Wednesday, May 21, 2014

Kleinfield, The Traders

When I requested temporary access to a digital copy of The Traders: Inside the World of the Billion-Dollar Gamblers of America’s Financial Exchanges by Sonny Kleinfield (Open Road, 2014), I naively assumed that it was a new book. But then I turned to the first chapter and began to read: “Finding space to breathe on the trading floor of the New York Stock Exchange is a continual worry. The floor is a scruffy, disheveled, high-ceilinged labyrinth that has the general appearance of a flea market.” (p. 3) Oops! That’s no description of today’s NYSE. As it turned out, the book was originally published in 1983, when traders jostled for space on trading floors, not for speed over fiber-optic cables. (Actually, by that time individual floor traders on the NYSE were already starting to become a dying breed, the victims of restrictive exchange regulations enacted in response to a scathing SEC study which had called for the abolition of floor traders on the NYSE. Some NYSE traders decided to set up off-the-floor offices and trade by phone; others defected to the floors of options and commodities exchanges.)

As a reporter for The New York Times, Sonny Kleinfield obviously learned how to make a story sing. Even though the trading floors he describes in five chapters (NYSE, AMEX, CBOT, CME, and NYMEX) are mere shadows of their former selves as traders eventually migrated to digital markets, he successfully captures the immutable, larger-than-life trading spirit, for the most part in the words of the traders themselves. The book is a great read—and a great trading textbook, full of examples of best practices.

Here, however, I’m going to focus on something different, to which I already alluded. For those who are following the debate over high-frequency trading, it’s a reminder that there often is nothing new (or at least little new) under the sun. I’ll quote Kleinfield extensively on this point.

“Little love has been lost between regulators and the floor traders on the New York Stock Exchange. Over a period of several decades, the species has acquired a distinctly unsavory reputation with the SEC, ..., which has waged a tenacious battle to put them squarely out of business. The nub of the Commission’s objection is that traders boast a formidable edge over the public yet serve a questionable good. The suspicion, in short, is that they are earning big dollars by bloodying the public. … The raison d’être of the floor trader, as commonly put forth, was to make the marketplace safer for the public by injecting liquidity, continuity, and stabilization. … Myriad studies of the habits of floor traders, however, have cast a considerable doubt on the soundness of these justifications. Traders actually tend to do most of their trading in the more active stocks, the ones that already enjoy great liquidity, continuity, and stability. … Also, studies show that traders, far more often than not, ride prevailing trends and therefore act not as stabilizing agents but as destabilizing forces.” (pp. 20-21)

Sound familiar?

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