Floor Traders Want Their Seats Back

Trading floors used to be natural monopolies. Some brokers get together and start trading stocks with each other under one particular tree, or in one particular coffeehouse, and they keep coming back every day; over time they get themselves a dedicated exchange building with a comfortable trading floor where they can meet and trade stocks. If you are a broker with stock to sell, you will naturally go to the exchange with the most potential buyers; if you are a broker who wants to buy stock, you will naturally go to the exchange with the most sellers. If you dislike something about the exchange — if you think the room is too drafty or the other brokers are unfriendly or the rules discriminate against you — well, tough. You could go across the street and start a new exchange, but that’s hard to do, because everyone wants to be where everyone is. If it’s just you across the street, who will want to trade with you?

In an important sense, the rise of electronic trading did not change this. People still want to be where the liquidity is; people still want to send their orders to the electronic venue where all the other orders are. But in an important sense it did. Old-school trading floors were floors, where brokers stood, and a broker could only stand in one place at a time. Electronic trading venues are just computer servers and communications protocols, and you can more or less connect your computer to as many other computers as you want. If one big exchange almost always has the most orders and the best prices, you will do most of your trading there, but if another small exchange occasionally has better prices, you can send some orders there when its prices are good. You don’t have to choose to stand only in the best location; you can stand everywhere at once. An exchange with a good product or a good idea can win market share gradually; incumbency is not quite as powerful an advantage as it once was.