These are slides from a recent keynote presentation I gave.

1. The
story of THE NEW YORK
STOCK EXCHANGE
Kenny Polcari’s Presentation Slides, May 2012

2. Golden Age
Electronic Age

3. the golden ageTHE electronic era
Kenny goes to college
and then Wall Street to
work at the New York
Stock Exchange.
THE
GREATEST
BULL BEGINS
1980 1990 2000 2010

4. the golden ageTHE electronic era
Kenny gets married,
buys a house, and has
his first daughter.
Kenny goes to college
and then Wall Street to
work at the New York
Stock Exchange.
CRASH
OF ’87
1980 1990 2000 2010

5. the golden ageTHE electronic era
Dow hits its 10k milestone
on Kenny’s birthday.
Kenny starts a company.
Buys another house.
Kenny gets married,
buys a house, and has
his first daughter.
Kenny goes to college
and then Wall Street to
work at the New York
Stock Exchange.
THE
GOLDEN
AGE AND
THE SUPER
BULL
1980 1990 2000 2010

6. the golden ageTHE electronic era
RN ING
TU INT
Starts a company.
P
Buys another house.
Kenny gets married,
buys a house, and has
his first daughter.
Kenny goes to college
and then Wall Street to
work at the New York
Stock Exchange.
THE THE END
GOLDEN OF THE
AGE AND WORLD AS
THE SUPER WE KNOW
BULL IT (PART 1)
1980 1990 2000 2010

7. (if you ever took psych 101...)
THE 5 STAGES OF GRIEF
denial anger bargaining depression acceptance

8. the golden ageTHE electronic era
TUR
P NIN
INT G
Starts a company.
Buys another house.
Kenny gets married,
buys a house, and has
his first daughter.
Kenny goes to college
and then Wall Street to
work at the New York
Stock Exchange.
THE THE END
GOLDEN OF THE
AGE AND WORLD AS
THE SUPER WE KNOW
BULL IT (PART 1)
1980 1990 2000 2010

9. the golden ageTHE electronic era
TUR
P NIN
INT G
Starts a company.
Buys another house.
Kenny gets married,
buys a house, and has
his first daughter.
Kenny goes to college
and then Wall Street to
work at the New York
Stock Exchange.
THE END
OF THE
WORLD AS
WE KNOW
IT (PART 2)
1980 1990 2000 2010

10. the golden ageTHE electronic era
Here comes the
peak of career.
TUR And a bonus:
P NIN daughters go to
INT Gcollege. Kenny
gets to pay
tuition.
Starts a company.
Buys another house.
Kenny gets married,
buys a house, and has
his first daughter.
Kenny goes to college
and then Wall Street to
work at the New York
Stock Exchange.
THE RISE
BEFORE THE
FALL
1980 1990 2000 2010

11. the golden ageTHE electronic era
Here comes the
peak of career.
TUR And a bonus:
P NIN daughters go to
INT Gcollege. Kenny
gets to pay
tuition.
Starts a company.
Buys another house.
Kenny gets married,
buys a house, and has
his first daughter.
Kenny goes to college
and then Wall Street to
Peak of
work at the New York
career,
Stock Exchange.
market
rock
bottom.
ARMAGEDDON
1980 1990 2000 2010

12. the golden ageTHE electronic era
Here comes the
peak of career.
TUR And a bonus:
P NIN daughters go to
INT Gcollege. Kenny
gets to pay
tuition.
Starts a company.
Buys another house.
Fed up
being fed
up, Kenny
starts
Kenny gets married, writing.
buys a house, and has Finds his
his first daughter. voice, fun,
and a recipe
Kenny goes to college for the
and then Wall Street to
Peak of markets.
work at the New York
career,
Stock Exchange.
market
rock
bottom.
PROFESSIONAL
LOUDMOUTH
1980 1990 2000 2010

13. These are the ingredients that build the backbone
of the stock market. They’re also known as
principles of economics, stupid!
The MARKET’s
{ }
role
integrity
fairness
resilience
efficiency
quality
strength

14. how it worked...
(meet our professors this afternoon)
Level Playing Field

15. Our task today learning how to recreate the ingredients in the electronic Age.
price discovery
transparency Level
Combine and
Ingredients: Playing
competition mix to make:
FieldS
liquidity

16. the history

17. 1975-1982
HIGH JINX HIGH FINANCE
Birth of electronic trading: Nasdaq (1971), Instinet, Quotrons
1975 1977 1979 1980 1982
>10% of Joe Q was Interest rates nuts:
SEC deregulates NYSE exclusive invested in the market 21%; Recession
specialists’ “Club” culture
commissions and stagflation

18. 1982-1987
THE GREATEST BULL IN HISTORY BEGINS
NYSE-Nasdaq
rivalry begins;
Bernie Madoff 11% of Americans
were invested in the
market Crash of ’87
1982 1983 1984 1985 1986 1987
SuperDOT Portfolio insurance,
program trading,
August 12, 1982: one circuit breakers
announcement, 2%, Free blood
and the greatest bull pressure tests
in history begins the next day

19. 1987-1995
JOE Q RALLYING THE TROOPS
The Internet...
401(k)s, IRAs,
mutual funds, and
Joe Q’s nest egg
The new Wall St.
analysts: Internet
1987 1989 1991 1993 1995
Donaldson CEO
Joe Q craving for
financial news makes a
whole new media genre
The end of the Cold
War and the first
Rates gen quants
below 3%

20. 1995-2000
PARTY AT THE NYSE FOR JOE Q PUBLIC
Dick Grasso and
the NYSE brand
Dot Com
bubble begins
NYSE-Nasdaq
=8 milestones
in 5 years
rivalry in full Reg
swing ATS
Battle Over The
Clob: Dick vs.
Hank The Tank
1995 1996 1997 1998 1999 2000
SuperDOT’s
Derivatives
first trade
Breaking Sandy Weil’s
supermarket High tech and high
the 1/8th finance can be
Rise of the to 1/16th banks: Glass
The Info Age bomb drops: Steagall repeal dangerous: LTCM
individual
investor and the trouble with news vs.
online trading knowledge begins

21. This is when I started a company. This was the view from our new office.

22. This was the view from the street.

23. 2000-2005
party’s over, hang me out to dry, i’m done
NYSE goes for
profit, electronic
and public
John Thain CEO
Decimalization Al says ARM
The Dot Com First big push to while the Fed
bubble bursts automation: fund rate is 1%
Direct+
2000 2001 2002 2003 2004 2005
Rise of ETFs 9/11 and the 6 days The death of Rise of credit
that changed the floor specialists default swaps
market forever

24. TURNING P INT
(part 1)

25. TURNING P INT (part 1)
SIX DAYS IN 2001

26. It seemed like the Golden Age ended when the party did.
But it turned out the shift to the Electronic Age wouldn’t come
down to technology at all. Nor would it come down to some
ambiguous time period during the march of tech. It would
come down to six days.

27. The six days that would change the market
forever were the six following 9/11.

28. TECHNOLOGY NEEDED TO PROTECT OUR CAPITAL MARKETS.

29. TURNING P INT
(part 2)

30. TURNING P INT
(part 2)
REGULATION NMS 2005
the final nail in the coffin

31. HOW TO KEEP PACE WITH TECHNOLOGY?
Reg nms. MAXIMIZE TECHNOLOGICAL EFFICIENCY.
Reasoning:
TECH EFFICIENCY SHOULD = MARKET EFFICIENCY

32. 2005-2010
RISE OF THE ROBOTS
Reg NMS, NYSE goes for
the final nail profit, electronic
in the coffin Rise of high and public
frequency
trading (HFT)
Rise of dark
pools and
internalizing NYSE Mahwah data
broker dealers center featuring
King of Quants’ buttonwood trees in
annual poker the parking lot!
tournament
2005 2006 2007 2008 2009 2010
John Thain
Duncan Avg daily volume
(2003-2007),
becomes often tops 8billion;
NYSE hybrid
CEO HFT do 75% of vol
model: high tech
& high touch

33. 2009-TODAY
COOKING COMPETES WITH COMPUTERS
Benny and the Jets
come up with
The 24-hr Benny’s QE2 Algorithms “read” and “Operation Twist.”
news cycle “analyze” the news Translation: QE3
2009 2010 2011 2012
Benny’s QE1 The Flash How writing a newsletter with
Crash...of 2:45 market analysis and market “Sterilize QE3!”
recipes taught me cooking
competes with computers
Rock bottom!

34. WHERE WE ARE TODAY

35. I’VE LEARNED THERE ARE 2 BIG STAGES IN TECH INNOVATION:
FIRST, WE LEARN HOW TO
HARNESS THEN WE LEARN HOW TO
CHANNEL

36. TECHNOLOGY
WE AND
ARE ALSO
HERE HERE
HARNESS WHAT
DOES
WE
HAVE
CHANNEL
...
TODAY SOME KE
MA
LOOK LIKE? DECISIONS TO

37. WE
ARE
HERE
What does trading look like today?
Market fragmentation
dark pools and the hidden market
news, noise, speed, algos, info, knowledge
high frequency trading and the race to zero

38. THE
BIGGEST
1+ 2
CHANGes
have been
WHO’S WHERE WE’RE
TRADING TRADING

39. the PLAYERS
THE CUSTOMERS
Retail Professional Traders Asset Managers
Hedge Funds Proprietary High Frequency
Trading Desks Traders
THE TRADING COMMUNITY
Brokers Broker Market Trading
Dealers Makers Venues

40. the venues
THE EXCHANGES (10+)
NYSE(3) NASDAQ(3) BATS(2) Direct Edge(2) Chicago National
ALTERNATIVE TRADING SYSTEMS (50+)
ECNs Dark Pools Internalization Voice Brokered 3rd
Party Matching

41. WE CAN SEE A SNAPSHOT OF THE CHANGES IN THE WHO
AND THE WHERE IN average daily trading volume...

46. market fragmentation

47. the
hidden
market
dark pools and alternative trading venues vs.
transparent exchanges

48. news
noise
speed
algorithms
information
knowledge
high frequency trading

49. FOOD FOR THOUGHT
High frequency trading and the race to zero

52. if you’re a wall street
algorithm and you’re
5 microseconds behind,
you are a loser.
to give you a
sense of what
that means
it takes us
500,000
microseconds
to click a mouse

53. (As we re-­examine our understanding of how to “keep pace with
technology,” there’s no need to waste time criticizing lack of foresight.
Of course we’d go with the efficiency objective first time around. It was
logical. Tech had already taken off in the race to zero. Now we’ve had a
chance to understand how and how much tech can effect the market,
so all we should worry about is staying focused on moving forward.)

54. 1 +2
but the bigger picture:
the implications
YES, hft and all of TOO MUCH SPEED
today’s SPEED has
a big impact on AND SHORT-
traditional TERMINISM
traders like me. have on
investing.

55. FOOD FOR THOUGHT
LET’S THINK ABOUT INVESTORS AND
AVERAGE HOLDING PERIODS...

58. TURNING P INT (part 3)
HIGH TECH HIGH TOUCH

59. TECHNOLOGY
WE AND
ARE ALSO
HERE HERE
HARNESS WHAT
DOES
WE
HAVE
CHANNEL
...
TODAY SOME KE
MA
LOOK LIKE? DECISIONS TO

60. AND
ALSO
HERE
We have some decisions to make. The market
runs on confidence--it’s the engine. To re-power it,
all we have to do is rediscover our roots:
{ }
the market’s...
role
integrity
fairness
resilience
efficiency
quality
strength

61. HOW TO KEEP PACE WITH TECHNOLOGY?
balance tech efficiency with system resilience
Reasoning:
TECH EFFICIENCY = MARKET efficiency
when it undermines system resilience
AND boiling electronic trading down to computing power,
algorithmic capabilities, and speed alone oversimplifies it

62. what i’ve learned about the future is that it’s
high high but
+
tech touch down
to earth

63. COOKING COMPETES WITH COMPUTERS:
HIGH TECH AND HIGH TOUCH

64. Thanks!
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