Thanks for responding Don,
I too agree that electronic markets are the way of the future, but that currently they do not offer the depth and liquidity of the floor.
As for the AMEX's specialist system, would I prefer open outcry - YES. That said, as you know all of the exchanges have adopted that system in some form - DPM's on the CBOE, LMM's on PSE, I believe the PHLX is specialist.
Trades aren't really "given" - nobody gives you anything in this business, unless it is bad
. The scenerio works with the broker entering the crowd, asking for a market which both the specialist and the individual members provide him. If I provide the best market I can take the whole trade, period; The specialist gets nothing.
Typically the crowd is running the same sheets, therefore our markets are going to be approximately the same, and the trade will be split up between the members. The problem for me, as a market maker, is that there is a long delay to discern the quantity of my trade, and I need to get my hedge off. The specialist has to trade the book orders first, then he gets to participate equally with the crowd, so if 10,000 traded, 4,000 in the book leaving 6,000 and there are about 10 people on the trade , he'll probably take 1000 and say "5000 out". Now we have to know exactly how many of us are on the trade (and you can guarantee that there are going to be assholes in the crowd who try to slide on bad trades and get in on good trades) and then divide it up. So, if it's ten we get 500 each and now I can hedge (which if I'm last will be horrible).
Admitadly, it's not a great system but until something better comes along that's what it is. I wish the ISE were viable. I wish I could set up shop and trade electronically, I'd save about $20,000/mo. in exchange fees and expenses right off the bat. The fact is that it isn't there yet. It's made encouraging advances, I welcome more and I also agree that there are a lot of firms working to improve it.
The reason the DPM/specialist systems were originally implemented was to enhance liquidity and provide more orderly, less choppy markets. What's it's done though, is essentially recreate the ISE on the floor. Yes, the locals are there but the specialist/dpm makes the markets and has the capitalization to take the whole trade. In fact, the only trade that the locals are wanted for are marginal/bad trades. You can guarantee that if the trade were a cherry it would have been traded upstairs and wouldn't have even seen the floor.
The local's role on the floor is being diminished. Firms don't want to hire traders on a 50/50 deal anymore, they want them to be employees and receive discretionary bonuses, which may be zero even if you've done well because the firm hasn't done well as an entity! Most large trading firms have a trader in every good pit. What's to stop them from leaving the floor and setting up shop upstairs? Any size order is shopped all over the place prior to trading anyway, and the executing broker won't mind making an extra phone call if he thinks that he can get the customer a better fill. The days of the independant local are numbered. Large firms with big assets and team trading, with an active upstairs desk are the way of the future. Given the fixed costs trading on the floor, it is inevitable that electronic trading is the future. I do not believe that the ISE will be the only source of off floor exchange trading however, much as instinet did not remain the only source of off floor equity trading.
Our financial system is constantly evolving and in flux. When you consider the advances in Information Technology, it's cost effectiviness and it's reaches, there is no doubt that we are going into an electronic era. We also need to temper our push for the faceless, electronic market with macro financial rule changes that will provide accurate and fair markets and also complement the speed of the electronic age. My suggestions include:
Abolision of the 90 second rule (what you see is what you get).
Abolision of the up tick rule, in all circumstances - would underwriters have opened internet IPO's at ten times their offering price if they knew their bids would be hit?
Options 100 up, liquid equity issues 10,000 up.
Multiple listing of listed equities.
Reestablishment of the 1,000 up SOES rule (I think keeps everyone honest).
I am an advocate of fast, fair, accurate, deep, liquid and inexpensive trading. I want our market system to be improved, and we should take personal responsibility as market professionals to oversea and actively direct those changes.
The Knight.
