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If You Have a Mouse in Your Hand, You are Too Late! by Blair Hull In the last decade, technology has improved to such an extent that an increasing amount of trades occur without human intervention. At the end of the next decade, a majority of transactions will be completely automated and those traders with human interfaces will be at a significant disadvantage. In 1999 The Hull Group, which was acquired by Goldman Sachs, was handling 30,000 transactions per day. Over 95% of these trades required no human intervention, which represents more than one trade per second. At that time, there were at least four firms worldwide that equaled or exceeded these numbers. These firms included Cooper-Neff, David Shaw, Morgan Stanley, and Timberhill. Most of these trades represent arbitrage strategies or relative pricing strategies. In the future, these trades will include more directional trades with longer horizons. I project that, by the year 2010, the majority of money managers will completely automate their trade entry decisions. In 1977, when I became a market maker on the Pacific Stock Exchange floor, I thought that the opportunity to make money in options would be short lived. |
I saw that each of the functions performed by the floor could be easily replaced with technology. These functions included order entry, posting of bids and offers, matching orders, and clearing. My timing was a little off. It wasn’t until 1990 when automated exchanges began to thrive. Today the United States still has trading floors, but the rest of the world has converted to screen-based systems. These U.S. trading floors still exist because floor members wish to keep the time and place advantage that comes with the pit. Automation will increase the size of the pit by creating a global pit. Today, any customer can go to his Futures Commission Merchant (FCM) and trade as if he is in the pit. Although this mostly occurs in automated foreign markets today, it will eventually happen in the United States. As one old time future trader told me recently, “open outcry is history, even if we haven’t admitted it.” Due to the short-sited visions of the CBOT, CBOE and the MERC, the Chicago exchanges have moved at a snail’s pace to provide an environment that is fair. They have lost their leadership position in futures and options trading to the EUREX. In the future, only electronic exchanges will exist for active products. Large trades and special illiquid products will trade over the phone, through brokers, and may be crossed on an exchange. However, most derivatives will be traded electronically. |
I have always tried to automate every possible decision. If we wanted to make a trade, we would determine why, then quantify the factors and design an algorithm to produce the trade so it could be done time and time again without error. The Financial Information Exchange (FIX) protocol has become the standard computer-to-computer interface (CTCI), which is being used by more and more proprietary houses. One of the main issues with new proprietary trading is speed. One needs very fast data feeds and efficient algorithms to trade effectively. Whether you have a direct data feed from the exchange, or go through a vendor, makes a difference.
In
many operations, speed specialists are the most valued
technicians. A
speed specialist’s job is to reduce both the time required
for the machine to make a decision and also to minimize the
transmission time to the computerized exchange. People speak
in milliseconds and new statistics are defined, such as hit
ratios. Machines
and trading occur at such speed that opportunities exist which
cannot be seen with the naked eye.
A blink of an eye is sufficient time to miss a trade or
not give you the time to cancel an order.
So in the very near future, if you have a mouse in your
hand, you will be too late. |