High speed, greater volumes and the race for low latency
The rise of electronic trading (e-trading) over the past decade has had a profound effect on the structure of equity markets. Automation transformed the market from one where a great deal of human intermediation was required into one where computers largely do the work in executing and processing trades.
There are many benefits to this. Firstly, it allows greater volumes of trades, which improves market liquidity: the US average daily reported trading volume increased from 2.5 billion shares in 2003, to nearly 6.5 billion in 2011. Secondly, the speed of executions and cost of transactions have fallen sharply while transparency has increased.
The use of algorithms – computer systems that decide on price, timing and quantity of an order – has also cut the size of the average trade.
Slicing large blocks into smaller pieces reduces the market impact of trades and limits adverse costs of trading large positions.
A downside is that greater automation means less manpower. One bulge bracket bank tells us it employs 30% fewer traders than in 2005, dealing with three times the flow.
Electronic trading is also well established in the high-volume foreign exchange market and increasingly important in fixed income. Goldman Sachs and Morgan Stanley, for example, have recently launched e-trading platforms for corporate bonds.
Roles and career paths
Quantitative analysts — Are the maths elite, key to gaining an edge in e-trading. They design, develop and implement execution algorithms using a mathematical approach to identify investment opportunities and strategies.
Consultants — Keep clients happy. They run statistical reports, including transaction cost analysis and trade reports, to ensure clients are using trading tools effectively.
Sales traders — Facilitate the execution of trades for clients, offer a menu of the bank’s e-trading products and aid a customer’s decision. This role combines marketing and client relationship management. Banks also hire for pure sales roles.
Market structurers — Analyse regulatory changes and macro trends and their potential effect on trading.
There are also a whole host of technology positions in the development of ever-more sophisticated e-trading platforms, so banks can maintain an edge over their competitors (see IT in Finance).
Pay and bonuses
Most quants have PhDs in a highly mathematical subject and must also possess a good knowledge of financial instruments and technical computing software such as MATLAB.
For other roles within e-trading, softer skills are valued. Sales, for example, is all about managing relationships, according to Holden Sibley, head of BARX sales, Americas at Barclays.
“This may seem counter-intuitive given our product is aimed at getting people to trade via a machine, but to be successful we have to be able to develop a relationship with clients, understand their needs, establish their trust, and identify how our technology solutions can provide for those needs,” he says.
Because of its reliance on technology, electronic trading is constantly evolving, which on one hand presents an opportunity for those working in the sector to be at the forefront of innovation. On the other, it also means that you have to be versatile enough to adapt.
As one managing director in electronic trading tells us: “You need not only to accept change, you also need to embrace, welcome and thrive amid change.”
“We look for the right blend of technical knowledge, trading experience, understanding of market micro structure and client servicing skills,” says Stephane Loiseau, head of execution, Société Générale Corporate and Investment Banking, London. “Adaptability is key as well, in order to provide the best level of service in a fast-changing environment where electronic usage continues to evolve and has now become one of the tools used by all traders.”