Are automation threats overblown?
I keep hearing how there is more and more automation, which there is, but it's mainly in annoying odd-lot sized trades (from what I've seen). For context, this is at a top BB (only referencing not as an ego point, but because there has been a shift toward flow to the BB in recent years). The argument can be made, if computers can trade oddies, they can move up in size over time and automate larger and larger trades. While in theory yes, in practice, in more illiquid markets, a lot of what the trader does is based on their "feel" of what's going to happen from having conversations with the buy-side. That's your whole edge as a market maker, you are the "hub of information", and can get a "feel" for where the market is moving.
I am only a first year, so I may be WAY off base, but it would be great to get some feel on this from those more experienced. Are the threats of automation overblown in more illiquid products like Structured Products, Munis, some dervis?
on a US treasury desk, there used to be 2-3 traders for each point on the curve
2 2yr traders
2 5yr traders
2 10yr traders
2 traders for 30yr bonds and 2 traders for strips
2 TIPS inflation traders
now there is only one trader for each sector, one algo/electronic trader who tweaks the algo for the small lots book, and maybe 1-2 juniors who shadow everybody trying to learn, and acts as backup when somebody is off the desk...so you've lost 6 senior traders, just on 1 desk....now multiply that by 30 other trading desks in one bank. fewer junior traders...lots of senior traders now unemployed and looking to get back in and willing to work for cheap
I understand there has been headcount cuts across the board over time. More so doing this from a forward looking approach (desks so lean, can't cut much more if only a few traders there already). Further, UST rates are relatively liquid, so I understand that product is more prone to automation.
Was more so asking on the more illiquid side, like securitized products and munis mentioned, do you think what you have seen in UST still holds for those asset classes? Thanks for you insight on this forum, as always.
On illiquid set, winners take all. There will be less and less firms trading illiquid or exotic products.
You need to understand banks are not doing prop trading anymore, even if they are allowed, they just won’t. Some traders may build some prop position for building inventory but it is simply not as popular as it was before. How banks make money? Platform. If you want to succeed in these products, you have to have full service, from syndication, funding to trading. Not many companies can do that nowadays. So in the end you may get better job security trading these products (assume you work in top 5 players, only top 5 will survive), but your pay won’t look as good as it’s before. Why? If you want good compensation, you have to prove to your boss you can find a similar position elsewhere pay you more. But for niche areas, you simply don’t see many job opps avaliable. Unless someone left, there won’t have empty seat. In summary, not liquidity of your product bad, liquidity of your job mobility also looks bad.
I will also say technology helped regulators a lot. Looking back 20 years ago, firms made a lot of money by trading using client information or market manipulation techniques or just insider trading.Was it illegal at that times? Of course! But “doing things illegal is okay as long as you don’t get caught” culture is such a normal thing on Wall Street (1mdb is a recent example, unfortunately it get caught)
SEC or other regulators have always been short of staffs and I can see this situation even worse. But unlike 20 years ago, they have big data and AI to help so they are able to detect more suspicious activities even though they are still short of headcounts.
I'll add something to the pot.
As the post above laid out, Big Data, Algos, AI, and the dawn of quantum computing will absolutely continue to decimate highly liquid, exchange / OTC products and entire asset classes in the next 5 to 10 years. Whatever human element that remains will be curtailed even further.
Now, structured and/or physical products? Not so much. I have never seen an algo deftly feather a two million barrel Mars oil order into the market. Never seen an algo serve 2,000 MW of load or dispatch power plants. Never seen big data give lumber traders any heed.
So take from this what you will.
Namaste
D.O.U.G.
Problem with structured product or other illiquid product is there are less and less players. Winners take all. Only top 5 players will survive, rest will starve, Number of headcounts for structure product is still shrinking over past 10 years.
Also, return on capital for a lot of structure product is much less than commercial bank. I can totally see why more banks want to focus on corporate or consumer banking, believe or not, they have better return on capital, which is a more efficient way of using capital.
Thanks for the thoughts here guys.. so if I am at the "lower tier" of the top 5 BB (arguably #4/5 lol) in a Public Finance Banking role, trying to move into Muni Trading (highly illiquid), do you think that would be a job worth pursuing *for the long term*, given that I am at one of those firms lucky enough to be benefitting from consolidation?
Illiquid product may not be automated but still have challenge of its own
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