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 Dan Mathisson |
As a trader, the specialist system seemed downright immoral to me. The specialist had access to order book information I couldn't get. The specialist could hold my cancels for 30 seconds or so, treating himself to a free option at my expense while he decided which way the wind was blowing. The specialist could regularly allow his buddies to front-run me and then claim the stock had "traded ahead." And worst of all, there was no clear way for me to get in on the racket -- the right to pick off your lesser-born peers wasn't earned so much as it was inherited, and my father was a pharmacist, not a specialist.
But now, as we enter 2008, the specialist system finally is dead. Today, the remaining specialists touch a tiny fraction of the fraction of order flow that still trades on the floor, and they inspire about the same level of fear as a declawed cat. 2007 on the floor of the NYSE was a bit like 1989 in Eastern Europe when the Berlin Wall fell, Ceausescu faced the firing squad, and the people stood up, looked around and said, "What's next?"
What's next in 2008 is a trading landscape that's faster, cheaper and cleaner than anything we have ever experienced.
Faster because pressure from high-frequency DMA players has brought the term 'microseconds' into vogue, making transactions that take a few milliseconds seem sluggish. And faster because the NYSE successfully rolled out its electronic Hybrid Market, which has cut turnaround on the NYSE from more than 14 seconds in 2006 to milliseconds in 2008.
Cheaper mainly because a brutal volume competition has broken out among brokers trying to achieve unprecedented scale. Trading in an electronic age is a high fixed cost/low marginal cost business. Brokers must spend a fortune to build and maintain a credible platform that can trade algorithmically throughout the globe, but once built, each additional share doesn't cost much at all. So the economics look a lot like a cellphone network -- expect all sorts of creative, low-cost "family and friends" international roaming plans in the year ahead.
Cleaner because information about your orders no longer flies around The Street. Huge institutional trades are getting sliced up by anonymous systems that don't send indications of interest (IOIs) or advertise flow. More and more of the world's trading is done by spraying dark orders across multiple destinations using deliberately complicated patterns. No one knows who's doing what anymore -- which means the guys who made a living by getting calls about your big orders are now out of business. In 2005, four brokers were charged with securities fraud for letting day traders eavesdrop on client orders in the infamous "squawk box scandal." That particular form of sleaziness is much harder to perpetrate now that you can get big size done without having your sensitive order broadcast throughout The Street. And, of course, the market is cleaner without a powerful specialist at the center of it all.
So we enter 2008 with the privilege of playing in the fastest, cheapest and cleanest market to ever exist. In light of these improvements, I recently called my friend the prop trader and asked him if he still uses the line about his daughter marrying a specialist. He told me it was too late -- she's now grown up and is engaged to a subprime mortgage trader. Maybe she would've been better off with the specialist after all.
Read about issues that other buy side traders think will be critical this year:
 Timothy Christiansen Equity Trader Sawgrass Asset Management |
 Bryan Kievit Head Trader Accipiter Capital Managment |
 Joseph Rogina Equity Trader Delaware Investments |
