University at Buffalo School of Management

28 Buffalo Business Autumn 2023 Insights A l g o r i t h m s h a v e i n c re a s i n g l y re pl a c e d stock traders over the past few decades, but a new School of Management study has found that market quality decreases when humans are removed from the equation. Published in the Journal of Finance, the study analyzed how the New York Stock Exchange was affected aer floor trading was suspended in 2020 due to the COVID- 19 pandemic. Of the 13 registered exchanges in the U.S., only the NYSE continues to use human floor traders — the rest are 100% electronic. "Given the increasing popularity of algorithms, and the growing belief that arti- ficial intelligence will disrupt labor markets, many have argued that floor traders are no longer necessary," says study co-author Dominik Roesch, associate professor of finance. "But the closure of the NYSE trad- ing floor due to COVID led to worse market quality across a variety of measures, includ- ing liquidity, price efficiency and auction quality." To examine the impact of floor traders on NYSE market quality, the researchers combined data from the Center for Research in Security Prices with the NYSE Trades and Quotes database. Using this data, they examined the relation between floor trad- ing and various measures of market quality in a difference-in-differences framework — comparing the quality of NYSE stocks both before and aer the suspension of floor trading, and comparing NYSE stocks to their equals on the NASDAQ exchange. Their results show pricing errors for NYSE stocks increase by 2 to 6% aer floor trading is removed, illustrating how humans continue to be valuable even in the age of algorithmic trading. "Our results show floor traders are important contributors to market quality for two reasons," says Roesch. "First, the floor facilitates the transfer of information in a way that electronic trading cannot, and second, clients can give brokers some lati- tude to work on their behalf when buying and selling, which improves outcomes." Business Analytics Not so fast, robots: Humans are still the best stock traders Roesch Social Impact of Management How to optimize recycled content in products As municipalities launch lofty environ- mental initiatives such as New York City's goal of sending zero waste to landfill by 2030, School of Management research- ers have developed a new model that optimizes the costs and benefits of using recycled materials in manufacturing. Published in the European Journal of Operational Research, the model provides a framework for manu- facturers to find the optimal recycled content claim given the sourcing and inventory costs of post-consumer content. "When you pick up a coffee cup and see a message about its post-consumer content, that's an incentive that drives demand because the consumer looks at it and says 'Well, that's a greener product so I'm going to buy it'," says the study's lead author Ananth Iyer, professor and dean of the School of Management. "But there isn't a reliable supply of recycled mate- rials, and using recycled content can be more expensive than using new materi- als, so manufacturers need to find the balance." To develop the model, the research- ers studied the European production of glass wool, an insulation produced from a mix of natural sand and recycled glass. They focused on Europe because there is a large amount of data on the recycling rates of each nation and recycling rates are high, but the logistics of moving consumer waste between countries is a challenge. The study found that manufacturers can increase their recycled content claims when they use a shorter time period for strategic planning, but attempts to create artificial demand for recycled products without a stabilized, reliable supply of recy- cled materials can decrease those claims. The researchers say finding market- based incentives like recycled content claims are key to preventing landfills from reaching capacity. "We have all this post-consumer waste in the U.S. with no overseas markets, so we need to find domestic solutions for this recycled material to avoid divert- ing it to landfill," says study co-author Aditya Vedantam, assistant professor of operations management and strategy. "Voluntary approaches can work if you provide manufacturers with the right incentives, such as making it cheaper to collect recyclables, or creating demand- side incentives by encouraging greener procurement." Iyer Vedantam Traders on the floor of the New York Stock Exchange. Photo courtesy of NYSE Group

• Cover