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."

The latest thing in the labs of the NYSE is a voice-recognition system that allows traders to call in their orders rather than key them into the computer and that can filter out all the background noise of the exchange, and respond to any kind of accent from British to Brooklynite to Jamaican, and a whole series of code names and variations on broker jargon. "Buy, 5000, Big Blue, at the market, not held, send!" barks a trader at a trading booth computer, and the order is flawlessly filled and executed. He is being studied through a one-way mirror by a team of "human factors" experts, who bring top-notch traders from the trading floor to a lab room, and watch them struggle to trade using different kinds of technological innovations. Based on their observations, they refine the technology to override any possible glitches in the trading process. In this case they spent 13 years testing, shelving, and refining voice-recognition software, which they estimate will be ready to hit the floor at the end of September.

But this technology may be reinforcing an archaic system of trading: what's the use of refining voice-recognition software, or retinally controlled data-retrieval goggles, if the NYSE is under pressure to shift into an entirely electronic system anyway? The innovators at the exchange don't think the floor is going anywhere, or hope not, because plans are well under way for a luxurious new NYSE headquarters on Wall Street designed by Skidmore, Owings and Merrill. And of all NYSE-listed stocks, only 15 percent are currently traded through exchanges other than the NYSE.

From a purely technical standpoint, the processes and tools they develop to streamline the operations in this Olympian factory of prices are stunning. On an average day, over $37 billion is traded on a volume of 810 million shares. The system supports over a million orders a day and has to be "99.99 percent up," according to Pastina. "You don't stop the market; you hit 'recovery.' We build recovery systems into everything we do."

This past spring, the exchange installed a 3-D trading floor, an elaborate three-dimensional data filtering system that graphically interprets— in a VRML (Virtual Reality Markup Language) format— all the numbers and code that get pumped through the exchange, from the below-ground operations of all the servers to the real-time activity of every individual stock.

The advantage this mapping system has over straight numbers is context— an immersive interface that makes clutch decision-making more intuitive, not to mention more pleasant.

The project was organized by the Securities Information Automation Corporation (SIAC), which manages the entire technological backbone of the exchange and commissioned New York­based architecture firm Asymptote to design the model and RT-Set, an Israeli firm, to program and animate it. Hani Rashid, a founding partner of Asymptote, which does both physical and information architecture, describes the technology as "datascaping: a new idea about mapping 2-D data into animated, 3-D environments," adding, "Our program translates all the data into shapes and graphs in a contextual environment, morphing real-time, that you can customize and correlate on the fly."

For systems analysis, operations experts look at the virtual landscape of the floor itself and can monitor all the activity at every booth; the graphics pulse and change color to indicate volume and speed of order flow at every booth, and indicate if there is any problem with the performance of the hardware or system software. For financial analysis, traders could customize a landscape of data that charts the real-time activity of any collection of stocks, and supplement that with background information and historical data. If the Dow is down 88 points, you can see which stocks are weighing it down most. Then you could get a profile of all the hot news on the wire, cross-reference it with your profile of Dow activity, and see the common trends in the markets and news.

"You can't separate the system performance from the data that it's monitoring," says Anne Allen, senior vice president of floor operations. "It's not enough to know just that there's a failure— you need to know the implications. Am I delaying traffic? How does that relate to trading volume and everything else that affects the stocks?" In other words, the software itself illuminates the synthesis between the data processing and the patterns of the market.

But still the main thing that affects those rhythms is the system of trading itself, and no one has any idea what will happen to various trading systems themselves. Will the specialist system survive all the criticism just as it survived the crashes of 1929 and 1987? Will it be scrapped for a whole other form of centralization? Will the market bifurcate into two kinds of trading systems— one that's centralized and one that's direct?

NASDAQ's volatility is as much a reflection of its listed companies as its trading system. The NYSE, on the other hand, has such stable companies that the transition to an electronic market may not be dramatic: "If the NYSE were to transition to an electronically based trading system, I don't think you'd find a problem with excessive volatility," says John J. Edwards III, markets editor of TheStreet.com. "There would still be professionals making the markets, just not a floor-based specialist." What makes the transition difficult, however, is that a lot of companies on the exchange would prefer to stay with a specialist-based system.

But there are those that prefer dramatic measures. "I hope they rip out [the NYSE trading floor] and turn it into a disco club," says day trader Jim Crane-Baker, one of 10 experts featured in the bestseller Electronic Day Traders' Secrets. "Specialists are basically a bunch of demigods in a system that's totally perverse. They have one guy who is controlling all the order flow in his secret book, and you have no idea what kinds of tricks he's pulling. In general, the NYSE is a complete mess— totally inefficient. Who cares about their high-tech gadgetry? They're still using carbon copy receipts! Why throw a lot of money on gadgets and make information pretty when it's all there online? There's no way that [the old] system can survive." Crane-Baker, who has been an independent equity trader since 1995, sees direct investor participation as the way to bring justice back to the market. "It should all be an electronic version of the open outcry system— a place of passions that may be volatile, but the fittest survive."

A pure meritocracy is about as likely to exist as a fairly mediated specialist system. Most big institutions and long-term investors want to trade in a market that feels safer and more controlled— even if the brokers and specialists get exorbitant commissions and have unfair advantages. And not all ECN advocates are sounding the death knell for the NYSE: "There will always be a place in the market for those that commit capital and provide liquidity," says Matt Andresen, president of Datek's Island, which is the second-largest ECN. "The question is to what degree you allow these participants to have temporal and informational advantages over the public as compensation." At Island and other ECNs, "everyone's orders are treated the same, and at the same time."

Andresen argues that all evidence points toward a future without physical trading floors, citing the example of the London International Financial Futures Exchange (LIFFE), which lost most of its volume in deutsche mark futures when the Germans shifted to electronic trading. "This example took weeks, not years. The simple facts are this: computers can match buyers and sellers quicker, more efficiently, fairer, and in greater volumes. That's not to say that humans don't have an important place in providing liquidity when needed."

As exchanges and trading continue to move online and become more and more electronically networked— possibly merging into one common operating system for trading stocks— what most people fear is the lack of order. What the electronic market needs, besides a fair regulatory system, is the ability to map all the activity of an unwieldy online market, an extension of the NYSE's datascaping technology; it needs an orderly, graphical interface, swarming with the life and energy of a real trading floor, but not limited to top-dog transactions.

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