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How technology is transforming the dynamics of the trading room




Through Nicolas larsen, international banker

IIt is perhaps one of the most iconic and evocative imagery of capitalism at the end of the 20e century. Large, noisy halls filled with hundreds of busy traders, some shouting Buy! and Sell! in futures pits, while others are on the phone desperately trying to fill their clients’ orders as market volatility wreaks havoc on financial markets. In a word: chaos. But do such images still ring true for today’s trading rooms? Or are these hectic scenes of stressed traders now relics of a bygone era?

While some ground trading still exists, the auction systems made famous in the 1980s are almost completely extinct. Instead, technology fundamentally transformed the inherent nature of trading as once there were legions of staff in trading desks, investment banks lost much of their capital resources. human, downsizing and replacing employees with software and automated trading solutions in search of ever more stringent efficiency. wins.

Writing in May 2019, Taran Khera, Asia Sales Manager at Bloomberg, described trading floor automation as a three-step process:

  • Electronification: Transform unstructured communications, such as manual and voice exchanges, into more structured electronic formats that can be read more efficiently by machines. In turn, this helps to increase workflow efficiency, create liquidity, and improve post-trade relationships.
  • Automating: Thanks to regulations such as MiFID II (Markets in Financial Instruments Directive II), more is being done to automate trading flows and thus expand the presence of electronic trading platforms. Such automation is more profitable vis-a-vis manual processes as well as more efficient, accurate and consistent in producing the desired results. It also saves important information in a faster, more organized format, which helps improve regulatory reporting requirements.
  • Digitization: This is primarily aimed at strengthening the decision-making process, allowing traders to allocate more time to complex tasks such as creating trades and analyzing data. Alternative data is proving to be extremely beneficial in this regard, with geolocation data and satellite imagery providing only a few of the datasets providing crucial and investable information. And new visualization techniques such as augmented reality and virtual reality simulations are also opening new doors for data analysis. As this practice continues to become more sophisticated, traders will increasingly want to use digitization to gain a competitive advantage.

As is the case with much of the infrastructure supporting the global financial services industry today, digitization is firmly at the heart of the transformation of dealing rooms around the world. In particular, it is e-commerce that has proven to be extremely popular. This method of buying and selling securities, which is normally done through online platforms, was instrumental in precipitating the decline of the auction trading room.

For example, the Hong Kong Stock Exchange (SEHK) closed its physical trading floor in October 2017 after 31 years in business as a direct result of the boom in e-commerce, with traders able to enjoy benefits such as fast speeds. higher transaction costs, overall costs for market players and greater market accessibility across geographic boundaries. “I have a deep affinity for this place. Every day coming to work we all sat side by side and talked all day, ”Christopher Cheung, lawmaker and founder of Christfund Securities, told the BBC. “But I know things are changing. And financial technology is changing too. So while I’m not quite willing to go and let this place go, we have to adapt and live with the times.

Automated solutions are also used to perform both repetitive and often mundane tasks, allowing traders to focus on more complex and high-value responsibilities, as well as making more and more trading decisions themselves. trading. Either way, a robot’s speed, accuracy, and endurance can provide significant improvements in cost and efficiency compared to a human trader.

Perhaps the most effective technology in this regard is artificial intelligence (AI), which is widely used in various trading floor applications. On the one hand, it is now widely used by quantitative analysts to model asset prices, market trends and risk management requirements, with algorithms generating various statistical results. AI is also increasingly used as the basis for trading advice, with tools being developed that can provide useful market information to trading staff, who in turn can then refine their preferences. research based, for example, on specific stocks or other important market measures. . Automated applications can also browse the market in real time to provide traders with useful trading information, which can prove particularly useful in high frequency and very liquid market environments, where the rapid speeds achieved by such tools are AI can often be the difference between successfully capitalizing on a market opportunity or missing it altogether.

Additionally, technology plays a central role in making the trading room more accessible to traders of all skill levels and in all regions of the world. As a result, financial inclusion and democratization have exploded in recent years, meaning that virtually anyone with a smart device and a fraction of capital can trade financial assets such as stocks and ETFs (funds traded in stock Exchange). More recently, cryptocurrencies have provided perhaps the clearest example of how technology has transformed the global nature of trading, removing the requirement to be in a physical trading floor altogether. These digital assets, which are typically secured by blockchain technology, can be traded on both centralized and decentralized digital exchanges from the convenience of a smartphone. And with blockchain removing the need to involve intermediaries, such as brokers, crypto may represent the most direct market access of any asset class in the world today.

Indeed, eliminating the need to be physically present in a trading room is proving to be a significant change, as traders are now able to buy and sell from any location using their devices or connection facilities. remotely. This has been particularly crucial since the start of the pandemic-induced closures that have confined much of the workforce to their homes. Needing full trading capabilities out of the office therefore only accelerates the development of appropriate digital solutions, with new software ensuring seamless transitions to home trading.

It also means that front office staff who work on a simpler basis, like execute-only trading, will no doubt feel the heat of the automated world. If the robots can do the same job more efficiently and competently, then these jobs are likely to be considered threatened with regard to human occupation. On the other end of the scale, however, structured product trading is much less likely to be taken over by automation, as are all jobs where the typical day is decidedly non-standard. “I’m sorry to say that when the automation started to affect the real world, I initially thought that the drivers would be the first to lose their jobs, because if you have autonomous driving, you don’t in need of a driver, Francis Lun, a brokerage owner and industry veteran, told the BBC when the trading floor of the Hong Kong Stock Exchange closed in 2017. But sadly, these are the traders in the room who have lost their jobs.

But maybe the world hasn’t quite called the time in the traditional trading floor. In early June, the London Metal Exchange (LME) announced that it had canceled its initial plans to close its trading floor at auction, the last such place in Europe. The world’s oldest marketplace for industrial metals began a consultation process in January to determine whether its auction floor should be permanently closed due to the successful migration to digital commerce. “The divergent views in response to the Discussion Paper were particularly apparent between traditional participants and some small physical clients on the one hand, and our larger merchants and financial participants on the other,” said Matt Chamberlain, CEO of LME. Nonetheless, the LME still strongly believes that e-commerce is the future, as Reuters recently reported.

So while bots may not fully take over in the short term, the proliferation of new technologies and automated solutions means that dramatic changes will continue to occur in the front, middle and back office. And the more the need to gain this competitive advantage continues to intensify, the more financial institutions will need to evolve with innovative technology-driven solutions and the most threatened jobs in the trading room will become. With e-commerce having all but wiped out the physical trading floor and with technologies such as AI, natural language processing (NLP) and deep learning driving seismic change in the industry, the human component of the rooms institutional market seems firmly engaged in an inexorable march. towards extinction.

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