Derivs traders feel algorithm heat

The advance of algorithms is causing uncertainty in the ranks of derivatives traders.

Derivatives traders, whose jobs were relatively secure during the layoffs of the past five years, are starting to feel fearful for their future, according to The Wall Street Letter.

The source of their trepidation isn't narrowing spreads for previously lucrative products, but the emergence of smart-order routing and algorithmic trading technology for options. Banc of America Securities, Goldman Sachs are said to have launched options algorithms in the past few months, and others may be set to follow in their footsteps.

The Wall Street Letter quotes Steve Sanders, managing director of Interactive Brokers, a Connecticut-based direct access brokerage firm. As options trading volumes grow, Sanders says it's becoming increasingly difficult to buy big blocks of stock without changing the price dramatically.

He says algorithms, which automatically disperse options orders between different potential sellers, and allow buyers to act anonymously, are an obvious solution. But what will become of the traders who currently negotiate trades and send orders manually to exchanges?

The good news is that recruiters say derivative traders who are contemplating selling up and starting new lives as sheep farmers need not panic, yet. "There's always concern that automation will take over from people," says one. "But it's too bold to say this is a big threat at this point, and even if it does become a threat brokers will still need people to build and automate the code."

Time to retrain then, perhaps?