Seventh Annual Netcentricity
The Transformation of
April 27, 2007
Howard Frank, dean of the Smith School of
Business welcomed attendees.
Characterized by expanded access, rapid and ubiquitous trading, reduced
reliance on physical marketplaces, today’s financial markets represent both
globalization and consolidation of markets in an ever-changing environment.
On April 27, 2007 distinguished members of the finance community and
renowned scholars from the University of Maryland's Robert H. Smith School
of Business finance and decision and information technology faculty gathered
to assess the forces driving change in financial markets at the Smith
School's Seventh Annual Netcentricity Conference.
Howard Frank, dean of the Smith School of Business, in his welcome to
attendees, discussed his personal involvement with the NASDAQ’s original
computer system, and the immediate and immense increase in traffic and load
it experienced when it went live. “As soon as people get a chance to use an
instrument that makes their work more efficient and effective, they use it,”
he said, referring to the rapid proliferation of technology in every sector
The keynote speaker was Samuel Gaer, chief
information officer of New York Mercantile Exchange, Inc. (NYMEX).
Rise of the Machines
Keynote speaker Samuel Gaer, chief information officer of New York
Mercantile Exchange, Inc. (NYMEX),gave a sweeping historical overview of the
rocky course of technology adoption in the finance industry. He traced the
development of modern trading technology from the time of the 1987 stock
market crash, a watershed event that indirectly resulted in the rise of the
modern day-trader. Gaer discussed the disruptive effects of technology and
the way it changed the trading landscape.
The biggest change in the last few years has been the migration from
primarily floor-based trading to electronic trading. On a global basis, more
than 50 percent of trading is done electronically, and Gaer reports that on
some days NYMEX conducts almost 80 percent of its trades electronically.
Today’s trading floor is bristling with formidable technology, from dense
wireless networks to real-time trading software to a complex distributed
infrastructure. But Gaer says that technology is becoming key to the future
success of the finance industry. “Finance used to be a very non-tech
business, but lately a spectacular change has taken place,” said Gaer.
“Millions of dollars hang on a company’s ability to have a millisecond
advantage over its competitors.”
To achieve this advantage, the industry is pushing the physical limits of
technology, with exchanges measured not just in milliseconds but
microseconds. Gaer predicted a “rise of the machines,” as algorithmic
trading systems programmed by humans begin to replace flesh-and-blood
Albert “Pete” Kyle, Charles E. Smith
Professor in Finance, Smith School
Michael Richter, executive vice president of
development at Lime Brokerage, LLC
Vasant Dhar, professor and head of
information systems at NYU's Stern School of Business
Robert L.D. Colby; deputy
director at the U.S. Securities & Exchange Commission's Division
of Market Regulation
Speakers & Panels
Albert “Pete” Kyle, Charles E. Smith Professor in Finance, spoke about
the economic and financial theories behind these new fast markets. Kyle, one
of the world’s preeminent experts in the economics of financial trading,
related today’s networked markets to the cotton farmer’s marketing
cooperative operated by his father in West Texas in the 1970s. It was an
early electronic market networked by phone lines and a bulky IBM 360; the
market connected far-flung cotton gins and cotton farmers and involved a
simple auction system similar to eBay. So the technology to create
electronic fast markets have been in existence for decades, said Kyle, but
only recently have financial markets become computerized.
In looking at the history of the computerization of financial markets,
Kyle discussed several seminal papers over the last 30 years that shed light
on the financial theories behind current market behavior.
Kyle also discussed the changes in recent financial markets and pondered
the differences between the market’s old profit model, which is a mutualized
private club where member traders make profits from a playing field weighted
in their favor, to the recent development of demutualized public companies.
“Electronic exchanges may be able to realize significant cash flow from low
fees charged to active electronic traders,” said Kyle. “Huge volume with low
fees could be a profit model that works.”
Michael Richter, executive vice president of development at Lime
Brokerage, LLC, spoke on algorithmic trading and its impact on electronic
markets. Vasant Dhar, professor and head of information systems at NYU's
Stern School of Business addressed the question, "Has the transformation in
financial services already
Robert L.D. Colby; deputy director at
the U.S. Securities & Exchange Commission's Division of Market Regulation,
discussed the challenges of regulating fast markets. Colby gave three
reasons why we need market regulations: externalities in the market
(individuals have a propensity to take on more risk than is beneficial, he
explained); market opportunities on an individual basis can't achieve
the same benefits as on a societal level; and to preserve competition.
Bruce Weber (left), professor and area chair at
London Business School.
Albert "Pete" Kyle, Smith Chair Professor of
Finance, Karen Furst, policy analyst with the Office of the
Comptroller of the Currency, and Joel Hasbrouck, Kenneth G. Langone
Professor of Business Administration and professor of finance at
NYU's Stern School of Business.
The conference played host to two panel discussions. Bruce Weber (left),
professor and area chair at London Business School, and Hank Lucas, Smith
Chair in Information Systems at the Smith School, tackled the topic, "How
Long Can Technology Postpone the Inevitable: The NYSE Moves to an Electronic
In the afternoon panel, Karen Furst, policy analyst with the Office of
the Comptroller of the Currency, Joel Hasbrouck, Kenneth G. Langone
Professor of Business Administration and professor of finance at NYU's Stern
School of Business, and Albert "Pete" Kyle, Smith Chair Professor of
Finance, took on "The Consolidation and Fragmentation in Financial
Hasbrouck said, electronic markets are transparent, and order
interactions are increasingly blind. The cancellation rate is increasing --
40 percent of orders are pulled within two seconds; there is a weak
desire to trade and no strong expectation that orders will execute. Albert
"Pete" Kyle, said that the next generation of development will be a customer
trading algorithm for before the order gets generated -- services to
automate order placement strategies. For example, explained Kyle, my 20
customers can trade with each other before they hit the trading floor.
Hank Lucas, a co-chair of the conference and
Robert H. Smith Chair in Information Systems.
There is a migration of major exchanges from floor to electronic trading
-- almost every major exchange is 75 percent electronic (NYSE hybrid 70%,
CME 76%, CBOT 80%, NYMEX 80% - peak). Markets have to move or lose their
franchise, summarized Hank Lucas, a co-chair of the conference and Robert H.
Smith Chair in Information Systems. You can use technology to support an
existing business model, but can’t stop an overwhelming technological
disruption, said Lucas.
The impact is more transparency, less biased markets, and higher volume
trades as traders move down the demand curve: high elasticity. The business
model for an exchange is changing. As traders trade more aggressively, the
market becomes more efficient, but not perfectly so, and exchanges can make
money on volume at a low cost. Virtual market makers provide limited
information and quickly abandon the market.
contrarian view states that existing business models of financial services
firms are not at risk. Major firms are building trading floors to have
traders all in one place with face-to-face contact. Any transformation is in
the markets, themselves. One challenge is interoperability and the number of
players involved in a trade.
Lucas wrapped up the conference saying he believes that financial markets
have indeed been transformed by information technology. "However," said
Lucas, "One man's transformation is another's incremental change."
▓ Rebecca Winner, Alissa Arford-Leyl, Office of
Photos by Vipul Bajpai