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What's Next for Wall Street?

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The face of the market has forever changed.

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"It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another." --Gordon Gekko

You don't have to be a big hitter to see that Wall Street has forever changed. What was traditionally an exclusive club of power players and moneymakers became a household hobby when technology made enablers of the mainstream.

In the storied history of financial markets, the rate of change has been nothing short of remarkable. The last ten years revolutionized an industry once known for clubby relationships and handshake agreements. The next ten years will forever alter the structural DNA as the old guard chases an evolving digital world.

When I started at Morgan Stanley in 1991, I arrived at my turret while the skies were dark and transcribed derivative positions by hand. As ancient as it sounds, the risk management approach was that arcane. We "paired" single stock positions into hand-written strategies in an attempt to manage the complex components of our collective risk puzzle.

That meticulous process was standard practice on the Street as traders relied on acquired acumen and T-accounts to base million dollar decisions. It was an innocent approach to an intricate machination, where inefficiencies were commonplace until arbitrage emerged to capture risk-free returns.

When we started pricing over-the-counter products, we "won" business by forty to fifty volatility points (a subjective assignment of valuation). Customers "collared" their stock and laid off the risk and we gladly facilitated the orders. Everybody won and nobody complained. That's typically how it works when the screens are green.



Technology companies awoke to write naked puts in lieu of stock buy-backs. If their short options were exercised, their cost basis was cheaper than it would have been in the open market. If not, the premium expired worthless and the income slipped through a tax-free loophole.

Microsoft (MSFT) did it. So did Dell (DELL). Intel (INTC) too.

They were happy campers and our firm a profit machine as the wheels of capitalism greased a seamless coexistence. In time, as other sell-side players entered the market, the relative edges rounded and fat dripped off the risk-free bone.

The emergence of market efficiency paved the way for new, more intricate products and strategies. If Wall Street has proven anything, it's an ability to reinvent itself, recreate risk and appeal to a customer segment eager to differentiate returns.

During this evolution-or perhaps because of it-the information age democratized finance and paved the way for retail oriented order flow. That introduced a fertile audience to the financial machination as desperate housewives flocked to stocks and the promises they held.

The feeding frenzy in the late 90's was manic but many of those lessons were forgotten despite the bitter pill of the post-bubble spill. It is a process that has been repeated many times since. Technology. Real Estate. China. Commodities. Debt. Each bubble was a new paradigm and each time was different… until it wasn't.

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