The Future of Trading
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2015: The Always On Desk
November 4, 2010
There are ways to justify human wisdom, even in the era of the automated trading desk. One is the concept of “At-Trade Transactional Cost Analysis.” This calculates not just all associated costs of a transaction, in advance, but expected return or performance.
This allows firms to turn savings almost into a revenue stream. One big Wall Street firm figures it generated $2 billion in savings from aggressive monitoring of its trading costs and results. And, used properly, such analysis allows traders to be judged on the execution prices and performance they consistently achieve, said Allen Zaydlin, chief executive of Inforeach, a supplier of trading management systems.
24 X 7: NOT
Getting to 24-hour trading, anywhere in the world, on the same equities, though, is not likely to happen in five years or quite possibly even 10.
A big sticking point is likely to be regulation, say Ted Myerson and Gary LaFever of FTEN, which develops risk management products for Wall Street firms. Twenty-four hour trading in stocks would require that regulatory schemes around the world be “synchronized,’’ they contend.
Helping out might be a securities industry “currency,’’ sort of like air miles. But that is not likely to happen either.
Currency exchange on equities trades will continue to just get handled in the settlement process, said Colaquiri of UNX.
Even that will require back office systems to get better, over the immediate future, as more and more markets try to establish cross-border trading of securities.
But even if regulation and back office systems become consistent, there’s still no guarantee that the same equities will ever get traded at all hours, at all points on the globe.
Mathematics, though, can produce substitutes. Already, machines are "replicating a basket of stocks that mathematically looks like IBM" and choosing, at any given instant, which to buy or sell, said Marques.
Twenty-four hour trading will reduce the liquidity of stocks and increase the volatility of their prices, Zaydlin contends. For most stocks, there is not enough interest to keep trading fluidly all day long.
It’s different with foreign exchange markets, where there is “huge liquidity,” said Colaquiri.
Indeed, the answer may be at the other end of the clock, said Drew Miyawaki, head of European and Asian trading for Liquidnet, a market that specializes in moving large blocks of stock.
He suggests a much more concentrated trading day, to establish more concrete prices on a given day. His time frame: Three-hour trading sessions, every day. This should reduce the range of price swings in a given day and make it easier to move shares a couple thousand shares or more at a time, rather than a couple hundred.
It’s not that far-fetched, said Joe Saluzzi, a co-founder of Themis Trading and critic of electronic trading practices. In recent years, stock markets have huge volumes in their first 90 minutes and last 90 minutes. Trading in between if largely calm, unless there are major midday business events.
A separate approach could be to set up a two-tiered marketplace. With the encouragement of new venues, the establishment of an alternative marketplace for institutional investors is not out of the question, Saluzzi suggests.
