V. 20:8 (75-77): Trading In The 21st Century by Tom Busby

V. 20:8 (75-77): Trading In The 21st Century by Tom Busby
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Trading In The 21st Century by Tom Busby

Equipment, education, and method — three necessities for successful trading.

It wasn’t so long ago that it was very important to buy stocks with dividends and only sell on an annual basis. Then in the early 1980s, the Standard & Poor’s contracts started trading in the Chicago futures pit, and things haven’t been the same since. Introduced in the form of S&P futures was a vehicle that allowed traders to enter and exit the market multiple times per year to increase net worth. The ensuing shift in philosophy set the stage for a changing market and led to the economic boom of the 1990s.

Initially, the most important tool a trader had was a connection or relationship with a pit trader. In the mid-1980s, the advantage of execution clearly went to the pit; the backoffice trader was confronted with higher transaction costs and less leverage — a real disadvantage. Not only that, only the large brokerage firms had access to the pit, which was a drawback for the small investor. In addition, brokerage costs were high and the electronic age had not yet begun to aid in order execution. The history of the Dow Jones Industrial Average (DJIA), the benchmark of the market (displayed in Figure 1), shows a nice picture of this.

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