Hello my name is Pedro Villanueva and I am a student at the Marshall School of Business located at the University of Southern California. I’m currently a junior majoring in Business Administration and concentrating in both Information and Operations Management and Finance. I am a Los Angeles native, and love soccer. I have an interest in both technology and finance and that is why I have decided to write this blog.
Today it’s nearly impossible to talk about finance without technology. That’s why this blog has a particular twist. This is about finance in the age of technology. The effects are undeniable and inescapable. That’s why it’s necessary to understand the way in which IT is changing the way we do business. At least I think so. I’ll be updating this blog periodically so please check back and feel free to join in. And to get things started I’ve decided to take a closer look at a major development in the world of financial markets that’s not especially new, but its nevertheless important and will continue to make an impact this year.
Algorithmic Trading
Algorithmic trading impacted Wall Street about two years ago. The technology allowed for large orders to be broken up and fed back into the market in smaller more digestible pieces. Customizable and less expensive than a traditional broker, the question then on the minds of many was whether or not the new technology was secure. In April of 2005 Business Week printed an article in which it was argued that the “predictability” of the algorithms themselves made it easier for more experienced traders to identify trading patterns and then capitalize on those patterns (Click here to learn more). Interestingly enough within the same article lay buried, and perhaps overlooked, the Aite group’s prediction that algorithmic trading would account for more than 40% of equities trading in all markets.
It seems that the market has been myopic as to the potential of the new technology. It may well be the case that there is a necessary learning curve, but it has been several years since the induction of algorithmic trading and there are surprises that continue to surface. My question is whether all of Wall Street has considered exactly how disruptive this disruptive technology actually is and what it means for future trading?
For example, it was initially thought that algorithmic trading would help recapture the commission revenues lost to electronic trading, and I don’t think anyone could have anticipated the shift that the market actually took. JP Morgan’s own Emily Portney would elaborate on the transition then gripping the market which was labeled as a move “from traders to tech supporters” that very same month. (Traders to Tech Support) More surprising was NYSE’s decision to merge with a then 8-year old Archipelago (Repaving Wall Street). While none found NASDAQ’s decision to enter into its own union with Instinet odd, it did seem odd to me that nation’s first electronic stock market (NASDAQ) should make such a decision as a means of necessity rather than as a means for strategy. Did NASDAQ fully understand the business altering nature of algorithmic trading? I don’t think so. I don’t think that the NYSE did either. Why you might ask. The reason is because at the time the NYSE still retained the hope of creating hybrid markets with trading done both electronically as well as on its own floors. Perhaps this is a naïve view at best at least when you consider what happened next.
As early as 2006 a whole new market was created for customized algorithms and strategies (Algorithm Marketplace). This is far from the hybrid dream first fostered by the NYSE. Tim Ferguson later published an article in which he writes that potentially 90% of traders faced the problem of unemployment because of the emerging technology (Tim Ferguson). This is at the same time when the London Stock exchange was already making arrangements to handle a greater volume of trades through electronic means. Did the realization come late in America? Apparently it did especially when you consider the debate that still existed at the end of last year over the transparency around algorithmic trading (Transparency). It could be that the American marketplace has been reluctant. That is what it seems like to me, however I don’t know why when there are numerous indications that this is a trend that unlikely to stop. I believe that new software, globalization, and an increasingly e-mobile audience will likely not only further the advancement of algorithmic trading, but also lead to new developments as well. What those developments are exactly I’m not sure, but somewhere someone is on the job. The point I am trying to make is simply this: The "old way" of trading is slowly being phased out, and it will becoming increasingly difficult to ignore the disruptive nature of this new technology. And it's not only algorithmic trading, the number of trades done electronically is growing all the time.
2007 will be a year which I think will prove my point and I think that many agree especially with the arrival of vista and web 2.0 (Algorithmic Trading Goes Mainstream). And if Wall Street has anymore doubts as to whether this is a fad they only need to consider the 416 point plunge in the market in late February because of the high volume of transactions done through electronic trading (Electronic Trading). It must be increasingly apparent that the “old way” of trading will continue to struggle if not for some help from IT. In fact it’s necessary, especially for those that have their eyes set on markets overseas. For a long time, we’ve used information technology to help bridge the gap between us and other markets why should trading be different? IT has succeeded in making trading both easy and cheap, now it’s necessary that it address the needs of traders everywhere. Competitors such as E-trade will surely not be shy to jump at the chance, and are already taking steps to eliminate existing borders (Global Trading).
Today it’s nearly impossible to talk about finance without technology. That’s why this blog has a particular twist. This is about finance in the age of technology. The effects are undeniable and inescapable. That’s why it’s necessary to understand the way in which IT is changing the way we do business. At least I think so. I’ll be updating this blog periodically so please check back and feel free to join in. And to get things started I’ve decided to take a closer look at a major development in the world of financial markets that’s not especially new, but its nevertheless important and will continue to make an impact this year.
Algorithmic Trading
Algorithmic trading impacted Wall Street about two years ago. The technology allowed for large orders to be broken up and fed back into the market in smaller more digestible pieces. Customizable and less expensive than a traditional broker, the question then on the minds of many was whether or not the new technology was secure. In April of 2005 Business Week printed an article in which it was argued that the “predictability” of the algorithms themselves made it easier for more experienced traders to identify trading patterns and then capitalize on those patterns (Click here to learn more). Interestingly enough within the same article lay buried, and perhaps overlooked, the Aite group’s prediction that algorithmic trading would account for more than 40% of equities trading in all markets.
It seems that the market has been myopic as to the potential of the new technology. It may well be the case that there is a necessary learning curve, but it has been several years since the induction of algorithmic trading and there are surprises that continue to surface. My question is whether all of Wall Street has considered exactly how disruptive this disruptive technology actually is and what it means for future trading?
For example, it was initially thought that algorithmic trading would help recapture the commission revenues lost to electronic trading, and I don’t think anyone could have anticipated the shift that the market actually took. JP Morgan’s own Emily Portney would elaborate on the transition then gripping the market which was labeled as a move “from traders to tech supporters” that very same month. (Traders to Tech Support) More surprising was NYSE’s decision to merge with a then 8-year old Archipelago (Repaving Wall Street). While none found NASDAQ’s decision to enter into its own union with Instinet odd, it did seem odd to me that nation’s first electronic stock market (NASDAQ) should make such a decision as a means of necessity rather than as a means for strategy. Did NASDAQ fully understand the business altering nature of algorithmic trading? I don’t think so. I don’t think that the NYSE did either. Why you might ask. The reason is because at the time the NYSE still retained the hope of creating hybrid markets with trading done both electronically as well as on its own floors. Perhaps this is a naïve view at best at least when you consider what happened next.
As early as 2006 a whole new market was created for customized algorithms and strategies (Algorithm Marketplace). This is far from the hybrid dream first fostered by the NYSE. Tim Ferguson later published an article in which he writes that potentially 90% of traders faced the problem of unemployment because of the emerging technology (Tim Ferguson). This is at the same time when the London Stock exchange was already making arrangements to handle a greater volume of trades through electronic means. Did the realization come late in America? Apparently it did especially when you consider the debate that still existed at the end of last year over the transparency around algorithmic trading (Transparency). It could be that the American marketplace has been reluctant. That is what it seems like to me, however I don’t know why when there are numerous indications that this is a trend that unlikely to stop. I believe that new software, globalization, and an increasingly e-mobile audience will likely not only further the advancement of algorithmic trading, but also lead to new developments as well. What those developments are exactly I’m not sure, but somewhere someone is on the job. The point I am trying to make is simply this: The "old way" of trading is slowly being phased out, and it will becoming increasingly difficult to ignore the disruptive nature of this new technology. And it's not only algorithmic trading, the number of trades done electronically is growing all the time.
2007 will be a year which I think will prove my point and I think that many agree especially with the arrival of vista and web 2.0 (Algorithmic Trading Goes Mainstream). And if Wall Street has anymore doubts as to whether this is a fad they only need to consider the 416 point plunge in the market in late February because of the high volume of transactions done through electronic trading (Electronic Trading). It must be increasingly apparent that the “old way” of trading will continue to struggle if not for some help from IT. In fact it’s necessary, especially for those that have their eyes set on markets overseas. For a long time, we’ve used information technology to help bridge the gap between us and other markets why should trading be different? IT has succeeded in making trading both easy and cheap, now it’s necessary that it address the needs of traders everywhere. Competitors such as E-trade will surely not be shy to jump at the chance, and are already taking steps to eliminate existing borders (Global Trading).
