I just logged day three of my first trip to Shanghai and I am beginning day 4 as I write this. The three days of non stop rain has given way to a beautiful sunrise, albeit a bit hazy one with either pollution or fog browning the blue sky. But it is so much nicer than the grey and wet days we have had. My shoes are still drying out.
My biggest regret so far on the trip to this city three times the size of Manhattan is that I don’t speak Mandarin. I am reminded of the movie Lucy with Scarlett Johansson (not so good) that I saw a few weeks ago. Through an accidental drug injection she is able to use 100 percent of her brain and learns to speak Mandarin quicker than a HFT can cancel a bid.
I am determined to go back to the States and get a Pimsleur course on Mandarin right away. I am not so worried about the Chinese taking over the US even though they own trillions of our Treasury Bonds. It is really more about the opportunity to partner and learn from the people in this fascinating city. Most American businesses have been waiting and waiting for China to “open up” to the outside world. I think the real opportunity is to just come here and learn and grow along with them. And then bring what you learn back to America.
I mentioned in my blog yesterday that I think Big Data may be the fourth wave of the evolution of the futures market. First wave open outcry, second wave point and click electronic trading, third wave HFTs.
Big Data refers to the ability to harness complex data to exploit trading signals. Data experts are the most sought after professionals in business today with everyone from Netflix to Google to Goldman Sachs paying top dollar for the smartest of the smart. Since speed is no longer the game in the trading world it is all about Big D. Analyzing correlations between markets across all asset classes to find trading opportunities before the next guy is the new HFT. So now the pressure on the exchanges will be to store and offer Terabytes of data instead of throwing servers at speeding up their matching engines. And for traders to find the most clever data rocket scientists they can to create Smart trading strategies by doing a deep dive into the data abyss. Maybe exchanges should offer data mining services in addition to co-location.
What is becoming most clear to me as I upload to my brain all that I am learning in Shanghai is that the futures industry model must change dramatically. I can’t see the current model remaining competitive or profiting much longer in its current fashion. Charging higher fees to smaller and smaller group of traders in a more and more heavily regulated and less volatile market does not bode well for increasing revenues.
I am researching the Yu Bao Money Fund which is a part of the amazing Alibaba company for clues as to how US Exchanges can evolve. There is an incredible phenomena going on here and I highly suggest you look into what they are doing. I have often wondered why companies like Google or Apple don’t get into the exchange business. The simple answer is there isn’t enough money in it. Why waste resources to make 1.5 or 2 Billion a year processing futures trades when you can make 50 or 60 billion in social networking, creating phones or original content?
But I still believe the futures industry will survive and I am convinced monumental change is coming to the world of trading. In the same way electronic trading exploded the ADV in the markets when it moved off the floor, there is an opportunity to see even more exponential growth in the future. Exploiting the power of social networking, creating original content and products, mining the riches of Big Data and utilizing the power of trading anywhere anytime could be the key to bringing many new traders and much more volume to the market.
A very smart guy I worked with at Cambridge Technology Partners back in 2000 named Mark Dalen came up with an astute realization that took me a few years to understand. We were hired by a futures exchange to come up with what the trading floor of the future would look like. After white boarding and discussing and arguing for days on end Mark said he figured it out. Remember this was the year 2000 and 95% of the trading was still done on the floor.
Mark said to me, “I know what the trading floor of the future will be”. I waited in anticipation for his answer. He simply said, “The trading floor of the future will be a park”. He blew my mind and it is being blown again the same way by being in Shanghai.