The dramatic changes in the stock floor trading businesses
Traders signal offers in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) following the Federal Open Market Committee meeting on January 25, 2012 in Chicago, Illinois. Following the meeting the Fed, which left interest rates unchanged, said it does not plan any rate changes until late 2014.
Goldman Sachs Group is reportedly trying to sell one of its stock floor trading businesses (a firm called Spear, Leeds & Kellogg). Goldman paid $6.5 billion dollars in stock and cash for it 14 years ago, but may sell it for a mere $30 million – or less.
When Goldman first purchased Spear, Leeds & Kellogg, it was acquiring what’s known as a “market maker” and a “specialist”. You can think of specialists as the auctioneers and market supervisors for a certain type of stock. Much like the person who runs the butcher section of the bazaar that is the stock market, it’s the place on the trading floor you go to buy and sell a certain type of stocks.
Specialists would be the auctioneers of certain stocks, they would help bring interested buyers and sellers together, and they could put in electronic instructions for orders (don’t buy or sell X stock until it hits Y price).
Goldman Sachs announced that with its purchase of such a specialist firm, it was now “at the forefront of advanced technology.”
Unfortunately for them, that was not the case.
What happened? Computers happened.
“The way we visualize the stock markets has completely changed,” explains Eugene White, professor of economics at Rutgers University. No longer are swarms of brokers scurrying across the trading floor to a specialist’s post. “That’s gone right now pretty much.”
Many orders are now akin to sizeable parking lot deals, done not in one central clearing house for a stock category but rather on any number of servers, says White. Around half of all stock trades are done this way -- electronically through high speed trading. Computers implement orders and react to prices on their own, and on different electronic exchanges. And the volumes are enormous – often larger than any specialist could reasonably accommodate.
“What’s happened is that there are huge orders now that come in and which are negotiated directly between different parties,” says White.
These deals are done millions of times a second and automatically. In fact, computers have gotten so good at doing this they’ve driven down profits for all middle men – computers and humans alike.
“The spreads have narrowed enormously,” says White, referring to the profits that specialists would make as middle men. It’s a long term trend dating back 50 years, but the rise of high speed trading has accelerated it apace.
It’s one other reason why a company that Goldman Sachs Group bought for $6.5 billion may sell for just a fraction of that - reportedly just $30 million -- “not even really the price of a trophy apartment” for a Goldman executive in New York, says White.