August 22, 2007

When stories came out this summer about the 500-plus New York Stock Exchange (NYSE) traders who were let go when the exchange moved to partial electronic trading, it looked like technology was eliminating jobs on Wall Street. But upon closer inspection, this turns out not to be true -- at least, not entirely.

According to data collected by SIFMA, overall employment on Wall Street is up. Citigroup, Goldman Sachs, Deutsche Bank, Bank of America Securities and Royal Bank of Scotland all have been expanding their trading floors and are said to be hiring traders.

"Technology isn't a threat to jobs on Wall Street," explains Peter Noll, chief technology officer at Pioneer Investments. "Technology is doing two things: It's changing the role of humans, and it's allowing companies to absorb growth without adding people." To the first point, Noll notes that in the past, firms have hired college graduates, some with advanced degrees, into somewhat clerical roles. "Technology is letting us automate the clerical work and let these people use the analytical skills they've learned," Noll says. For instance, in the investment middle office, computers and software can now handle reconciliation, leaving only exceptions to the staff, he notes.

Easily automated jobs -- such as the order-taking floor trader -- are being axed on Wall Street, just as they are in manufacturing, publishing and other industries. "It's been a constant trend since we went from video green screens to digital quote data and began using applications to parse the data and start doing rudimentary electronic trading," points out Alan Paris, director in PricewaterhouseCoopers' (PwC) financial services advisory division. "It's been accelerated by the move to instantaneous clearing for commoditized products."

But on the bright side, new technologies, exotic instruments and growing market volumes are creating new jobs and making existing jobs more interesting, experts point out.

Traders vs. Program Trading

The NYSE layoffs, most say, only affect a relatively small group of order-taking middlemen. "The people who got displaced by algorithmic trading were not the upstairs traders, not the buy-side traders and not the sell-side traders, but the floor brokers and OTC market makers," says Dan Mathisson, managing director and head of advanced execution services at Credit Suisse. "The act of taking an order and passing it on to the next guy without an error used to be highly prized. Now that's all done by FIX, by computers and by algorithms."

Many floor brokers have transitioned to "upstairs" roles, Mathisson continues. "But this requires changes in skill sets, and you're going to have some people who adapt and some who don't."

For example, traders on both sides have to be versed in many products. "You can't be a one-trick pony anymore," says PwC's Paris. "Traders and firms are going cross-asset and cross-product. Clients want exposure and leverage, which means you have to create products for them that might have an equities component, a foreign exchange component and a fixed-income component."

But how do traders obtain these new skills? "They double up with people who know that stuff," says Mayiz Habbal, managing director of Celent's securities and investments group. "Some study after hours. ... If you have the potential, you'll catch up on these skills quickly; if you don't, you'll drop out."

A slew of new roles exist on trading floors today for people with econometrics, statistics and software development backgrounds, Credit Suisse's Mathisson says. In his department at Credit Suisse, "Everybody's working on algorithms; whether you call us traders or not is semantics," he says. "We're not traders in the sense that we're not working on individual transactions. We're trained in sciences and approach trading as a science rather than an art, looking for repeatable patterns in the way stocks behave and using those to trade better. Most people would call us quantitative analysts, computer programmers or developers, rather than traders."

Still, traders themselves are anxious about the effect of technology on their jobs. When Pragma Financial Systems executives bring their electronic trading software into Wall Street firms, traders sometimes say they fear the program will replace them, according to Lee Maclin, director of research at Pragma. Yet Maclin insists, "On the whole, traders love this stuff. There are holdouts -- there are people who don't want to embrace the new technology. But most traders are clamoring for better tools."

Maclin also asserts that program trading is relatively easy for traders to learn and that new tools often mean new jobs, pointing to the Black-Scholes model as an example. "In the early '80s, traders who were trading options by gut feel started to compete with the first traders who were using the Black-Scholes options pricing formula," he recalls. "It was an innovation that caused the old-style traders a lot of distress initially, but it spawned a whole new industry. At that time, there must have been several hundred derivatives traders, mostly on the floor, in the entire world. Now there are tens of thousands of derivatives traders. This is a prime example of a few growing pains that lead to huge growth."

So where might the resistant traders go? Some will move to the back office, where trade allocation, confirmation and settlement is done, because they understand the business well, hypothesizes Raghuvir Mukherji, senior consultant, financial securities, domain competency group, at Infosys Technologies. Others will become business analysts and get hired by companies such as Infosys. "They are the best people to give the functional inputs for programming algorithms," Mukherji explains.