Where Are All The New Traders Going to Come From?

Posted by Jeff Carter
on January 26th, 2012

Was speaking with some friends the other day. We are a bunch of old pit traders dealing with the new electronic world. Each of these guys was successful in their own way. That was one of the great things about a trading pit. Find your niche, and you could exploit the hell out of it. There were infinite ways to find value. It just wasn’t buying and selling.

In the course of our conversation, one asked, with an electronic environment where are all the traders going to come from?

It’s a fair question. Pretty relevant. When Congressman used to visit the CME ($CME) floor we’d take them around. I always told them that “we grow locals around here like Illinois grows corn”. There was never a shortage of people looking for the opportunity to get into the pit and trade.

Think about it. What credentials or qualifications did you need? You didn’t need a degree from anywhere. You didn’t need a certification. All you needed was cash, a survival instinct, and a strong stomach. There were very few barriers to entry.

In the electronic arena, the game is very different. The co-location game has made it impossible for but a few firms to get close to order flow. Bandwidth is only so large. While it’s supposedly more democratic because more people can easily access the market, it’s not unlike an order filler being overwhelmed and just dolling out his order to the people closest to him.

To successfully trade today, you have to develop a computer program. The start up costs are significantly higher providing a barrier to entry to most people. It takes a lot of testing to make sure whatever you have cooked up will work. Testing means either burning through working capital or taking your chances in the live market.

Not only are the costs much higher, but the high tech marketplace has commoditized opportunity. Why should it be different than any other distribution system that has been radically flattened by the internet? It’s much tougher to find a niche and exploit it. Today’s successful arbitrage play is quickly eaten up buy algo’s and machines. Even if you are right the market, the intraday moves can be so big they force you out of a winning position. There is no way to protect yourself.

When I was in the pit trading, even when I got lambasted with a big number, I had a place that I could go with them. I have pit traded liquid contracts, Eurodollars($GE_F), and illiquid contracts, Hogs($HE_F). I also spent a little time in currency and the S+P ($ES_F) pits. Mistakes generally weren’t fatal. Today they are.

One long time successful trader I know who said it best. He said, “In the old days, I would always buy the high and sell the low of moves. It’s because I was working in and out of stuff and you never knew if that was a point where the market would really blow through and take it to the next level or not. It was worth the risk, because when I was wrong, I would only lose a few points getting out. When I traded, through the whole day I’d be right 70% of the time. The other 30%, I’d be wrong and lose. Today, every time I put a position on, the market runs against me. Doesn’t matter the size. How can I be wrong 100% of the time?”

I think it has a lot to do with bandwidth and co-location. There are only so many feeds that can quickly go across the net. Only so many servers that can go next to the main server. Unless you are one of the chosen few, you are out of luck.

In the old days, we never ran out of traders. In the new times, I think the world is contracting.

follow me on twitter.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

You might be interested in: