THE CHALLENGE: As markets make the seemingly inevitable transition to automated trading, former floor-based traders need to relearn their craft. To familiarize themselves with electronic trading technologies, many traders are going back to school.
Dan Fairbanks is preparing for changes that will have a major impact on his business. Fairbanks, a trader at the Chicago Mercantile Exchange, is prepping for the CME's move from an open-outcry exchange to one that operates electronically.
As part of that transition, Fairbanks has been spending a lot of time in the classroom at the Globex Learning Center (GLC). But the GLC isn't your typical school; it's more like a laboratory of vendors, where CME traders can come and tire-kick software and determine which system will best help them in the CME's transition to an electronic exchange.
"I'm at the beginning. It's still very difficult," says Fairbanks of the transition. "When you trade off-floor, you don't get the feel from the energy and actual market swings and the market trending one way or another."
Earlier this year, Fairbanks spent three weeks at the center, working eight hours a day learning about different electronic trading platforms. The transition isn't easy, he says, noting that he's made some trading mistakes and "donated along the way," thanks to inadvertent keystrokes. He says he has to learn to trade differently than he did on the floor. "You don't have the camaraderie you do down on the floor," he adds.
Although he's still learning how to trade profitably through electronic means, the 43-year-old Fairbanks sees the education as an investment in his future - and the only way to compete with younger traders "who are much more computer savvy." "Basically, we all see the handwriting on the wall," he says of the move to more automated trading in the industry. Currently, 95 percent of CME equities, 70 percent of currency products and 65 percent of its interest rate products are traded electronically.
Maz Chadid, managing director, trading operations and facilities, who oversees the GLC, says the challenge for the CME or any exchange that moves to incorporate more electronic trading is to ensure that the traders can make the transition. He notes that exchanges that have moved quickly from being a floor-based exchange to an electronic exchange have found that "They lost quite a bit of their liquidity providers, who just couldn't make the transition."
That's because electronic trading uses different methodologies, and traders cue off of different indicators. Floor traders, Chadid says, cue off of hand signals, sounds and voices, along with market data. "They're cueing off a completely different set of senses" and indicators, such as crude oil prices, futures and the Dow, he explains.
Knowing that, the CME approached software vendors at the end of 2003 and opened the GLC in March 2004. The CME touts it as the first training facility to be offered by an exchange that is dedicated solely to electronic trading. According to CME stats, about 130 people a week are now using the GLC, including mostly traders and clerks who want to make the transition and learn more about the various electronic trading systems.
The GLC has 50 trading stations with real-time news and data feeds, including Reuters and Bloomberg. It allows traders to engage in simulated trading using real-time market data. The focus is on education, training and electronic trading, and more than 20 vendors have signed on to provide access to their systems and training personnel at the site. The facility is also partnering with local universities to develop certificate and continuing education programs.
Chadid estimates that the buildout of the room cost less than $1 million and notes that users aren't charged to access the systems for training. But Chadid remains realistic. "There's no doubt a segment [of traders] won't make it," he says of the transition to automated trading.
As more exchanges look to automate, they will also face the challenges of introducing electronic trading to their market participants. That's particularly true for exchanges that are creating hybrid environments, which mix automation with the traditional floor environment. (See cover story, page 20.)
When it comes to teaching pit traders to use the new electronic tools, "Some people are going to be intimidated by the electronic part of it; these are not the most trainable people," says Bob Iati, formerly an analyst with Needham, Mass.-based research firm TowerGroup. (As WS&T went to press, Bob Iati left TowerGroup.) "I don't think the mechanics of it are difficult. You have to teach them to rely on their instincts as far as the markets go." But they will have to rely more on electronic and analytical tools.
"The kind of training they have is going to be somewhat unforgiving," and traders will learn with their pocket books, Iati adds. The onus will be on them to come up to speed, he says. "They'll feel a considerable amount of pressure - they know there will be people waiting in the wings to snap up those jobs who will be very proficient on the electronic side of things."