doubt theyre going to get anything substantially through, at least this year. Theres a lot of things going on next year, but no, I dont see any threats of new rules from Congress.
From the regulatory side, I think we will see more disclosure and transparency in how these algorithms and models work, and probably some more oversight. We definitely want to be involved in those discussions. High-frequency trading is not going anywhere. Its here to stay. These systems make the markets incredibly efficient, but if someones doing something illegal, it must be stopped and they need to be punished. There needs to be consequences.
Traders: What are you hearing from your counterparties about the industry? Are they confident? Do they think that some of the troubles and criticisms were brought upon themselves in some part? Whats the mood from the men and women on the trading floor?
OKane: Well, theres a lot fewer of us. I think the concern is that the business has matured. Its highly technologically efficient, and I always say to my coworkers and people who come up through the ranks, You dont want to be competing with the server. What do you do if they computerize it, make an algorithm, write a program that does what you do and put it on a server? Theyre going to buy two servers and youre going to go. You must constantly add value.
Still, in these technologically advanced and interconnected markets, theres still a human being on the other side of that connection and computer with whom you have a relationship.
And you both have an understanding of the business thats mutually beneficial. You depend on and trust each other, and you do right.
Its the march of automation, progress and change, and thats threatening and disconcerting. But I see an evolution, though. Im from Chicago. Ive been a STAC [Security Traders Association of Chicago] member since 1996. When I joined, I was a newbie on the cusp of a lot of changes on the stock side of the business. I was 15 years in the options business, and we were starting a stock trading firm to do the hedging for option traders.
I joined STAC for the networking opportunities and for the education to get involved on the equity side and learn how things were done. The businesses represented in STAC have changed. In the late 90s, more than half the members were from the Chicago Stock Exchange and broker-dealer, over-the-counter shops in and around the Chicago area. And now if you look at it, Id say almost half, maybe 40 percent, are from the derivatives space. Theyre from the CBOE. There are futures people. A lot of these people are on the IT side of the business or the technology services sector, and more from compliance. A woman who headed my desk back when I was with TD Securities works in compliance and is now earning her law degree. When I look at these people now, their name tags and where they work has changed, and some of their roles in the business have changed as well.
Traders: A recent news story in Traders reported that trading floors are shrinking. They were once jam-packed, but back-office support and IT people are sitting on the trading floor these days. How does one get a start in the business now?
OKane: When I entered the business out of college in 1983, I started as a runner making about $675 a month in Chicago on the CBOE. I had to work another job for two years to make ends meet, but thats how you started. A lot of people did that, but today you cant start as a runner on a floor. Those jobs arent there. A lot of the things that we took for granted 20, 30 years ago have been automated. Its now a server, computer and a program on somebodys desktop. The business has evolved; it values more technical and quantitative backgrounds and experience.
Traders: Do you travel to the regional offices of the Security Traders Association?
OKane: I do. I generally go to where I have clients. I attended the meeting of the Minnesota Security Dealers a week ago, and then the previous month, St. Louis was a huge event. We had the opportunity to go to dinner with [SEC] Commissioner Michael Piwowar while we were there. Its good to see the different affiliates up close. Each one has its own kind of flavor as progress moves on and everyones specializing. I appreciate and value the time that I get to spend with some of these affiliates.
Traders: Whats the next up-and-coming region in the STA? You said that St. Louis was very big.
OKane: Its the retail trading community there, yes. They have Scottrade, Wells Fargo, Edward Jones and Stifel, to name a few based in St. Louis. Its kind of the ground zero for the retail trading community outside of Omaha and Chicago. And working with these firms and others, STA has started the Retail Advisory Committee, which is only a few years old, and it focuses on electronic broker-dealers that are responsible for and represent the self-directed retail community and investment advisory community.
In the last five years, you can see the metamorphosis. There was an article in Forbes magazine about a year ago that reported that nearly all of the job growth in the financial services industry is focused in the St. Louis area versus New York or Chicago. Not in the areas of the country that you would normally think are the center of the financial universe.
As for Chicago, Id say they are in a close second place because theyve become more focused on derivatives and the growth has emanated from those firms. During the STAC Mid-WinterMeeting now, they generally spend a whole day on derivatives, when 20 years ago that wasnt the case.
Traders: What are the affiliates telling you?
OKane: They have their own concerns. St. Louis would have concerns over anything that impacts the electronic retail community, such as any oversight of routing practices. In Chicago the concerns are taxes, specifically 60-40 tax treatment of options. Each affiliate has its own concerns and its own threats. These concerns rise up to the executives locally and the STA national, and they come to a consensus. This does not always happen quickly, because we have many different practitioners on different sides of the aisles.
Traders: And regulators?
OKane: I believe the regulators have been a lot more open and receptive to our input. They want help from us. They dont want to hurt these markets. They do not want to impose a rule thats going to have some kind of unintended consequence. They are aware we have the best capital market structure in the world, but it is complicated.
Traders: Look no further than Reg NMS, right?
OKane: Right. Its hard to say there are a lot of things wrong with our markets. Trading has become incredibly efficient by every kind of empirical standard: spreads, the cost of executions, commissions and so on. Everything is better, faster, cheaper than it was five, six, seven years ago. Could it be made better? Absolutely. There are some things that could be improved, so lets review. Lets see whether there are some issues and we have some concerns, and lets look them over and see if we can make things a little better than they are but be careful that we dont damage what we have.
Traders: Is finding and keeping new talent a challenge for this industry? In the past, people wanted to work on Wall Street. Now it seems like they want to work for Google or
Facebook or start the next Snapchat.
OKane: When I was on the CBOE after graduating from college, options were still a relatively new product. Chicago was the place to be, and thats how you got your job. It was by word ofmouth from somebody on the floor. You didnt need any kind of advanced degree – you just learned the ropes from runner to phone clerk to trader to broker and such, and you advanced that way.
Nowadays, things are more specialized. You have to have a Ph.D. in physics or an applied mathematics degree or a J.D. degree, and be a lawyer and ex-SEC staffer. Its tougher to get started.
Its kind of like a barbell versus the bell curve. You either need an incredibly advanced degree in sciences to work in that technical and computerized environment, or at the other end a legal degree to work in the regulatory, legal or compliance areas. Not as much opportunities in between without experience.
Traders: Do you think investment firms will start rehiring again or start working on ambitious IT projects as they did in the past?
OKane: Investment firms are sitting on a lot of money, and I think the problem is uncertainty and the rule sets emanating from the regulators. Were four years into Dodd-Frank, and half the rules are still yet to be completed. Everyones sitting on their hands because they dont want to make a kind of career-ending investment decision amidst the rule changes. We just need more clarity and some certainty out of Washington. This would go a long way to relieving a lot of that anxiety I think that some people believe the retail investor has.
Traders: Whats it going to look like in five years? Is it just going to be a wall of servers? Will there be a Wall Street and a stock exchange with traders on the floor?
OKane: Progress is going to continue to march on. As participants in the industry, we must continue to stay relevant and educate ourselves and our clients and stay on top of the issues and, basically, add value to that ultimate customer and client that we deal with. We have to interact on a daily basis with people and add value and simplify their workflows.
I think there are a lot of people on both sides, the sellside and the buyside, who are harried by the velocity of the changes.
Theyve got a lot of things going on. They have extra responsibilities, especially with the onslaught of the regulatory and governmental oversight. Anything that makes their lives easier and their workflows more productive, they are going to value. Youre going to be a partner and theyre going to trust you, and thats how you stay in the game.
