It’s curtains for floor shows

By Bart Chilton

Tribune News Service

Every day, trading on exchanges impacts people around the planet. Stock exchanges affect companies and economies. Commodity exchanges (trading energy, agriculture, metals and related products) influence prices we pay for everything from a gallon of gas or orange juice to a home or car.or a loan on either. How those deals are done has been mutating in monumental ways. Is it for the better? Yes.

For centuries, exchange traders have bartered in physical locations, but like much of our increasingly virtual reality, buildings and human capital overhead are out. Driven by technology, markets have rapidly shifted to all-electronic trading. The weighty Chicago Mercantile Exchange recently announced trading floor closures set for July. The iconic New York Stock Exchange floor has become smaller to accommodate a television studio, but remains a place where corporeal traders congregate (although 90-plus percent of trades are electronic).

We will miss the show: motley traders modelling multicolored jackets and jockeying for position in “the pits” — the shouting for attention, the hurried hand signals and even the occasional fist fight. But the move to electronic markets makes obvious business sense. Most trading already is transacted via computers — much by sophisticated high frequency traders (HFTs). Electronic trading is a win for exchanges, investors and consumers. Here’s how:

Technological trading innovations have made prices better through increased market participation. There’s plenty of elbow room in cyberspace; more traders and trades equal greater market liquidity, which brings about better price discovery (fairer pricing with less market volatility). Since we care about prices on things we purchase, that’s all good.

For average investors, electronic trading is also a win-win. Years ago, it cost $75 for an individual investor to make one trade. Today, not so much. Online trade commission fees start at five buckaroos. Speedy HFTs and the competition between them have improved order lag times, meaning the price shouldn’t change much, if at all, from that which was sought.

Finally, instead of some potentially shady and hard-to-discover floor deal, with electronic trading there’s a data trail of trades, by trader. That’s about the best thing ever for enforcement investigators.

People are often reluctant to embrace technology. In modern markets, however, sophisticated technology is enhancing trading. Do we need new and different regulations for the new and different way of doing business? Of course, but the technology is here to stay, and that’s a categorically good thing for us all.

Former U.S. Trading Commissioner Bart Chilton is a senior policy advisor at the global law firm DLA Piper LLP and author of “Ponzimonium: How Scam Artists are Ripping Off America.” Distributed by Tribune Content Agency, LLC