As Nasdaq OMX Group (NDAQ) and Deutsche Boerse duke it out over control of the iconic New York Stock Exchange, the eventual sale may only hasten the virtual extinction of the floor traders synonymous with the Big Board.
Once a bustling symbol of the free market at work, the floor of the NYSE more closely resembles a ghost town these days as floor traders have ceded their competitive advantage to high-frequency trading, which uses supercomputers to execute transactions in microseconds.
“I wouldn’t want to be a floor trader. I could do all the trading I want by sitting in an office,” said Muriel Siebert, the so-called “First Woman of Finance” and the first female to own a seat on the New York Stock Exchange.
Even though neither Deutsche Boerse nor Nasdaq has advocated doing away with floor trading at the NYSE, the trend is clear. Electronic trading at the Big Board has surged over the past five years, consistently accounting for more than two billion shares a month since the middle of 2007 and topping out north of five billion shares. On the other hand, floor volume has plunged more than 50% since topping two billion shares a month in 2007.
“Someone who wanders around the floor to make a trade is a bit like a dinosaur, given modern technology. It’s so much easier to trade quickly and inexpensively on an electronic platform,” said Richard Sylla, an economics professor and financial historian at NYU’s Stern School of Business.
High-frequency trading firms tend to be secretive, shying away from the limelight even as they control an increasing amount of the action. Some of the biggest electronic traders include Hudson River Trading, Jane Street Capital and Jump Trading.
To be sure, some electronic trading firms have still shown an interest in floor trading, underscored by Getco's 2010 purchase of about 350 NYSE designated market maker assignments from Barclays Capital, which is a unit of British lender Barclays (BCS).
Siebert laments a decrease in openness that has accompanied the rise of high-frequency trading and dark pools, which consist of trading by institutional orders that aren’t available to the public.
“You used to have people who would change their jobs to be a floor trader. You had total transparency then,” said Siebert. “If something traded and you were at that post, you saw it or you saw the tick. You don’t see the tick anymore. You don’t see what’s going on in the markets. You don’t see the dark pools and what’s trading in there.”
This lack of transparency and shift in where the action is has diminished floor traders’ ability to serve as the eyes and the ears on the trading floor.
“These guys don’t have the competitive advantage they once had,” said Joe Saluzzi, co-head of trading at Themis Trading. “You used to be able to get color from them. You aren’t getting any color now.”
Many were quick to point the finger at high-frequency trading in the wake of last year's "Flash Crash," which caused a mysterious 1,000-point plunge on the Dow Jones Industrial Average and then a similarly rapid rebound.
Some believe the presence of humans on the trading floor is necessary to prevent a similar crash from occurring, or at least keep order and mitigate the effects of another meltdown.
“Under the current guidelines and parameters, it wouldn’t make any difference because we as brokers are forced to operate within the context of the same electronic environment that the computers play in. That’s the playing field," said Ted Weisberg, president of Seaport Securities. He predicted a similar crash will happen "again and again."
Weisberg points to a series of rule changes instituted by the government, including the elimination of the plus-tick or short-sale rule in 2007, allowing short sales to occur on downticks. Weisberg also cited the introduction of penny and even half-penny stock price increments.
Siebert argues the sale of NYSE could open up an opportunity for increased regulation of high-frequency trading to even the playing field.
While there are some disadvantages to dealing strictly with computers, there’s an obvious economic argument for exchanges to rely increasingly on electronic trading.
“It’s too expensive to maintain the floor of a stock exchange when the same types of trades can be executed electronically,” said Sylla. “The knowledgeable people meet electronically and eliminate the middle man. That’s what the broker or floor trader is: the middle man.”
It is too early to forecast the precise future of the NYSE floor trader, in part because it’s not clear who will own the 194-year-old Big Board.
NYSE Euronext (NYX), the parent of the NYSE, reached a deal in February to be acquired by Germany’s Deutsche Boerse, but rival Nasdaq and Intercontinental Exchange (ICE) launched an $11.3 billion hostile bid last week. The Nasdaq/ICE joint offer represents a 19% premium of the DB bid, but faces serious regulatory hurdles and could still be trumped by a sweetened offer from the German company.
Even though neither DB nor Nasdaq/ICE have advocated for doing away with floor trading at NYSE, the end may still be near.
“My guess is either one of those deals will make the trading floor disappear sooner rather than later. I think the trading floor has been kept on as an element of tradition,” said Sylla, pointing to floor traders’ support for Duncan Niederauer, the CEO of NYSE Euronext.
After all, floor trading is the way of life for many who have stuck around the floor, like Weisberg, who bought his seat on the NYSE in 1974.
“I have a corner office with a beautiful view of the New York harbor, but I must say, I get cabin fever after about 45 minutes,” Weisberg told FOX Business last week. “For 38 of the past 42 years it’s just been spectacular place to work. But the game clearly has changed.”
Weisberg added, “We continue to keep a presence here because we still have clients who want us here for various reasons… Unfortunately, if customers tell me they don’t need me [on the floor], we obviously need to rethink the whole business model.”