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
I have complained long and loud that the regulatory changes put forth in the late 1990s-decimalization most prominent among them-favored retail investors at the expense of institutions. That's all well and good, given that individuals don't have the market access and protections available to institutions. My main complaint was that, when politicians lauded their good work in the name of Ma and Pa Investor, they never thought about trying to do right by the nearly 100 million individual investors represented by the mutual fund industry.
But institutions have fought back. The growing success of so-called dark pools of liquidity has further developed the behind-the-scenes institutional market. A number of people who believe that Reg NMS, crafted to increase the display and accessibility of the best prices available on any exchange, is more likely to shade institutional trading behavior even more dark than before. Big buyside firms have always sought refuge from displayed prices in places like the Third Market and in ECN reserve books. Dark pools in all their iterations take this trend one step further.
One of the most amazing contrasts between trading today and trading last decade is how quiet things have become. I don't mean quiet in a figurative sense-traders are probably busier than they've ever been. I mean literally quiet, save for the clicking of keys on a keyboard.
Traders don't talk on the phone nearly as often as before. And I, for one, am thrilled. I don't have anything against the telephone per se, but what I never got used to was the sound of phones ringing constantly. Maybe it's just me. But back when phones were our primary means of communication, I'd go home at the end of the workday and refuse to pick up the phone. Nine hours of constant ringing each day will wear anyone down.
Now, trading rooms are much quieter. Traders don't go home with telephonic anxiety anymore. The phone is generally reserved for emergencies or for angry situations when THE CAPS LOCK KEY JUST WON'T DO! Everything else is on IM.
The Rorschach Test
This last Thing I Like is really a combination of the rest. It's the melding of all the different ways to trade that have arisen over the last few years. And it's the fact that traders have unprecedented choice and control over their orders. It's like a Rorschach inkblot-different traders can look at the same industry and see what they want to see in it.
They can see an industry the way they want, and one could not say that about our business even 10 years ago. This flexibility is the best thing about our industry. It makes the confusion around all the changes taking place bearable.
If you don't like the NYSE's modified auction, go electronic or go dark. If you can't stand the lack of information thought to be part of monitor-based trading, you can pay a broker to stand in a crowd for you. You can ask a market maker to position stock; some still do.
Granted, many of the old ways to trade are disappearing, and people-centric choices are growing scarcer. But they still exist. And, to the extent that people want them, they are likely to persist in some form. And that ability to have a choice in how to do one's job, to work in a field that encourages competition and innovation-that's something that even a Gloomy Gus like me can appreciate.
Brian Pears, a senior vice president for NYFIX, runs the firm's client coverage desk. The views expressed here are his own and not necessarily those of Traders Magazine.