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The Fear of Computers

17 June 2015 David Weisberger

"Hey, Weisberger, is this really about you???" Some traders yelled as I walked by the NASDAQ trading desk, in 2004. "Is what about me?" I asked. Two traders on the desk pulled out copies of Maxim Magazine and there it was, "Be a Jerk", by Erin Ness, the third highest placing woman in the World Series of Poker... Erin had written about yours truly.

I had just knocked Erin out of the 2004 World Series of Poker main event, earning myself a few seconds on ESPN. In the article she describes my use of headphones as trying to look like I was ignoring the high stakes game going on. Erin then called my expression "smug," when both our hands were turned face up and I was a 3:1 favorite. The win pales in comparison, of course, when a geek like me gets mentioned by the "Poker Hottie" in Maxim, making it easier for traders to relate to me. The fact that I was building quantitative engines that replaced traders with algorithms was forgotten and I was considered one of the guys, for a time.

Last week, I was reminded of this story when reading David Siegel's excellent piece in the Financial Times called "Human error is unforgivable when we shun infallible algorithms." In the editorial, Dr. Siegel describes the normal human reaction to automation, and in my case, the people who build those systems. He showed, by quoting multiple studies, how people tend to ignore positive facts about computerized systems and positively associate with human controls, despite repeated failures. While he wasn't talking about Wall Street, per se, his article is very much on point to the current media coverage of technology and system complexity.

His logic illustrates how the traders and salespeople, who long for the glory days of Wall Street, often use irrational fears to promote their agenda, as does the media. The combination of "Occupy Wall Street" fervor and a dystopian fear of computers is a powerful cocktail for selling books and moving public opinion. Sadly, these people are constructing a lie of Orwellian proportions.

The reality of equity trading on Wall Street is that the leaders of most large firms fought, tooth and nail, against electronic trading for over 25 years. As I chronicled in one of my first commentaries, the program trading desk that I helped create, was mistrusted by the "cash" traders. Remember, my first encounter with NASDAQ traders, they called me a "little shit", but by 2004, I was briefly upgraded to a respected "smug jerk" in Maxim. Worse, the "geeks," my people, as it were, were openly scorned by the most successful traders and salespeople unless they had their own proprietary trading operation and even then were not well liked. This dynamic existed for many years, particularly in the customer-facing businesses in equity departments. Business groups such as program trading, electronic market access and algorithmic trading were considered "cannibalistic" to the business. In Wall Street terms, "cannibalism" referred to the collapsing of the sacred 6 cent per share commissions earned by "high touch" trading in those days.

Those high-commissioned fueled lifestyles, for thousands of traders and salespeople, can charitably be described as excessive. Much of the public's distrust of Wall Street was fueled by media accounts of these excesses, including nightly client entertainment at top restaurants and private jet trips with all the "trimmings."

Many factors led to these "entertainment" practices being curtailed, but the largest was the advance of technology. Quite literally, thousands of high six and seven figure jobs were lost or scaled back as brokers and asset managers were replaced by computer programmers and quantitative analysts. Those quants and programmers earned far less money on average and also tended to be much more restrained in their lifestyles and client entertainment. Considering this anecdote, it's not really surprising that the popular discourse has been as biased as it has. After all, the people who either lost their jobs or had their earnings (or perks) reduced had earned a lot of money and had both political and media contacts.

Despite the barrage of editorials and news stories describing the perils of our complex, automated market, the real news is excellent. Almost every major brokerage firm has embraced the discipline and superior trading quality that electronic trading provides. The U.S. Market is the best in the world, with trading costs well below every other major market. While the US Equity market is, indeed, complex, technologies such as Smart Order Routers (SORs) have evolved to simplify them to the end investor. Virtually every trading system has access to SOR technology, including those serving online brokers, order management systems and institutional traders. SORs are truly ubiquitous, provided by brokers, exchanges, and software vendors so investors do not have to worry about the technological details of connecting to every venue.

I do not believe that the average person needs to understand these technological details, underpinning the SORs they use. I am certain, for example, that the complexity behind applications like Google Maps, is way beyond the average smart router, though no one cares. Most people are happy to use complex applications to get around town and even let applications like UBER use it to calculate their fees... (Have you ever heard of a person complaining that UBER overcharges by using GPS?) On the flip side, how many times have you thought that a taxi meter was rigged? (One is an industry solution and the other is a government regulated monopoly) The taxi solution is simpler, but is it better?

That said, while there is no need for understanding the technological complexity, investors should care a great deal about the performance of routing strategies. In the UBER example, as well as, with most internet enabled consumer products, there is a rating system. Since equity trading is more nuanced, there is need for a more detailed analysis. That is why I have repeatedly called for greater transparency in routing practices. With the ability to properly measure various routing methods and the venues that are accessed, investors would be able to fine-tune their trading and improve overall performance.

The bottom line is that there is still work to be done to provide better transparency and metrics, but regulators are rightly hesitant to make anti-competitive, structural changes. Absent competition and the ability to innovate, the markets could backslide into the "men's club" that it used to be. Progress is a good thing, and while investors should demand more insights into how their trades are executed, education and analysis is the only real answer. Not, surprisingly, this will require more automation and computation, not a return to more manual processes.

Sincerely,
Your Smug Jerk

David Weisberger, Managing Director, Trading Services at Markit
Tel: +1 212-488-3290
david.weisberger@markit.com

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