After the closing of the New York Stock Exchange as a result of the massive Superstorm Sandy that swept over New York, the question automatically came up – could this all be done by computer?
More to the point, can it all be done in a more distributed way, without everyone congregated in one location? The answer is yes. But there are several considerations that would have to be resolved first.
Moderating Influences – The operation of the exchange has some processes that moderate fluctuations in price. The problem comes up when significant order volume comes in at one time and computer generated orders from automated business programs exacerbate the price movement instantaneously. Historically, the specialists on the trading floor provided the other side of many transactions as they stepped in to make for a more stable market. Additionally, the specialists hold market orders that are tripped when a specific price is reached. As prices fall, the specialist, and the order book that they hold, move in to buy. When prices rise, the opposite occurs. Further, there is an automatic suspension of trading if prices move too far. Any computer system needs to replicate this effect in a much shorter time frame and with much larger share volume.
Supporting and NYSE Member Systems – The underlying support that comes from the Depository Trust, where the actual trades and records for the NYSE members are kept, also partially occurs in lower Manhattan. Serious disruption of these activities would also have to be accounted for. All of the member firms also have back office personnel in the lower Manhattan area and they need to be able to synch their records with the exchange. If those staffs are not able to get to work, as happened in the most recent storm, it would cause serious operational problems as well.
It Can Be Done – It will require a broad based approach that accounts for the actual trading activity as well as the supporting software and business programs. A half-way step is to allow some trading to occur outside the physical floor. The US bond market is traded by individuals on the phone or in front a computer screen. Trading activities can be disbursed around the country. What would be left is to determine how the record-keeping would be done.
The extent and vitality of the US markets are an exciting place to look for a future career. Students learning business today can expect to be a part of the ever changing world of finance. And find answers to questions we haven’t even thought of, yet.