Twofish's Blog

September 23, 2007

The Exchange is dead. Long live the Exchange

Filed under: china, economics — twofish @ 8:19 am

http://www.nytimes.com/2007/09/23/nyregion/23exchange.html

Here is a good article on the end of physical trading on the NYSE.  What is the case is that physical trading has become much less important, and the new trading floors are vast virtual expanses that now exist in cyberspace.  People in the financial industry will refer to the “street” and the “street” is a place in cyberspace where you can buy and sell stocks and bonds, 24 hours a day.  Instead of going to Wall Street to do a trade, you log onto your machine and access one of several dozen electronic exchanges.

A few comments:

The opportunity to have people rather than computers make decisions on a customer’s trade distinguishes the exchange from its all-electronic competitors like the Nasdaq stock market, they said.

The issue here is that people *do* make decisions about customer’s trades.  People who get hired by the customers to program the computers that make the trades.  The situation with NYSE is that it is not man versus machine but rather man versus man + machine.  The way that the system currently works is that the machine handles all of the millisecond level stuff according to rules that a human being sets up.

Two years ago, the city agreed to provide about $650 million in incentives to Goldman Sachs to build its new headquarters near ground zero instead of moving to Midtown. Goldman, which has about 30,000 employees, is thriving now, as the exchange is shedding jobs and shrinking its presence in the city

One of the major causes of the shift to electronic trading has been the 2001 World Trade Center attacks.  WTC showed the dangers of having business operations in one central location, and the trend has been to distribute people and technology at multiple sites throughout the world so that a failure in one site doesn’t critically end business operations.

They understand, Ms. Wylde said, that the key components of exchanges in the 21st century are not people, but computers and technology. “The shift is happening; it’s inevitable, and it’s happening quickly,” she said.

This is wrong.  The key components of exchanges and financial transactions in the 21st century are people. Without good people, the computers and technology would instantly fall apart.  Computers don’t fix and don’t program themselves, and you need lots and lots of people who are constantly looking after the machines to make sure that they do their thing.

The focus on people is actually going to help NYC a lot.  In order to run a trading operation, you need people with a lot of different skills.  People with business skills, people with computer skills, and people with mathematical modelling skills.  The interesting thing about these skills is how specific some of them are.  When you need a problem to be solved quickly, it doesn’t help much to have a people who is a general expert in computer programming, but rather you need to get in touch with the person who is the expert of line 1344 of the file ProcessOrder.cpp.  Similarly you also need to get in touch with the person who is the expert on how vanilla options on Microsoft stock trade, and the person who knows the most recent tweak on the Heston model that is in the system.

You also need to have these people physically in the same room.  It’s often amazing how much productivity decreases when you have people fifty feet from each other rather than five feet from each other.  (The other curious thing is once that someone is on another floor, they might as well be in another city.  So once you move someone out of a room, you can move them to another continent without much loss in productivity.)  The fact that integrated teams end up being both fast and productive, means that it is easier to move people into the NYC than to distribute people away from it.

So the urban planning issue here is Midtown versus Downtown, or possibly Jersey City versus NYC.  It’s not NYC versus somewhere else.

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