The Dow flash crash: of machines and men

This week, images of brokers were in the news every day, headlining a record flash crash of the Dow Jones. The news was flooded with photographs of traders looking on as numbers dropped. But just how much effect do the men in the photos really have?

This week started off with a major plunge in the Dow. A 1,600 points collapse in a single day kept analysts and media busy tracking the movements of the flash crash. The Dow closed Monday at -1175 points, the crescendo to an eight-day global loss that totaled $4 trillion (€3.26 trillion) in market value.

The images that accompanied the news were iconic yet predictable: businessmen in blue suits stand clutching tablets, eyes scanning the tickers above, expressions of disbelief on their faces. It's the face of the stock exchange, and despite advances in technology and increases in automation, the traders remain an emblem of the market even if their role has changed.

Why the human factor?

With many stock exchanges vying for part of the $30 trillion US market, the New York Stock Exchange (NYSE) continues to hold around 22 percent market share and remains the primary choice for public offerings.

"These listed companies pay to be on the floor of the stock exchange, to have a specialist that is supposed to be accountable, someone they can call to talk to and ask what's going on in their stock," says Michael A. Pistillo Jr., a designated market maker for Global Trading Systems.

He adds that traders are also responsible "to provide liquidity using capital on both sides of the market so traders can come to the market to trade stock."

While dealers once had to talk to one another to complete the actual stock transactions, now they function more as an expert oversight to the movements of the market on any given day.

Last year $22.2 billion was raised in public offerings, doubling that of the next leading exchange. Yet traders do very little of the trading these days, accounting for only 10 percent of stock trades.

It's hard for any human to compete with algorithmic trading, made with proprietary software and capable of processing thousands of trades a second. Analysts are referencing this as one of the main reasons this week's flash crash was especially quick and volatile. 

"For us, think about yourself as an investor. You're up and down money, how do you feel?" asks Pistillo Jr., "The animation naturally comes out, it's real. I enjoy and embrace the media."

Whether or not it is part of the job description, this type of personality was successful in competing to get trades through in the heyday of the exchange. "There were massive crowds of four to five thousand people back in the late 1990s." Now there are around 500 traders who work on the floor who come into the media spotlight during peaks and falls, he explains.

The most photographed trader ever

Peter Tuchman knows about being photographed. He has been in magazines, news reports, and newspaper interviews across the world, earning the nickname 'Einstein' for his physical likeness to the theoretical physicist.

With his wild hair and expressive face, he has become the most photographed trader of the exchange. "My face is very emotional. I'm the 400 down guy, the up 400 guy, I'm the confused crazy guy, I'm the chaotic look,” he says.

While his job has morphed into a combination of finance and celebrity, he finds a natural connection between the market and his depiction in mass media, "Money is an emotional thing and people get emotional about money. I love that there's a human factor to the market, we have created another brand here."

But is it sustainable?

The Hong Kong Stock Exchange recently closed the doors of its trading floor, becoming fully automated. This follows the moves of other major exchanges, like those of Tokyo, Singapore and London.

While Goldman Sachs once had over 600 traders working the US cash equities trading desk, it has opted to automate. Currently working to transition these positions into 200 computer engineers, automated trading programs will then do the trading work.

Although the threat to livelihoods is real, the traders on the floor remain optimistic about their presence at the exchange.

"What's important about this place is that people know we are here,” says Tuchman. "People are fearful of scammers and conmen, Ponzi schemes. But everyone knows this building is here every day. They know I'm here, that I stand by my word, and the word of the stock exchange."

With bookings of celebrity appearances and bell ringing ceremonies scheduled, the traders know they have work to do. Tuchman feels positive about the shifting roles of traders. "We have created another brand here. If it's through my face, how cool is that?"