Where Next for Equities Traders?
This isn't a great time to be working as an equities trader. In the past four months, both Goldman Sachs and UBS have slashed U.S. equity trading teams by up to 10%. Recruiters warn of more cuts to come, and lower bonuses.
"There will be further redundancies for equities traders before December," predicts Joe McCann, chief executive officer of McCann & Company, a New York-based executive search firm with a finance specialty. "When banks like Goldman and UBS make cuts everyone else has to sit up and take notice," he adds. "By some accounts, there's a 30% surplus of people trading equities right now: too many people have time to look at screen savers and chit chat about taking holidays"
Paul DeLucia, a partner at the Options Group in New York, is equally downbeat: "If you're talking about pure execution traders who are responsible for making prices, instead of product development, there'll be a definite decrease in the need for them," he agrees. "It's increasingly hard for these people to add value."
March of The Machines
Equity traders' travails are symptomatic of changes afoot in the broking industry. Commissions are falling as mutual funds, hedge funds, and other institutional clients squeeze fees. At the same time, automated trading systems are allowing these clients to bypass traditional brokers and execute trades directly. And according to industry pundits, mergers such as those between the New York Stock Exchange and Archipelago, Nasdaq and Instinet, are likely to hasten the spread of automated trading still further by boosting the power of electronic exchanges.
Gavin Little Gill, a senior analyst at TowerGroup, a U.S. market research firm, and author of a report on the spread of electronic trading, says growth is inevitable given the cost savings on offer: "We're looking at the difference between a penny-a-trade under automated systems compared to upwards of five cents at trade under traditional systems," he says.
To date, publicity surrounding redundancies has largely focused on the U.S. market. But equities traders are also being let go the other side of the Atlantic. Seven traders were made redundant from Merrill Lynch in February 2005; Mark Horlock, a consultant at recruiter Alexander Mann in London describes it as a harbinger of things to come: "Customers increasingly want a low touch execution service with minimal human interaction."
According to recruiters, low bonuses will be an important mechanism for lopping surplus equities traders: by paying less than last year banks will aim to communicate that the time's come to move on. "The bonus norm for equities traders will be 10-15% down in 2006 compared to 2005," says McCann. "The people who banks want to leave will receive zero or minimal bonuses this year," forecasts Horlock.
Re-skill or Regret it
So what's a simple equities trader to do? The answer is, re-skill, and soon - no one can say they didn't see this one coming.
"At the end of the day, what was once a relationship game is becoming a quant game," says Little Gill. "Equities traders are being replaced by people with strong quant backgrounds who can build algorithmic models."
Not everyone will need a math PhD, however. While quantitative models take over so-called 'low-touch' trades requiring minimal human intervention, 'high-touch' trades which are complex and high value, will still need a human somewhere in the mix. But recruiters say the traders who keep their jobs will be a different breed to their predecessors.
"The new generation are multi-asset class aware and customer facing," says Horlock in London. "Customers like hedge funds are increasingly interested in talking to traders directly - unlike old-fashioned market makers, the new breed needs to be eloquent and presentable in front of clients."
McCann advises actively seeking exposure to equity derivatives. "If you're an equities trader and you don't have exposure to derivative products, make sure you get it," he says, "The folks who remain on will be the ones who raised their hands and said I'd like to migrate to a derivatives desk."
At a push, De Lucia says equities traders who are good relationship builders and salespeople could join the salesforce for quant trading models used by electronic trading systems. He says another alternative could be moving into fundamental research or execution trading on the buy-side.
Some recruiters are pessimistic, however. "At the end of the day it's going to be a real catch for some people," said one. "If you don't have the educational background and mental aptitude to re-skill, the future could look pretty bleak."