<A> Two Options Traders Hope To Make Floor Trading Wireless
By Steven M. Sears
NEW YORK (Dow Jones)--It seems like a contradiction. Computer screens surround the trading floor, flashing prices, quotes and the latest news. Complicated formulas are used to determine when to make a trade.
Despite these high-tech advances, traders at exchanges around the country still stuff buy and sell tickets into their pockets to record their daily transactions.
That could all change, at least on options trading floors.
Two options traders at the American Stock Exchange, Steven Lesser and Biddle Worthington, have developed a computer program, initially called Be-Bop Analytics, that processes option and stock trades electronically. It should increase the speed of options trading and the efficiency of traders.
Rather than wearing trading jackets bulging with order tickets, pencils, pens and palm-sized computers that run analytical programs, options traders would wear battery-packs strapped to their belts to power a two-pound computer that handles every transaction needed to compete in the market.
Screaming, jumping and jostling would still be a hallmark of options trading. But Be-Bop would lend a degree of ease and sophistication to the profession.
Be-Bop also could eliminate "DK" risk, which occurs when two traders misunderstand the terms of the trade and the clearing firm sends them a "Don't Know" notice that cancels the transaction.
The mix-ups occur when traders can't hear each other over the screaming of the crowd, for example, and they both complete sell tickets when in reality one trader thought he was buying calls from the other.
"The problem is not the quantity of DKs. It's the size of the losses on the very, very rare DK, which may cost thousands or even tens of thousands of dollars to repair," Lesser said. Be-Bop would confirm and reconcile trades in minutes.
Options traders now use hand-held computers to track their positions and model probabilities. Many of those computers were designed by Blue Note Analytics Inc., a company Lesser and Worthington formed in the early 1990s to market bid/OPTIONS Power Pack, an analytical computer program that analyzes options positions and models "what-if" scenarios. The program is used by traders at the four U.S. options exchanges - the Amex, Chicago Board Options Exchange, Pacific Exchange and Philadelphia Stock Exchange.
Be-Bop, however, is designed to go a step beyond Blue Note's first program. The system will operate over a wireless local access network and will have all of the capabilities of bid/OPTIONS, and then some. Its first program runs on palm-top computers that can interact with each other.
Options traders at various exchanges are testing Be-Bop software for kinks. A roll-out date hasn't been set because Lesser and Worthington aren't sure what refinements will have to be made.
They also are talking with major clearing firms about integrating their computer protocols into Be-Bop's software to enable the wireless transmission of order reports.
"I guess I look at the technological enhancements to the trading floor the way a novelist might look at a word processor," Lesser said. "They are both tools that help the user do a job, increase accuracy and lower costs. Neither is a threat."
But options traders do feel threatened by technology even though they use sophisticated hand-held computers to track positions and model probabilities. The fear is accentuated by the proposed merger between the Amex and Nasdaq. Traders are afraid the merged exchanges could adapt Nasdaq's screen-based trading systems and abandon the open-outcry market and the traders who work there.
Even though Wall Street has relied on computers for decades, most options floor traders only began using computers when Hewlett-Packard Co. (HWP) introduced its HP 100 LX palm-top computer in 1993. Before this, said Worthington, co-developer of a new computer program that electronically processes option and stock trades, computers were too big and heavy to be used on the trading floor.
Floor traders were at a disadvantage to the specialists who made markets in the options and to the upstairs traders who sent orders down to the floor. Both used computers, a definite edge in a fast-moving market.
Traders carried papers as thick as the Manhattan telephone book that listed option prices at different volatilities. The reports were unwieldy and expensive and sold by none other than Fischer Black, one of the creators of the now-standard options pricing formula, Worthington said.
"Everybody had access to a computer except the trader in the crowd and he felt he was at a disadvantage," he said. "That's why he carried around reams of paper of what-if scenarios."
Be-Bop's co-developer, Lesser, rolled his reports on wands. When the market started moving, he started rolling through the papers looking for the right model. Other traders called him "Scroll Man."
"It was a seat-of-the-pants business," Lesser said.
Lesser and Worthington spent years thinking of how computers could improve trading. They wrote computer programs and waited for technology to catch up with them.
Along the way, Worthington, a retired trader and former Amex governor, became the first person to program the Black-Scholes options pricing formula onto a small calculator. Before his breakthrough in September 1976, the formula only ran on massive, mainframe computers. Lesser has a thorough grounding in computers and a long history trading options. He is now the chairman of the Amex Market Makers Association.
When Hewlett-Packard introduced its palm-top computer, they saw a market develop overnight for their work.
One important advantage that Lesser and Worthington say they have over competitors is their backgrounds. "It's critical that the developer of software has trading experience," Worthington said. Several companies have tried to develop trading software only to produce an inferior product without the input of traders.
Lesser doesn't think technology will replace traders or floor brokers. He said they're the only ones who can read the mood of the trading crowd and the direction of the market to get the best price for customers.
"Options trading may soon become wireless to the extent that we are able to remove all pencil sharpeners from the floor, but floor-based human interaction will remain the key to the liquidity and price improvement capabilities of our markets," Lesser said. |
