A Great New Idea: You Win, Wall Street Loses
by Tom Dyson
November 21, 2006
There was no yelling and shoving like you see in the movies. I didn’t even see any hand gestures.
Many of the terminals were empty, and the rat runs around the trading posts weren’t crowded at all. The last time I was here – just six years ago - traders had to throw elbows to cut through the crowd. On Friday, I wandered around the trading floor without once saying “excuse me.”
I visited the New York Stock Exchange last week. The trading floor is dying. Electronic trading is taking over. They say 80% of total volume is now traded electronically. The NYSE already has fired 450 people this year and just announced another 500 will follow. In total, the NYSE will fire 35% of its employees. The firms who work the floor of the NYSE – called “member firms” – are also firing dozens of traders.
Our guide took us into a room the size of a college gymnasium. It was brightly lit and filled with trading pods. Hundreds of screens hung from these pods and the brokers milled around underneath watching them.
Within the next 18 months, the exchange will close down this room and move the 33 firms located in it to another floor. The closure of this room will save them $80 million a year, my guide said.
Regardless, electronic trading worked out well for my visit. All the traders seemed to be loafing around. Half of them were eating pizza, the other half were shooting the breeze with their buddies. I could wander around and ask as many questions as I wanted.
I spend half an hour chatting with a specialist from the firm LaBranche and Co. He explained his job and showed me how his systems worked. He was responsible for a dozen stocks. Allergan Technologies – makers of Botox – was one. BJ’s Wholesale Club was another. I asked him why he didn’t trade stocks in the same industry. “Imagine if I had to trade Exxon, Chevron, and Schlumberger,” he said. “If news came out, we’d get slammed.”
Every few minutes, dealers would come up to the post and interrupt us. Not to buy stocks - buying and selling is done through a handheld device the traders hang around their necks. These guys wanted information. They’d ask my man where the selling was coming from or if he had any scoop on big buyers waiting in the wings.
Nymex was the big topic of conversation for the day. Nymex, short for New York Mercantile Exchange, is the famous commodity exchange a few blocks uptown. On Friday, stock in Nymex traded for the first time. They priced the IPO at $59 a share. It opened trading at $120 and immediately jumped to $150. By lunch, it had backed off to $135.
Everyone was talking about it. But here’s what interested me:
NYSE stock is up 726% since its August 2004 IPO and Chicago Merc stock is up 1,155% since its IPO in 2002. Then the Nymex goes up 130% on its first day of trading.
On one hand, the floor gets hollowed out and hundreds of traders lose their jobs. On the other hand, investors make millions as the stock prices of the exchanges all shoot up.
Investors win and Wall Street loses.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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