Trading is on the verge of a quantum leap forward, and it is being spurred by advances in technology. Exaggeration? Hyperbole? Perhaps.

But there is no doubt about the important changes being brought about by technology in the pre-trade, execution and settlement stages of the trade cycle. Let me explain with some examples.

For one, consider the electronic transmission of indications of interest, and the ability of the buyside to electronically respond in turn to those indications. For another, take the proliferation of new execution mechanisms directly accessible to the buyside, mechanisms that include electronic communications networks and other alternative trading systems (ATSs), such as OptiMark, Instinet and POSIT.

The push towards straight-through processing, moreover, further demonstrates the role played by technology in the trade cycle.

At the moment, trading-desk technology is aimed primarily at generating efficiencies rather than transforming the traditional trading process. If these ATSs are as successful as their promoters expect, technology will become instrumental in the trading process in ways not seen before. Technology will become a more significant factor in the ability of both buy-side and sell-side firms to access markets and to compete.

How to Prepare

So how can firms prepare for change if, in fact, these new vehicles fulfill the hopes of their promoters? First, consider that there has always been tension between the trading community and technologists a tension that can be traced directly to the separate worldviews of the two groups.

Trading is critically dependent on instant access to rapidly-changing information; transactions have high dollar value, placing a premium on accuracy and timeliness in recording trade details. Speed is of the essence for capturing liquidity in today's fast-moving markets.

Technologists see in technology the power to speed the dissemination of information and to enhance the ability to act on it. In the view of technologists, trading is precisely the sort of activity that can benefit from these powers. In their view, technology provides exactly the tools traders need to cope with the information deluge.

Traders, on the other hand, see the world quite differently. They place a premium on person-to-person contacts and on personal relationships. For traders, the extra seconds it takes to execute a trade using an unfamiliar technology equates to lost opportunities for the firm and its clients. The consequences of missing a market extend far beyond the dollar-cost involved.

Some traders are concerned that technology will diminish their importance or even eliminate the need for their role in the market. In the trader's view, information is essential, but cannot in itself assure successful trading. Personal relationships and professional skills are the precursors to excellent executions.

The Challenge

Given this reality, firms must do two things to meet the challenges presented by new market structures that require adept use of new technologies. First, they must find a way to bridge the cultural divide between traders and technologists.

Earlier this year, a survey was conducted among the traders and chief information officers (CIOs) who attended the Financial Technology Forum.

In response to the question of the biggest problem traders have with information-technology departments, 31 percent of the traders said that the departments did not understand the trading process. (It was the most frequent response given by traders.) Among the CIOs, however, only 18 percent held this view.

When asked what the biggest problem information-technology departments had with traders, 33 percent of the CIOs said it was that traders don't articulate problems (which was cited by only 21 percent of the traders present). Of the traders present, 31 percent viewed their firms as either "behind the curve" or "frozen in the ice age," compared with only five percent of the CIOs who held that view.

I cite the figures to refute the widely-held view that traders are resistant to new technology. Traders live in a very unforgiving world where mistakes or perceived under-performance are simply not tolerated. The figures show that traders know they are behind and technologists just don't get it.

Most traders will quickly adopt any technology that can enhance their performance. Unfortunately, information-technology departments' understanding of the true nature of the trading process often inadequately recognizes which tools can genuinely benefit traders. As a result, traders must either take the lead in developing their own technology plans, or explain the trading process sufficiently to technologists for their requirements to be met.

Trading Processes

The second requirement for firms seeking to be successful in meeting the challenges of new market structures is a re-examination of their trading processes and approaches to seeking liquidity. If and it's still a big if the proliferating ATSs succeed in creating viable liquidity sources, buy-side firms, in their clients' interest, will have to find a means to access these systems.

One way is through internal order-management and routing technology, either proprietary or purchased, to access these systems directly. Relatively few buy-side firms currently utilize order-management technology on their trading desks, but the introduction of new trading machines may spur more firms to do so.

Another way for buy-side firms to access these ATSs is to have the sell side do it and achieve best execution wherever it can be found. The buyside's trade-off is between the cost of deploying new technology versus the opportunity costs of not gaining the advantages through direct access to the new trading machines.

The trade-off for sell-side firms is whether to cede a portion of their business to the new trading vehicles, as buy-side firms bypass the sellside to access them directly, or to add value by assisting buy-side firms in navigating the increasingly-complex trading markets. In the latter case, their challenge is to use technology creatively to distinguish their offering from competitors trying to do the same thing.

Common Denominator

The common denominator for success is a closer collaboration between traders and technologists. Each needs a better understanding of the other's discipline, and both need to be proactive and open-minded in their pursuit of this understanding.

Regrettably, there is no magic bullet. The cultural differences between traders and technologists are substantial and result from their separate histories that are now intersecting.

To gain competitive advantage from these technology-driven market developments, firms must combine their technology and trading brainpower. They must formulate and execute strategies to capitalize on the technology-driven opportunities presented by these new trading vehicles, and their impact on evolving market structures.

Michael A. Tappan makes every effort to be accurate. He learned as a retail broker about the costs of mistakes, and the responsibility a money manager has to its clients.

"Being a retail broker put me in touch with the fact that I was managing money for people," Tappan said. "A broker keeps that in mind, because people trust that you'll protect their investments. If you make a mistake, you're responsible to your clients for their losses."

Tappan began his Wall Street career seven years ago as a retail broker first at New York's PaineWebber, and then at Shearson Lehman Brothers, a predecessor brokerage of two current Wall Street firms.

Working for commissions, Tappan said his stint as a retail broker also gave him a strong work ethic, and taught him the importance of organization with a heavy workload. But after two years as a retail broker, he decided he wanted to move into trading, which seemed to better fit his personality.

So he made the jump to institutional trading, joining Ashland Management in New York in 1994. He felt moving to trading was the continuation of a learning process.

"The institutional side seemed like the most interesting part of Wall Street to me," Tappan said. "There is more of a level playing field, and a standard of sophistication. It's not a process that's transaction-oriented. There's a long-term approach to managing people's money."

He is currently the director of trading at Ashland Management. The firm is a large-cap growth manager, serving mostly pension funds, high net-worth individuals and wrap programs. With $1.6 billion in assets, Ashland Management has averaged a 20 percent annual return over its 20 years of existence. Last year, the firm averaged a 31-percent return for clients through the end of November.

"Being a broker served me well," Tappan said. "For a trader or a retail broker, you have to be 100-percent accurate, and you have to be able to recognize how things happen, and react quickly to changes. After a few years getting my feet wet as a broker, trading seemed like the continuation of a process for me."

At Ashland Management, Tappan and Michael Jablonski the other trader on the desk work closely with the firm's six portfolio managers and its investment committee. Tappan and Jablonski are relied upon to gauge the climate in the market, and advise the portfolio managers and investment committee on certain stocks. They also rebalance the portfolios on a day-to-day basis.

"It's important to have open communication and a sharing of responsibilities. It makes it more interesting to be involved in the whole investment process, and not just executing orders," he said. "It heightens your sense of responsibility for the work that you're doing, and for your clients."

Ashland Management follows set quantitative computer models in selecting stocks for the firm's accounts. Using information from Ashland Management's analysts, the proprietary models rate stocks that fit the firm's accounts. With the stock ratings from the quantitative models, the investment committee makes decisions on restructuring the portfolios.

To help balance the ratings by Ashland Management's quantitative models, Tappan uses some soft-dollar arrangements for proprietary research from the sellside. He estimates that up to 20-percent of his desk's trades are directed to soft-dollar firms.

"I would say that's pretty average," he said. "That outside research increases our ability to add value to our portfolios. But you don't want to be driven on the desk by soft dollars. You have to be driven by best execution."

Tappan and Jablonski work regularly with roughly 20 brokers a year. Tappan likes to keep a close relationship with his brokers for information on the stocks Ashland Management follows.

Tappan said he and Jablonski have been relatively inactive recently because Ashland Management's portfolios have performed well. But under normal market conditions, the desk can run from a few trades a day to nearly 500.

To perform well on busy days, Tappan's relationship with Jablonski works to their advantage. "We know how to work together, and we can step in for each other," Tappan said.

Tappan tends to do more of the desk's block trading, but on some days, the two just shuffle the orders out randomly. Occasionally, orders are directed by the portfolio managers. But Tappan and Jablonski usually have the discretion to work the orders themselves.

"We invest mostly in large-cap stocks, so finding liquidity is usually never a problem," Tappan said. "But I want to work hard with an order to get best execution. I want to be accurate, and help clients get the best return they can. Keeping trading costs to a minimum is important to that process."