How Computers Are Terminating Your Brokers

In the 1984 sci-fi classic directed by James Cameron, machines from the future traveled to the past to change the course of human history and enable machines to dominate humans and rule the world. Although this plot may sound far-fetched, it’s a pretty realistic scenario playing out for many corn brokers today.

Futuristic CPUs have effectively “terminated” the corn broker. And its easy to see why this is happening and why its ultimately to our advantage. At the veritable “fount of open-outcry floor trading,” CME Group says only 10.7 of its volume in January 2011 was traded on the exchange floors.

The average daily volume of floor trading was down another 4 per cent from January 2010. For all of 2010, in fact, floor trading represented a scarce 12 per cent of total volume. Indeed, we’ve come a long way since 1992, the CME’s first year of electronic trading, when only 0.2 per cent of volume was traded on the Globex system.

With today’s ease of access to electronic markets and the arrival of options on the screen, there’s no shortage of reasons why most corn brokers are so lonely these days. In the era of 24/7 global markets and round-the-clock futures trading access and opportunities, the perks and advantages of working with a 9:30 am to 1:15 pm corn broker are shrinking faster than Jennifer Hudson on Weight Watchers.

Last Friday, when corn traded limit down at 4:30 a.m., where was your corn broker? Probably sound asleep. And, as Gordon Gekko famously told us, money never sleeps. For seventeen hours a day the hardest working and most successful grain traders are those who are actively engaged in markets, trading, observing, or biding their time in anticipation. Thanks in no small part to the computer geniuses at “Trading Computers” (Falcon Trading Systems) the high-powered technology for high performance trading has never been more accessible, dependable, and affordable.

In keeping with my earlier analogy, Scott Tafel of Falcon Technology systems is president of a company that, without question, produces some of the best trading computers and associated technologies available anywhere in the world today. In essence, machines like the F35 that populate the offices of Indiana Grain Company are effectively terminating the need for corn brokers faster than even The Terminator himself was ever capable of pursuing John Connor. And unfortunately for most of the brokers I know, there won’t be any sequels to extend the life of their dying franchise.

Although no shortage of erroneous criticisms are levied at high-performance electronic traders and electronic trading, the truth of the matter is that the birth of the screen in our industry has leveled the playing field for almost everyone. “In the pit, a lot of it was who you knew, and who you could intimidate. There’s a physical presence to trading there,” trader Chip McNulty recently shared in a cover story for Medill. “You could intimidate a broker into giving you an order over somebody else. In another instance, one guy is a trader and his brother is a broker, so whenever the broker gets a good order he feeds it to his brother and they just make each other money. There was a lot of free money in the pit that you just can’t make on the screen.”

McNulty, as you can imagine, now trades exclusively on the screen. And that’s exactly where he and others continue to see the industry going in the years ahead.

“The barrier to entry is much easier on the screen. You can have thousands of people on the screen and never know it, whereas in the pit, you have 50 guys if it’s a small enough contract, and it’s crowded. If you try to come in as an outsider, brokers don’t know you, they’re not going to work with you and you’ll be stuck just standing there for three months without ever getting an order from a broker,” McNulty said. “It’s just much easier to get involved on the screen.”

Sadly for our former friends and colleagues who remain brokers in the pit, there’s little hope for business as usual to return. Indeed, “judgment day” arrived and the machines won. And, as a result, corn brokers won’t “be back.”

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