Twilight of the Traders

Twilight of the Traders

Is trading going away?

Photo: Phaedra Wilkinson. Source: Morguefile

After decades of transmitting trades by phone, J.P. Morgan, Citibank, Morgan Stanley and other major trading firms may be getting close to cutting the cord. Some primary dealers are exploring moving their trading systems to an internet-based cloud computing service. The advantages are clear: better security, greater flexibility, and lower costs.

For decades Wall Street relied on telephone lines, hoot-and-holler boxes, and local servers to transfer trading data and record phone conversations. Under securities law, a phone call is a binding contract. It was efficient to gather all the traders together on a single floor. Some of these work-areas are huge: tens of thousands of square feet, hundreds or sale-people and traders all staring at computer screens and talking on the phone. The waste-heat from these facilities could warm the Hudson River on a cold February morning.

Source: UBS

Of course when you gather a bunch of highly pressured risk-takers together in an overcrowded football field you get some side-effects: a raucous, rowdy culture that confuses skill with luck and feels entitled to act out. This has created the Wall Street trading culture of legend: sexist, boorish behavior and an Old Boys’ Club mentality.

But much of that may over soon. Outsourcing the computer networking and telephony means traders can make markets from anywhere—at home, on planes, even from a speedboat. Of course, it’s only a small step from having human traders to using computer-based algorithms. The market-making banks will save billions in costs, and the algos don’t make rude remarks to their female colleagues.

To this I say, good riddance. The testosterone-fueled trading culture contributed significantly to the Financial Crisis that we’re still recovering from. And rogue traders that make the news every few years always seem to be men—Kweku Adoboli, Jerome Kerviel, Nick Leeson. Markets work better when rational finance prevails, and adrenaline and reflection don’t mix.

There may be places for an inspired “Band of Brothers” that can go on to accomplish great things. But a billion-dollar trading floor isn’t one of them.

Douglas R. Tengdin, CFA

Chief Investment Officer

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