Trading room

Room where traders operating on financial markets gather

A trading room gathers traders operating on financial markets. The trading room is also often called the front office. The terms "dealing room" and "trading floor" are also used, the latter being inspired from that of an open outcry stock exchange. As open outcry is gradually replaced by electronic trading, the trading room becomes the only remaining place that is emblematic of the financial market. It is also the likeliest place within the financial institution where the most recent technologies are implemented before being disseminated in its other businesses. Specialized computer labs that simulate trading rooms are known as "trading labs" or "finance labs" in universities and business schools.

The Trading Rooms first appeared among United States bulge bracket brokers, such as Morgan Stanley, from 1971, with the creation of NASDAQ, which requires an equity trading desk on their premises, and the growth of the secondary market of federal debt products, which requires a bond trading desk. The spread of trading rooms in Europe, between 1982 and 1987, has been subsequently fostered by two reforms of the financial markets organization, that were carried out roughly simultaneously in the United Kingdom and France. In the United Kingdom, the Big Bang on the London Stock Exchange, removed the distinction between stockbrokers and stockjobbers, and prompted US investment banks, hitherto deprived of access to the LSE, to set up a trading room in the City of London. In France, the deregulation of capital markets, carried out by Pierre Bérégovoy, Economics and Finance Minister, between 1984 and 1986, led to the creation of money market instruments, of an interest rate futures market, MATIF, of an equity options market, MONEP, the streamlining of sovereign debt management, with multiple auction bond issues and the creation of a primary dealer status. Every emerging market segment raised the need for new dedicated trader positions inside the trading room.

Telephone and teleprinter have been the broker's first main tools. The teleprinter, or Teletype, got financial quotes and printed them out on a ticker tape. US equities were identified by a ticker symbol made of one to three letters, followed by the last price, the lowest and the highest, as well as the volume of the day. Broadcasting neared real time, quotes being rarely delayed by more than 15 minutes, but the broker looking for a given security's price had to read the tape

As early as 1923, the Trans Lux company installed the NYSE with a projection system of a transparent ticker tape onto a large screen. This system has been subsequently adopted by most NYSE affiliated brokers till the 1960s. In 1956, a solution called Teleregister, came to the market; this electro mechanical board existed in two versions, of the top 50 or top 200 securities listed on the NYSE; but one had to be interested in those equities, and not in other ones

During the 1960s, the trader's workstation was remarkable for the overcrowding of telephones. The trader juggled with handsets to discuss with several brokers simultaneously. The electromechanical, then electronic, calculator enabled him or her to perform basic computations. In the 1970s, if the emergence of the PABX gave way to some simplification of the telephony equipment, the development of alternative display solutions, however, lead to a multiplication of the number of video monitors on their desks, pieces of hardware that were specific and proprietary to their respective financial data provider. The main actors of the financial data market were; Telerate, Reuters, Bloomberg with its Bloomberg Terminal, Knight Ridder notably with its Viewtron offering, Quotron and Bridge, more or less specialised on the money market, foreign exchange, securities market segments, respectively, for the first three of them.

From the early 1980s, trading rooms multiplied and took advantage of the spread of micro computing. Spreadsheets emerged, the products on offer being split between the MS DOS/Windows/PC world and the Unix world. For PC, there was Lotus 1 2 3, it was quickly superseded by Excel, for workstations and terminals. For UNIX, there was Applix and Wingz among others. Along video monitors, left space had to be found on desks to install a computer screen. Quite rapidly, Excel got very popular among traders, as much as a decision support tool as a means to manage their position, and proved to be a strong factor for the choice of a Windows NT platform at the expense of a Unix or VAX/VMS platform. Though software alternatives multiplied during this decade, the trading room was suffering from a lack of interoperability and integration. To begin with, there was scant automated transmission of trades from the front office desktop tools, notably Excel, towards the enterprise application software that gradually got introduced in back offices; traders recorded their deals by filling in a form printed in a different colour depending on the direction (buy/sell or loan/borrow), and a back office clerk came and picked piles of tickets at regular intervals, so that these could be re captured in another system.

Video display applications were not only wrapped up in cumbersome boxes, their retrieval based display mode was no longer adapted to markets that had been gaining much liquidity and henceforth required decisions in a couple of seconds. Traders expected market data to reach them in real time, with no intervention required from them with the keyboard or the mouse, and seamlessly feed their decision support and position handling tools. The digital revolution, which started in the late 1980s, was the catalyst that helped meet these expectations. It found expression, inside the dealing room, in the installation of a digital data display system, a kind of local network. Incoming flows converged from different data providers, and these syndicated data were distributed onto traders' desktops. One calls a feed handler the server that acquires data from the integrator and transmits them to the local distribution system. Reuters, with its TRIARCH 2000, Teknekron, with its TIB, Telerate with TTRS, Micrognosis with MIPS, soon shared this growing market. This infrastructure is a prerequisite to the further installation, on each desktop, of the software that acquires, displays and graphically analyses these data. This type of software usually enables the trader to assemble the relevant information into composite pages, comprising a news panel, in text format, sliding in real time from bottom to top, a quotes panel, for instance spot rates against the US dollar, every quote update or « tick » showing up in reverse video during one or two seconds, a graphical analysis panel, with moving averages, MACD, candlesticks or other technical indicators, another panel that displays competitive quotes from different brokers, etc

Two software package families were belonging to this new generation of tools, one dedicated to Windows NT platforms, the other to Unix and VMS platforms. However, Bloomberg and other, mostly domestic, providers, shunned this movement, preferring to stick to a service bureau model, where every desktop based monitor just displays data that are stored and processed on the vendor's premises. The approach of these providers was to enrich their database and functionalities enough so that the issue of opening up their datafeed to any spreadsheet or third party system gets pointless. This decade also witnessed the irruption of television inside trading rooms. Press conferences held by central bank presidents are henceforth eagerly awaited events, where tone and gestures are decrypted. The trader has one eye on a TV set, the other on a computer screen, to watch how markets react to declarations, while having, very often, one customer over the phone. Reuters, Bloomberg, CNN, CNBC each propose their news channel specially dedicated to financial markets.

The development of the internet triggered the fall of the cost of information, including financial information. It hit a serious blow to integrators who, like Reuters, had invested a lot the years before to deliver data en masse and in real time to the markets, but henceforth recorded a wave of terminations of their data subscriptions as well as flagging sales of their data distribution and display software licences. Moreover, the cable operators' investors lead to a huge growth of information capacity transport worldwide. Institutions with several trading rooms in the world took advantage of this bandwidth to link their foreign sites to their headquarters in a hub and spoke model. The emergence of technologies like Citrix supported this evolution, since they enable remote users to connect to a virtual desktop from where they then access headquarters applications with a level of comfort similar to that of a local user. While an investment bank previously had to roll out a software in every trading room, it can now limit such an investment to a single site. The implementation cost of an overseas site gets reduced, mostly, to the telecoms budget. And since the IT architecture gets simplified and centralised, it can also be outsourced. Indeed, from the last few years, the main technology providers active on the trading rooms market have been developing hosting services.

From the late 1980s, worksheets have been rapidly proliferating on traders' desktops while the head of the trading room still had to rely on consolidated positions that lacked both real time and accuracy. The diversity of valuation algorithms, the fragility of worksheets incurring the risk of loss of critical data, the mediocre response times delivered by PCs when running heavy calculations, the lack of visibility of the traders' goings on, have all raised the need for shared information technology, or enterprise applications as the industry later called it. But institutions have other requirements that depend on their business, whether it is trading or investment.

Telephone, used on over the counter (OTC) markets, is prone to misunderstandings. Should the two parties fail to clearly understand each other on the trade terms, it may be too late to amend the transaction once the received confirmation reveals an anomaly. The first markets to discover electronic trading are the foreign exchange markets. Reuters creates its Reuter Monitor Dealing Service in 1981. Contreparties meet each other by the means of the screen and agree on a transaction in videotex mode, where data are loosely structured. Several products pop up in the world of electronic trading including Bloomberg Terminal, BrokerTec, TradeWeb and Reuters 3000 Xtra for securities and foreign exchange. While the Italian born Telematico (MTS) finds its place, in the European trading rooms for trading of sovereign debt. More recently other specialised products have come to the market, such as Swapswire, to deal interest rate swaps, or SecFinex and EquiLend, to place securities loans or borrowings (the borrower pays the subscription fee to the service). However, these systems also generally lack liquidity. Contrarily to an oft repeated prediction, electronic trading did not kill traditional inter dealer brokerage. Besides, traders prefer to mix both modes: screen for price discovery, and voice to arrange large transactions.

For organised markets products, processes are different: customer orders must be collected and centralised; some part of them can be diverted for internal matching, through so called alternative trading systems (ATS); orders with a large size, or on equities with poor liquidity or listed on a foreign bourse, and orders from corporate customers, whose sales contact is located in the trading room, are preferably routed either towards brokers, or to multilateral trading facilities (MTF); the rest goes directly to the local stock exchange, where the institution is electronically connected to. Orders are subsequently executed, partially of fully, then allocated to the respective customer accounts. The increasing number of listed products and trading venues have made it necessary to manage this order book with an adequate software. Stock exchanges and futures markets propose their own front end system to capture and transmit orders, or possibly a programming interface, to allow member institutions to connect their order management system they developed in house. But software publishers soon sell packages that take in charge the different communication protocols to these markets; The UK based Fidessa has a strong presence among LSE members; Sungard Global Trading and the Swedish Orc Software are its biggest competitors.

With order executions coming back, the mutual fund's manager as well the investment bank's trader must update their positions. However, the manager does not need to revalue his in real time: as opposed to the trader whose time horizon is the day, the portfolio manager has a medium to long term perspective. Still, the manager needs to check that whatever he sells is available on his custodial account; he also needs a benchmarking functionality, whereby he may track his portfolio performance with that of his benchmark; should it diverge by too much, he would need a mechanism to rebalance it by generating automatically a number of buys and sells so that the portfolio distribution gets back to the benchmark's.

In most countries, the banking regulation requires a principle of independence between front office and back office: a deal made by the trading room must be validated by the back office to be subsequently confirmed to the counterparty, to be settled, and accounted for. Both services must report to divisions that are independent from each at the highest possible level in the hierarchy. In Germany, the regulation goes further, a "four eyes' principle" requiring that every negotiation carried by any trader should be seen by another trader before being submitted to the back office. In Continental Europe, institutions have been stressing, since the early 1990s, on Straight Through Processing (STP), that is, automation of trade transmission to the back office. Their aim is to raise productivity of back office staff, by replacing trade re capture by a validation process. Publishers of risk management or asset management software meet this expectation either by adding back office functionalities within their system, hitherto dedicated to the front office, or by developing their connectivity, to ease integration of trades into a proper back office oriented package. Anglo Saxon institutions, with fewer constraints in hiring additional staff in back offices, have a less pressing need to automate and develop such interfaces only a few years later. On securities markets, institutional reforms, aiming at reducing the settlement lag from a typical 3 business days, to one day or even zero day, can be a strong driver to automate data processes. As long as front office and back offices run separately, traders most reluctant to capture their deals by themselves in the front office system, which they naturally find more cumbersome than a spreadsheet, are tempted to discard themselves towards an assistant or a middle office clerk. An STP policy is then an indirect means to compel traders to capture on their own. Moreover, IT based trade capture, in the shortest time from actual negotiation, is growingly seen, over the years, as a "best practice" or even a rule. Banking regulation tends to deprive traders from the power to revalue their positions with prices of their choosing. However, the back office staff is not necessarily best prepared to criticize the prices proposed by traders for complex or hardly liquid instruments and that no independent source, such as Bloomberg, publicize.

On May 5, 1996, during a Saturday to Sunday night, a fire, suspected to be criminal, ravaged the trading room of Crédit Lyonnais; trading businesses have been transferred in a couple of days to a backup, or disaster recovery, site, in outer Paris. On September 11, 2001, the attack against the World Trade Center destroyed the Cantor Fitzgerald's trading room and killed 658 persons, two thirds of its workforce. Yet business resumed about one week later.

Trading rooms are also used in the sports gambling sector. The term is often used to refer to the liabilities and odds setting departments of bookmakers where liabilities are managed and odds are adjusted. Examples include internet bookmakers based in the Caribbean and also legal bookmaking operations in the United Kingdom such as William Hill, Ladbrokes and Coral which operate trading rooms to manage their risk. The growth of betting exchanges such as Betfair has also led to the emergence of "trading rooms" designed for professional gamblers. (reference: Racing Post newspaper 19/7/07) The first such establishment was opened in Edinburgh in 2003 but later folded. Professional gamblers typically pay a daily "seat" fee of around £30 per day for the use of IT facilities and sports satellite feeds used for betting purposes. Today there are eight such trading rooms across the UK, with two based in London – one in Highgate and one in Canary Wharf.