On a hot November morning in 2012, Wall Street was in high gear, as traders, analysts and investment bankers huddled in a conference room at a New York City law firm.
As the Dow Jones Industrial Average was climbing into the stratosphere, one of the few places on the planet where the market had a real pulse, the analysts were plotting the futures of the entire industry.
It was a very, very busy day.
The strategy was simple: We were going to track every one of those big stocks.
At the time, we were still in the middle of the 2008 financial crisis, and the Dow was soaring over the past two years, the market was about to experience its first major rally since 2000, and most analysts had no idea how to even begin to predict the next move in the economy.
“You have this whole bunch of data that you’re going to need to make some calls on,” says Brian Kelly, chief market strategist at J.P. Morgan Securities.
We had an entire room full of people that were making their predictions on stocks that weren’t even close to the Dow.
To help manage the frenziedness, Kelly set up a “bubble” of trading desks at the firm.
A computerized trading system called an algorithm would track the performance of a particular stock, like a bond or a stock in a bond-buying scheme, using data from more than 1,500 publicly available sources.
These sources included the stock price, the average volume per day and the number of trades made by the firm every day.
It would be possible for any of these analysts to make a call, but the most important piece was that they would do it in real time.
As the Dow rose to new heights and other investors and regulators scrambled to clean up the mess, it was Kelly’s job to track everything.
Kelly spent nearly every day at the company’s New York offices.
Every morning, he would call the firm’s stock traders, each of whom would respond with a quick rundown of the market’s fundamentals.
The day before, Kelly would sit down with the analyst to discuss the next day’s action.
In other words, this was the Wall Street equivalent of an investment banker’s dream job.
After a day or two, Kelly and his team would take the call, which they would send back to the company, which would send the analysts another summary.
It was an automated process that took less than a minute.
“The system was so automated that it was easy to ignore the chatter,” says Scott B. Jones, the former chief market economist for Morgan Stanley and now an analyst at BlackRock.
“It wasn’t really like being a Wall Street economist.”
A few months later, the system would become a big part of the firm and its strategy.
Today, the firm operates out of about 300 offices across the country, employing about 10,000 people.
Despite its size, Wall St. was never as frenetic as it is today.
Its most prominent client, General Electric, has had its shares traded for decades.
But Wall Street has been increasingly interested in new forms of trading.
Last year, the firms trading desks were expanded to incorporate more sophisticated models.
And in December, the companies announced plans to start trading in futures.
One of the most interesting ways Wall St.’s trading desks have become an asset class is that they have become highly automated.
In the past, they were just one component of the system.
Now they are part of it.
During the dot com boom, a major Wall Street firm would have to buy a huge number of securities and then sell them to a company in a private market.
The firms trading desk, which is essentially a computer, would then take the money from the private market and use it to buy and sell securities in the public market.
For example, the brokerage firm that trades Wall St stock in New York’s commercial and residential real estate markets would typically purchase a million shares of the company at $50 each.
That’s just one quarter of its $1.2 trillion in holdings.
Then, as Wall St.-related companies like GE and McDonalds have become increasingly profitable, the company would buy and hold another million shares in the same company and use them to buy stock in the trading desk.
The trading desk then would buy these shares, which it then sells to the brokerage.
This process, called clearing, would be similar to the way a private bank buys and sells securities.
The clearing firm would pay the brokerage a fee, and then it would send those shares to the trading desks, which buy them and sell them back to Wall St, a process known as volume transfer.
By doing this, Wall Tech’s trading desks are becoming a big asset class for the firms.
And they’re not just going to grow.