from pit to screen

We all know locals provide the necessary liquidity which helps to make the market efficient. In a screen trading environment they will be of even greater value.

It may in fact be better for many locals, allowing them anonymous access to a trading style that is now as much bravado as it is skill. The skill set required by a local differs, depending on the individuals trading style. Yet there are commonalities to all traders.

The discipline required by a local or scalper has to be even more ruthlessly exercised than perhaps any other trading style. Speed and agility are paramount, ability to read price action is a must and ability to pull the trigger is probably the greatest asset to a pit traders arsenal.

It's a simple exercise of mathematics really. Locals trade the most often of all traders. They might be in and out of the market within minutes sometimes seconds. Their average lot size may not approach that of the institutional trader, but their frequency of execution certainly makes them the largest volume players in the market, on any given day.

Right now traders in the 10 year pit trade the SPI. They do this by watching ticker boards and therefore nothing but price action. This is a great skill. What is the difference between reading price action on a ticker board standing on the exchange floor or sitting in a comfortable location at a desk with a computer mounted on it.

You don't have to wear a tie and you don't have to run across the floor to get in and out. That can all be done from the same location. In fact there are other markets, in other countries that will be just as accessible. Even the US 30 year bonds, one of the highest volume markets in the world.

So while there is no need for us to have any loyalties to the SFE or our contracts the SFE is in fact attempting to make it easier for more people to trade our markets than most other markets in the world. But that's only a matter of time.

Allocations - well when I started on the exchange floor the way a trade accepted by two parties at the same time was settled, was to toss a coin to see who got the trade. Now it's the traders choice, who he trades with and naturally the guy's who trade a book get treated well by all and sundry, everyone's best mate.

So now we're going to stand in line and that information, how many in line, will be known by the market. But there is no difference. Orders can still be cancelled. Everyone who wants to get set will get set and some that don't want to.

That's part of the risk of trading. Yet locals are more sensitive to it because of their short term scalping mentality. Lets face it, if you got a hunch it's going lower you want to take out the bid and use anything on the offer to get out on.

That could become more pronounced on screens and therefore that just may make the market more efficient, more fluid and therefore more liquid.

If the bid is disappearing then hit it.

One of the greatest edges the local perceives he has is being able to sit on the bid or offer and hope for an allocation as someone, generally an order, chooses to cross the spread. Having received the position he then looks to cover for 1 tick profit or take a 1 tick loss.

As a trader matures he tries to get 2 or 4 ticks out of the trade while still only risking 1 tick. This is what sorts the men from the boys and this is where screens may just help. You can put a stop into the system walk away and go and have a cup of tea. Just as when you'll leave a stop with a mate and the market to work for you.

Computers

You can all use an ATM. So you'll all be able to trade. Just think back to the first day you ever saw a trading pit. You would have said to yourself "What the fuck is going on there?". It doesn't take long to pick it up though, I mean there are not many alternatives to buy or sell.

So, to learn to use a computer, buy one and play. That's my advice. Games preferably. They might be real time strategy games or role playing or arcade style where agility and technique count for everything. What ever game you choose will prepare you for the new trading environment.

Thank god for Bill Gates who gave us Win95 and now Win98 which took the computer out of the realm of hobbyist or geek and into the lounge rooms of quite normal people. Now the standard tools for any employee of any organisation is a desk, a chair and a computer. It's no more frightening than using a remote control for your TV set and making preferential changes is less difficult than setting up or using a VCR.

Nevertheless I do realise that the most difficult stage of a new technological advancement is implementation to the new user. Training rats at university taught us that the most difficult part of learning is unlearning before we can relearn.

Well in the case of the local I think unlearning would be a mistake and in this case unnecessary. Think of it like Sycom but instead of having to deal with another human being on the phone you get to place your order directly.

Technology Accessibility

As long as technical competence is a prerequisite for success, then technology becomes restrictive rather than enabling. According to John Seely Brown (until recently the Chief Scientist at Xerox PARC) "In the last 20 years, US industry has invested more than $1 trillion in technology, but has realised little improvement in the efficiency of its knowledge workers ­ and virtually none in their effectiveness.

If we could solve the problems of the assimilation of new technology, the potential would be enormous. Technology that requires adopters to change their behaviour is all too easy to reject. Good technologies will encourage learning; the best ones will be so intuitive that they simply disappear into the background."

Service & Support

Your selection of broker will be more important now. You will need support in two forms, computer support and help with how to use the new order input application.

But most important of all, the application will have to be intuitive, almost to the degree that it appears to be secondary to the main function. The main function is trading, reading the market and trading.

The order execution part should not be the most important part, the information is the most important part. In the case of a local, price is the only information they need.

Of course this environment will make it easier to use tools such as technical trading tools or a wider news coverage or just more price information from associated markets around the world.

Finally local traders won't be giving up the edge. The perceived edge they think they have is a function of their personalities, that's why they are locals, that's what gives them the ability to be pit traders. That won't change in a screen environment.

Position takers will still be position takers, they won't necessarily trade more often, although I think they will. But the locals already have the edge, they have the ability to pull the trigger quickly, confidently and often. That's the sort of people they are and they are a rare breed.

Margins

One of the biggest fears is change in the margining process. Currently a local can trade 10 year Bonds in lots of 10 or 20 or even 50 with about $20,000 in their account, as long as they are within the limit of $2,200 per contract at the close of business. Initially that won't change, but the broker will have the ability to limit the local trader to a lot size that is more relevant to the amount of funds on deposit.

This can only be good for the market in the long run and good for the individual. One could say it will protect people and their families, from themselves. I think the margin process will change, it will become more real time and therefore instead of making a deposit to cover a possible market move over a 24 hour period, that time period may be reduced to hours.

The need for pre-emptive risk management then becomes paramount. A dynamic margin adjustment process will maintain the edge for the local trader, rather than inhibit trade. It will be up to the broker to address this problem and deal with it accordingly. This is yet another reason why the broker will have to be selected very carefully in the future.

The broker will become the ultimate technocrat, providing a technical service to their clients, while trying to maintain a personal relationship. I live 400 kms north of Sydney. Through the use of the computers and more importantly the Internet I maintain a personal relationship with anyone who has ICQ. ICQ is an instant messaging service that is available from our home page at www.traderspace.com.au

In fact some of my friendships with other traders have flourished over ICQ. It means others and myself will be personally available to answer all of your questions about computers and the new application, regardless of how dumb they may seem. I've heard them all before.

Being a client of UCS gives you access to our computer network, which in turn gives you automatic access to the new trading application and as a bonus, a fast connection to the Internet. Don't let this opportunity pass you buy, get a computer, get some games, take it home and start playing. So by the time we go to screens, it merely becomes a replacement for you current order book.