Trading Floors - Past, Present, and Future - Part 3
TraderDads MBA Lecture Series
The Future
Trading Floors in 2100
As crazy as it seems, we have over 100 years of stock price data available for some of the original Dow Jones components and for the Industrial Average itself.
Over 100 years, floor mechanics to trade shares stayed mostly recognizable to people from 1896 right up until the the advent of electronic trading in the mid 2000s.
Electronic trading was such a game changer that it’s hard to envision what radical changes could even manifest over the next 100 years. Most predictions will be a linear extrapolations of what the world looks like today. Some of those predictions will be proven true but that’s like guessing a new iPhone will be out next year with a better camera.
It’s nearly impossible to see around corners or guess what type of innovation or 9/11 caliber events will impact the world of capitalism and trading.
But that doesn’t mean we can’t try -
As we discussed in Part 2, a “floor” is quickly becoming a fluid concept on Wall Street.
As such, for clarity of thought, we can tweak our definition of a trading floor in the future as “the venue for transactions of value between participants”.
Counterintuitively to some, I think the biggest market changes over the coming decades will be regulatory rather than any innovation or invention to improve things.
The technological element of trading floors have mostly hit its limits. While more and more servers can be thrown at a trading strategy to crunch numbers, these are marginal gains at best and have largely lost their economic benefits these days.
Predictions For Trading Floors
Every product, every trade and every transfer of ownership will be tracked, logged and given a chain of ownership by an authorized party or parties
Distributed Ledgers will be incorporated into U.S. Law for government transactions . Blockchain and CBDCs become standard methods for tax payment and foreign remittances
Every OTC product and transaction is cleared and settled by a 3rd party regulatory agency (See SEFs after the Great Recession as the template)
Regulation will stay behind the curve on any technology updates that do emerge— for better or worse
With Speed maxed out as an edge for traders, technology becomes “outthinking” your competitors.
New AI algorithms (Smart Order Routers on steroids) will fight for trade flow with ever more sophisticated predictive approaches.
Ironically, trading will grow in the direction of Advanced Chess where deliberate human intervention using non-optimal strategy will become the last edge
Lancey Howard - The Cincinnati Kid
A “Long Tail” of products will continue to grow and drive new waves of boom-bust profit and mania. Liquidity in products will vary wildly as now nothing needs to "stop” trading to make room for other products and participant access declines
“You want to trade it? We’ll supply a venue” will continue to be ECN and Trading Floor’s mantra
2023 is the year of 0DTE option trading.
2019 saw the the explosion of weekly expiration options
2010 started the whole Crypto market
2006 saw ETFs dominate volume
ETF volume skyrockets then plateaus just as Crypto markets came around
The Long Tail is Chris Anderson’s term for a library with infinite shelf space, one where the rules of scarcity don’t apply in the same way. The internet platform doesn’t care how many different titles they carry, and in fact, benefits from carrying all of them. Spotify and YouTube and Amazon don’t actually care what you listen to or watch, as long as you come back tomorrow.
Regional commodity markets and price discrepancies make a come back as regional exchanges and trading connections become “Walled Gardens" of capitalism
De-globalization creates heavily regulated artificial walls and economic spheres by mid 21st Century
This creates trade restrictions between spheres and so creates price differentials between commodity prices in each sphere
Only the biggest and most well connected organizations will be able to profit from the arbitrage
