JSE flashback: How open-outcry trading worked

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SIMON BROWN: I’m chatting with David Shapiro. You’ll find him at Sasfin. David, I appreciate the time today. We are talking about exchanges and how they work. I want to go all the way back to open outcry [system]. I did a trip to Joburg in the mid-eighties, and to the open outcry [trading floor], and I’ve never seen such chaos in my life.

DAVID SHAPIRO: It was chaotic. And the reason it was chaotic is that a client would phone you and you would have to write an order on a piece of paper. There were a whole lot of instructions around that. The client would tell you, ‘I want to buy at this price. You can use a five cents discretion’. Excuse me if I’m going on, but it was a scrap piece of paper.

And then you had a dealer who was well positioned, or he would be positioned under the boards in which he dealt. So at that stage, in the early days, the prime markets were the gold markets, the platinum markets, the mining markets. They took centre stage.

To the left you might have the financials – facing the boards – to the right you’d have some of the industrials. Now you would have to have dealers strategically placed. We would run with those orders to give to the dealer, and the poor dealer now has to sort out his pad. He is dealing in 20 or 30 different stocks. So it does become a little chaotic. It’s almost impossible, to be fair, to understand the time that it came in and to treat orders fairly. So it tended to be a little chaotic.

And when you wanted to do something, you would shout the name of the stock and you would shout an order to a recorder on the board who would put the price at which you wanted to buy or sell in chalk on a board. So it was very antiquated, very quaint, lots of fun, but very inefficient.

SIMON BROWN: Inefficient. The recorders – so those were the people who were almost up on the wall. I mean, they were on a balcony of a sort. I never knew what they were doing. So they were writing down, essentially, bids and offers.

DAVID SHAPIRO: That’s it. So you would shout the name of the share. The one thing that we learned, Simon, is our brains were tuned. I could be talking to you in one corner and if I was interested into De Beers, and someone shouted De Beers, I would pick that up – my brain was trained to pick up De Beers – I’d slap you on the head, say, ‘cheers, boom, run and go and try and deal’.

Put it this way, people assisted each other. You never did something behind the back of a friend or another trader. You got together in little circles and made sure that everybody was satisfied.

It was a lot of fun. There was a lot of noise. You could actually feel the pulse of the market. But in hindsight it was very, very difficult to trade and very difficult to be fair on clients.

And of course, Simon, institutional clients took precedence over the poorer person. Yes. If you came in with an institutional client and your private client was first, he got whacked on the head.

SIMON BROWN: My first trade in 1987 was an odd lot. In other words, it wasn’t a round hundred shares [David laughs]. It meant nothing to me. But years later my broker gave me all shades of hell because of the complexity of trading in an odd lot.

If you looked around the camaraderie, there was a sense that you could feel the market. Now we look at screens and it’s all red or it’s green or something like that. You don’t get that sense of ‘is it just selling, is it panic?’ You’ve lost that energy.

DAVID SHAPIRO: Yes. The energy was there and you felt it. You could feel the build-up. You might have seen pictures of a new listing when a new listing came. It was a scrum. It was a lot of fun. There was a lot of acting there. It was a lot of show for the public and for everybody. It was always an event. Not only that, you’d celebrate the event with going up to the broker, the sponsoring broker’s offices. A huge spread there. So it was much more of a community and understanding.

Look, the other thing is that because of the floor, you had to live or you had to operate within not more than a kilometre – certainly not more than a kilometre –  away from the floor, but within a few blocks. Your offices were there. We knew the community.

SIMON BROWN: I thought you were going to say you were going up to the red room for a morning, because I heard stories about that. But let’s not go down that.

These days it’s electronic, it’s boring. But I suppose in a way it’s efficient. I can come with my little order and I can get ahead of Old Mutual if I’m in time and price. The playing field is level, even if boring.

DAVID SHAPIRO: Oh, yes. No doubt about that. That’s one thing that electronic trading favours. Yes, there are openings if you have large orders and you want to bypass the market; because you might disturb the market there are a whole lot of rules around that. But generally, you can get in first and you’ve got sight of what the market is. You know where the buyers are, you know where the sellers are, because the trading system displays that for you. So yes, you can get ahead of a large institutional order. I think that’s what’s made it fair; it’s all timestamped and so on.

Simon, trading has not quadrupled – it’s to the power of 10 compared with what we used to do. When I see bad days today, we would’ve loved in the olden days to have a day like that.

SIMON BROWN: And also it’s things like failed trades. [With] the new electronic system there have been some failed trades, but hardly ever. And sometimes the system goes down.

And settlement – I don’t know how you guys settled back in the seventies.

DAVID SHAPIRO: Settlement? Funnily enough, we introduced the clearing house in the 1960s, which was ahead of most of the major markets. But that’s another point. So a lot of scrip, everything was handled by hand [such as] your share certificate, with the admin behind [that].

The number of people we employed was phenomenal. A huge number. I won’t bore you with it, but there was a massive, massive back office, because I would have a share certificate for 500 [shares], and I’d only sold 100. So I would deliver it. They had to give me back a share certificate for 400 or something, and then split that share certificate, deliver it to somebody else. So it was a complicated settlement system. We had these huge registers, but even at the end of the day there was matching.

We would go onto the floor. I was in a scrum, or I was trading with you and, Simon, you would say, ‘Hold on a sec, you said you bought 300 from me, and I would say no, I only sold you 200’. At the end of the day, all of these deals had to match, and you couldn’t go home until you’d matched all your trades. So there were a lot of queries. You’d sit down at the end of the day – and that was the time when the market closed, at 16:00/16:30 – I can’t even remember.

Before the queries came out, there was an hour, and that was a time you went to the red room. You went to play snooker or you’d play dominoes, everything, because the chaps were just idle, waiting for queries to come. But you’d hang around there, watching the cricket or whatever it was. So it was a completely different day. But that was the old system. It was quaint, it was fun. It was social, but nowhere near as efficient as we are today.

SIMON BROWN: Yes. I was there in the mid-eighties. I remember we bumped into someone and he had a bag full of Krugerrands because he was selling Krugerrands, and you settled them physically. That’s how it was.

It ended in mid-1996 [when], if I recall, that we went electronic.

DAVID SHAPIRO: We went slowly. We started with certain boards and so on. Simon, the tragedy is that so many dealers who had a very specific quality and skill could never adapt to the screen. It was a totally different skill set that you needed to trade on screen. These dealers were dealers who were really very special. They could smell markets, just simply by being around. I think a lot of them fell on hard times when we did go electronic, simply because they couldn’t adapt to what was required.

SIMON BROWN: David Shapiro was chatting us through the old ways of doing markets.

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