Markets Served

If you follow us on Twitter at @Trading_Tech, you’ve probably seen our compilation of 2012’s top 10 news stories in trading, tech and Chicago business—or as we called it on Twitter, the #TTTop10. To close out the year here on Trade Talk, we’re recapping that list.

We chose the news stories that made the biggest impact on the trading industry and on TT’s customers. Whether or not you agree with our selections, hopefully you’ll be entertained and informed by the list.

Without further ado, let’s count down our picks.

10) TT Gets Social

We joined the social media fray in a big way this year with our Twitter feed, our LinkedIn page, our TradingTechTV YouTube channel and, of course, this blog. In 2013, we’ll expand our social reach to other venues, including Google+. If you’re not already familiar with this increasingly popular platform, take a look at “Google+ Is Growing at Facebook Speed”, a recent (and brief) article from Wired.

9) Chicago Tech Scene Emerges

Pundits from near and far wrote about the tech boom in TT’s toddlin’ (home)town. Among the reports were “’The Midwest Mentality’: Why Chicago’s Supposed Weakness May Be Its Greatest Strength” from The Atlantic and “Relic of an Era, Revitalized”* from the The New York Times. We’re loving this trend and very proud to be a part of it.

8) Libor Scandal

What’s a year without a scandal? We saw a big one unfold last summer, when news broke that several major U.S. and European banks had manipulated the London interbank offered rate (a/k/a the “Libor”) and other benchmark lending rates. The Financial Times created “Libor Scandal”*, an extensive web-based compilation of relevant coverage. It’s a good source for updates as the story continues to unfold.

7) No Prosecution for MF Global

Our industry was rocked to the bone in October of 2011 when MF Global imploded amidst widespread allegations of criminal wrongdoing. Although a whopping $1.6 billion in customer funds went missing and many cried for the government to bring a criminal case against ex-CEO Jon Corzine, a 10-month investigation failed to result in the filing of charges. An op-ed from The New York Times titled “Is MF Global Getting a Free Pass?” foreshadowed this outcome. Five months later, the Times made the bad news all but official in “No Criminal Case Is Likely in Loss at MF Global”. Meanwhile, The Daily News recently photographed Corzine roaming free in wealth-ridden East Hampton.

6) Eris Exchange and the Futurization of Swaps

Throughout 2012, the upstart Eris Exchange attracted an avalanche of media attention (and inked a connectivity agreement with TT) for its move to futurize interest-rate swaps by launching contracts that replicate swaps in a cheaper, more efficient manner. Waters painted a bright picture in “Eris Exchange Seeks to Futurize, Standardize, Capitalize”*, and we covered the story on Trade Talk in “Swaps: They’re in Our Future”. More recently, news broke on December 20 that Morgan Stanley will make a strategic equity investment in the exchange and become an anchor bank liquidity provider. The Wall Street Journal spelled out the details in “Morgan Stanley Stake in Eris Exchange Spotlights Market Shift”*. With the deal slated to close in early 2013, and with TT’s new Eris Gateway scheduled to launch in the same time frame, we expect Eris Exchange’s star will continue to rise.

5) TT’s Platform Rebuild

TT made news in October when CTO Rick Lane announced here on Trade Talk in “The Pace of Innovation at TT” that development of a brand-new trading platform based entirely on the TTNET™-hosted ASP model was underway. Rick talked about the rebuild and other issues last month with MarketsWikiTV in this video. You’ll hear more about this next year as TT’s next-gen platform continues to evolve.

4) Regulation

Ah yes, what would our list be without this one? Not a day passed without a mainstream media mention of Dodd-Frank and regulatory reform. Waters recently provided an interesting perspective in “2012 Review: Economy, Regulation Create Perfect Data Storm”*. We even covered it ourselves on Trade Talk in “The New Role of the Software Vendor in the Midst of Risk Management and Regulatory Reform”. This issue will continue to be top of mind in 2013.

3) ADL™ Changes Trading

As we approach the peak of our list, we get to one that makes all of us at TT very proud. It’s ADL, the game-changing visual algo programming platform that we released with X_TRADER® 7.11 in March. Futures magazine tested X_TRADER 7.11 and awarded it a perfect four-out-of-four stars, citing ADL as a “potentially important programming innovation for the algorithmic trading community” and saying it “achieved its goal of providing a powerful graphical interface for the high-frequency algorithmic trader”. Read the full report in “Software Review: ADL/X_TRADER”.

2) Cliff Diving and Sandy

The runner-up in the #TTTop10 is actually two stories because we felt they were equally impactful.

At 2a is Cliff Diving, which every serious media outlet on the planet has covered ad nauseum—especially over the past few days, as we’ve been edging perilously close to the edge. Will the U.S. go over the fiscal cliff in a freefall towards economic doom and gloom or be saved by a last-minute deal? We’ll know very soon. For now, if you’ve been living under a rock and need a primer, you can read up on this debacle in “Stocks Sink 2% for the Week” from CNNMoney. Or if your eyes are starting to burn from reading the articles listed above, sit back and watch “MarketWatch Ahead: Cliff Diving”, a video from The Wall Street Journal.

At 2b is Hurricane Sandy, which ravaged the East Coast in October, killing at least 125 people and reportedly causing damages in excess of $160 billion. Sandy brought Wall Street to a grinding halt, forcing a two-day shutdown of New York’s iconic exchanges. “NYSE and Nasdaq Closed as Hurricane Sandy Hits” from CNNMoney reported the situation as it unfolded.

1) Trading Errors Abound

Atop our list of the year’s most important stories is the epidemic of trading errors and software malfunctions that plagued the industry in 2012. There were some biggies, including Knight Capital’s near-fatal mistake and the aborted BATS IPO. Rather than go through the details here, we’ll direct you to Traders Magazine, which devoted two covers to this ongoing story with “Glitch! Part 1” and “Glitch Part 2”.

That takes to the end of the list, which is fitting because we’re only hours away from the end of the year. If you’re inclined to share your top stories for 2012 or your predictions for 2013, please leave a comment here on the blog, or tweet us at @Trading_Tech and use the hashtag #TTTop10.

Thanks for joining us on Trade Talk these past few months. We look forward to connecting with you in 2013, and we wish you a happy, healthy and prosperous new year.

** Denotes login or subscription is required.

“It’s not a question of enough, pal. It’s a zero-sum game. Somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply, uh, transferred from one perception to another. Like magic.” – Gordon Gekko

The futures markets are generally regarded as a classic example of a zero-sum game. Simply stated, a zero-sum game consists of one winner for every loser. When I play against you, if I win, then by definition you must lose. The net outcome of our efforts is zero.

Participants in a financial zero-sum game transfer money only amongst themselves as they win or lose. Winning traders do not increase the total pool of available funds, they obtain their winnings from the losing traders. Some pundits who label futures markets as zero sum also claim that futures differ from equity markets because in the futures markets, no new wealth is created.

Personally, I feel the zero-sum depiction incorrectly casts futures trading in an unfavorable light. To me, it portrays futures markets as providing little or no useful economic benefit, and instead as just a collection of private high-stakes games for greedy speculators.

By design, a single futures transaction matches the opposing views of one buyer and one seller. And yes, the net proceeds of completed trades do indeed impact the participants as the profits (and losses) are marked to market and ultimately transferred to their respective accounts. So in that respect, I do agree that an individual futures trade in and of itself is a zero sum.

Much More Than a Single Transaction

“The truth is more important than the facts.”
– Frank Lloyd Wright

Where I disagree with those who label futures trading as zero sum is the common disregard for the distinct economic benefits that occur due to the activity of futures buyers and futures sellers. Here’s a quick list of examples describing how their actions do indeed add value and positively impact the overall economy.

First, the fundamental reason why futures markets exist is to efficiently facilitate risk transfer from producers to speculators. This function provides a real economic benefit to effectively manage a business against uncertain variables, such as weather and economic changes. Imagine a world without futures markets for a second…how much would a gallon of gas have cost the day after Saddam Hussein set the Iraq oil fields on fire? Without the futures markets, producers would need to build those types of future uncertainty into their current-day prices.

Volatility is a popular buzzword these days. Futures markets
take the unmanaged, uncontrolled volatility that exists in the real world and
bring it into a controlled, regulated environment. This important role of futures markets is often overlooked and/or misunderstood by casual observers.

Second, the price discovery process provided by freely traded markets constantly assimilates all available information to produce the best possible assessment of current value. Not only are price levels established for today’s date, but the breadth of available futures contracts forecast prices for months and even years in advance. Name another method that can better predict a future interest rate or the prices of specific global commodities several years from now.

Third, the one buyer/one seller transaction—where I win and you lose—does not occur without a great deal of associated enabling capabilities. Someone looking to consummate a transaction equivalent to the purchase of a futures contract does not privately locate a seller on their own, negotiate the price and terms and conduct the trade. An extensive fabric of supporting functions has been developed to facilitate the ability for that trade to even occur. Futures trading has evolved far beyond the necessary standardized contract terms and centralized order matching and clearing. Data center facility providers, telecommunications lines and equipment makers, computer hardware providers and software vendors have all invested time, effort and capital in an extremely competitive quest to better facilitate electronic futures trading. Not only do the futures buyer and seller benefit from these efforts, but the providers themselves (including their employees and shareholders) benefit according to the success of their contributions.

Innovation and Ingenuity Add Value

Lastly, the potential financial reward inherent in futures trading ensures a continuous stream of new ideas from traders looking to identify and capitalize on profitable trading opportunities. In parallel, the efforts by others focused on creating new markets and contracts, along with developing more efficient means to submit, match and process transactions, all work to add value and help increase trading volumes.

When new ideas and innovation move from thought to reality, the contributions benefit more than the originators. The entire market grows and prospers, becoming larger and stronger from these new additions. Human ingenuity can indeed create new wealth.

I suppose that you could argue that the examples I’ve described encompass more than “futures trading” and should more correctly be associated with the “futures industry”. But even so, to me it is clear that a strong, vibrant futures industry provides numerous benefits beyond the individual recipients of each winning trade. Not to try to spin a pun, but while some say zero sum, I say the futures industry provides something much more.

Thanks for reading.