Tools of the Trader

Could the NYSE Hold the Key to the Future of Electronic Trading?

It's a slow day on Wall Street in late August, but the trading floor of the New York

Stock Exchange (NYSE) still feels like the inside of a Jiffy Pop. Old-boy brokers are capering with the bored confidence that accompanies an economic heyday. One particularly round and balding trader near the IBM booth belts out an aimless battle cry from the depths of his maw— which is otherwise preoccupied with a meatball sub.

Others nearby echo the hoot in unison, then merge and slap against each other, and crack up at their own frivolity. "They're just playing around," says my guide, ducking.

These guys seem like weathered artifacts among the whirring hives of LCD monitors and TV screens and tickers that surround every booth and stream from every wall. Some of them are strapped into headsets and wireless trading stations, which they use to punch in large-scale orders and on-the-run e-mails while they follow the activity from booth to booth. You can tell they're at home in the swarming stadium— the very spot that some consider the last bastion of order in a market that's hurtling toward a boundless online agora.

Meanwhile, a couple of buildings down the block, on the 20th floor of 50 Broad Street, there are rows and rows of day traders sitting silent in a bleak, fluorescent haze, peering into the skein of numbers on their monitors as though it's Sanskrit and thumping steadily at their keyboards. This is the trading floor of Broadway Trading LLC, which provides NASDAQ executions for individuals who want to day trade for a living. It's intensely serene, though occasionally a price pilot, quietly navigating his electronic trading network like he's racing light cycles on the grid in Tron, will give way to a spasm of victory or defeat. The trappings— tables, chairs, and bulky PCs— may seem as outmoded as early-'80s sci-fi, but many consider this the generation of traders most empowered by the digital-age economy. Day traders have been around as long as the stock market, but all the new, volatile companies on NASDAQ these days make an ideal climate for short-term investments. Most long-term investors who trade on the NYSE see them as reckless marauders, with one eye on the latest news and rumors, and the other on the next impulse buy.

It's a bizarre contradiction— you've got the NYSE, by all accounts the market's old-world behemoth, housed in a spectacular high-tech romper room, and you've got the market's next-gen warriors tucked away in a tranquil cockpit with nothing but numbers and a changing economic paradigm.

The agents of the so-called electronic trading revolution are NASDAQ-based electronic communication networks (ECNs) that match buyers and sellers directly, eliminating the need for human traders. When it comes to electronic trading, technology is overhauling the market on a systemic level: individual, nonprofessional traders have more liberty and power, and the market is generally subject to far more volatility. The ECN model embodies, in other words, the digital era's libertarian attitudes toward the economy and information. It is based on the belief that there's order inherent in chaos— or at least that chaos is a good, sustainable thing.

The technological advances at the NYSE seem comparatively ornamental. They are not changing the traditional, more hierarchical trading system but enhancing it. Right now, there is serious doubt about how long the exchange as we know it will remain in existence given that it has to remain competitive with NASDAQ and the electronic exchanges of the future. But no matter what structural metamorphosis occurs at the NYSE, its tech labs have been refining superior tools and software, which could have far-reaching democratic applications.

The NYSE essentially operates on a system in which all big trades are supervised by a human specialist, whose job it is to monitor the order flow and maintain liquidity— and generally guard against market volatility. Eighty-five percent of trades are actually processed electronically at the NYSE, but all the consequential trades have human arbiters. "What you see on the trading floor are people who are handling the big, buy-in orders," says Louis Pastina, vice president of point-of-sale technology at the NYSE. "Say a firm wants to buy 5 million shares of AOL at market price; they can't buy all at once in a direct trade or they'd move the price of the stock, so they talk to a broker, and buy strategically through the course of the day. The broker has to play this game of poker without showing his hand. At the NYSE we've developed technology to aid that broker, because in a billion-share day he's inundated with orders like that."

The NYSE's high-tech tools are designed to empower the titans. "Think about it as a commodity kind of thing," says Pastina. "You can buy commodities over the Internet, but you can't go out and buy a jet over the Internet. If you are going to spend a couple million you probably want to see it, kick the wheels, take it for a drive. That's what these [specialists and brokers] are paid to do; they're paid to add value because they have a lot of experience in executing large orders. And we've got to design their tools."

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