The trading floor - Cathedrals of Capitalism

Exchanges, brokers, investment banks and hedge funds

A few days ago, JP Morgan’s new 270 Park Avenue headquarters was in the news. Jamie Dimon has been evangelical about the need to have staff in the office rather than work from home. JPMorganChase Celebrates Grand Opening of New Global Headquarters at 270 Park Avenue

At the same time, Michael Dell tweeted out this photograph of a section of (what looked like) the new JP Morgan trading floor. It was viewed 17 million times relative to the usual 50K for his tweets, so it obviously struck a chord with people. It attracted lots of noise around how cramped it looked and lacking in character compared to the trading floors of the past.

Trading floors have always been about more than just traders. They were a mixture of traders, salespeople, and other functions, including support staff. This is even more so now in an era of quant-driven electronic trading.

Of course, the contrast with prior decades is huge. Just look at this video of the Goldman Sachs trading floor from the mid-eighties if you want a reminder Goldman Sachs Fixed Income Recruiting Video 1985

But trading floors have also been a part of modern financial history - a sign of progress, new ways of doing things, but also at times a sign of hubris and risky overexpansion.

From exchange pits to co-location

The early cathedrals of capitalism were the exchange floors.

The shift from informal gatherings and coffee shops to structured timings and rules had occurred in major European exchanges in the late eighteenth century, around the same time the NYSE was founded. Open outcry trading started at the NYSE and CBOT around the middle of the nineteenth century. The leaps in technology were gradual. The adoption of the telegraph to transmit stock prices over long distances in near real-time was the first. Soon after, ticker tape machines followed, providing traders with a constant stream of market data. Next came the invention of phones, which allowed traders to trade from different locations.

The exchange floor remained a vibrant place for trading until the late twentieth century. Many of the founders of the most storied proprietary trading firms and macro hedge funds started as floor brokers. The era of peak open outcry trading was immortalized by the film “Trading Places” with Eddie Murphy and Dan Aykroyd in 1983.

European exchanges led the way in the migration from floor to electronic trading, with moments in history like the fully electronic Eurex winning the Bund Future from the open outcry Liffe, one of the few examples (even decades later) of a major futures contract moving between trading venues.

Futures trading floors had closed, and open outcry was down to 1% of trading volumes on the CME by 2015. Options activity migrated online with a lag, with only a few pits like the Eurodollar options or CBOE’s index contracts still open. Similarly, internationally, there remain only the odd exception. For instance, the LME’s ring. The famous NYSE floor is today as much a media studio as a place for trading activity.

Brokers

The trading floor at ICAP was always a special place for me and my colleagues. I spent many years working for the largest interdealer broker in the world – interdealer brokers are firms that connect banks and other wholesale traders (e.g., energy firms like BP and Shell) in over-the-counter markets.

The ICAP trading floor was most famous once a year at our annual Charity Day, which my boss, ICAP founder Michael Spencer, had launched in the early nineties. BGC Partners and other broking firms would start Charity Days as well in due course.

My first experience of walking on a brokering floor was in 2003. ICAP was booming – a cult firm with stratospheric growth. It had gone through a three-way merger a few years earlier and benefited from surging derivatives trading. But the ICAP trading floor in Finsbury Circus (London) was small, divided into sections, and worse for wear.

The following year, ICAP moved to a large, modern, and impressive new trading floor, which had belonged previously to a mighty investment bank - Lehman Brothers. But within months of this office move, ICAP had its first-ever major profit warning. The firm recovered, and broking kept growing for the next 4 years. But it reminded me of the old tale of buying shiny objects when you are doing well.

We sold the ICAP voice broking business around 10 years ago, a deal I had worked on for many years. Exchanges would only acquire ICAP’s electronic trading platform and post-trade assets without the voice broking business.

But it was also a bittersweet moment. For many years, I would walk on the broking floor daily as it was right next to my office. It was different compared to the bank trading floors, whether it was the more colourful nature of the brokers or the fact that you had a more diverse set of backgrounds. A Gary Stevenson kind of boy from East London backstory wouldn’t have stood out here.

The interdealer broker industry also suffered the worst ever tragedy to be faced on a trading floor, when Cantor Fitzgerald lost its team that was located at the top of the World Trade Center during 9/11. Cantor had been the market leader in voice broking of US Treasuries, and in the rebuild made a large push to expand its electronic trading platform for US Treasuries.

Banks - the trading floors of 2008

JP Morgan’s shiny new headquarters at 270 Park Avenue may be a sign of the strong getting stronger, but with Jamie Dimon nearing the end of his long tenure, you do wonder if this is as good as it can get for JP Morgan.

History is littered with dozens of examples of major banks opening fancy new buildings and then going through tougher times. The Citicorp Center in New York was opened in the late 70s, a few years before Citi got into trouble in the 1980s. Both Bank of America and Goldman Sachs started building fancy new towers in Midtown Manhattan during the credit boom of the mid-2000s, only for them to open just after the GFC.

JP Morgan’s London trading floors are currently at 25 Bank Street, Canary Wharf. This building has some history. It was once earmarked for Enron in its planning stages. Chancellor Gordon Brown officiated the building’s opening ceremony in 2004 for Lehman Brothers, who were there through the dark days of 2008.

But the biggest sign of the decline of Wall Street’s big swinging trading desks was in a state known more for its hedge funds than investment banks: Connecticut.

In 1994, the Swiss Bank Corp (SBC) was attracted to Stamford, Connecticut, by generous tax credits from the state. As SBC merged with UBS and the combined firm expanded its footprint in the US through the PaineWebber wealth management acquisition and an aggressive expansion of its investment bank trading appetite, the Stamford campus grew. The trading floor would expand and house several hundred equity, currency, bond, and derivatives bank traders.

It was so large that on August 16^th, 2002, it entered the Guinness World Record as the world’s largest trading floor ever. A space bigger than a football pitch and almost as large as the world’s largest aircraft carrier of the time. https://www.guinnessworldrecords.com/world-records/largest-single-trading-floor

It grew to become more than 100,000 sq. ft at its peak.

During the GFC, UBS suffered $50bn of subprime losses and needed a bailout from the Swiss government. When UBS scaled back its trading operations in 2011-12, rumours started to spread that it would exit the Stamford campus. UBS bundled the mortgage on the building into CMBS and sold it to investors. When UBS finally abandoned the location in 2017, debt investors took a loss of $100m.

Another European bank with a huge and expanding balance sheet, that had ambitions to take on the top Wall Street banks, was RBS. Having expanded aggressively in the US and in fixed income, it announced plans in 2005 to consolidate its RBS Greenwich and New York operations in a fancy new $400m office complex also in Stamford, near UBS. RBS also suffered huge losses during the GFC.

Despite plans to scale back, it made the move to Stamford in 2010. Its new trading floor was a similar size to that of UBS and big enough to accommodate around a thousand traders RBS new trading floor . Soon it was dramatically downsizing its trading operations in Stamford and letting out parts of its complex, including sections to UBS that was getting out of its own trading floor.

The new masters of the trading world

JP Morgan’s new headquarters are getting all the headlines at the moment. In around 7 years, a few hundred yards away, an even taller building will look down on JP Morgan – a new tower being built by Citadel. This is in addition to Citadel having moved its headquarters for both the hedge fund and securities business to Miami. Ken Griffin recently joked on Bloomberg about the escalating cost of building its new Miami tower, which has seen its budget go from more than $1 billion to closer to $2.5 billion Citadel Miami. Citadel is also making a less dramatic expansion to its London offices.

Headcounts in hedge funds and proprietary trading firms tend to be lower than the large sell-side banks, but have grown fast at the pod shops. I still remember the SAC Capital trading floor in Stamford around twenty years ago, and its image was made famous on TV screens with the series Billions. But the growth in headcount at the large pod shops has been accompanied by a growth in the number of offices. Most of the big pod shops now have 20 offices. Millennium management is now twice as large as any other firm in terms of headcount. It only has around 20 proper offices, but it has a total of over 140 employee locations with PMs and their teams all over the world. This reflects its highly autonomous pod structure in contrast to the greater collaboration between Citadel’s different teams.

Out of the proprietary trading firms, the largest in headcount is Jane Street at just over 3,000. Unlike the pod shops, this is highly concentrated. The firm has 5 locations, with the New York office by far the dominant one. Revenue growth is driving expansions in those cities rather than new locations. New York, London, Hong Kong

Jane Street’s trading floor was made famous by Sam Bankman-Fried. It is known for the contrast between its maths Olympiads and tech geeks and the alpha noisy traditional sell-side bank trading desks. But many of the details are also very interesting.

Firstly, there is an obsession with trading floor design and setup – who and which teams should sit next to each other to get the optimal information flow around the firm. This is something the sell side has looked into for decades, but Jane Street seems even more focused on it than others. Large desk moves happen twice a year, and smaller moves happen more regularly. To ensure that the existing desk setups are not disturbed, Jane Street has moveable desks on wheels. So rather than logging on and off and having to pack your things in crates, you keep the same desk, and it moves with you.

Unlike pod shops, where teams are paid independently based on the performance of their pods and the costs passed through to their investors, at Jane Street, the compensation is based not on pure individual output but on collaboration, innovation, team performance, and firm-wide results. Traders and researchers do not have individual P&L metrics, and the emphasis is on team sport. This reinforces the importance of the trading floor culture.

Secondly, there is a significant focus on the environment, from lighting to cooling. As trading floors have evolved since the days I used to spend time on them, as well as the human density, the additional computing power being deployed creates a lot of heat, and in a recent podcast, Jane Street talked about their focus on cooling systems using false floors. https://signalsandthreads.com/the-thermodynamics-of-trading/

Thirdly, there is considerable attention paid to desktop real estate and ensuring that users have the right number and types of applications they need to use. The firm is also building out a team focused on User Interface Design. It famously builds a lot more in-house than many firms, and its user design team is particularly focused on ensuring that applications require a minimum amount of keystrokes and time to use.