The history of the financial markets has revolved around community. The Buttonwood Tree, the Stock Exchange, the delivery zone and the talent pool - all were very New York, Lower Manhattan-centric. Even the design of the trading floor revolves around community, as fear, emotion and important information can often be felt before it can be read.
We needed community in the early days (really, until as recently as 20 years ago) for finding buyers and sellers, for price discovery and to deliver physical securities. But technology changed that. Functions were automated; quotes disseminated electronically; securities dematerialized; and no longer did we need a crowd to trade. No longer were we tied to Lower Manhattan.
As technology enabled and building infrastructure impinged, firms fled Lower Manhattan. They moved uptown, out of town, out of state and even cross-country. Order routing technology allowed trading desks to be located anywhere. Electronic exchanges enabled not only the matching of orders at increasingly faster speeds, but the development of virtually linked exchanges where the ease of trading across venue is many times easier than trading within a traditional floor-based exchange.
So, do we still need community? Has technology and connectivity killed our need to be close to a market center? A few years ago I would have said yes. In fact, I probably did. But increasingly, the answer may be "no." Technology and connectivity are actually forcing our firms closer together. Well, maybe not our offices, but certainly our computers and networks.
Let me explain. A few weeks ago, The Tabb Group hosted a focus group on connectivity in which we brought in some of the best and brightest industry connectivity specialists. What they said surprised me. They basically said that "The speed of light is too slow." They noted that firms located further away from the market center were being shut out because the speed of light could not carry their orders to market fast enough.
That amazed me. Now, anyone sitting far away from a noisy event knows that there is certainly a gap between the speed of sound and the speed of light. But who, besides Einstein, ever thought that the speed of light (299,792,458 meters per second) would be too slow?
But as our markets increasingly become more electronic, time matters. Whether it's the 7-millisecond delay between Chicago and New York, or the 35-millisecond delay between the Big Apple and San Francisco, increasingly, if you are not co-located near where you execute, you're just not fast enough to grab the brass ring.
While you might think, "Who cares?", it's impacting the market in very real ways. Hedge funds are saying that market opportunities they were able to take advantage of last year are no longer accessible. By the time they get to market, the opportunities are gone. And, it is not just the hedge fund that is having troubles. Bulge-bracket brokers are troubled as well. Many are actively looking to accelerate their market data velocity and their execution speeds.
So maybe the NYSE was right all along - maybe we just need a community, a venue, a floor. We may just need to relocate back into the delivery zone. But, unfortunately, community in this model does not mean people, it means technology. So, instead of having floor traders, specialists, and compliance officers, we may just have high-speed clusters, in-memory databases and fiber-channel networks. While this new sense of community may not be as inspiring as the Buttonwood, a 5-billion-share day certainly can't be executed around a tree.
Larry Tabb is founder and CEO of Westborough, Mass.-based The Tabb Group, a financial-markets strategic-advisory firm. [email protected]Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio