When you think Wall Street trading, what do you think of?
Shouty men in colourful jackets doing weird hand signals? Or a box full of servers in New Jersey?
The former has been replaced with the latter over the past decade or so, and stock market trading in particular is now predominantly electronic. Bank of America Merrill Lynch analysts led by Andrew Stimpson said in a recent note:
“Equity markets are already predominantly electronic, but there is still margin pressure as the mix of counterparties and types of trading is changing. ETFs are growing quickly and conduct nearly all trading automatically and electronically. Quant funds have grown quickly and also automate trading. High-frequency trading firms automate trading. Even traditional asset managers that wish to split research and execution payments are executing more trades through lower margin methods.”
This process has led to a lot of highly paid jobs on Wall Street being automated away. Computers are now doing the jobs that human stock traders used to perform.
The process has now shifted in to fixed income, which has historically been a market driven by phone calls and human relationships.
The Bank of America note included the chart below, pulled from a January report from the Bank for International Settlements. The yellow bar is the percentage of the market trading electronically in 2015, and the blue bar is the 2012 level. You can see significant increases across the board.
The chart shows the rapid growth in electronic trading in fixed income asset classes such as interest rate swaps, US Treasuries, precious metals, foreign exchange options and swaps, and repos.
Those markets are changing rapidly, with new tech-savvy entrants grabbing market share. High-frequency trader firms are now dominating the US Treasury market, and an upstart tech-driven marketmaker is now one of the biggest players in the FX market.
Wall Street jobs are already down dramatically in the fixed income, currency and commodity (FICC) business lines, with front-office headcount in FICC down close to a third since 2011, according to data from Coalition. Increased electronic trading could well see the job-cutting process accelerate further.
Bank of America said (emphasis ours):
“Some of the recent hires into Head of FICC electronic trading positions have come from an equities background where electronic trading has already been normal for many years. In some cases the banks are even trying to use the same architecture to create the equities and FICC algorithms, further reducing the number of duplicated staff and systems needed to support those algorithms.”
It is important to note that the rise of electronic trading isn’t linear, and it is clear that the corporate bond market (HY cash, IG cash) is a laggard.
That’s in part because of the structure of the market: while a company has one stock ticker, it can have 100 different types of bonds, making it difficult to find a match between a buyer and seller without human involvement.
That’s not to say that market isn’t changing. It’s just slower progress.
According to a recent study by the Securities Industry and Financial Markets Association, 20% of corporate bonds were traded electronically in 2015, more than double the figure for 2013. Goldman Sachs said in a May presentation that there had been a 70% increase in electronic trading volumes for US credit between 2011 and 2015.