Documentary Review: Your Cheat Sheet to FLOORED – How Exchange Trading Floors are Changing

I recently had the opportunity to screen the documentary FLOORED, which is nominally about the decline of floor trading in Chicago.  Chicago, of course, is known for its resolutely blue collar work ethic, billionaire hedge fund managers notwithstanding.  And this movie delivers on that account.  We see middle-aged former floor traders smoking cigars, drinking, lying on their couches remembering the glory days, worrying about their family’s finances, and lamenting the rise of electronic trading.

In short, the movie is really about technology and how it obsolesces labor.  Floor traders historically provided liquidity in a market.  Each trade has a buy side and a sell side, and the floor traders act as intermediaries to facilitate the trade.  But, with the rise of electronic trading, the buyer and the seller can communicate directly and trade with each other.  This has the beneficent effect of making the bid-ask spread smaller and trading more efficient and liquid.  As happened with stock brokers, the floor traders were disintermediated: their market-making function was obviated by technology that promised better, cheaper, quicker, and more efficient trades.

The real problem here is that the floor traders were so focused on their business and the historic nature of it that they ignored the larger developments in the financial markets, namely, the widespread embrace of technology. They remained ignorant of the peril that technology created.  We see in the documentary the quantitatively-oriented startup, with its computer programmers and physicists and compare them to the inefficient, laboring traders, none of whom needed any sort of formal education to shout to other floor traders.  And, of course, when floor traders did well, they did very well: they could earn hundreds of thousands of dollars a day just on the bid-ask spread on thousands of securities or commodities or bonds, or whatever other financial instrument they could trade on the floor.

Their story is one that has been repeated many times over in competitive economies: unless a business has a way to build a defense around its franchise, technology has a way of worming itself into the business and making it more efficient.  This creates winners (the consumers and the companies that provide this new technology) and losers (the companies and people that fail to adapt).

Of course, I come from the rather biased perspective of thinking that narrower bid-ask spreads are a good thing, and I am not affected by the demise of the floor trader.  So, it is easy for me to sit here and say “You should have looked up from the floor and seen what was coming toward you.”  But this documentary provides a lesson for other purveyors of a service: if you don’t understand how technology affects your present business, you have little hope of understanding what its longer-term implications are.  None of the floor traders really understood what was happening to their business until it was too late.

There’s a good economics lesson here, and it is that those who fail to see the world at large risk being obsolesced by it.  The documentary creates a compelling, and tragic, cast of characters who are overwhelmed by changes to the industry that is the only thing they know.  To an extent, education protects people from the vulnerabilities that technological change brings, but perhaps even more important than being educated is understanding that no franchise is forever, and that the world changes in ways that can eliminate your source of income.

David Friedman is the Editor of our new Wall St. Watchdog platform. Click here to follow Wall St. Watchdog on Twitter or Facebook.