The dwindling ranks of people who work on trading floors in New York and Chicago are worried.
Those boisterous pits full of sweaty guys literally screaming to make a buck have been losing ground to computer screens for years. Now, some believe that last week's deal for the New York Stock Exchange to merge with electronic-trading upstart Archipelago Holdings signals the end of manual labor in a rapidly automating business.
Friday's announcement by the Nasdaq Stock Market that it would buy another electronic trading network, Instinet, seems only to advance the fear that keyboard clicks will drown out the sounds of open-outcry trading.
The way the NYSE has traded stock has gone mostly unchanged for nearly 213 years, though certainly the volume of shares and the speed of transactions has picked up considerably as computers were brought in process trades. Yet the idea is the same -- a floor trader walks up to an auctioneer, called a specialist, and places an order to buy or sell. The specialist finds a trader interested in that order and brokers a deal.
Trying to allay fears, NYSE Chief Executive John Thain said there were "absolutely no" plans to do away with floor trading. Indeed, the NYSE will continue to explore trading options, futures, exchange-traded funds and other derivative investments alongside its equities -- and some of those derivatives could come from Archipelago, which has been making inroads in options trading.
But while the NYSE could take some derivative business from ArcaEx, the electronic trading platform could rob the floor system of trading volume -- and that could have an impact on prices as well as the people who work there.
Within the specialist system, floor traders and specialists need a certain amount of critical mass in the number of shares traded in order to keep prices from becoming too volatile. If buyers and sellers are automatically matched via computer, then maintaining an orderly market in a stock becomes more difficult, since the real people on the floor of the NYSE will have fewer shares to work with.
For the most part, prices on all-electronic markets aren't too much more volatile than on the NYSE. But when there's exceptionally good or bad news about a given stock -- or a general sell-off or buying spree -- an electronically traded stock tends to be far more volatile than a stock managed by humans.
And it's that kind of price security that may make the floor traders and specialists a selling point for the new combined NYSE Group.
"You know, a lot of people are belittling the role of the floor, and you would think that with the evolution of electronic trading, it becomes less important," said Yakov Amihud, Rennert professor of finance at New York University's Stern School of Business. "But in our research, we've found that in times of intense volatility, where do traders go? They go to the floor."
If the floor traders do see less volume, that could mean fewer traders and fewer specialists will be needed to manage trades. While the big Wall Street firms such as Bear Stearns, Goldman Sachs, Merrill Lynch and Morgan Stanley could easily reabsorb unneeded floor traders and specialists into other areas of the firms, much of the floor is populated by smaller trading firms. And at least one publicly traded specialist firm, LaBranche & Co. Inc., has no other meaningful businesses aside from managing auctions on the floor of the New York Stock Exchange.
But not everyone believes open-outcry has a future.
"I think the floor is eventually going to go away," said Jodi Burns, a senior capital markets analyst with Celent Communications. "Of course, Thain can't really say that right now. But if you look overseas, they're now all-electronic exchanges when they used to be floor-based."
In the Archipelago merger, the NYSE will follow the Chicago Mercantile Exchange and others in going public, and many view that step as leading inevitably to more efficient electronic platforms.
Up to now, only the entrenched interests of floor traders who controlled the exchanges have kept computers at bay, said John Damgard of the Futures Industry Association, a trade group that represents financial firms.
"Open-outcry existed much longer than it should have because the guys who owned the exchanges insisted on it," Damgard said. "When it's stockholders deciding which way it should go based on their investments, open outcry is doomed."
Combine that political shift with much improved trading technology and the transformation can blind-side the unwary.
Just ask Michael Arbor. At the beginning of last year, his successful business as a broker in the Chicago Merc's Eurodollar trading pit supported 10 employees and provided a fine living.
Then electronic trading caught on. "It was a whole different ballgame," Arbor recalled.
By June, his revenues were cut in half and his work force had dropped to five. He was still making "good money," he said, and hoped to hang on.
By November, though, he was barely breaking even. He lost money in December, quit at the end of January, and now he's searching for a new career.
"I don't know what to do," he said. "I'm 42. I did that for 20 years. I have no other job experience but pit experience."
While the politics of public ownership and the advance of technology played a role in bringing about the Eurodollar transition, he said, "The real reason it didn't go quicker is that we didn't have competition."
No question, the pressure of competition, above all other factors, has pushed traditional exchanges to adopt computers.
The Eurodollar pit where Arbor worked came under threat from the all-electronic Euronext.liffe exchange. The all-electronic Eurex exchange targeted Treasury futures at the Chicago Board of Trade, and the all-electronic International Securities Exchange took aim at the Chicago Board Options Exchange's equity options. In each case, the trading floor suffered.
Not coincidentally, open-outcry has the greatest share in markets without competition, such as those based on agricultural products too small to attract much interest, and those based on indexes that trade exclusively under license deals.
The parochial concerns of brokers such as Arbor who have found themselves without a job have given way to the ambitious pursuit of business worldwide. Where competition with electronic markets has led to greater access, reduced costs and increased transparency, volume has surged mainly through computers.
At the publicly held Chicago Merc, for instance, volume in the first quarter of 2005 shot up 39 percent, with two-thirds of it done by computer, up from less than half the year before.
As a Merc spokesman puts it: "The new customers we're targeting are not in Des Moines. They're in Milan, Gibraltar, Singapore and Shanghai."
In the end, the gains will more than compensate for the losses as open outcry wanes, said Richard Sandor, founder and chief executive of the Internet-accessible Chicago Climate Exchange.
"One set of folks have been supplanted by an even larger number of upstairs financial traders" who ply their trade via computer, Sandor said. "There's never been more prosperity."