Credit Trading automation
Hello everyone,
I am a first year credit trading analyst, and I am not trying to beat a dead horse, but what are everyone's thoughts on the state of trading in AI, specifically within the credit space. Will banks continue to make money in trading over the next decade? How big of a risk is AI to this industry. Eager to hear people's thoughts good and bad.
AI's impact on credit trading is nuanced and depends on the specific aspects of the market. Here's what the most insightful WSO content suggests:
Automation in Credit Trading:
Junior vs. Senior Roles:
AI's Current Role:
Future Outlook:
In summary, while AI poses some risks to the industry, particularly in automating routine tasks, the human element remains critical in credit trading, especially for complex decision-making and navigating less liquid markets.
Sources: Q&A: VP in LO Public Credit, Q&A: VP in LO Public Credit, Is it worth pursuing a career in trading in 2017?, Will robots replace your consulting or financial career?
Credit is still very much an institutional market. I think what people miss in discussions about automation is what made cash equities susceptible to it in the first place. For any company there’s basically 1 ticker you can trade and hence all of the liquidity is concentrated in one place. Additionally equities by nature are going to be higher volume products since “hold to maturity” doesn’t exist (even retirement accounts go through rebalancing and such through their lifetime).You also have more retail participation which means there’s a real incentive to have a system in place to quote odd lots. You’ll notice this is very true of something like SPX daily expiry options as well (with a bit more fragmentation across strikes) which happens to be the most automated HFT-like market in the equity derivatives world.
Now look at credit. Even in the most liquid names (probably IG telcos or something) you have hundreds of bonds for each company across the curve each with their own ecosystem (front end has different players than back end), very little retail flow, not exchange traded, and more block trades. The automation problem is a lot more difficult since you’d basically have to build something that warehouses risk over a longer timeframe, not HFT. This becomes even more difficult as you move to more illiquid stuff like distressed or lev loans.
This is not to say electronification isn’t happening, but electronification and automation aren’t synonymous. More trades are being done over the portfolio trading channel or electronic RFQ but there’s still a human quoting on the other end (although algos for odd lots are becoming more prominent). There are some areas like on the run CDX which is probably most primed for automation but even then firms have tried and failed to implement algos.
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