Something that you should know about the Stock Exchange

“Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That’s the other guy’s problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series – they don’t know what pressure is. In this building, it’s either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you’re up half a million in soybeans and the next, boom, your kids don’t go to college and they’ve repossessed your Bentley. Are you with me?”

Spoken by Dan Ackroyd in the 1983 film Trading Places as the two main protagonists are about to enter the stock exchange, but how close is this to the real thing? Common preconception is that it resembles a cattle auction on steroids as traders with dangerously high blood pressure throw absurd contorted hand signals across the room that appear to be complete nonsense but when in actual fact they are making or breaking people’s pension fund. Well, that may be slightly over-egged but you get the point.

Indeed, the first task of the morning for many businessmen in the City of London is to check the latest developments in the FTSE 100. But what is behind these numbers? How does the Stock Exchange work? We certainly could not presume to explain the complexity of the stock market in our little blog, but we can give you a tidbit of info on the system used for trading: The name of this particular method of communication between traders was called open outcry and it was a precise language to buy and sell orders in the pit (the trading floor). This system is still used in the London Metal Exchange; other than in the New York Mercantile Exchange, in the Chicago Mercantile Exchange, the Chicago Board of Trade, the Chicago Board Options Exchange and in the Minneapolis Grain Exchange.

However, In the Computer Age – the Fast Century, everything claims a faster, cheaper, more efficient way to achieve the best result by using a new generation trading system. It was in June 2007 when the London Stock Exchange’s new trading system went live: a new technology platform with a higher speed of trading and a better system capacity: market participants are now able to manage trades in around 10 milliseconds, knowing company prices within 2 milliseconds. New market strategies had to be rebuilt on this new system and nothing has been the same again.

So it seems that the ‘absolute carnage’ of the trading floor is now the stuff of (movie) history. The carnage rather has moved to a trader’s comfortable chair in an office of a large glass-clad tower block in Canary Wharf somewhere. That’s 21st century trading for you…