The first paper I wrote for one of my earliest economics classes was about the inefficiency of the Chicago Board of Trading – or CBOT – market structure. I was 19 years old and a runner in the world of high finance, and it was down to me to deliver success for an investor. How? By physically running an order from the desk to the soybean pit, waiting for a guy in a garish jacket to shout something, scrawling hieroglyphics on the order, running all the way back to the desk and having the order punched in to a ‘computer’.
On a good day, it took three minutes. On a bad day, it took 15. I was concerned for the world of high finance, and not just because the success of a trade depended on how fast I was on my feet.
(Chicago Board of Trade - Gursky, 1999)
As weird as it might be to think about now, the most sought-after trader in the early 90s was very much the Gordon Gecko, Wolf of Wall Street stereotype. However, the growing influence of technology on trading in the later part of the decade saw that culture brought to an end. Instead, we saw mathletes take over. While this put a stop to the kind of camaraderie you only get from working shoulder to shoulder on the trading floor, it altered the state of trading globally – for the better.
Technology has improved the speed and accuracy of the flow of information, which has allowed the cost of providing and accessing liquidity to plummet.
A great example is the bid ask spread. The difference between the price a customer would be able to immediately buy or sell a security is often referred to as the bid ask spread. Until 2000, the smallest a spread could legally be was either 12.5 cents (USD) in stocks or 6.25 cents in options. Today, the bid ask spread has collapsed to one penny in many securities. Those smaller spreads give direct savings to the end users each time they buy or sell a stock or option.
Liquidity can now be accessed in many different ways, which are linked by a lightning-fast network that gives consumers and their agents the freedom to choose the liquidity that suits them. Thanks to the mathlete, they can choose from 13 stock exchanges, 15 options exchanges and 40 viable dark pools.
We’ve also seen equity option volumes increase by 540%. In 1990, 830,000 options contracts were processed per day. Today, that figure sits at nearly 16.5 million.
There have been many more developments in trading efficiency – I never thought I’d be bickering over a 350-microsecond speedbump, for example. This sort of speed and detail is only possible because traders are increasingly more quantitative and technology is more advanced than ever before. This culture and talent shift has delivered faster, tighter, and more reliable markets contributing to a better investment experience overall.