03.23.2020
By Terry Flanagan

Trading Loses ‘Color’

Wall Street is a little less colorful today. And it’s not just the gray skies and rain.

The unprecedented temporary closure of the New York Stock Exchange’s physical trading floor, due to concerns around COVID-19, means that human equities and options traders are not supplementing the machines with their own unique liquidity.

Monday, March 23 was the first day the iconic NYSE floor was traderless since it opened on May 16, 1792, according to NYSE Group Chief Operating Officer Michael Blaugrund.

“The bell rings above an empty floor,” Blaugrund said on Inside the ICE House, a weekly podcast hosted by NYSE owner IntercontinentalExchange. Only one company traded on the NYSE today — BNY Mellon – had shares traded back in 1792, Blaugrund said.

Floor trading was the only game in town decades ago, but that changed with the emergence of electronic trading, and the presence and influence of floor traders steadily dwindled in the late 1990s and 2000s. NYSE is one of financial markets’ last bastions for physical traders, and its estimated 500 men and women who still work on the floor add value mostly in large and/or complex transactions that need a human touch.  

Blaugrund said Designated Market Makers that typically provide liquidity in a blended human/electronic format now be electronic-only. “Even though humans are not going to be on floor, DMMs still have accountability to our issuers and regulatory obligations to provide continuous bids and offers to the market,” he said. 

Human traders are not just for CNBC broadcasts or 1980s movie nostalgia — they play an important role in the market ecosystem, one that will be missed during this temporary shutdown. “A human DMM is not going to step in with manual interest if the algo is unable to open a stock due to any number of circumstances,” Blaugrund said.

Human traders are perhaps most valuable in providing ‘color’ on liquidity. This can be loosely defined as qualitative, sometimes anecdotal information on how easily a trade can be executed, based on what other traders are saying or doing.

Floor brokers handle about one-third of NYSE order flow. “In a fully electronic mode, those order types and access to point-of-sales cannot occur. Traders must use different mechanisms.”

“NYSE will remain the principal price-discovery venue for those stocks and will remain the most significant risk-transfer venue for those stocks,” Blaugrund continued. “Our model is at its most robust and excellent and full-throated with the human interaction. But even diminished, we are going to provide a superior product.”

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