Technology V. Man... Again

Ray over at Hybridtalk is back from a nice long vacation and he has posted a very interesting article from the USA Today on how technology is affecting the trading floor.

Interesting because I had no idea this "technology thing" was affecting the trading floor at all.

This is a new story for me... ah, but it's the USA Today, the paper of the fat pasty people. Surely they have a different take!

Nope, the story is the same. Human traders are making less money now. The machines are chopping large orders into thousands of tiny little ones (hence the 1x1 spreads littering the market?) and the humans don't know what the fuck to do.

They're leaving the business or hoping something will change. Some are even spending more time blogging for free rather than trade. In a way, it's hilarious. But remember, the best comedy often straddles that thin line that exists between what's funny and what's tragic... like this video clip.

Anyway, here's a quote from the article:

"Specialists' age-old money-making model — part commission, part trading profits — is basically broken. Commissions, a big part of their pay in the past, have been squeezed out of the equation. To stay alive today, specialists must make money trading just like everyone else. (For example, if a specialist buys 5,000 shares of stock XYZ at $25.50 with his own cash and the stock goes to $25.60 and he sells his 5,000 shares, he makes $500.) The problem is that, because of technology, they are participating in fewer trades. That makes it harder to make up for losses incurred when they're forced to step in as a buyer of last resort. A year or two ago, specialists got involved in 12% to 15% of floor trades. Today, it's 8% to 9%. As an incentive for specialists to keep playing that role, the NYSE now pays them a monthly stipend for providing liquidity to the market.

The sagging fortunes of floor-based specialist firms is not due only to technology. The downfall has been speeded up by the profit-eating switch to penny trading spreads, a public relations fiasco following allegations of improper trading in 2003, and the ouster that same year of former NYSE CEO, and floor backer, Dick Grasso, amid a furor about his sizable pay package.

In their heyday, specialists were the centerpiece of the open-outcry auction market. The job entails making a market in a stock, fleshing out the best price, and ensuring that shares trade orderly and fairly. It also means stepping in as a buyer or seller of last resort to avoid sharp, scary price swings. The value of specialists was reinforced last month when erroneous orders for three stocks were flagged by floor pros, resulting in a trading halt that saved investors a lot of money."