John Forman, of The Essentials of Trading, explains how electronic trading has reduced the amount of information sharing now taking place versus in days prior and he questions if market efficiency has taken a bit of a hit as a result.
I was in London recently talking a bit of shop with some guys in the professional market analysis business. The conversation got on to the subject of information sharing the financial markets. Specifically, it related to the degree to which those who work on bank and other institutional trading desks exchange information nowadays. Once upon a time, it was the case that traders and sales people were constantly talking with each other about what they were seeing in the markets, thinking about, etc. Things have changed.
The first place this really started to drop off is in foreign exchange where the large number of major traded currencies combined with mainly phone trading to require large staffing numbers. That was a lot of people available to interact with on a day-to-day basis. The introduction of the euro, however, started to cut those numbers back sharply.
Electronic trading has, of course, hit staffing levels across the whole financial industry. If people can just hit a few keys to execute trades, there isn’t much need to have a bunch of people waiting to pick up the phone to do transactions. Trading desks get leaner, even as trading volumes increase (especially in forex).
Consider also that electronic trading can allow potentially market-moving players to act more anonymously. They still leave footprints, of course, but these days the likes of central banks and major money management companies don’t have to actually interact with often multiple bank contacts to do their business. That means you don’t have a dozen traders calling around talking about seeing the Fed or the Bundesbank in the market. In other words, there’s less juicy information making its way around the global trader network.
Lastly, pile on the backlash from the recent fixing scandals. This has traders either constrained from or simply refusing to speak with their counterparts at other institutions for fear of regulatory trouble. That means “flow” information has dried up. Basically, one no longer really has much in the way of old school contacts.
This whole progression has interesting ramifications for trading. In the past, it was definitely the case that those working on a trading desk had an edge due to their access to information about trade flows because of what they were seeing and hearing about. With things becoming so electronic and limited now, though, the playing field has shifted. Certainly, institutions with access to order flows—because of their position in the market—can still make use of that information. The markets are so large and fast moving now, however, that this is largely an electronic thing. Think algos.
That doesn’t leave much room for the old flow traders who populated trading desks for years. Maybe that provides more opportunity for off-desk traders. I do wonder, though, if market efficiency has taken a bit of a hit with information exchange more limited.
By John Forman, Author, The Essentials of Trading
