In a recent speech to his introducing brokers the Chairman of the Board of one of the largest U.S futures and Forex brokerage firms referred to the brokerage industry as akin to a Roach Motel -- easy to get lured in, nearly impossible to get out.
In early 2000 and I was one of five guys, down from seven, on a trade desk on the bond floor of the Chicago Board of Trade. I had been on the desk for less than a year, after having been laid off from a prominent Japanese bank, after they had closed their floor operations the year before. Rumors were flying that there were more lay-offs to come, as they were on every desk on the floor at the time. I remember just shaking my head every time a fellow arb-clerk or floor broker told me he had gotten married, or had a child. I had no idea why someone in our precarious position would make such a commitment given we knew way ahead of time that what we did -- facilitating the flow of business into the futures pits – was an obsolete skill set. I may have had a healthy ego – it was a territorial imperative on the trading floor -- but I wasn’t blind. ECN’s or Electronic Communications Networks were changing the face of brokerage and trading forever. Institutions would not have to bid up for the quickest and most reliable arbitrage clerks and pit brokers. In fact the price of our skills was in a death spiral. I did get laid off from that last floor gig, and missed the business so much I would go down to the visitors’ gallery of the Chicago Board of Trade on FOMC day just to watch the action. The cost of an exchange seat and security bond, on top of a trading account, was a powerful deterrent to going independent.
The following month I was hired as a full service broker for the largest retail futures firm in the U.S., and as I walked back toward the Chicago Loop following the interview, literally singing out loud because I was so happy to have a job, I had no idea I was entering the Roach Motel.
I figured out pretty quickly that working in the office with salesmen was a far cry from working on the floor where everyone prided themselves on their word being their bond. For many on the sales side of the business the price of having that house in the suburbs and the 2 cars and 2.3 kids was they had to drive downtown to the office 5 or 6-days a week, get on the phone, and tell people what they wanted to hear. While it may not sound hard at first, try it for a year. You eat what you kill, and if your sword dulls, you’re fired. What I did slowly start to realize was that same ECN that forced me off the trading floor and into a sales office was a good thing because it had implications beyond trading, it also meant “social media”, and that had even deeper implications for me than my initial forays into Match.com.
Social media sites that cover trading and markets had an immediate positive effect for clients because it spelled transparency. Before social media a client might be lucky if he knew someone else who had acquired the risky hobby of gambling on the price of the British pound, or on corn futures, let alone what was considered a fair commission rate, or spread, for such a transaction. Social media also promoted writing, and the best writing, as Ernest Hemingway pointed out rolled out the truth like dough beneath a rolling pin. While it might not happen overnight, ECN’s and the media they supported were going to help eliminate the middle men, reduce transaction costs, and create a market place similar to the trading floor where everyone’s word was their bond, and not just because there was an electronic record of it. This was going to happen because that’s the natural direction an open society takes, and social media epitomizes open society.
On the trading floor we were all respectful of each other because we all worked in the same glass house. We knew that no matter who a kid was or where he/she came from, that if they were smart and hard-working that they could start as a runner and end up being the VP that decided who filled the firm’s paper a couple of years later. We were also respectful of each other because when you work in such close proximity to each other as on a trading floor there were no secrets. Just as the trading floor had a magnifying effect on us which steered us toward telling the truth – it’s always easier in the long run to be honest -- the internet has created a glass exchange for both individuals and companies.
The CEO of that U.S. futures and Forex firm went on to say that despite that previous Roach Motel reputation, and his earlier insistence that his children not follow in the family business, he was very proud that his son had not taken his advice, and had started at the bottom of the business and was now playing a leadership role in moving the firm forward into a much more transparent environment. And while that CEO can be proud of his son for continuing to earn the respect of his contemporaries and carve out a living in a very tough industry, it’s social media that is making the real changes that have led to a higher standard of service and support, and lower rates and tighter spreads across the board. And its social media that will insure that firms continue to move toward providing real value, and not just more shiny lures.
Jay Norris hosts Live Market Exercise where he spends 12 hours per week pointing out trade set-ups and signals in live markets during the London/U.S. overlap. He is the author of Mastering Trade Selection & Management, McGraw-Hill, 2011, and Mastering the Currency Market, McGraw-Hill, 2009.
Trading futures or Forex is a risky endeavor and not suitable for all investors!
