By Nicholas Larsen, International banker
It is perhaps one of the most iconic and evocative images of late 20th century capitalismthe Century. Big, noisy venues with hundreds of busy vendors, some shouting “Buy!” And sell!” in the futures pits while others desperately try to fulfill their clients’ orders as market volatility ravages financial markets. In one word: pandemonium. But do such images still sound true for today’s stock exchanges? Or are these hectic scenes of stressed traders today relics of a bygone era?
There is still part of floor trading, but the open-outcry systems that became famous in the 1980s have almost completely died out. Instead, technology has fundamentally changed the inherent nature of trading. While there were once legions of employees occupying the trading departments, investment banks have shed much of their human capital, reduced headcount, and replaced employees with software and automated trading solutions in order to stay consistent with greater efficiencies.
In May 2019, Taran Khera, Head of Asia Sales at Bloomberg, described trading floor automation as a three-step process:
- Electronization: Conversion of unstructured communication, such as B. manual and language trading, into more structured electronic formats that can be read more efficiently by machines. This in turn helps to increase workflow efficiency, build liquidity and improve post-trade reporting.
- Automation: Thanks to regulations such as MiFID II (Markets in Financial Instruments Directive II), more is being done to automate trading processes and thus expand the presence of electronic trading venues. Such automation turns out to be more cost-effective vis-a-vis manual processes as well as being more efficient, accurate and consistent in getting the results you want. It also records key information in a faster, more organized format, helping to improve regulatory reporting.
- Digitalization: This is mainly aimed at strengthening the decision-making process so that merchants can spend more time on complex tasks such as transaction generation and data analysis. Alternate data is extremely beneficial in this regard, as geolocation data and satellite imagery provide only some of the data sets that provide critical, investable insights. New visualization techniques such as augmented reality and virtual reality simulations also open new doors for data analysis. As this practice becomes more sophisticated, retailers will increasingly want to use digitization to gain a competitive advantage.
As with much of the infrastructure that supports the global financial services industry today, digitization is at the heart of the global transformation of trading spaces. Electronic commerce in particular has proven to be extremely popular. This method of buying and selling securities, usually done through online platforms, was critical to the demise of the open-outcry trading floor.
For example, the Hong Kong Stock Exchange (SEHK) closed its physical trading floor in October 2017 after 31 years of operation as a direct result of the rise in electronic trading, with traders benefiting from benefits such as faster transaction speeds, lower overall costs for market participants and better market access opportunities across geographic boundaries away. “I have a deep affinity for this place. Every day when we got to work we would all sit side by side and talk all day, ”said Christopher Cheung, lawmaker and founder of Christfund Securities, then told the BBC. “But I know things are changing. And financial technology is also changing. So, even if I’m not quite ready to go and let this place go, we have to adapt and move with the times. “
Automated solutions are also used to handle repetitive, often mundane tasks, which in turn give traders time to focus on more complex, high-value responsibilities and increasingly make trading decisions themselves. In both cases, the speed, accuracy and endurance of a robot can achieve significant cost and efficiency increases over a human trader.
Perhaps the most effective technology in this regard is Artificial Intelligence (AI), which is used extensively in a wide variety of trading floor applications. For one, it is heavily used by quantitative analysts today to model asset prices, market trends, and risk management requirements, with algorithms generating various statistical results. AI is also increasingly being used as the foundation for trading advice, with tools being developed that can provide trading staff with useful market news, which in turn can refine their search preferences for, for example, specific stocks or other key market metrics. Automated applications can also search the market in real time to provide traders with useful trading information that can prove particularly useful in busy, highly liquid market environments where the high speeds achieved by such AI tools can often mean the difference between success To seize market opportunities or to miss them entirely.
In addition, technology is playing a vital role in making the trading floor more accessible to traders at all levels and in all parts of the world. As a result, financial inclusion and democratization have increased dramatically in recent years, meaning that virtually anyone with a smart device and a sliver of capital can trade financial assets such as stocks and ETFs (exchange traded funds). More recently, cryptocurrencies have provided perhaps the clearest example of how technology has transformed the global nature of commerce, completely eliminating the requirement to be on a physical floor. These digital assets, which are normally secured by blockchain technology, can be conveniently traded on digital exchanges – both centrally and decentrally – from a smartphone. And since the blockchain makes the involvement of intermediaries such as brokers superfluous, crypto currently represents perhaps the most direct market access of all asset classes in the world.
Indeed, eliminating the need to be physically present on a trading floor is proving to be a significant game changer as traders can now buy and sell from anywhere using their devices or remote login facilities. This has been particularly critical since the pandemic-induced lockdowns began that have tied much of the working population to their homes. So the need for full trading capabilities away from the office only accelerates the development of appropriate digital solutions, with new software ensuring a seamless transition to trading from home.
It also means that front office workers who work on a more “vanilla” basis, such as execution-only trading, will no doubt feel the heat of the automated world. If robots can do the same task more efficiently and competently, such tasks are likely to be at risk in terms of human employment. At the other end of the scale, however, structured products trading is far less susceptible to being taken over by automation, as are all jobs where the typical daily routine is downright unstandardized. “I’m sorry to say that when automation started affecting the real world, I first thought that drivers would be the first to lose their jobs because when you have autonomous driving, you need no driver, “Francis Lun, a brokerage owner and industry veteran, told the BBC on the occasion of the Hong Kong Stock Exchange’s floor closing in 2017.” Unfortunately, it is floor traders who have lost their jobs. “
But perhaps the world has not yet fully declared the time on the traditional trading floor. In early June, the London Metal Exchange (LME) announced that it had canceled its original plans to close its Open Outcry trading floor, the last such trading venue in Europe. The world’s oldest marketplace for industrial metals started a consultation process in January to advise whether its open-outcry trading floor should be permanently closed due to the successful migration to digital trading. “The different views in response to the discussion paper were particularly evident between traditional participants and some smaller physical customers on the one hand, and our larger commercial traders and financial participants on the other,” said Matt Chamberlain, CEO of LME. Still, the LME firmly believes that e-commerce is the future, as recently reported by Reuters.
While robots may not take full power in the short term, the proliferation of new technology and automated solutions means that dramatic changes will continue to take place in the front, middle and back offices. And the more the need to create this competitive advantage grows, the more financial institutions have to develop with innovative, technology-oriented solutions – and the more endangered jobs across the board become. With e-commerce nearly wiping out the physical floor, and technologies like AI, Natural Language Processing (NLP), and deep learning driving a seismic shift across the industry, the human component of the institutional floor appears to be on an unstoppable path towards extinction .