Wall Street Is a Casino in the Clouds

NEW YORK (TheStreet) -- Last summer, when I visited TheStreet.com's Wall Street office on my way to an assignment, I noticed the area around the New York Stock Exchange had become something of a movie set, that it was no longer the center of trading but a stage where trading was discussed.

I was more right than I realized. It's clear now that Wall Street is indeed obsolete, replaced by computers and software, and that the actual ownership of things is less important than the casinos of risk built on top of them.

The deal reported by Reuters between NYSE Euronext ( NYX) and InterContinental Exchange ( ICE), along with the deal between Getco and Knight Capital Group ( KCG), reported at Sfgate.com both reflect this new reality.

Trading is moving to cloud computing platforms, traders becoming software algorithms. The instruments you see priced on the TV crawls, the equity in real companies, are no longer where the action is. The exchange owners are welcoming their new cloud overlords, taking stock in the acquirers as part of these deals.

ICE is based near my home in Atlanta -- actually the suburb of Sandy Springs -- but its computer center is in Chicago. It's a browser-based front-end that can run Java programs and looks, to my eyes, pretty compatible with Microsoft's ( MSFT) Azure cloud. It is mainly a derivatives market, selling futures, options and swaps tied to oil, indexes, and commodities.

While ICE had been trying to get NYX for some time -- and was previously part of Nasdaq's ( NDAQ) $11.3 billion bid for the exchange, I think the writing on the wall here was Hurricane Sandy. Sandy closed the exchange floor for days and, frankly, a global, cloud-based trading world can't have that.

ICE and NYX are about the same size in terms of revenue but ICE's business is much more profitable, and the multiple paid for its earnings dwarfs that of NYX, which is why it's able to do the deal.

The Getco-KCG deal is even more virtual. Getco is a privately held market maker, which is using this reverse merger to go public. Both companies are just running computerized trading systems, and Getco was able to move because, earlier this year, someone at Knight made a mistake, as Kiddynamitesworld.com said, executing a week's worth of trades in a matter of minutes.

Getco and ICE are computers. The don't sleep. They mainly trade esoteric instruments only dimly related to actual ownership of anything. The trades are usually pre-set by software algorithms, not by humans at all.

Despite the 2008 market crash, and despite Knight's own example of software failure, global trading keeps moving into this dimly regulated computerized netherworld, a virtual casino where fortunes are made and lost in a heartbeat, and where cops are almost guaranteed to be several steps behind the robbers.

The instruments on which trading is based are futures, options and other derivatives, not real commodities, not real stakes in companies, but imaginary instruments on which traders' software programs can get more action. The trading volume of the New York Stock Exchange, and the value of its exchange, have been falling for years because the virtual casino provides more, better, faster action.

But we're losing the point of trading at all. Companies need capital, commodities need markets, all sorts of entities need debt financing. Who is left holding the bag when the casino has finished its work? What is the value of individuals trading a market that's rigged by software and lives in the clouds?

Merry Christmas, Wall Street. Now disappear.

At the time of publication the author had a position in MSFT.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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