Generational wars on the trading floor:"People are making decisions on things they know almost nothing about"
If any banking jobs were protected in the past five years, those in electronic trading were surely deepest in the safe space. Banks threw money and headcount at 'electronification' simply to stay in the race, but as trading commissions plummet and market leaders gallop into the distance, it’s becoming apparent that many are being left behind.
The trouble is that the need for investment to rain on electronic trading has increased precisely as commissions earned from equities trading have plummeted. The TABB Group concluded recently that the buy-side’s U.S. commission pool fell 42% between 2015 and 2019. TABB concluded that a “painful” few years are coming next.
Banks don’t divulge how much of their giant technology trading budgets go on their trading systems, but it’s safe to assume it’s substantial. Goldman Sachs, for example, says 25% of its 35,600 staff work in technology and Joanne Hannaford, the firm’s head of EMEA technology, said at a conference in June that 3,000 technology staff work on SecDB, the bank’s risk and pricing system alone. Goldman spends $1bn a year on technology and communication, and proportionately the implication is that SecDB alone consumes up to 33% of that budget, to say nothing of the bank’s investment in the rest of its electronic trading infrastructure.
Goldman is one of the banks to have spent lavishly on electronic trading in recent years. After falling behind rivals like Morgan Stanley and JPMorgan after the financial crisis, it hired Raj Mahajan, the former CEO of high speed trading firm Allston Trading and bought Stockholm-based Pantor, a trading technology company (with a 'no outside shoes' policy), in 2015. In early 2018, then-CEO Lloyd Blankfein said Goldman hired 100 electronic trading specialists the previous year. And this August, Adam Korn, head of engineering for Goldman’s trading division, said he wants to hire 100 more engineers to work on trading systems in months to come.
Goldman seems to have been rewarded for its pains. The firm’s equities trading market share rose to 17% in the second quarter of 2019 and revenues in equities were at their highest rate for two years. But insiders in the electronic trading team suggest all is not entirely well. There have been resignations, with junior talent in particular leaving, including – most recently, Ally Huchro, an associate in the bank’s New York electronic trading and quant sales team, who went last month.
“Electronic trading jobs in banks are thinning out,” says one Goldman electronic trading insider. “People are realizing that electronic trading houses like Virtu have become the places to be.”
This is another angle on the same problem. While big banks throw money at a shrinking market, pure electronic trading houses with lower overheads and better systems are eating their dinner. Last November, Virtu acquired ITG for $1bn, thereby gaining access to ITG’s relationships with institutional investors. Anecdotally, the newly combined firm is already a new headache for banks. Meanwhile, XTX Markets, which came from (almost) nowhere to rank third in FX trading, is now competing in the equities market too.
The new electronic trading houses don’t employ many staff. Accounts are out today for Jane Street International Limited, the UK business of Jane Street. In 2018, it employed 158 staff in the UK, of whom 129 were in the 'back office.' For banks' electronic trading professionals who are worried about the coming squeeze, available exit opportunities are hard to fathom.
Concerns are most acute in the second tier. Away from market leaders like Goldman Sachs, JPMorgan and Morgan Stanley, Citi, Credit Suisse, UBS, Barclays and SocGen each hovered around 6%-7% market share in the second quarter. This is where the pressure on revenues is most intense and the need to invest is most apparent. And ever since Deutsche Bank’s July decision pull of equities trading market, secon- tier participants have been wondering who’s next.
“We’re struggling because we’re trying to build the product and to be extremely cost efficient, but our product is very incomplete,” says a senior electronic trading professional at one of these banks. “Thje problem is that it's not just about having the fastest box, but the fastest box that’s well run with good risk control, TCA and analytics and good post-trade processing and service. Yes, we’ve got a few algos and some token investments, but it’s nowhere near enough. The race has already been run, and we’re too far behind the leaders to catch up.”
A senior electronic trading professional at another bank in the second-tier list expresses a similar sentiment. “We're under pressure to cut technology costs now,” he says. “There’s been a big relaunch but fundamentally there’s no new product behind it and it’s only a matter of time before this becomes clear.”
While second-tier banks tread water in electronic trading, there are complaints that the executives running their electronic businesses are overpaid traditional traders with little understanding of the new landscape and what's required to compete in it. Deutsche Bank's recent experience is, again, seen as a case in point.
“Senior management here are entrenched and can’t distinguish one algo from another,” says one disaffected director in an electronic trading team. “They’re a load of legacy high touch and derivatives people who are making decisions about the future of an electronic trading platform they know nothing about. They think that having one algo and some token investments is enough, but this is an extremely competitive market and it's not one size fits all."
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