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June 2012 Archive for Points and Figures

RSS By: Jeffrey Carter

An irreverent look at economics, finance, trading and politics.

Electronic Trading Vs. Open Outcry

Jun 22, 2012

There is a pretty big debate going on among traders right now. Neophytes say it’s about electronic trading versus open outcry, but it’s really a lot more than that.

Link to original blog posting.

Electronic trading has changed the market place. In many cases, it’s for the better. Access to the marketplace is much improved over the old model. For outside customers, there is better transparency before placing an order because they see a little of the book and bids with offers. They can research trade history and see historical price quotes. It’s also pretty anonymous. Electronic trading has expanded the reach of the marketplace so that anyone can be connected to it at any time from anywhere. That’s great.

Electronic trading for many customers has driven down the cost to trade by eliminating layers of distribution in the marketplace. Customer–>IB—->Floor order desk—->Floor broker—>market; now is simply Customer—->market or Customer—->broker—–>market. For traders like myself, our costs have gone up exponentially. But in total industry sum, costs have come down. That’s good.

But the other phenomena that is going on is the way electronic trading has changed the market place. There are things that go on in the screen based market that old traders see and shake their head at. They would be illegal in a pit traded environment. The culture of the pit would have disciplined that trader, or in extreme cases the pit committee would have written the rogue trader up and tossed them out into the street.

Flash crashes happen every day. Flash rallies happen too. The other day in the soybeans, a spread was trading at 59 points. A big market order was entered to sell. The HFT guys front ran the order, took the market down to 18 points where the order was executed, and then it rallied back to 59 points in less than a second. Ironically, the price the order was executed at was the exact limit of the no bust range. Hmmm, smell something fishy?

Is that good for the long term price transparency and risk transfer function of the marketplace?

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