NEW YORK, May 1, 2050 -- D.J. Smith arrived at his office in the General Motors building at 6: 15 a.m. He knew he would have to mollify the overnight trader whose place he was taking, who didn't like to stay a minute past his allotted shift, which was supposed to end at 6 a.m.
After making apologies, he quickly donned goggles and gloves for his virtual reality tour through the Asian markets and news of the day. This was his favorite part of the morning.
One touch and he was in a bustling Tokyo, with all of the market news before him. The Nikkei was at 50,124, up 1,023 for the day.
He left Tokyo and with a touch at a sign that said "NYSE" he found himself on the noisy trading floor with specialists and floor brokers -- he always got a kick out of seeing what the New York Stock Exchange had looked like 50 years ago. Now it was just another for-profit electronic exchange.
He touched a sign that said "this day in history," and saw that today was the 75th anniversary of Wall Street's infamous 1975 "May Day," when fixed commissions for brokerage trades were abolished. He chuckled to himself. Fixed commissions! He thought he was being taken when he had to pay 1/2 cent a share for a trade, in his job as a portfolio manager/trader (the two positions were combined several years ago) for the General Motors pension fund.
He walked through the virtual reality marketplace and did a quick tour of Europe to see how the markets there were doing, and then he was ready to start his day.
"Virtual reality" might be a new fad to people in 1999 but, said Ananth Madhavan, a professor at the University of Southern California at Los Angeles, it will be a regular part of a trader's day in 2050.
"A person will have the illusion of walking down the floor of a stock market. It will give a feeling of a physical presence you don't get from sitting at a trading screen," he said.
Computers easily will take oral commands for stock trades by 2050, said Harold Bradley, senior vice president of the American Century Funds, Kansas City, Mo. With reams of data available instantaneously by the touch of a key or by voice command, securities traders will spend most of their time at their computers.
There is a consensus that trading will take place on a global scale, 24 hours a day, seven days a week.
"The Internet will be the backbone to any system," said Junius "Jay" W. Peake, a professor at the University of Northern Colorado, Greeley, who has been in the forefront of the movement toward an electronic marketplace.
"The worm has turned. Electronic trading cannot be stopped any longer," said David K. Whitcomb, chief executive of Automated Trading Desk Inc., New York. "No one
knows where the Internet will go in 50 years. As soon as we get around the bandwidth problems (which make transactions slower) it will completely change trading.
"Where there used to be the need for a central market or floor, the Internet makes that unnecessary. Stock exchange trading floors will be museums."
The electronic communications networks that are trading stocks now are expected to proliferate over the next few years, but merge to just a few by 2050.
"The ECNs will cause a terrible period of fragmentation in the market," said David Quinlan of Eze Castle Consulting, Boston. "Portfolio managers on the buy side are going to be very frustrated."
A sorting of the ECNs, he predicted, will lead by 2050 to a big electronic marketplace.
Or, there might be a number of for-profit exchanges that will operate as trading networks, said Richard Y. Roberts, a former SEC commissioner and now a partner at Thalen, Reid & Priest in Washington.
New trading networks might look similar to OptiMark, an alternative trading system coming online later this year, Mr. Quinlan said. Many expect it to be the basic profile of the sophisticated electronic trading systems in 2050.
On OptiMark, all orders for a particular security are gathered together. These include giant orders from institutions as well as small retail orders. Traders will fill out anonymous profiles before they enter the market telling how many shares they want to buy or sell and at what price.
OptiMark's algorithm scans all of the profiles and matches buyers with sellers anonymously, executing all of the trades and taking a small per-share commission.
"The system takes out the middle man and matches pieces of liquidity together," Mr. Quinlan said. "The new system (for 2050) may be the son of OptiMark."
Will there be a place for middlemen in these systems?
There will be "more and more roles for intermediaries, as people realize they need institutional investors (such as money managers and brokers) to watch their money full time," said Alfred Berkeley, president of Nasdaq.
"There are people who will say 'I want out, buy me out,' and the middleman will do that."
There will always be a place for human middlemen, USC's Mr. Madhavan said.
"A hybrid system which combines the best of the auction and dealer markets is the best system," he said. In times of stress, market makers will be the "buyers of last resort. When there is no liquidity and an imbalance of orders, that's when the dealers will step in."
There are also "a lot of things brokers bring to the table," that institutions will pay for in 2050, Mr. Quinlan, the consultant, said.
"They'll pay brokers for such things as research and access to IPOs," he said.
Much lower costs
Technology is expected to sharply reduce trading costs.
"I think we'll see the elimination of the hidden costs of trading," said Mark Andreesen, president of Islands ECN, a New York-based electronic communications network. "I can envision a time when costs are down to a fraction of a penny."
Nicolo Torre, managing director of research at Berkeley, Calif.-based BARRA, estimates that today the sale of a 1 million-share block of stock with medium liquidity has an overall cost of 20 cents a share.
"In 50 years I think it's possible it will get down to 2 to 4 cents a share," he said.
"Trading will be free," American Century's Mr. Bradley said. "If you don't have to pay any intermediaries online, it's free."
"Brokerage shops will be paying institutions to trade," Mr. Quinlan predicted. "Institutional investors will be so savvy about what they're doing, it will be hard for a broker to make money on them."
The new technology will allow for more sophisticated risk management and hedging strategies, Mr. Quinlan said.
"There may be a machine that is a 24-hour hedging device. If some market starts to implode, a machine will start doing hedges while people in other time zones are still asleep," he said.
Clearance and settlement will be simplified.
Currently, the settlement process takes three days (T+3). It's supposed to go to one day (T+1) by 2002. By 2050 it will be instantaneous, market experts said.
"One of the very large, but hidden, costs is the cost of clearing (a trade) on less than the trade's date," said Bill Lupien, chief executive of OptiMark, Durango, Colo.
"To the extent you have a time delay between when you do a trade and when you clear, there is a risk one party won't be there. To the extent it (becomes) automatic, that cost will go away," he added.
If there was any problem with a trade "you would identify it immediately."
But there still are some traditionalists who think the New York Stock Exchange can remain a power in securities trading.
People who think the NYSE will disappear, "are saying the NYSE will do nothing to protect its franchise. It's doing all kinds of things," said Gene Noser, president of Abel/Noser Corp., New York. The exchange has embarked on a $1 billion project to modernize its systems.
Moreover, Mr. Noser said he believes that large institutional orders are best handled through person-to-person negotiation, not through computerized trading.
"Every time you use a computer to enter a (large) order, it's like playing poker with the cards face up," he said, because it lets other traders know an order is waiting.
Officials at the NYSE declined to be interviewed.