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Ivy Schmerken
Ivy Schmerken
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Wall Street's Legendary Innovators

The current state of high-speed trading, derivatives and dark pools owes its history to a long line of innovators.

I have met many innovators over the course of my career reporting on financial technology and electronic trading, enough to know that the real force behind Wall Street is the people, not the machines. Today's era of high-frequency trading, complex derivatives and electronic exchanges didn't just arrive overnight. It's taken decades of work by innovators in finance and technology -- people who blazed a trail in market data distribution, middle- and back-office operations, options pricing models, portfolio construction, basket trading, matching engines, and more.

So what are the characteristics of innovators? I asked my husband, who is an engineer and whose father was an inventor, of sorts. (In the 1970s, he invented a phone meter that allowed consumers to measure the cost of routing a call through the nearest central office.) While my father-in-law's ingenuity never resulted in a big payday, he nonetheless turned his family's house into a factory and enlisted his four children to work for him. One time he even took apart the family television set, refusing to call a repairman, but lost interest and never put it back together again.

Shaped by that experience and traumatized by several engineer bosses who fancied themselves as pioneers, my husband tells me, "Innovators tend to be eccentric and obsessed with their ideas. They also tend to be ahead of their times, and they can also be socially inept. But they have charisma and attract a cult following."

Steve Jobs offers a perfect example. Though he was forced out of Apple, the company he founded, in 1985, he kept at it, founding NeXT, which built the NeXT Computer workstation that made inroads on the Street in the 1990s. Jobs sold the NeXT workstation to Wall Street firms such as O'Connor & Associates.

In 1989, Chicago-based O'Connor & Associates, a proprietary options trading firm, formed a joint venture with Swiss Bank Corp., SBC/OC Services. The joint venture was designing OTC derivatives with NeXT workstations to speed up application development. Craig Heimark, a managing partner of the O'Connor Group and head of the SBC/OC venture, told me at the time, "It's better to take risks with technology than [with] your balance sheet."

Despite Jobs' reputation as an innovator, however, NeXT had a hard time gaining critical mass in the capital markets, where Sun Microsystems dominated. But that didn't matter to Jobs. He ended up going back to Apple to rescue the company and introduce to the world the iPod, iPhone and most recently, the iPad tablet.

Paving the Way on the Street

In the same way that Jobs set the standard for digital consumer media, there have been key innovators on Wall Street who laid the groundwork for the modern financial industry and influenced generations of traders to come. I often think of Leo Melamed, the former CME chairman emeritus who was the architect of Globex, the CME's electronic trading platform, in the late 1980s. Melamed, who writes science fiction in his spare time, envisioned the future -- and he saw the global growth of futures exchanges. Like many innovations, Globex had a rocky start and faced resistance from traders in the pits, but eventually Melamed's vision was validated and the CME went electronic.

Steve Wunsch also comes to mind. Before the term "dark pool" was even muttered, Wunsch, a former VP at Kidder Peabody, teamed up with computer scientists from Cray Research to develop an auction system for stocks that completely bypassed brokers and exchanges. Institutional investors would enter their orders and stipulate the prices they would accept. Then three times a week, the computer would sort through the orders and find the equilibrium price. While computerized markets such as Jefferies Posit (before it was sold to ITG) and the Instinet Crossing Network already existed, they used the prices from the exchanges, whereas Wunsch's system set its own prices by matching institutional buyers and sellers.

At the time, observers noted that Wunsch was testing the limits of Wall Street. Clearly, that trait -- the desire to disrupt the status quo -- is another characteristic of innovators.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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