Wall Street's traditional trading jobs are feeling the heat from an increased reliance on algorithmic trading and technology. At the same time, new specialties for technologist-traders are beginning to appear on the horizon.
The industry has lost about a third of its sell-side trading jobs, estimates Richard Korhammer, chief executive of Lava Trading, which processes about 400 million shares on heavy days. Decimalization narrowed spreads, causing traders to be less profitable, he explains. Meanwhile, algorithmic trading systems took over much of routine execution.
Sam Sego, vice president of global trading at Integrated Management Resources in New York, says although his firm has openings for traders, he is hard-pressed to name an area experiencing fast growth. "I wouldn't say it's hot, although we do have openings in emerging markets, specifically Latin America," he says. Sago also sees openings for traders in the commercial mortgage-backed securities (CMBS) market. Even if they're not actively recruiting, he believes many firms are ready to hire promising candidates.
The Value Of Experience
Where did the traders go? Many retired. Industry observers note that trading careers can be short and lucrative. The work is stressful, and new instruments may require new skills that discourage older traders from making the transition.
Kenny McBride, a former FX trader who ran Microsoft's capital markets industry group until he moved to Verizon's financial services unit, says that while simple spot and short-term trading can be done through algorithmic engines, experienced traders who know their market will continue to have value.
"Some individual traders will be around for execution purposes, but the real value-add is now written into the code of the algorithm," he says. "The only ones who will survive will be proprietary traders with a medium- to long-term view who look for anomalies in the market data, for trends that aren't black and white and aren't easily seen by an algorithm."
Korhammer expects large order execution to benefit from the knowledge of professional traders and sales traders, who will consult on how to best conduct a particular trade. Some sell-side traders have moved to the buy-side, where technology makes it easier for firms to handle much of their own trading, he adds. Hedge funds have also become home to sell-side traders looking for a change of scenery and rich rewards for their skills. An IBM white paper entitled The Trader is Dead, Long Live the Trader suggests that beta jobs will disappear as firms increasingly use indexing in place of active management to match industry benchmarks.
In McBride's view, the sell-side has lost traders because buy-side trading is the future. "The network is becoming the exchange," he says. "ECNs opened up the windows of connectivity. Direct market access provides low cost access and has created a new paradigm."
One possible area to keep an eye on for opportunity is algorithm analysis and repair. Sego has seen trading operations where algorithms have stopped behaving as expected. In addition, several buy-side firms at the TradeTech USA 2006 conference in March described a need to understand the algorithms their brokers supplied. And TIAA-CREF doesn't use broker-supplied algorithms. It builds its own. Understanding when to use algorithms, when a trader has to step in to complete an order, and how to monitor algorithm performance through the trading day are skills that could become increasingly important on trading desks.